Sixth Circuit Widens Split on Benign Language Exception

 

The Sixth Circuit recently weighed in on whether there is a “benign language” exception to Section 1692f(8) of the Fair Debt Collection Practices Act (the “FDCPA”).  In Donovan v. FirstCredit, Inc., No. 20-3485, 2020 U.S. App. LEXIS 39798 (6^th Cir. Dec. 18, 2020), the Court joined the Third and Seventh Circuits in holding that Section 1692f(8)’s plain text unambiguously prohibits markings on envelopes other than those necessary for sending communications through the mail. 

In Donovan, the debt collector sent a letter with two glassine windows.  One of the windows revealed the consumer’s name and address. The other window revealed an empty checkbox followed by the phrase “Payment in full enclosed.”  Depending on how the letter was situated, this second window sometimes also revealed an additional empty checkbox followed by “I need to discuss this further.  My phone number is __________.”  Id. at *2-3.  The consumer filed suit alleging that the envelope created a risk that third parties would recognize that she was receiving mail from a debt collector and asserting, among other things, a violation of 15 U.S.C. § 1692f(8).  After pleadings closed, the district court granted the debt collector’s motion for judgment on the pleadings concluding that Section 1692f(8) should be read to include a “benign language” exception, relying upon 2004 decisions from the Fifth and Eighth Circuits.

On appeal, the Sixth Circuit reversed and sided with the more recent and contrary positions of the Third and Seventh Circuits.  See Douglass v. Convergent Outsourcing, 765 F.3d 299 (3d Cir. 2014); Preston v. Midland Credit Mgmt., Inc., 948 F. 3d 772 (7^th Cir. 2020).  In doing so, the Court determined that the plain text of §1692f(8) forecloses a “benign language” exception because: (a) the section is unambiguous; and (b) a literal reading of the section does not lead to an absurd result. 

In determining that the section was unambiguous, the Court dismissed the Fifth Circuit’s rationale for applying a “benign language” exception. The Court noted that the canons of statutory construction refute the Fifth Circuit’s interpretation of §1692f(8) which would prohibit “marking on the outside of the envelope that are unfair or unconscionable, such as markings that would signal that it is a debt collection letter and tend to humiliate, threaten, or manipulate debtors.”  Goswami c. American Collections Enter., 377 F.3d 488, 493 (5^th Cir. 2004).  The Court went on to state that the Fifth Circuit’s interpretation was unreasonable because §1692f(8)’s more specific provision takes precedence over the preface of §1692f and to read it otherwise, would violate the canon of surplusage. 

The Court likewise was dismissive of the debt collector’s argument (and by the same token, the rationale of the Eighth Circuit)  that a literal reading of §1692f(8) would lead to an absurd result.  The debt collector argued that a literal reading of §1692f(8) would lead to an absurd result because the provision simultaneously endorses the use of mail communications while prohibiting debt collectors from including language and symbols on their envelopes that are necessary for communicating by mail, including the consumer’s address. The Court disagreed and held that:

the provision's blanket prohibition is best understood as forbidding "any language or symbol" on the envelope other than "language or symbols to ensure the successful delivery of the communication," with a statutory carve-out for the debt collector's return address and its name (where the name does not indicate that the sender is a debt collector). 

Donovan, 2020 U.S. App. LEXIS 39798, at *15 (internal citations omitted).  The Court supported its rationale by looking to the stated purposes of the FDCPA.  The Court noted that “[p]rohibiting language and symbols on envelopes aside from what is required for efficient mail delivery furthers the ‘purpose of preventing embarrassment resulting from conspicuous language visible on an envelope that indicates that the contents of the envelope pertain to debt collection.’" Id. at *16 (internal citations omitted).

Donovan is the third circuit court in recent years to examine §1692f(8).  Each of these circuits has taken a restrictive view of the section - a trend the receivables industry should note and weigh when assessing the risks and conveniences of glassine envelopes, bar codes and the like.

The Final Debt Collection Rule is Here and Focuses on Communication Methods – Here’s What You Need to Know

 

On October 30, 2020, the CFPB published its long awaited Final Debt Collection Rule (the “Rule”) which is intended to interpret the federal Fair Debt Collection Practices Act (the “FDCPA”) and clarify how new communication technologies can be used in compliance with the FDCPA.  As an unexpected twist, the CFPB has delayed publishing its final rules as to validation notices and time barred debt disclosures and has indicated that those provisions will be published in December. 

What’s Not Included in the Rule?

            The Rule leaves for another day the final versions of Sections 1006.26 (Collection of Time Barred Debt), 1006.34 (Notice of Validation of Debts) and the Safe Harbor Model Forms.  The proposed rule and supplemental proposed rule included new provisions as to time barred debt and validation notices.  These provisions are still under consideration by the CFPB and are anticipated to be published in December.  The final provisions are widely expected to include mandatory disclosures in addition to those already required by 15 U.S.C. §1692g(a).  Those additional mandatory disclosures are likely to include:

·         Disclosures as to time barred debt or debt that can be revived by payment; and

·         Additional validation information, including a tabular itemization of the amount of the debt from its itemization date and a response section which allows the consumer to dispute the debt by simply checking a prescribed number of boxes as to the basis of the dispute.

When Does the Rule Go Into Effect?

            The Rule will take effect  one year from its publication in the Federal Register.  As of the date this article was written, it has not yet been published.  It is therefore unlikely it will take effect until December 2021 or early 2022.

Who’s Covered?

            While the proposed rule provided some concern as to whether it would cover first party creditors, the final version of the Rule expressly states it applies only to “debt collectors” as that term is defined in the FDCPA.  First party creditors, however, need to be mindful of the CFPB’s warning that the Rule is not intended to address whether activities performed by entities not subject to the FDCPA would violate other statutes, including the unfair, deceptive or abusive act provisions found in the Dodd-Frank Act.  

What’s Included in the Rule?

            The bulk of the Rule addresses communications between the consumer and the debt collector.  The Rule expands significantly on the provisions of the FDCPA while attempting to clarify how debt collectors can use new communication technologies which were not in place when the FDCPA was enacted including email, voice mail and text messages.  Focusing on those communication technologies, the Rule establishes rules for engaging in communications with consumers and identifies certain policies and procedures that if implemented, would create safe harbors from FDCPA violations for debt collectors.  Of particular note, the Rule contains a robust Official Commentary which includes sample language for such things as opt out notices.  While the Rule will not take effect until some time towards the end of 2021 or early 2022, compliance departments should begin aligning their policies, procedures, letters and scripts with the Rule now in anticipation of its effective date.

            Attempts to Communicate vs. Communications

            Generally speaking, the Rule attempts to distinguish between attempts to communicate and actual communication. “Attempts to communicate” are any acts to initiate a communication about a debt and include leaving “limited contact messages.” 

            “Limited Content Messages” are a new concept introduced by the Rule in its definitional section (1006.1) and are intended to provide a safe way for debt collectors to leave non-substantive messages for a consumer requesting a return call while not inadvertently disclosing the debt to third parties.  The Rule and its Comments make clear that Limited Content Messages are not communications regarding a debt.  To qualify as a Limited Content Message, the message must be left by voice mail and only contain the specified limited content set forth explicitly in Section 1006.1(j). Those familiar with the proposed rule should note that while the proposed rule allowed for limited content messages via text message and orally, the final version of the Rule does not.  Similarly, while the proposed rule included the identification of the consumer as an allowed component of the Limited Content Message, the Rule as finalized does not.  Instead, a Limited Content Message can only include: (a) a business name for the debt collector that does not indicate that the debt collector is in the debt collection business; (b) a request that the consumer reply to the message; (c) the name or names of one or more natural persons whom the consumer can contact; (d) a telephone number or numbers the consumer can use to reply to the debt collector; and (e) certain very limited and specified optional content.  Communications are distinguished as they convey information regarding a debt.

Time and Place

          With the advent of new technologies, preventing communications at a time and place which is known or should be known to be inconvenient has become challenging for debt collectors.  The Rule attempts to address these challenges in Section 1006.6 and its Official Comments.  Section 1006.6 provides that an inconvenient time for communication with the consumer is before 8:00 AM and 9:00 PM local time at the consumer’s location.  The Official Comments further clarify that if the debt collector has ambiguous information as to the consumer’s location, then in the absence of information to the contrary, the debt collector may assume a time that is convenient in all time zones at which the debt collector’s information indicates the consumer may be located.  The Official Comments additionally attempt to provide debt collectors with guidance in circumstances in which the debt collector needs additional clarity or information from the consumer by allowing the debt collector to ask follow-up questions regarding a convenient time and place.  Additionally, the Rule makes clear that no particular words are necessary for a consumer to indicate a time and place are inconvenient.

          Use of Electronic Communications and a Safe Harbor

          The Rule allows for the use of email and text message communications and sets forth procedures which provide the debt collector with a safe harbor if followed.  Specifically, Section 1006(d)(4) allows for email communications to the consumer: first, by allowing the use of an email address the consumer has either used to communicate with the debt collector (and has not subsequently opted out) or the consumer has provided prior express consent to use and second, by allowing an email address used previously by the creditor or a prior debt collector subject to certain limitations and conditions.  Section 1006(d)(5) allows for text messaging subject to similar conditions.  Section 1006.6 further requires debt collectors allow consumers to opt out of electronic communications and further requires debt collectors provide a clear and conspicuous statement describing a “reasonable and simple method” for opting out.  The CFPB has indicated that it is currently finalizing provisions that will require debt collectors to provide consumers with, among other things, a reasonable and simple method to opt out of electronic communications and to control the time, place and medium for communications.  Presumably, these provisions will be included in the December supplement to the Rule.

            Frequency and a Safe Harbor

          Section 1692d(5) of the FDCPA prohibits a debt collector from causing a telephone to ring and from engaging a person in telephone conversations repeatedly or continuously with the intent to annoy, abuse, or harass.  As compared to the proposed rule, the final rule is more restrictive.  Section 1006.14 establishes a bright line by placing numeric limitations on the placing of telephone calls.  In its final version, the Rule creates presumptions of compliance and violation.  Generally, and subject to certain very limited exceptions, a debt collector is presumed to have violated the provision if: (a) it places telephone calls to a particular person in connection with a particular debt more than seven times within seven consecutive days; or (b) after having had a telephone conversation with a particular person regarding a particular debt, makes a call within seven days of that conversation.  The converse is also true.  The debt collector is presumed to have complied if it stays within the call frequency limitations.

            It should be noted that the exceptions presented in the final version of the Rule are more limited than those that were originally proposed. In particular, the Rule clarifies that any prior consent provided by a consumer for follow up communications expires within seven days of being provided.

            Unfair or Unconscionable Means

          Section 1006.22 interprets and implements Section 1692f of the FDCPA which contains a non-exhaustive list of unfair or unconscionable means to collect a debt.  Section 1006.22 adds new prohibitions on communications using certain media.  Section 1006.22(f)(3) prohibits communicating or attempting to communicate with a consumer using an email address that the debt collector knows is provided to the consumer by his employer unless the consumer provided the email address to the debt collector or a prior debt collector and the consumer has not subsequently opted out.

What’s Next?

            As with any rulemaking, it’s not over until the fat lady sings.  Depending upon the final outcome of the 2020 election, Congress may consider legislative proposals to walk back certain provisions of the Rule and potentially, overturn the Rule using the Congressional Review Act if the Democrats seize control of both the House and the Senate.  It remains to be seen how the continued effects of the pandemic will impact any legislative effort to circumvent the Rule.

            Additionally, there is more to come from the CFPB.  In December, the CFPB plans to release the remainder of the Rule, this time focusing on disclosures.  Additionally, the CFPB is looking at additional interventions, including the debt collector’s obligations to substantiate debts.  In any event, compliance departments should begin carefully reviewing the Rule and its Official Comments and aligning their policies, procedures, media content and scripts to conform with the Rule and take advantage of the safe harbors contained within the Rule. 

Sixth Circuit Examines Who is a Debt Collector for Purposes of FDCPA Section 1692(f)(6)

By Anna Claire Turpin

The Sixth Circuit Court of Appeals recently explored the limitations of Section 1692(f)(6) and held that a property preservation and maintenance company was not a debt collector for purposes of that section.  The opinion highlights the importance that principal purpose and timing have on this limited provision of the FDCPA. Thompson v. Five Bros. Mortg. Co., 2020 U.S. App. LEXIS 2881  (6^th Cir. Jan. 27, 2020).

In Thompson, the consumer alleged that Defendant, a property preservation and maintenance company, violated 15 U.S.C. §1692f(6) by dispossessing her of her personal property when there was no legal right to possession.  Central to the court’s determination was whether the defendant was a debt collector for the limited purposes set forth in Section 1692(f)(6).  More specifically, the “central inquiry … is whether the principal purpose of Five Brothers’ business is the enforcement of security interests.”  Thompson, 2020 U.S. App. LEXIS, 2881 at *5.

The facts, as pleaded by the plaintiff, became integral to the Court’s reasoning and emphasize the importance that careful pleading and timing can play in FDCPA cases. Plaintiff, a consumer, defaulted on the mortgage for her home. The mortgagee, the bank, pursued a nonjudicial foreclosure of the property. Pursuant to state law, the bank held a sheriff’s sale at which it purchased the property, leaving a deficiency. The plaintiff failed to redeem the property during the statutory redemption period. After the redemption period ended and title passed to the bank, the defendant, a property-preservation and maintenance company that was hired by the bank, entered the property for the first time.  The defendant attempted to contact the plaintiff to post notices on the property that the bank had foreclosed the property and advising her of certain rights available. After no contact from the plaintiff, the defendant informed the bank that the property was vacant, and began to secure the property by performing maintenance and clearing the property, including removing belongings and changing the locks. The plaintiff alleged that the defendant violated 15 U.S.C. §1692f(6) by dispossessing her of her property when there was no legal right to possession.

PRINCIPAL PURPOSE.  Under the FDCPA, for the limited purposes set forth in §1692f(6), a “debt collector includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.” 15 U.S.C. §1692(a)(6) (emphasis added).   While the parties disputed “whether, in the abstract, a property-preservation company that secures and maintains properties on behalf of a mortgagee during non-judicial foreclosure proceedings can be said to the in the business of enforcing security interests,” the Court did not reach that issue because the Plaintiff did not allege nor offer evidence as to Defendant’s general practices.

TIMING IS EVERYTHING.  Instead, the Court considered the defendant’s practices as they specifically related to its  actions in this case: Defendant entered the property and began to clear and secure the property after the foreclosure proceedings had ended and title had passed to the bank. Because the redemption period had ended prior to defendant’s involvement, the plaintiff’s rights in property had already been extinguished. Furthermore, the Court reasoned that the fact that the bank was entitled to a deficiency judgment did not change the result because there was no evidence that Defendant would take part in that action, nor was there evidence that Defendant’s “principal purpose” was to do so. The Court was further persuaded by the fact that the right to seek a deficiency judgment stems from the promissory note and does not relate to the enforcement of a security interest.

Based on that reasoning, the Court held that the defendant, did not meet the definition under 15 U.S.C. §1692f(6) and affirmed the district court's judgment in favor of the defendant.

Anna Claire Turpin is a member of Smith Debnam’s Consumer Financial Services Litigation and Compliance team.

North Carolina Department of Insurance Extends Deferral Period

The North Carolina Department of Insurance has extended its previous order which activated the payment deferral provisions of N.C.Gen. Stat. 58-2-46.  The Order would have expired April 26th and has been extended an additional thirty (30) days through and including May 27, 2020.  A copy of the Extended Order can be found here.  

Additionally, in response to the number of questions posed with respect to the obligations of collection agencies and others licensed by the North Carolina Department of Insurance, the Department has now published  a list of FAQs.  Collection agencies should be mindful that the North Carolina Collection Agency Act encompasses to the collection of commercial, as well as consumer debts, and that this Order, by extension, applies similarly. The FAQs make clear:

•  There is no affirmative duty on collection agencies to send a mass mailing to debtors offering deferrals.  Instead, it is "up to the customer" to contact the collection agency to discuss options.  If, however, a collection agency contacts a debtor to discuss repayment, the agency is affirmatively obligated to advise the customer of the option to defer payment for 30 days.
• A request for deferment acts as a cease and desist for the 30 day period.  "Not just payments are deferred; ANY collection activity should cease for 30 days should the customer request a deferral."
• The Order and Extended Order apply to all payments, including those required by payment plans, ACHs and credit card repayment agreements. If the customer requests the deferments, the collection agency should cease all collection payment, including collection according to pre-arranged ACHs, credit card payments and other pre-arranged agreements for the 30 day period.
• While the Order and Extended Order do not generally apply to law firms and attorneys collecting debt, the Order and Extended Order do apply to law firms and attorneys to the extent they are seeking to collect payments under insurance contracts or policies.  In those instances, the law firm or attorney "must delay collection activities on behalf of its clients during the deferral period.

Collection agencies and others impacted by the Order and Extended Order should continue to check periodically for further extensions of the Order.

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. 

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.

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.

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 (6^th 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.

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

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.

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

Bureau Sheds Light on its Abusive Acts or Practices Standard in New Statement of Policy

The CFPB has issued a Statement of Policy which seeks to “convey and foster greater certainty above the meaning of abusiveness”  and provide a framework for its exercise of supervisory and enforcement authority as to abusive acts or practices.  Under Dodd Frank, the CFPB has supervisory and enforcement authority over abusive acts or practices in connection with consumer financial products or services. The Policy reflects an effort by the CFPB to resolve uncertainty as to the scope and meaning of abusiveness in the content of its enforcement actions.

Here’s what you need to know:

·        Historically, the Bureau has included in its enforcement actions an abusiveness claim with its unfair and deceptive claims, but not alleged any specific course of action distinguishing the two claims.  Because of this dual pleading, little clarification has been provided by the Bureau previously as to the abusiveness standard.

·         The Policy sets forth three pillars:

o   First, in its supervision of covered entities and enforcement actions, the Bureau will only challenge conduct as being abusive if it concludes the harm to consumers outweighs the conduct’s benefit.  The Bureau further makes clear that the balancing test will consider not only quantitative analysis but also qualitative analysis.

o   Second, the Bureau will generally avoid challenging conduct as abusive that relies upon the same set of facts as claims for unfair or deceptive.  In other words, it will not “pile on.”  Instead, where it pleads stand-alone abusiveness, it intends to clearly plead such claims in a manner which will clearly demonstrate the nexus between alleged facts and the Bureau’s analysis of the claim. 

o   Finally, the Bureau sets out what may be termed as a sort of “safe harbor” for those who are in good faith attempting to comply with the abusive standard.  In those instances, the Bureau indicates it will not seek certain monetary relief based upon abusiveness where the good faith can be demonstrated.  The Bureau makes clear, however, that this is not an affirmative defense.  What this means, in essence, is that it will be imperative for covered entities to demonstrate through their compliance management system their good faith attempt to adhere to the standard and if that can be demonstrated, the Bureau will be less likely to seek certain civil monetary penalties.  What it does not mean is that the Bureau will not seek relief – the Statement of Policy makes clear that the Bureau still intends to seek legal and/or equitable remedies, including damages and restitution.

·         While the Statement of Policy should be viewed positively by the consumer finance industry, readers should be aware that it is simply that -a statement of policy and does not carry the legal import of a published rule.  Moreover, as a Statement of Policy it is subject to amendment or revocation at any time, particularly in times of political change.

CFPB’s Rulemaking Agenda Provides Glimpse into 2020

Photo by Michael Longmire on Unsplash

The CFPB’s 2020 Rulemaking Agenda provides a preview of the Bureau’s intended rulemaking activities for 2020.  Here are the highlights of what we can look forward to in 2020:


Business Lending Data (Pre-rule Stage):  Under Dodd Frank and the Equal Credit Opportunity Act, the CFPB has rulemaking authority to require lenders to collect and submit data concerning credit applications made by women-owned, minority-owned and small businesses.  The Bureau intends to hold a symposium on small business data collection in 2020. 


Higher-Priced Mortgage Loan Escrow Exemption (Pre-rule Stage): The Bureau is conducting preliminary analysis for rulemaking which would exempt certain lenders and higher priced mortgage loans from the FRB rule requiring the establishment of escrow accounts for payment of property taxes and insurance payments.


Debt Collection Rule (Proposed Rule Stage): The Agenda does not provide any further hints as to when a final rule will be published but does acknowledge that the Bureau is conducting consumer testing of disclosures related to time-barred debt.  Proposed Section 1006.26(c) was reserved for that purpose.  The Agenda indicates that, after testing, the Bureau will assess whether to publish a supplemental Notice of Proposed Rulemaking related to time-barred debt disclosures.  No anticipated date for a final rule is included in the Agenda which may suggest a delay to allow the Bureau to include the time-barred debt provisions before publication of the final rule.


Home Mortgage Disclosure Act Data (Proposed Rule Stage):  The Bureau has indicated new proposed rules will be forthcoming as to the publication of HMDA data, as well as the collection and reporting of data points.  The anticipated date for the NPRM is mid-summer.


Payday Lending (Final Rule):  As many recall, the CFPB rolled back the final rule issued in 2017 after a change in leadership.  The CFPB now anticipates publishing its new rule in the Spring of 2020.