Wednesday, June 7, 2017

Fourth Circuit Weighs in on Article III Standing

The Fourth Circuit recently examined the issue of Article III standing in the context of the FDCPA.  In Ben-Davies v. Blibaum & Associates, P.A., 2017 U.S. App. LEXIS 9667 (4th Cir. June 1, 2017), the consumer sought to assert an FDCPA claim against a law firm, contending that the law firm attempted to collect a debt arising out of a state court judgment by demanding payment of an incorrect sum based on the calculation of an interest rate not authorized by law.  The consumer alleged that as a “direct consequence” she “suffered and continues to suffer” “emotional distress, anger and frustration.”  Id. at *6.  The district court dismissed the FDCPA claim for lack of standing under Article IIII, concluding that Ben-Davies had not established an injury in fact.

In an unpublished opinion, the Fourth Circuit reversed.  In examining the “injury in fact” component of standing, the court noted that “injury in fact” is not limited to financial or economic losses but can be shown when the plaintiff shows that she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent.  In this case, the court was influenced by the fact that “[t]his was not a case where the plaintiff simply alleged a bare procedural violation [of the FDCPA], divorced from any concrete harm.”  Id.  Instead, the court took the position that the allegations of actual existing harms that affected here personally and specifically, the allegations of “emotional distress, anger and frustration: were sufficient to establish the existence of injury in fact.

A point of concern for the ARM industry is the fact that the court did not limit its review of the matters to the pleading (the motion before the court was a motion based upon Rule 12(b)(1)) but instead included “documents explicitly incorporated into the complaint” as well as additional documents submitted by Ben-Davies which “do not conflict with the allegations and that are integral to the complaint and authentic.”  Id. at *3-4.

Thursday, June 1, 2017

Guest Post: District Court Rejects Vicarious Liability Claims under the TCPA

By Alexa Cannon

A Michigan district court recently weighed in on the availability of vicarious liability for violations of the Telephone Consumer Protection Act (the “TCPA”). In Kern v. VIP Travel Servs., the plaintiffs received several dozen telephone calls from United Shuttle Alliance Transportation Corp. (“USA”). Kern v. VIP Travel Servs., 2017 U.S. Dist. LEXIS 71139 (W.D. Mich. 2017). The calls were made over a three month span to cell phones which were registered on the national do-not-call registry. When answering the calls, plaintiffs heard an automated voice telling them, “Pack your bags! You’ve won a Disney Vacation!” Id. at *3. The voice directed the plaintiffs to press 1 to reach a representative in order to reserve a date at various vacation resorts of their choosing. After plaintiffs spoke to a representative, they were directed to a website in order to purchase the packages at a discounted rate. Plaintiffs made reservations to stay at three resorts and received emails from the resorts confirming their reservations.

Plaintiffs contended that the telephone calls made by USA violated the TCPA, and that the resorts were vicariously liable for the calls. Examining the vicarious liability of the resorts, the court first noted that “[a]n entity may be vicariously liable for TCPA violations ‘under a broad range of agency principals.”  Id. at *16.  The court then went on to examine the claims against the resorts under principles of actual authority, apparent authority, and ratification.

Actual Authority

In reviewing the plaintiffs’ claims as to actual authority, the court focused its analysis on the resorts’ rights to control the agent’s actions. Id at *17. When analyzing the facts here, the court determined there was nothing in the complaint that created a reasonable inference that the resorts had the right to control USA. The court noted that even if the resorts contracted with USA to solicit customers, this was not enough to establish that the resorts had the right to control USA. Id. at *19. The court therefore concluded there was no supporting evidence to prove that USA reasonably believed that the resorts had given it authority to make calls which violated the TCPA, thus actual authority was nonexistent.

Apparent Authority

The court next turned its attention to the plaintiffs’ assertion that USA had apparent authority on behalf of the resorts to make calls which violated the TCPA. Here, the court focused on whether the resorts had held USA out to third parties as possessing sufficient authority to commit the particular act in question. Id. at *19. The court ruled that there were no well-pleaded allegations to suggest the resorts gave USA access to detailed information about their vacation packages, or gave USA to authority to enter customer information into Resort’s database. The court reasoned that although USA knew the price of the vacation packages, the duty rested on the Plaintiffs to confirm their reservations because USA could not finalize the transaction. In short, the court concluded that the plaintiffs’ apparent authority argument failed because the resorts never “held out” USA as possessing sufficient authority to make the violative calls.


Lastly, the court examined the plaintiffs’ argument that the resorts should be held vicariously liable due to their ratification of USA’s actions. The court took issue with plaintiffs’ ratification argument and noted that the complaint did not provide the court with any reasonable inference that the resorts were aware of USA’s unlawful calls. Therefore, the resorts never affirmed USA’s actions.

Rejecting the Plaintiffs’ vicarious liability argument, the court rendered a dismissal for both resorts. The opinion should be welcomed by defense counsel defending TCPA violations as it provides guidance to the extent at which vicarious liability can hold a party liable under federal common law agency principles for a TCPA violation by a third  party telemarketer.

About the Author.  Alexa Cannon is a rising third year law student at Campbell University and is a summer law clerk with Smith Debnam Narron Drake Saintsing & Myers, LLP.

Tuesday, May 30, 2017

Guest Post: CFPB Issues Request for Information Regarding Small Business Lending

By Vanessa Garrido

The CFPB has issued a Request for Information (RFI) to collect data that will shed light on how small businesses engage with financial institutions, with a particular focus on women-owned and minority-owned small businesses. Of the estimated 27.6 million small businesses in the United States, over 7 million of these businesses are minority-owned and over 8.4 million are women-owned. In order to learn more about how to encourage and promote small businesses, “it is vitally important to fill in the blanks on how small businesses are able to engage with the credit markets.”  Prepared Remarks of CFPB Director Richard Cordray at the Small Business Lending Field Hearing, CFPB (May 10, 2017),The RFI was issued pursuant to Section 1071’s business lending data collection rule under the Dodd-Frank Act which modifies the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses.

The purpose of the business lending data collection rule is to:
  • Fill existing gaps in the general understanding of the small business lending environment;
  • Identify potential fair lending concerns regarding small business, including women-owned and minority-owned small business;
  • Facilitate enforcement of fair lending laws; and
  • Identify the needs and opportunities for both business and community development.

In an effort to collect and report on small business lending data, the CFPB seeks comment on:
  • How the lending industry defines small business and how that affects their credit application processes;
  • The particular data points that financial institutions are compiling and maintaining in the ordinary course of business concerning their small business lending, the sources of information that financial institutions rely on in obtaining this data, and any challenges financial institutions foresee in collecting and reporting this data;
  • How financial institutions integrate data collection into their application process;
  • The ability to measure accurately the prevalence of lenders and the products they offer;
  • Roles that marketplace lenders, brokers, dealers and other third parties may play in the application process for loans;
  • Whether certain classes of financial institutions should be exempt from the requirement to collect and submit data on small business lending;
  • Any financial products that finance small business, in addition to term loans, lines of credit, and credit card products; and
  • Ways to protect the privacy of applicants and borrowers, as well as the confidentiality interest of financial institutions that are engaged in the lending process.

Comments are due on or before July 14, 2017.

 Vanessa Garrido is a rising third year law student at Wake Forest University and is clerking with Smith Debnam Narron Drake Saintsing & Myers, LLP.

Tuesday, May 16, 2017

Supreme Court Reverses Bankruptcy Proof of Claim Case

“The law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense … And we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code’s similar system.”

Midland Funding, LLC v. Johnson, (May 15, 2017).

Yesterday, the Supreme Court reversed the Eleventh Circuit’s holding in Midland Funding v. Johnson in a 5-3 split. Their decision resolves a circuit split as to whether the filing of a time barred proof of claim violates the FDCPA. For those familiar with the oral arguments in this matter, it should come as no surprise that the dissent was written by Justice Sotomayor and joined by Justices Ginsburg and Kagan. The majority opinion was authored by Justice Breyer.

 Johnson in the Lower Courts

Aleida Johnson filed her Chapter 13 bankruptcy petition in 2014. Midland Funding, LLC, a debt buyer, filed a proof of claim which disclosed on its face that the claim was barred by the applicable statute of limitations, listing the date of last transaction as May 2003. Johnson sued Midland in federal court, alleging that Midland had violated sections 1692e and 1692f of the federal Fair Debt Collection Practices Act by filing a time barred proof of claim.  

Midland moved to dismiss asserting that Johnson’s FDCPA claims were precluded by the Bankruptcy Code. The district court concluded that that the Bankruptcy Code expressly provided for the filing of a claim irrespective of whether it is time barred so long as the creditor has a right to payment that has not been extinguished by state law while the FDCPA prohibited debt collectors from doing so. The district court further concluded that the Bankruptcy Code and FDCPA were in irreconcilable conflict and that the later statute, the Bankruptcy Code, impliedly repealed the earlier statute, the FDCPA. Johnson v. Midland Funding, LLC, 528 B.R. 462, 470 (S.D. Ala. 2015). 

On appeal, the Eleventh Circuit reversed, holding that the Bankruptcy Code and FDCPA were not in irreconcilable conflict. Instead, “[t]he FDCPA easily lies over the top of the Code’s regime, so as to provide an additional layer of protection against a particular kind of creditor.” Johnson, 823 F.3d at 1341. The court concluded that the two statutes could be reconciled because “they provide different protections and reach different actors.” Id. at 1340. While the Bankruptcy Code allows creditors to file proofs of claim even with respect to time barred debt, it does not require that they do so and they “are not free from all consequences of filing these claims.” Id. at. 1339. 

Supreme Court

The significance and divisiveness of the issues led both the petitioner and respondent to agree that the issues merited review. The parties’ consensus fast tracked the courts’ consideration of the petition and the following issues were certified for appeal in October: (a) whether the filing of an accurate proof of claim for an unextinguished time barred debt in a bankruptcy proceeding violates the FDCPA; and (b) whether the Bankruptcy Code, which governs the filing of proofs of claim in bankruptcy, precludes the application of the FDCPA to the filing of an accurate proof of claim on an unextinguished time-barred debt. 

Like the majority of the circuits that had previously examined the issue, the court held that the filing of a proof of claim, which on its face indicates the limitations period has run, does not fall within the scope of the FDCPA. Specifically, the Court determined that the filing of the proof of claim did not fall within the “five relevant words” of the FDCPA: false, deceptive, misleading, unfair or unconscionable. 

False, Deceptive or Misleading

In concluding that Midland’s proof of claim was not false, deceptive or misleading, the Court explored the issue of whether the Bankruptcy Code’s definition of a claim requires the claim be enforceable, as well as the respective burdens imposed upon the parties by the statute of limitations. Regarding enforceability, the Court held that the Bankruptcy Code does not contain a requirement that a claim be enforceable. In fact, the Court observed that “[t]he word enforceable does not appear in the Code’s definition of ‘claim’”. Instead, Section 101(5) (A) states that a claim is a right to payment, “whether or not such right is … fixed, contingent, … [or] disputed.” Midland Funding, LLC v. Johnson, slip op. at 4.

The Court also addressed one of the issues which troubled several justices during oral argument: reconciliation of the statute of limitations as an affirmative defense rather than as a condition precedent to filing a claim. At oral argument, Justice Kennedy posed a number of questions to Johnson’s counsel and the Department of Justice (appearing as amicus curiae) raising concerns with Johnson’s assertion that a debt collector can violate the FDCPA by filing a time barred proof of claim. Justice Kennedy’s questions seemed to reflect a two fold concern. First, that by its inherent nature, the statute of limitations is an affirmative defense and secondly, that, in a majority of states, the running of the statute of limitations does not extinguish the debt. Both Justices Kennedy and Alito seemed to share a concern with reconciling those concepts with the position of Johnson which would place an affirmative duty on the claim filer not to file the time barred proof of claim in the first place rather than upon the trustee or other interested party to object. In addressing those concerns, the Court noted that under relevant state law (Alabama), the creditor has a right to payment even after the statute of limitations has expired, meeting the definition of a claim. Additionally, the Court determined that the Bankruptcy Code’s provisions make clear that the running of a limitations period is an affirmative defense, “a defense that the debtor is to assert after a creditor makes a “claim.”

The Court went on to conclude that “[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense … And we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code’s similar system.” Id. at 5.  

Unfair or Unconscionable

Whether the filing of a proof of claim on “obviously” time barred debt is unfair or unconscionable presented a closer question. Like many of the lower courts which had examined the issue, the Court immediately noted the differences between the context of a civil suit and a Chapter 13 bankruptcy proceeding. In a Chapter 13 bankruptcy proceeding, the claims procedure makes it “considerably more likely that an effort to collect upon a stale claim … will be met with resistance, objection, and disallowance” and minimize the risk to the debtor. Id. at 7.  

In its examination under the lens of unfair or unconscionable, the Court returned to its concerns with the debtor’s proposition that the initial burden is on the creditor to insure it files proofs of claim only on debts which are not time barred. The Court noted the practical issues of carving out and defining the boundaries of an exception if it were to change the simple affirmative defense approach. “Does it apply only where … a claim’s staleness appears “on [the] face” of the proof of claim? Does it apply to other affirmative defenses or only to the running of a limitations period?” Id. at 8. The Court concluded that finding the FDCPA applicable to such proofs of claim would ultimately add to the complexity of the claims process and shift the burden from the debtor to the creditor to investigate the staleness of any claim. The Court ultimately concluded that the practice of filing proofs of claim on time barred debt is neither “unfair” or “unconscionable” within the terms of the FDCPA.

Limitations on the Court’s Decision

The Court’s decision is a major win for the industry and is a continued reflection of the Court’s practical approach to claims under the FDCPA. Having said that, it is important to note that the Court’s decision is limited to claims which are otherwise accurate and on their face indicate the limitations period has run. It is important to note that the Court’s opinion does not expressly address the broader issue of whether the Bankruptcy Code precludes the application of the FDCPA. In fact, the opinion may suggest otherwise. By applying the FDCPA’s “five relevant words” to the claim at issue, the Court’s opinion suggests that the FDCPA may, under different circumstances, have some application to the claims process.

Monday, May 15, 2017

CFPB Seeks Comment on Effectiveness of the RESPA Mortgage Servicing Rule

As required by the Dodd-Frank Act, the CFPB is conducting an assessment of its RESPA Mortgage Servicing Final Rule, which took effect on January 10, 2014. The assessment will seek to compare servicer and consumer activities and outcomes to a baseline that would exist if the Rule has not been implemented.
  Specifically, the CFPB’s assessment plan will examine how well the Servicing Rule has met its purpose of:
  • Providing borrowers with timely and understandable information;
  • Protecting borrowers from unfair, deceptive, or abusive acts and practices;
  • Helping borrowers avoid unwarranted or unnecessary costs and fees; and
  • Facilitating review for foreclosure avoidance options.
The CFPB is requesting comments on the assessment plan and is inviting stakeholders to comment on:
  • The feasibility and effectiveness of the assessment plan and its proposed metrics and analytical methods for assessing the effectiveness;
  • Data and other factual information that may be useful for executing the plan;
  • Recommendations, data, factual information and sources of data to improve the plan;
  • Data and other factual information about the benefits and costs of the rule for stakeholders, and the effects of the rule on transparency, efficient access and innovation in the mortgage market; Data and other factual information about the rule’s effectiveness in meeting the purposes and objectives of Dodd Frank; and
  • Recommendations for modifying, expanding or eliminating the Mortgage Servicing Rule.
Comments are due on or before July 10, 2017. A report of the assessment will be issued by January 2019.

Friday, May 12, 2017

District Court Takes on the Intersection of Bankruptcy and the FDCPA

A New York District Court recently tackled the intersection between bankruptcy and pre-petition FDCPA claims and the application of judicial estoppel to undisclosed claims.  In December 2013, Jeziorowski filed a complaint alleging violations of the Fair Debt Collection Practices Act (FDCPA) and the Telephone Consumer Protection Act of 1991 (TCPA). Jeziorowski v. Credit Prot. Assn., L.P., 2017 U.S. Dist. LEXIS 66084 (W.D.N.Y. 2017). Shortly after filing suit, Jeziorowski filed bankruptcy pursuant to Chapter 7. At his 341 meeting, Jeziorowski orally informed the trustee about his pending FDCPA and TCPA claims.  The trustee instructed him to have his attorney report to the court if the pending claims had more value than $1,000. Shortly thereafter, Jeziorowski was granted his discharge. At the time of his discharge, the FDCPA/TCPA lawsuit remained pending and Jeziorowski had not amended his schedules to reflect the claims.

Two years later, Jeziorowski requested the bankruptcy be reopened to allow him to amend his schedules to include the FDCPA and TCPA claims. Shortly after, Jeziorowski filed a motion in the pending FDCPA/TCPA litigation to substitute the trustee as plaintiff. In response, the defendant opposed the motion, arguing that both Jeziorowski and the trustee should be judicially estopped from pursuing the FDCPA and TCPA claims and requesting the complaint be dismissed with prejudice.

The intersection of bankruptcy and pre-petition consumer protection claims is a tricky one.  The proper functioning of the bankruptcy system requires a full disclosure of all claims. The failure to do so may prevent the unwary consumer from pursuing them. In a Chapter 7, disclosed claims may be abandoned by the trustee post discharge and returned to the debtor to pursue.  However, undisclosed claims remain property of the estate and the debtor may be estopped from pursuing them. In short, the doctrine of judicial estoppel prevents consumers from gaming the system.   

In addressing the defendant’s judicial estoppel argument, the court first noted that for judicial estoppel to apply, “1) a party’s later position must be ‘clearly inconsistent’ with its earlier position; 2) the party’s former position has been adopted in some way by the court in the earlier proceeding; and 3) the party asserting the two positions would derive an unfair advantage against the party seeking estoppel.” Jeziorowski at *6.  The court noted, however, that the failure to disclose an asset does not necessarily preclude his claims when the non-disclosure is inadvertent. The court went on to state that even if the debtor is judicially estopped from pursuing an undisclosed claim, a trustee is not necessarily estopped from pursuing the same claim on behalf of the creditors.  

Rejecting the defendant’s judicial estoppel argument, the court reasoned that neither the debtor nor the trustee were judicially estopped from pursuing the FDCPA and TCPA claims. In doing so, the court relied heavily on the fact that Jeziorowski had orally disclosed the pending litigation to the trustee at his 341 meeting.  The court concluded, therefore, that “there is no basis for concluding that Jeziorowski deliberately asserted inconsistent positions to gain an advantage; on the contrary, there is every reason to conclude that his nondisclosure was inadvertent and that he acted in good faith.” Id. at *10. Moreover, the court concluded that there was no reason to judicially estop the trustee from pursuing the claims. “Estopping the trustee … would work the sort of unfair windfall – this time, to the defendant – that equity is designed to prevent.” Id. at *9.

The opinion serves as a reminder that, at the outset of every litigation, defense counsel should determine whether the plaintiff has filed bankruptcy and closely examine any bankruptcy petition for a disclosure of the claims. Generally, a court will invoke the judicial estoppel doctrine if the plaintiff was deliberately asserting inconsistent positions in order to play “fast and loose with the courts.” Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 358 (3d Cir. 1996).