Tuesday, August 27, 2019

First Circuit Affirms Bankruptcy Court’s Judgment in Favor of Mortgage Company


By Caren D. Enloe


A First Circuit Bankruptcy Appellate Panel (the “Panel”) recently held that a mortgage company’s communications did not violate the discharge injunction when viewed under an objective standard and considering the facts and circumstances surrounding the communications. Kirby v. 21st Mortg. Corp., 599 B.R. 427 (2019). 


In Kirby, the consumers filed Chapter 7 while engaged in a state sponsored Foreclosure Diversion Program.  After the Kirbys received their discharge, the parties continued with the diversion program, including mediation. Post discharge, but within the context of the mediation and other loss mitigation efforts, the mortgage company sent a series of communications to the Kirbys in care of their counsel.  All but one of the documents contained a bankruptcy disclaimer informing the Kirbys that


To the extent your original obligation was discharged, or is subject to an automatic stay of bankruptcy under Title 11 of the United States Code, this notice is for compliance and/or informational purposes only and does not constitute an attempt to collect a debt or to impose personal liability for such obligation. However, a secured party retains rights under its security instrument, including the right to foreclose its lien.



Id. at 434.  After all attempts at loss mitigation failed, the Kirbys’ counsel sent a cease and desist notice to the mortgage company.  After receipt of the cease and desist, the mortgage company sent an annual escrow account disclosure statement, a letter regarding a possible short sale as an alternative to foreclosure and a PMI Disclosure, all of which were addressed to the Kirbys in care of their counsel.  The mortgage company additionally sent a Right to Cure directly to the Kirbys which contained a bankruptcy disclaimer. In total, the mortgage company sent 24 written communications to the Kirbys or their counsel in the 26 month period following the discharge.



Post foreclosure, the Kirbys reopened their bankruptcy and initiated an adversary proceeding alleging, in part, that the mortgage company’s post-discharge communications were coercive attempts to collect a debt in violation of the discharge injunction.  The bankruptcy court disagreed and granted summary judgment in favor of the mortgage company.



On appeal, the issue before the court was whether the post-discharge communications improperly coerced or harassed the Kirbys into paying the discharged debt.  While the Kirbys argued that the sheer volume of the communications amounted to coercion, even if the individual communications did not, the Panel did not agree and concluded that the surrounding circumstances and context in which the communications were sent eliminated any coercive or harassing effect of the post-discharge communications. Id. at 444.



In reaching its decision, the Panel noted that the discharge injunction does not prohibit every communication between a creditor and debtor—only those designed to collect, recover or offset any discharged debt as a personal liability of the debtor. The court then examined the individual communications sent by the mortgage company.  Regarding the letters sent during mediation period, the Panel first observed that each of the communications was sent to the Kirbys’ counsel and not directly to the Kirbys.  Moreover, all but one of those communications included “unambiguous bankruptcy disclaimers informing Mr. Kirby that if he had received a bankruptcy discharge, 21st Mortgage was not attempting to collect a debt from him personally and the correspondence was for informational purposes only.” Id. at 444.  The communication which did not include the bankruptcy disclaimer was an ARM Notice which merely informed the Kirbys of a change in interest rate.  With respect to the ARM Notice, the lack of a bankruptcy disclaimer did not concern the Panel and was not a per se violation of the discharge injunction because it was evident from the circumstances that there was no coercion or harassment.  Id.  Moreover, the Panel noted, when debtors initiate contact with a creditor to negotiate alternatives to foreclosure after post-discharge, certain communications from the creditor are logical and will not violate the discharge injunction. Id. at 445.  The Panel also concluded that the post mediation communications were either sent for informational purposes or to enforce the Defendant’s mortgage foreclosure rights and therefore did not violate the discharge injunction.



Based on the totality of the circumstances surrounding the post-discharge communications, together with the substance of those communications, the Court concluded that the correspondence in question, whether viewed individually or cumulatively, was not coercive or harassing and did not violate the discharge injunction.  Id. at 448.



Caren Enloe is a partner with Raleigh, NC’s Smith Debnam and leads the firm’s Consumer Financial Services Litigation and Compliance Group. 

Monday, August 26, 2019

Letters Demanding Payment Did Not Overshadow Validation Period


By: Zachary K. Dunn


A debt collection agency did not violate § 1692g(b)’s 30-day validation period by sending two letters demanding payment and offering settlement terms during that period, a district court in Illinois has ruled. In Moreno v. AFNI, Inc., 2019 U.S. Dist. LEXIS 107654 (N.D. Ill June 27, 2019), Mr. Moreno’s past due account with DirectTV was placed with the defendant, AFNI, Inc., for collection.  AFNI sent Moreno two letters – one in January and a second in February of 2019.



In the first letter, Afni notified Moreno that his past due DIRECTV account had been referred to them, and that he should “take this opportunity” to pay the $283.03 account balance in full. In the second letter, AFNI stated that it was “making another attempt” to contact Moreno about the past due account, and offered to settle the account for $183.97, or 65%, of the past due balance. If Moreno paid that amount, the letter informed him, the account “will be closed and marked as settled in full with Afni, Inc. and DIRECTV.” According to Moreno, Afni also “frequently” called him about the account.



Moreno filed suit against Afni for its collection activities, alleging it violated §1692g(b) because, when considering Afni’s collection activity “as a whole,” it created an impression that payment of the debt was immediately due and owing and overshadowed Moreno’s validation rights under § 1692g.



Afni filed a motion to dismiss arguing that the letters and phone calls did not violate the FDCPA, and the court agreed. The court noted that neither letter contained language that is “confusing, threatening, or creates an impression of urgency such that they 30-day validation period would be negated.” The court went on to state that “the simple act of demanding payment in a collection letter during the validation period does not automatically create an unacceptable level of confusion” such that the least sophisticated consumer would feel as if his or her validation rights were overshadowed. Further, the court noted that Moreno had not alleged he had actually talked with anyone associated with Afni during the January phone calls he allegedly received, so “no threatening or confusing statements” during those phone calls were at issue. Therefore, the court dismissed the complaint for failure to state a claim.



Key Takeaway: Key to the disposition of this matter was the failure of the consumer to allege that the debt collector made any statements, either in its letters or telephone conversations, which created a false sense of urgency or either negated or overshadowed the thirty day validation period.  The court’s dismissal was without prejudice and allowed for the filing of an amended complaint addressing the deficiencies of his original pleading; however, no amended complaint was ever filed and the case was ultimately dismissed with prejudice.



Zachary Dunn is an attorney practicing in Smith Debnam’s Consumer Financial Services Litigation and Compliance Group

Wednesday, April 24, 2019

Spring is Here and a Proposed Debt Collection Rule is Imminent


More than five years after it issued its Advanced Notice of Proposed Rulemaking, the CFPB appears poised to issue its proposed debt collection rules. The first hint that this was imminent came in the fall of 2018 when the CFPB announced it anticipated issuing a Notice of Public Rule Making in the spring of 2019.  Since then, there have been several other public statements concerning the highly anticipated rule making.

In March, the CFPB issued its annual report to Congress regarding its administration of the FDCPA and its other consumer protection-related debt collection responsibilities. In that report, the Bureau reiterated its intention to issue a Notice of proposed Rulemaking which would address such issues as communication practices and consumer disclosures. 

More recently, Kraninger offered further information on the proposed rulemaking noting the tension between the FDCPA, a 1977 statute, and the advances in technology that have occurred in the forty years since its inception.  In her prepared remarks to the Bipartisan Policy Center last week, Kraninger provided a preview of the proposed rule, noting that it will:

  • Provide a clear bright-line limits on call frequency;
  • Provide clarity on communications through email and text messages; and
  • Require debt collectors to “provide consumers with more and better information at the outset of collection to help them identify the debts and understand their options, including their rights in disputing debts or paying them.”

WHAT CAN WE EXPECT? Juxtaposing Kraninger’s comments against the Outline of Proposals for Third Party Rules which was circulated in 2016 just prior to the third party SBREFA, it is likely the proposed rule will address:

  • Information Integrity.  The 2016 proposal required debt collectors have certain information in hand before collection, such as statements of account, account histories, credit applications, chains of custody and disputes.  Kraninger’s comments suggest the proposed rule may closely track this proposal.
  • Dispute Resolution. The 2016 proposal included model disclosures and a “tear off” dispute notice.  This proposal met with significant push back from stakeholders.  Based upon Kraninger’s recent comments, it is likely the proposed rule will include additional or model disclosures but it is unclear whether the “tear off” dispute notice will be included. 
  • Communications.  Based upon Kraninger’s comments as to modernization, the rules are likely to provide some welcome clarification as to messaging, whether by email, text or voice mail.

Monday, April 15, 2019

District Court Rules “Informational Injury” Sufficient to Confer Article III Standing



By: Zachary K. Dunn

Attempting to collect on time-barred debt without informing the consumer that a payment may renew the applicable statute of limitations creates an “informational injury” sufficient to confer Article III standing, a district court in Illinois has ruled. In Navarroli v. Midland Funding LLC, 2019 U.S. Dist. LEXIS 34704 (N.D. Ill. Mar. 5, 2019), the defendants Midland Funding, LLC, Midland Credit Management, Inc. and Encore Capital Group, Inc. (collectively, “Midland”) sent Navarroli a letter offering him various payment options to settle an alleged consumer debt. The letter also informed Navarroli that the law limited how long he could be sued for the debt and how long a debt can be reported to a credit bureau, and went on to state that due to the age of the debt at issue, Midland would “not sue [Navarroli] for it or report payment or non-payment of it to a credit bureau.”

 

Despite including these statements, Midland did not include a warning that any payment “could restart the statute of limitations and revive an otherwise legally unenforceable debt.” After receiving the letter, Navarroli filed a class action lawsuit alleging that by failing to include such a warning, Midland’s letter contained false, deceptive, or misleading representations in violation of the FDCPA. Midland countered with a motion to dismiss, arguing that Navarroli’s claims amount to a bare statutory violation rather than a concrete injury in fact, thereby failing to confer Article III standing on the court.

 

The district court found that Navarroli had standing to pursue his FDCPA claims. The court recognized that even though it is Congress’ role to identify and elevate intangible harms (such as the intangible harm at issue here), just because Congress has passed a statute purporting to authorize a person to sue to vindicate a particular right does not automatically mean that person has standing. A litigant must still allege a “particularized injury” he or she has suffered before the court can hear the case.

 

The court found that Navarroli had done so here because he alleged that Midland’s letter failed to give him information – that any payment on the time-barred debt would restart the statute of limitations – that he was entitled to and the omission of which made the letter false and misleading. Relying on the Seventh Circuit’s landmark opinion in Pantoja v. Portfolio Recovery Assocs., LLC, 852 F.3d 679 (7th Cir. 2017), the district court found that this type of intangible injury was exactly the type of injury that the FDCPA was passed to protect: “We begin with the danger that a debtor who accepts the offered terms of settlement will, by doing so, waive his otherwise absolute defense under the statute of limitations. Only the rarest consumer-debtor will recognize this danger.”

 

The injury, according to the court, was clear; Navarroli received a letter asking him to pay a debt that he was not legally obligated to pay due to its age, and the letter omitted the “crucial information” that paying any amount towards the time-barred debt would restart the statute of limitations. This created an “informational injury” that was concrete and particularized, even though Navarroli did not make any payments on the debt.

 

Especially in the Seventh Circuit, dunning letters on time-barred debt should include a warning that any payment made on the debt may restart the applicable statute of limitations. Navarroli reminds us that failing to do may be construed as an “informational injury” which confers standing on the consumer to pursue an FDCPA claim, even if he or she did not make any payments on the time-barred debt.

Zachary Dunn is an attorney practicing in Smith Debnam’s Consumer Financial Services Litigation and Compliance Group

Monday, April 8, 2019

Back to Basics: District Court Opinion Serves as a Reminder that Minimum Pleading Standards Must be Met to Stave off Dismissal



By  Caren Enloe and Anna Claire Turpin

A recent District Court decision serves as a reminder to both Plaintiffs and Defendants to properly scrutinize a complaint for well-pleaded factual allegations.  In Walker v. Lyons, Doughty & Veldhuis, P.C., et. al, No. 1:18-cv-513, 2019 U.S. Dist. LEXIS 42180 (S.D. Ohio Mar. 15, 2019), the Southern District Court in Ohio held that the Plaintiff did not include well-pleaded factual allegations in her Complaint and therefore granted the Defendants’ 12(b)(6) Motion to Dismiss. 


In support of the action alleging violations of the FDCPA, the Plaintiff alleged that she incurred a debt “for purchasing items for personal, family or household purposes.”  The Defendants filed a 12(b)(6) Motion to Dismiss based in part on the Plaintiff’s failure to properly allege that she actually incurred a consumer debt.  


The court reemphasized the minimum pleading standards and determined that merely reciting the statutory language that the debt was incurred “for personal, family, or household purposes” with no other facts does not meet the minimum pleading standards required by Rule 8 of the Federal Rules of Civil Procedure and set forth in the Supreme Court’s decisions in Ashcroft v. Iqbal, 556 U.S. 662 (2009) and in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).  To establish such a claim, the complaint must include more than labels, conclusions, or recitation of the elements and instead must contain sufficient facts to support the reasonable inference that the Defendant is liable for the alleged misconduct. Therefore, the Plaintiff failed to adequately plead any factual circumstances that would support the claim upon which relief could be granted and the Motion to Dismiss was granted. 


The decision serves as a reminder to both the consumer and defense bar that threadbare allegations are insufficient to support claims and more robust pleading is necessary.

           

 Anna Claire Turpin is a third year law student at Campbell University School of Law and is currently clerking with Smith Debnam's Consumer Financial Services Litigation and Compliance group.

Thursday, March 21, 2019

District Court: 1099-C Language May State Claim for FDCPA Violation


By Caren Enloe and Anna Claire Turpin


A recent case from a New York district court serves as a reminder that a single word in a debt collection letter may cause a wave of implications if enough further information is not supplied.  In Leonard v. Capital Management Services, LP, 2019, No. 1:18-cv-90, 2019 U.S. Dist. LEXIS 18336 (W.D.N.Y. Feb. 4, 2019), a debt collection letter offering to settle the debt for less than the full balance included a statement that “[s]ettling a debt for less than the balance owed may have tax consequences and Discover may file a 1099-C form” (emphasis added).  Because the total debt forgiveness would have been less than $600.00 and therefore did not meet the IRS threshold for reporting, the Plaintiff alleged that the language violated 15 U.S.C. §§1692e and 1692f.


The debt collector moved to dismiss, arguing that the letter was not false and that the 1099-C clause was true because it was not cast in mandatory language.  Instead, the debt collector argued that the use of the word “may” in the statement did not imply that Discover or CMS would in fact file a 1099-C or take other actions that would create “tax consequences” with the IRS.  


The court disagreed.  While not concerned with the tax consequence language, the court took issue with the 1099-C clause.  Despite the debt collector’s arguments to the contrary, the court held that the use of the word “may” did not insulate the statement from potential liability.  The court concluded that the 1099-C clause stated a plausible claim because it did not provide any reference to nor clarify that the reporting requirements only applied where the $600.00 threshold was met.  Without that clarification, the court concluded the least sophisticated consumer could reasonably believe that CMS or Discover might report the cancelled debt to the IRS.


The key take-away is that the use of generic conditional language is not a cure-all.  In the case of 1099 language and to the extent conditional language is used, letters should be reviewed to insure they provide enough information as to the tax consequences to make clear the circumstances in which the tax reporting requirements may apply.


Anna Claire Turpin is a third year law student at Campbell University and a graduate of James Madison University.  Turpin is currently a law clerk with Smith Debnam’s Consumer Financial Services Litigation and Compliance group.