Tuesday, March 31, 2020

North Carolina Department of Insurance Amends COVID-19 Order

On March 30th, Commissioner Mike Causey amended his March 27th Order regarding COVID-19 to provide for thirty days rather than sixty days.  The Order will now expire April 26th. A copy of the Amended Order can be found here.  Aside from the change in the Order's expiration date, the Order remains in effect as originally reported yesterday.  

The DOI Order notes the emergency conditions in the state and invokes the provisions of N.C. Gen. Stat. § 58-2-46 (1)-(3). N.C. Gen. Stat. § 58-2-46(2) requires collection agencies and debt buyers to give their customers the option of deferring premium or debt payments[.]” The DOI Order designates the entire state as the affected geographic area, so consumers located anywhere in the state must be given the option to defer payments. Further, Chapter 58 of the General Statutes broadly defines “consumers” to include businesses, so the mandate applies equally to traditional consumer debt (that incurred for personal, family or household debt) and commercial debt. 

Additionally, the NCDOI has confirmed that licensed entities are not required to preemptively notify "consumers" of the waiver option but do have an obligation to offer the deferred payment to "consumers" when discussing payment. The option to defer payments must be given for payments that are due through and including the time period covered by the DOI Order as amended. Subsection 2 goes on to state that the deferral period “shall be 30 days from the last day the premium or debt payment may be made under the terms of the policy or contract.” While this statutory section is open to (at least) a few possible interpretations, we believe the best reading is that the option to defer must be given until at least April 26, 2020, when the DOI Order is currently set to expire. If a consumer elects to defer a payment, the deferral must be granted and the new payment date should be set 30 days after the original payment date. 

Monday, March 30, 2020

Governor Cooper and Dept of Insurance Issue COVID-19 Orders Affecting Debt Collection Agencies, Others


By: Caren Enloe and Zachary Dunn



In response to the rapidly developing COVID-19 pandemic, North Carolina Governor Roy Cooper issued an order on March 27, 2020 requiring all people in the state to stay in their homes “except as permitted in” the order. In a related move, the Department of Insurance invoked statutory powers which require collection agencies and others licensed and regulated by the Department of Insurance to offer their customers the option to defer debt payments. Both orders are effective statewide and have the potential to affect business operations for the time being. The basics of each order are discussed in more detail below.



Stay at Home Order

The Stay at Home Order, available here, applies statewide and requires all persons present in North Carolina to stay in their homes except for certain specified essential purposes.  The Order additionally only allows certain specified essential businesses to remain physically open. The Order takes effect at 5:00pm Monday, March 30, 2020.



As far as financial institutions and debt collectors are concerned, there are two definitions of “Essential Businesses” which may apply and therefore allow employees to physically report to work:



Businesses that Meet Social Distancing Requirements: The Stay at Home Order exempts businesses that “conduct operations while maintaining Social Distancing Requirements” between and among its employees and customers. Social Distancing Requirements, in turn, is defined in the Stay at Home Order as

·         Maintaining at least six (6) feet distancing from other individuals;

·         Washing hands using soap and water for at least twenty (20) seconds as frequently as possible or the use of hand sanitizer;

·         Regularly cleaning high-touch surfaces; and

·         Facilitating online or remote access by customers if possible.



Financial and Insurance Institutions: The Stay at Home Order also exempts a large array of financial and insurance institutions, including “bank, currency exchanges, consumer lenders” and “affiliates of financial institutions.” While debt collectors and creditors are not specifically included on the enumerated list, this section of the order is broadly worded and arguably may include those businesses. However, whether this section applies would likely be fact specific.



Please note that the Order allows for local orders which are more restrictive and those entities with physical operations in North Carolina should verify whether or not a local order is in place which contains additional restrictions.  Please be aware that violation of the Stay at Home Order is a Class 2 misdemeanor.



Department of Insurance Order

The Department of Insurance, which regulates debt collectors, debt buyers, and insurance companies in North Carolina, also issued a state-wide order last Friday, available here. The DOI Order notes the emergency conditions in the state and invokes the provisions of N.C. Gen. Stat. § 58-2-46 (1)-(3). The order currently expires May 26, 2020.



N.C. Gen. Stat. § 58-2-46(2) requires collection agencies and debt buyers to give debtors the option of deferring debt payments[.]” The DOI Order designates the entire state as the affected geographic area, so consumers located anywhere in the state must be given the option to defer payments. Further, Chapter 58 of the General Statutes broadly defines “consumers” to include businesses, so the mandate applies equally to traditional consumer debt (that incurred for personal, family or household debt) and commercial debt.



The option to defer payments must be given for payments that are due through and including the time period covered by the DOI Order. Subsection 2 goes on to state that the deferral period “shall be 30 days from the last day the premium or debt payment may be made under the terms of the policy or contract.” While this statutory section is open to (at least) a few possible interpretations, we believe the best reading is that the option to defer must be given until at least May 26, 2020, when the DOI Order is currently set to expire. If a consumer elects to defer a payment, the deferral must be granted and the new payment date should be set 30 days after the original payment date. However, if that new payment date is still within the time period during which the DOI Order is in effect – i.e. is before May 26, 2020 – the new payment date should be extended to May 26, 2020.



Key Takeaways

The Stay at Home Order and DOI Order are focused on different very subjects, but both have the potential to affect business operations. While working from home is likely the best option if feasible, businesses may be able to stay open if they can fit within one of the exceptions in the Stay at Home Order. However, interpretation and enforcement of the order is still very much up in the air, and violation risks a Class 2 misdemeanor penalty. If you have any doubts, we recommend contacting your attorney to discuss.



The DOI Order requires debt collectors give debtors, both commercial and individuals, the option to defer debt payments until (at least) May 26, 2020. While neither the DOI Order nor N.C. Gen. Stat. § 58-2-46(2) explicitly require notification of the option to defer to consumers, notification of the option to defer is likely the safest course of action and should be built into all current scripts and correspondence.


Wednesday, March 4, 2020

House Passes Bill to Provide Additional Protections to FDCPA for Servicemembers


The House has passed a bipartisan bill that amends the FDCPA to provide additional protections to servicemembers.  The bill, H.R. 5003, amends 15 U.S.C. §§1692c and f to add provisions regarding communications to servicemembers, their dependents, and those discharged within the past year ("covered persons").  The bill proposes to amend Section 1692c, which addresses communications in connection with debt collection to prohibit debt collectors in connection with the collection of any debt of a covered person from threatening with a reduction in rank, a revocation of security clearance or military prosecution. The bill proposes to similarly amend Section 1692f to consider such representations made to covered persons as being an unfair debt collection practice.  The bill has been forwarded to the Senate’s Committee on Banking, Housing and Urban Affairs for further consideration.


Monday, February 17, 2020

Sixth Circuit Side Steps the Bona Fide Error Defense


A recent opinion issued by the Sixth Circuit should prove helpful to attorneys facing unsettled issues of state law.  As drolly described by the Court, “[a] lawyer sued two lawyers, and each side hired more lawyers.  Five years later, after ‘Stalingrad litigation’ tactics, discovery sanctions, and dueling allegations of professional misconduct, we are left with $3,662 in damages and roughly $180,000 in attorney’s fees.”  Van Hoven v. Buckles & Buckles, 2020 U.S. App. LEXIS 1483, *2 (6th Cir. Jan. 16, 2020).   So what caused this apocalyptic litigation war?  A series of post judgment garnishments.

In Van Hoven, a law firm enforced a judgment by filing a series of garnishments.  With each garnishment, the law firm included within the post-judgment costs accrued to date their garnishment filing fees.  The consumer contended that the law firm violated §1692e of the FDCPA by seeking the costs of each garnishment, contending that doing so violated Michigan law because: (a) the law firm was not allowed to include the costs of the present garnishment within the amount due; and (b) the law firm was not allowed to include the costs of prior unsuccessful garnishments.  Michigan law, at the time, was unclear as to whether a creditor could include the costs of the present garnishment in their calculation of costs.  At the trial court level, the consumer and the class she represented were successful and were awarded a total of $3,662.00 in damages and $186,600.00 in attorney’s fees.  The law firm appealed.

On appeal, the Sixth Circuit was left to address whether “an inaccurate statement about state law counts as a ‘false … representation’?”  Id. at *8.  The Court started by noting that not every violation of state law is a violation of the FDCPA.  In order for an inaccurate statement about state law to be actionable, the statement must be both inaccurate and material.

While the Court quickly determined the statements at issue were material, it ultimately concluded they were not false.  “Even though the Act covers ‘false’ material statements about state law, that does not mean it extends to every representation about the meaning of state law later disproved.”  Id. at *9.  While the Court considered the Supreme Court’s holdings in Jerman v. Carlisle, 559 U.S. 573 (2010) and Heintz v. Jenkins, 514 U.S. 291 (1995), it veered away from employing the bona fide error defense when considering the law firm’s interpretation of Michigan law.  In doing so, the Court explained that “[t]he key question … is not whether the bona fide error defense applies to interpretations of state law; it is whether this is a cognizable “false representation.”  Id. at *21.

Instead, the Court turned to Rule 11, stating that “[m]ore helpful is the analogy to sanctions based on attorneys’ statements in litigation” and noting that it is only sanctionable to advance legal contentions that are not warranted by existing law.  Id. at *13.   Key to the Court’s determination that the statements were not false was the fact that at the time the statements were made (and the costs sought), the law was unsettled.[1]  The Court noted that

[i]n dealing with open questions of state law, excellent arguments sometimes will appear on either side.  And we generally don’t think of a position on the meaning of state law as false at the time it was issued whenever a higher court over time takes a different position in a later case … A representation of law is not actionably false every time it turns out wrong.”

Id. at *14.  Drawing from Rule 11 and its threshold for sanctions, the Court held that “a lawyer does not ‘misrepresent’ the law by advancing a reasonable legal position later proved wrong. This logic applies with even more force to representations of law given the frequent before-the-case difficulty, sometimes indeterminacy of legal questions.”  Id.

Applying this rationale, the Court reversed the district court on the issue as to whether the law firm made misrepresentations in seeking its current garnishment costs.  The Court additionally remanded the remaining issue (whether the law firm improperly sought costs for prior unsuccessful garnishments) to the district court to determine whether that claim was subject to the bona fide error defense.

The opinion provides an excellent road map for law firms dealing with unsettled areas of law and should provide law firms with additional avenues for defense.





[1] Michigan later amended its rules to clarify that creditors may include their current costs in their garnishment requests.

Monday, February 10, 2020

CFPB Issues Semi-Annual Report to Congress


The CFPB has issued its semi-annual report to Congress.  The Report, which covers April through September of 2019, is mandated by Dodd-Frank and was released in conjunction with Director Kraninger’s testimony to the House Financial Services Committee.  Here are a few of our key take-aways.

Credit Reporting is a Focus of the Bureau.  The Report identifies credit scoring and credit reporting as a source of major concern for consumers.  Specifically, the report notes that the reporting of collections and bankruptcies have a significant impact on consumer credit scores and upon consumer lending. The Report also confirms what litigation trends are showing - credit reporting has surpassed debt collection as the most complained of consumer product.  In the twelve-month period ending September 30, 2019, credit reporting accounted for 43% of all consumer complaints.

Debt Collection Rule – Mum is the Word.  The Report is silent as to when a final debt collection rule will be forthcoming.  The Report simply indicates that the proposed rule was published and that the Bureau is reviewing the submitted comments with no indication as to when the final rule will be forthcoming.  Keeping in mind that the reporting period covered ended in September, perhaps that is not unusual except for the fact that the Report includes footnoted updates as to other issues addressed in the report.  Moreover, debt collection complaints no longer are the most complained of consumer product, having been surpassed by credit reporting.  For the year ending September 30, 2019, debt collection only accounted for 24% of all consumer complaints.

Friday, January 31, 2020

Deepening Circuit Split, Third Circuit Holds that Items Seized Pre-Petition Did Not Violate Automatic Stay


The Third Circuit has recently held in In re Denby-Peterson, 941 F.3d 115 (3rd Cir. 2019) that creditors who refuse to relinquish an item that was seized pre-petition are not subject to sanctions because their refusal does not violate 11 U.S.C. § 362’s automatic stay. The case further deepens a circuit split on the issue.



The Facts

As the Third Circuit explained, “the center of this bankruptcy appeal is “‘America’s first sports car’: The Chevrolet Corvette.” Joy Denby-Peterson purchased a 2008 Corvette in July 2016, and several months later the vehicle was repossessed when Denby Peterson failed to make all of the required loan payments. After repossession, Denby-Peterson filed an emergency Chapter 13 Bankruptcy petition in the Bankruptcy Court for the District of New Jersey. She then notified her creditors of the filing and demanded return of the Corvette. The creditor refused to do so, and Denby-Peterson filed a motion for turnover seeking an order (1) compelling the return of the Corvette, and (2) imposing sanctions for an alleged violation of the automatic stay. After a two-day hearing, the Bankruptcy court ordered the creditor to return the Corvette as required by 11 U.S.C. § 542(a), but denied the request for sanctions. On the latter point, the bankruptcy court reasoned that the creditor’s refusal to return the Corvette was not a violation of the automatic stay absent a court order requiring turnover. Denby-Peterson appealed to the district court (which affirmed on similar grounds) and again to the Third Circuit.



The Third Circuit’s Ruling: Meaning of Section 362’s Automatic Stay and the Interplay of Section 542’s Turnover Provision

Noting a split in authority among the federal circuits, the Third Circuit sided with the minority of circuits by holding that a secured creditor does not violate § 362’s automatic stay by maintaining possession of collateral that it lawfully repossessed pre-petition, even after notice of the debtor’s bankruptcy. The Court began its analysis by considering the plain language of Section 362(a)(2), which provides (as relevant here) that the filing of a bankruptcy petition “operates as a stay . . . of . . . any act to . . . exercise control over property of the estate.”  11 U.S.C. § 362(a)(3). The court noted that the operative terms and phrases of the Section are “stay,” “act,” and “exercise control” and concluded, after a review of the ordinary meaning of those terms, that “Section 362(a)(3) prohibits creditors from taking any affirmative act to exercise control over property of the estate.” The Court further held that this duty “is prospective in nature . . . the exercise of control is not stayed, but the act to exercise control is stayed.” Denby-Peterson, 941 F.3d at 126 (emphasis in original).  Based on this enunciation of the rule, the Court held that on the facts of this case, “a post-petition affirmative act to exercise control over the Corvette is not present,” and thus there was no violation of the automatic stay. Id.



The Court also considered and rejected a related argument made by the debtor that Section 362 should be read in pari materia with 542(a)’s “allegedly self-effectuating” turnover provision. Section 542 provides that an entity in possession, custody, or control of property of the debtor “shall deliver” the property to the bankruptcy trustee. The Court acknowledged that Section 542 uses mandatory language – “shall deliver” – but explained that the question in this case “is when must a creditor deliver?” The Court analyzed Section 542’s provisions and held that “it would be illogical for us to interpret the turnover provision as imposing an automatic duty on creditors to turn over collateral to the debtor upon learning of a bankruptcy petition.” Id. at 130. Doing so would allow debtors to temporarily strip creditors of their rights to assert affirmative defenses such as laches, or to claim that the property is not property of the estate. While the Court agreed that creditors could still make these arguments in the course of the bankruptcy proceedings if the collateral was immediately turned over, it held that it did “not read the turnover provision as placing the onus on creditors to surrendering the collateral and then immediately file a motion in Bankruptcy Court asserting their rights.” Therefore, the Court reasoned, the mandatory language in Section 542 does not lead to the conclusion that Section 362’s automatic stay is self-effectuating.



The Court also rejected the notion that § 362 and § 542 must be read together, reasoning that “[e]ven assuming the turnover provision is self-executing . . . there is still no textual link between Section 542 and Section 362.  The language of the automatic stay provision and the turnover provision do not refer to each other. The absence of an express textual link between the two provisions indicates that they should not be read together, so violation of the turnover provision would not warrant sanctions for violation of the automatic stay provision.” Id. at 132.





Widening of a Circuit Split

As the Third Circuit noted, its decision in Denby-Peterson deepened a split among the circuits on the meaning of Section 362’s automatic stay provision. The Third Circuit joined the Tenth and D.C. Circuits in holding that a secured creditor does not have an affirmative obligation to return a debtor’s collateral immediately upon notice of the bankruptcy. On the other side of the split, the Second, Seventh, Eighth, and Ninth Circuits have held that Section 362 requires a creditor to immediately return collateral that was repossessed pre-petition as soon as the creditor knows of the bankruptcy filing.



This leads to a complicated state of the law, especially for nationwide creditors. In some circuits, a creditor is permitted to ignore a post-petition demand for the return of collateral that was lawfully repossessed pre-petition. In other circuits, however, that same conduct could expose the creditor to sanctions for willful violation of Section 362’s automatic stay. And still in other circuits, the law is wholly unclear and the creditor must make a calculated risk of either returning the collateral thereby necessitating the expenditure of more resources to protect its rights, or possibly be subject to sanctions.



Due to the deep (and deepening) circuit split, the state of the law related to § 362 is obviously disuniform. In December 2019, the Supreme Court agreed to decide the issue presented by Denby-Peterson by granting certiorari in a Seventh Circuit case, In re Fulton, 926 F.3d 916 (7th Cir. 2019). The Fulton court held that the Bankruptcy Code’s turnover provision requires immediate turnover of estate property that was seized pre-petition; look for the creditor’s attorneys in that case to rely heavily on Denby-Peterson’s reasoning in seeking to obtain a creditor-friendly ruling at the Supreme Court.



Zachary Dunn is an attorney practicing in Smith Debnam Narron Drake Saintsing & Myers, LLP’s Consumer Financial Services Litigation and Compliance Group