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. 

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