Monday, August 14, 2017

No interest? No Disclosure? No Problem!


The juxtaposition of Sections 1692e and 1692g continues to be a battle ground for the consumer bar and collection industry.  Section 1692e prohibits false, deceptive or misleading representations in connection with the collection of a debt.  Section 1692g(a) requires that within five days of initial communication, the debt collector provide the consumer with a written notice which contains five pieces of information: (a) the amount of the debt; (b) the name of the creditor to whom the debt is owed; (c) a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector; (d) a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and (e) a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor. 

A recent case out of the District Court for Oregon illustrates the extreme positions being taken by the consumer bar and provides some reassurances to the industry.  In Powers v. Capital Management Services, the collection agency sent a single letter which identified the original and current creditor, the account number as “5702” and the amount of the debt as $565.91.  Powers v. Capital Mgmt Servs., 2017 U.S. Dist. LEXIS 121536 (D. Ore. Aug. 2, 2017).  The consumer filed suit, alleging that: (a) by failing to disclose whether interest was or was not accruing on the balance of the debt, the agency violated 15 U.S.C. §1692g(a); and (b) by identifying the account number as being its last four digits, the agency misrepresented the account number in violation of 15 U.S.C. §1692e.

In addressing the first issue, the court quickly drew a distinction between accounts where interest is accruing and those in which it is not.  “Where interest is not accruing on a debt, the debt collector does not need to state that no interest is accruing.  Rather, it is only in instances when interest is accruing on a debt does Section 1692g(a)(1) require a debt collector to disclose that fact and include both principle and interest when stating the amount due.” Id. at *3-4.

Moving to the second issue, the court was dismissive of the consumer’s claim that the collection agency’s use of the last four digits of the account number was misleading.  The court observed that the numbers used were associated with the consumer’s account and the notice reflected the exact amount owing on the account.  Moreover, while there may have been better ways to identify the account – for instance, preceding the last four digits with xxx-xxx-xxx or with the phrase “account ending in”,  a “consumer of below average sophistication or intelligence, but still possessing a basic level of understanding and willingness to read with care, would understand that “5702” identifies their consumer… credit card account number.” Id. at *6.

Friday, July 14, 2017

Fifth Circuit Affirms Debt Collector’s Duty to Report Disputed Debt


A recent opinion from the Fifth Circuit should serve as a reminder to debt collectors that their duties as to disputed debts are not governed solely by section 1692g.  In Sayles v. Advanced Recovery Systems, Advanced Recovery Systems (“ARS”) sent debt validation notices pursuant to section 1692g to the plaintiff regarding two debts.  The notices were sent to the plaintiff’s last known address in June and September of 2013.  Sayles v. Advanced Recovery Sys., 2017 U.S. App. LEXIS 12080, *1 (5th Cir. July 6, 2017). The plaintiff never responded to the notices with a dispute or request for validation and in fact, alleges he did not recall receiving the validation notices.  In February 2014, however, the plaintiff discovered ARS was reporting the debts on his credit report.  In response, plaintiff faxed a letter to ARS on March 5, 2014 disputing the debts and requesting validation.  In April 2014, plaintiff ran his credit report again and discovered ARS was still reporting the debts and had failed to mark the debts as “disputed.”  The plaintiff filed suit against ARS, contending that ARS violated 15 U.S.C. §1692e(8) which provides that a debt collector may not  communicate or threaten to communicate any “credit information which is known or which should be known to be false, including the failure to communicate a disputed debt is disputed.”  15 U.S.C. §1692e(8).

The primary issue before the district court was whether a debt collector may rely upon a consumer’s failure to seek validation within the thirty day validation period as a defense for the debt collector’s failure to report a subsequent dispute as to the debt to the credit reporting agencies. The district court held that it could not.  In doing so, the court stated that the protections provided by section 1692e(8) were separate and apart from those provided by section 1692g.  While ARS was not under an affirmative duty to correct its reporting prior to its receipt of the plaintiff’s fax, once it received the fax, it was under an affirmative duty to communicate in its future reporting that the debt was disputed.  Sayles v. Advanced Recovery Sys., 206 F. Supp. 3d 1210,  1216 (S.D. Miss. 2016).

On appeal, the Fifth Circuit agreed with the district court.  In doing so, the Fifth Circuit focused on the specific language of section 1692e(8) and,  particularly, the “knows or should know” language.  “This “knows or should know” standard requires no notification by the consumer, written or oral, and instead, depends solely on the debt collector’s knowledge that a debt is disputed, regarding less of how or when that knowledge is acquired.  Applying the meaning of “disputed debt” as used in {1692g(b)] to [1692e(8)] would thus render the provision’s “knows or should know” language impermissibly superfluous.” .  Sayles v. Advanced Recovery Sys., 2017 U.S. App. LEXIS 12080 at *5-6 (internal citations omitted).

Wednesday, July 12, 2017

Mortgage Servicer’s Transfer Notice Violates FDCPA


Mortgage servicers need to carefully review their Transfer Notices when the debt is in default at the time of transfer.  In an unpublished decision, the Eastern District of New York recently held that a “Notice of Servicing Transfer” violated 15 U.S.C. §1692e(10).  In Baptiste v. Carrington Mortgage Services, LLLC, 2017 U.S. Dist. LEXIS 103609 (E.D.N.Y. July 5, 2017), Carrington sent a “Notice of Servicing transfer” to the plaintiff alerting him that his mortgage servicing was being transferred to Carrington.  The letter went on to advise the plaintiff that “going forward, all mortgage payments should be sent to Carrington, but that ‘[n]othing else about [the] mortgage loan will change.”  Baptiste at *2.  The letter additionally included an FDCPA notice that stated that “[t]his notice is to remind you that you owe a debt.  As of the date of this Notice, the amount of debt you owe is $412,078.34.”  Id..  The attached FDCPA notice also noted that “[Carrington} is deemed to be a debt collector attempting to collect a debt and any information obtained will be used for that purpose.” Id. at *3.  At the time of the servicing transfer, the mortgage was in default.  The plaintiff contended the letter violated 15 U.S.C. §1692e(10) by failing to disclose that the balance on his debt was increasing due to interest.  Carrington moved to dismiss.

In denying Carrington’s motion to dismiss, the court relied upon the Second Circuit’s recent decision in Avila v. Riexinger & Associates, LLC, 817 F.3d 72 (2nd Cir. 2016).  In Avila, the Second Circuit held “that the FDCPA requires debt collectors, when they notify consumers of their account balance, to disclose that the balance may increase due to interest and fees.” Avila, 817 F.3d at 76. 

In support of its motion to dismiss, Carrington argued that Avila was not applicable because the Transfer Notice was not a collection attempt and therefore not subject to section 1692e.  The court, however, rejected that argument relying on another Second Circuit decision, Hart v. FCI Lender Servs., Inc., 797 F.3d 219 (2nd Cir. 2015).  In doing so, the court considered the following factors when reviewing the notice: (a) the Notice’s reference to the debt and direction that payments be sent to Carrington; (b) the reference to the FDCPA and inclusion of the section 1692g notice; and (c) the inclusion of a statement that the Notice is an attempt to collect a debt.  These factors, according to the court, indicated that the Notice of Transfer was sent in connection with the collection of a debt.

Mortgage servicers need to pay careful attention to each and every communication with consumers beginning with their Notice of Transfer. While mortgage servicers are not covered by the FDCPA when servicing current accounts, those mortgage servicers accepting transfers of defaulted portfolios or mixed portfolios should review each and every communication provided to a consumer to ensure its compliance with the FDCPA.

 

 

Tuesday, June 27, 2017

CFPB's Monthly Complaint Report Takes a New Approach

The CFPB has issued its monthly complaint report. The report is a high level snapshot of trends in consumer complaints. The report traditionally provides a summary of the volume of complaints by product category, by company and by state. This month, however, the Report has taken a new view- one based upon a state by state analysis and new national statistics. Here are the major takeaways on the national front:
  • The Report rather succinctly notes the following
    • Complaint volume rose 7% between 2015 and 2016.
    • Debt collection and mortgage product types account for approximately half of all complaints filed. 
    • Over half of all consumers submitting complaints want their narratives published.

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.

Ratification

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).

 

 

Wednesday, May 10, 2017

Successors by Merger May Not be Debt Collectors


A recent decision from a Louisiana district court should provide some comfort to banks and other financial institutions who acquire other entities by merger – at least in the Fifth Circuit, they are not debt collectors.  As most know, Bank of America (BoA) acquired Countrywide Bank FSB and its mortgage portfolio in 2008.  In Jackson v. Bank of America, N.A., the consumer brought an FDCPA claim against BoA based upon its actions in a foreclosure suit and an underlying mortgage which originated with Countrywide.  The consumer alleged BoA was a debt collector under the FDCPA because his “loan was in default prior to the transfer from his original lender Countrywide to Bank of America.”  Jackson v. Bank of America, 2017 U.S. Dist. LEXIS 46117 at *6 (M.D. La. Mar. 28, 2017).

In reviewing the issue of whether BoA was a debt collector subject to the FDCPA, the court took judicial notice that BoA acquired the mortgage loan by merger and not by transfer or assignment while in default.  The acquisition by merger was a key factor for the court which also relied upon prior Fifth Circuit precedent, Brown v. Morris, 243 Fed. Appx. 31 (5th Cir. 2007).  In Brown, the “Fifth Circuit considered that the term ‘obtained’ had not been defined under the FDCPA, and looked to the act’s legislative history noting how, ‘[t]he Senate Report accompanying the FDCPA explained that the purpose of the act was ‘to protect consumers from a host of unfair, harassing, and deceptive debt collection practices without imposing necessary restriction on ethical debt collectors.’” Jackson at *7.  As was the case in Brown, the court concluded that “obtained” was synonymous with “assigned” and ultimately, since the mortgage company had not been specifically assigned the mortgage for debt collection purposes but rather had acquired it through merger from its prior mortgage company, the mortgage company was not a debt collector.

In addition to those cases which rely upon the creditor’s primary purpose not being debt collection, this case should also prove useful to those representing successor creditors against debt collection claims-  particularly those where portions of the portfolios acquired are performing loans.

Sunday, May 7, 2017

CFPB's Monthly Report Focuses on Student Loan Products


The CFPB’s most recent monthly report on consumer complaints spotlights student loans. The report is a high level snapshot of trends in consumer complaints. The Report provides a summary of the volume of complaints by product category, by company and by state.

 

Complaint Volume by Product

  • The three most complained of consumer products remain debt collection, credit reporting and mortgage.
  • Student loans continue to reflect the highest increase in change from last year– a 325% increase when comparing January-March 2017 to the same period in 2016. The CFPB attributes this increase to the updating of its student loan intake form to include complaints after Federal student loan servicing in late February 2016, as well as an enforcement action initiated by the CFPB against Navient in January 2017.
  • Student loan complaints showed the greatest month to month decrease after spiking in January 2017 after what appears to be a response to the Bureau’s enforcement action against Navient.

Highlighted Product: Student Loans

 

The Report’s spotlighted consumer product, student loans, reflects that the majority of student loan complaints arise from non-federal student loans.  Interestingly, however, the majority of complaints described arise from federal student loans. 

  • With respect to federal loans, consumers complain about difficulty with receiving information regarding alternative payment plans and particularly, the failure of servicers to provide more beneficial payment repayment options like income-driven repayment plans. 
  • Consumers with nonfederal consumer loans complained most about the misapplication of payments and inaccurate accounting of payments.
  • Consumers in general also complained about credit reporting inaccuracies.

 

Friday, April 21, 2017

Weltman takes on the CFPB's Stance on Meaningful Involvement


This week the CFPB filed suit in the Northern District of Ohio against Weltman, Weinberg & Reis, an Ohio law firm.  The complaint is a continuation of the CFPB’s attack on collection law firms and their level of meaningful involvement.  Similar to its enforcement action against Works & Lentz, the CFPB’s attack in Weltman is focused on prelitigation collection efforts.

In its complaint CFPB alleges that the attorneys at Weltman were not meaningfully involved with the firm’s pre-suit demand letters and collection calls.   The CFPB takes issue with the following alleged practices:

  • Attorneys had not reviewed the individual account information before sending demand letters or allowing its non-attorneys to make collection calls;
  • The letters are generated through an automated process;
  • The letters are on the firm’s letterhead and contain the firm’s name in type face in the signature line;
  • The use of the following language when attorneys have not generally review the corresponding consumer’s account prior to sending the letter:
    • “Failure to resolve this matter may result in continued collection efforts against you or possible legal action by the current creditor to reduce this claim to judgment.”
    • “This law firm is a debt collector attempting to collect this debt for our client and any information obtained will be used for that purpose.”
    • “Please be advised that this law firm has been retained to collect the outstanding balance due on this account.”

As acknowledged by the CFPB, it views collection law firms as collection agencies not law firms at any time prior to an attorney reviewing the consumer’s account file and determining that the consumer owes the amount demanded.  This viewpoint is similar to what was reflected in the CFPB’s consent order with Works & Lentz in which the Consent Order required that, “in connection with the collection of a debt, if any attorney has not been meaningfully involved in reviewing the consumer’s account at issue and has not made a professional assessment of the debt”, the law firm may not:

  • State or imply that a written communication in connection with the collection of a debt, including a demand letter, is from an attorney or on behalf of an attorney; 
  • State or imply that a phone call in connection with collection of the debt is from or on behalf of an attorney; 
  • Refer to “attorneys” or a “law firm” in any automated message that plays for consumers calling the firm regarding a debt; 
  • State or imply an attorney has reviewed the account;  or
  • State or imply that the firm may file suit or seek legal action.

Instead in those instances, the CFPB position is that the communications must include a disclaimer that no attorney has reviewed the account at issue and refrain from referring to the “law firm.”

As we have stated before, this approach is problematic on a number of levels.  First, the CFPB’s utter disdain for collection attorneys is apparent in its discussion of their contingent fee arrangements and concerns with use of the firm’s name in the automated recordings. To the point, by prohibiting the law firms from identifying themselves as such when there has not been meaningful attorney involvement with the account and no "professional assessment" has been made, the Consent Order effectively requires the law firm to violate 15 U.S.C. 1692e by not disclosing the true name of the debt collector. To counteract that concern, the Order makes it implicitly clear that attorneys will need to be meaningfully involved at the intake point forward and yet fails to clearly articulate what that means. Remember, that the Hanna Consent Order set the expectation that that Hanna have in hand account documentation before engaging in collection efforts, but did not require the law firm document their meaningful involvement except prior to filing suit. The current consent order suggests that is not enough.

 

The good news is that Weltman has decided to fight and its press release emphasizes that t Weltman fully cooperated with the CFPB’s two and a half year investigation and that the investigation failed to uncover any instance of consumer harm. 

 “We fundamentally disagree with the CFPB's allegations and believe that this lawsuit is the result of our firm's refusal to be strong-armed into a Consent Order," said WWR Managing Partner Scott Weltman. "We are a law firm that is legally allowed, under federal and state law, to provide collection and legal services. We are being truthful with consumers and factually accurate when we use our name and our company's letterhead for proper debt collection activity. WWR has taken every reasonable step to ensure that it collects on consumer debts in compliance with those statutes and to ensure that every statement made to consumers is accurate and not misleading. I'd also like to emphasize that the CFPB’s two-and-a-half-year investigation into our firm did not uncover a single instance of consumer harm.”

 

Collection law firms should closely monitor the Weltman litigation and continue to review their own practices.  For now, the CFPB’s position on meaningful attorney involvement requires meaningful attorney involvement to be documented from the time of intake through the closure of the file to prevent any undue attention from the CFPB.

 

 

 

Tuesday, April 18, 2017

CFPB Issues its Annual Fair Lending Report and Sets its 2017 Agenda



The CFPB has issued its 2016 Fair Lending Report which provides a summary of the Bureau’s efforts in fair lending for 2016.  The Report also includes an indication of the Bureau’s fair lending priorities for 2017.  Here are the highlights:

·        A Risk Prioritization Approach. The Report confirms that the Bureau takes a risk-based prioritization approach to supervisory and enforcement.  Risk based prioritization considers several factors including cooperation with the Bureau’s special population offices, consumer complaints, tips and leads from advocacy groups, whistleblowers and other governmental agencies, supervisory and enforcement history and, of course, analysis of HMDA and other data.

·        2016 Fair Lending Activities.  The Report indicates that its 2016 focus was on mortgage and indirect auto lending, as well as credit card account management.  While the Bureau is expected to continue investigations in these three areas, it will also increase its focus on other segments of consumer credit.

·        2017 Fair Lending Priorities. Based upon this approach, the Bureau intends to increase its focus in the areas of redlining, mortgage and student loan servicing and small business lending.

·        Mortgage and Student Loan Servicing. The Report expresses concerns as to whether student loan and mortgage servicers are handling workouts and loss mitigation differently with customers based upon their race, ethnicity, sex or age.

·        Small Business Lending.  Dodd Frank charges the CFPB with ensuring that women owned and minority businesses have fair access to credit.  The CFPB intends to begin exercising small business lending supervisory authority to ensure fair access to credit.

·        Fair Lending Supervisory Observations.  The Report recaps examination observations which were previously provided by the CFPB in its 2016 Summer and Fall Supervisory Highlights and reported previously.

·        Redlining.  While we are not going to rehash all of the 2016 Supervisory Highlights, the Bureau’s observations as to redlining bear repeating. The Report indicates the factors considered by the CFPB is assessing redlining risk and provides the following laundry list:

o   Strength of the institution’s compliance management system including its underwriting policies and guidelines;

o   Unique attributes of the relevant geographic area, including population demographics, credit profiles and the housing market;

o   Lending patterns including applications and originations with and without purchased loans;

o   Peer and market comparisons;

o   The institution’s physical presence in the area (full service branches, ATM only branches, brokers and loan production offices, etc.) as well as the services offered;

o   Marketing;

o   Mapping;

o   CRA assessment area and market area more generally;

o   The institution’s lending policies and procedures record;

o   Additional, miscellaneous evidence (including whistleblower tips, loan officer diversity, testing, and comparative file reviews); and

o   An institution’s explanation for apparent disparate treatments.

·        Ongoing Investigations.  The Bureau’s ongoing investigations and referrals to DOJ include discrimination in mortgage and auto lending, as well as discrimination in credit card account management.

Based upon the Report and prior announcements regarding fair lending prioritization from the Bureau in the past several months, mortgage and student loan servicers should be re-examining their policies and procedures as to loss mitigation and workouts to ensure their practices are consistent with the Equal Credit Opportunity Act and other fair lending mandates.

Monday, April 17, 2017

District Court Takes Perplexing View on FDCPA Standing


An Illinois district court has taken a broad view of standing under section 1692e of the FDCPA.  In Koval v. Harris & Harris, Ltd., 2017 U.S. Dist. LEXIS 53124 (N.D. Ill. Apr. 5, 2017), a demand letter addressed to Michael Koval was opened and read by his daughter, Kate Koval, who serves as his legal guardian and allegedly had authority to open and read her father’s mail and make decisions on his behalf concerning the mail.  Kate Koval took issue with certain statements contained in the demand letter and filed suit against the debt collector in her individual capacity alleging violations of 15 U.S.C. §1692e. 

The debt collector moved to dismiss the complaint.  In doing so, the debt collector maintained that Kate Koval did not have standing in her individual capacity to make claims under section 1692e as she was not an obligor on the debt and had not brought the suit in her representative capacity. 

Section 1692e prohibits false, deceptive, or misleading representations in connection with the collection of any debt.  Generally, the FDCPA’s purpose is to protect against abusive debt practices.  While several of the FDCPA’s sections are specific as to their intended scope (see, for instance 1692d) and whether they include persons other than the consumer, section 1692e is silent.

In addressing the debt collector’s argument that Kate Koval did not have standing to sue in her individual capacity, the court looked at other provisions of the FDCPA and concluded that while certain provisions are expressly limited to communications with the consumer (for instance, 1692g), section 1692e contains no such limitation.   The court therefore looked to whether the plaintiff was within the statutory provision’s zone of interest.  Relying on Seventh Circuit case law which instructed that “[t]he protections of the FDCPA generally do not extend to third parties, unless that person ‘can be said to stand in the consumer’s shoes,’” the court concluded that as her father’s legal guardian plaintiff was in the zone of protection.  “Protecting close associations…is consistent with the statute’s own definition of “consumer”.  Koval at *4.

Moreover, the court was influenced by two other factors.  First, the FDCPA’s definition of “consumer” includes the consumer’s legal guardian.  The plaintiff, therefore, could have sued in her representative capacity and avoided the standing issue altogether.  Secondly, the FDCPA provision at issue (1692e) did not explicitly limit itself to consumers. 

The court’s decision is troublesome.  While it is apparent from its face that the court is attempting to take an equitable and practical view under the facts, it does not prevent the conclusion that the court has allowed a third party to sue personally and potentially recover personally damages for a collection letter sent to someone else.