In a major victory for consumer bankruptcy debtors and their advocates, the U.S. Court of Appeals for the Fourth Circuit reversed a troubling lower court decision in Koontz v. SN Servicing Corporation, holding that a mortgage servicer’s post-discharge collection efforts could still be subject to the Fair Debt Collection Practices Act (FDCPA), even where the debtor’s personal liability had been extinguished. This opinion affirms that a debtor’s in rem obligations after discharge are still “debts” under the FDCPA—and that debtors remain “consumers” protected by its provisions.
[Read more…] about Fourth Circuit Affirms Post-Discharge Protections: Koontz Decision Preserves FDCPA Rights for Bankruptcy Debtors4th Circuit Considers Whether the FDCPA Protects Discharged Debtors From Improper Collection
The 4th Circuit Court is considering an appeal from the District Court for the Northern District of West Virginia which dismissed the Debtor’s FDCPA complaint due to lack of standing since his debt was discharged in a prior chapter 7 bankruptcy.
Facts
John Koontz entered into a mortgage loan with CitiFinancial, which was later serviced by SN Servicing Corporation (SNSC) and then by Land Home Financial Services (LHFS). After Koontz received a Chapter 7 bankruptcy discharge in 2017, he continued to make voluntary payments on the loan. He alleged that SNSC and LHFS charged excessive late fees and failed to respond to his requests for information.
Analysis
The district court analyzed whether Koontz had standing to pursue claims under the FDCPA and WVCCPA, given his bankruptcy discharge. Under the FDCPA, the court determined that Koontz was not obligated or allegedly obligated to pay the debt because the bankruptcy discharge extinguished his personal liability. The court referenced the Fourth Circuit’s decision in Lovegrove v. Ocwen Home Loans Servicing, LLC, where post-discharge mortgage statements containing disclaimers were not considered attempts to collect a debt. The court concluded that SNSC’s and LHFS’s communications, which included similar disclaimers, were not attempts to collect a debt under the FDCPA.
For the WVCCPA claims, the court held that Koontz was not a “consumer” as defined by the statute because his personal obligation to pay the mortgage debt was discharged in bankruptcy. The court referenced its previous decision in Fabian v. Home Loan Center, Inc., which held that a discharged debtor is not a “consumer” under the WVCCPA and therefore lacks standing to bring claims under the Act. The court rejected Koontz’s reliance on other federal court cases, noting that many involved phone calls rather than written correspondence and did not alter the applicability of Fabian.
The court dismissed Koontz’s claims, reaffirming that a bankruptcy discharge eliminates personal liability for the debt, thereby negating standing under the FDCPA and WVCCPA. The court emphasized the importance of clear and unequivocal disclaimers in post-discharge communications to avoid violating debt collection laws.
NCBRC along with the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center filed a brief in support of the Debtor.
Amici Brief in Support of Appellant – Koontz vs SN Servicing
9th Circuit Limits Walls, Permits FDCPA Action for Post-D/C Collection
Declining to extend its 2002 holding in Walls, the Ninth Circuit found that a chapter 13 debtor who fully paid the creditor’s claim prior to completion of his plan was not precluded from pursuing an FDCPA claim based on the creditor’s post-discharge collection efforts. Manikan v. Peters & Freedman, L.L.P., No. 19-55393 (9th Cir. Nov. 25, 2020).
The debtor entered chapter 13 bankruptcy after receiving a notice of foreclosure from Peters & Freedman, a debt collector, based on HOA arrears. Through P&F, the HOA filed a claim in his bankruptcy, and the debtor provided for the arrears in his plan. He fully paid off the debt approximately two years prior to completion of his plan. After the debtor received his discharge, P&F hired Advanced Attorney Services (AAS) to re-serve a Notice of Default based on the debt that the debtor had paid off in his bankruptcy. AAS served the notice by breaking through a gate, entering the debtor’s backyard and banging on his windows, causing the debtor to call the police. [Read more…] about 9th Circuit Limits Walls, Permits FDCPA Action for Post-D/C Collection
Class Certification in FDCPA Case where Servicer Raised Preclusion Defense
The district court abused its discretion when it denied certification of a class of plaintiffs alleging FDCPA violations based on the mortgage servicer’s post-discharge collection efforts where the servicer’s defense that the Bankruptcy Code’s discharge injunction precluded the claim applied to all claims of the purported class members. Sellers v. Rushmore Loan Management Services, No. 15-1106 (11th Cir. Oct 29, 2019).
After the Sellerses moved out of their home and obtained a chapter 7 discharge, the mortgage servicer, Rushmore, continued to send them monthly statements listing an ever-increasing amount due on their mortgage. The Sellerses filed suit in the district court alleging that Rushmore’s continued collection efforts violated the FDCPA and the Florida Consumer Collection Practices Act (FCCPA) by falsely representing its right to collect the discharged debt. In addition, the Sellerses sought to certify a class of consumers subject to the same conduct. In its answer to the complaint, Rushmore argued against class certification and raised the affirmative defense that the claims were preempted/precluded by the Bankruptcy Code’s discharge injunction provision.
The district court declined to certify the class, finding that the issue of whether the Code preempted/precluded the purported class’s claims was a matter of individualized consideration. Its decision rested on the finding that the preclusive effect of the Bankruptcy Code was a function of the applicability of section 524(j), which permits a debt collector to collect payments in lieu of foreclosure from a debtor whose personal liability was discharged in bankruptcy but who continues to live on the property. The district court found that the issue of preclusion would affect only debtors to whom section 524(j) applied. [Read more…] about Class Certification in FDCPA Case where Servicer Raised Preclusion Defense
SCOTUS Addresses “Debt Collector” Definition
In a unanimous, narrow, decision, the Supreme Court held that an entity merely carrying out nonjudicial foreclosures is not a “debt collector” within the meaning of the FDCPA. Obduskey v. McCarthy & Holthus LLP, 586 U.S. ___, No. 17-1307 (March 20, 2019).
The action arose when the law firm of McCarthy & Holthus, acting as agent for the mortgagee, initiated nonjudicial foreclosure proceedings against Dennis Obduskey. In response to McCarthy’s notice of foreclosure, sent in compliance with Colorado nonjudicial foreclosure law, Mr. Obduskey invoked the FDCPA and sent a letter disputing the debt. When McCarthy went forward with the foreclosure proceedings, Mr. Obduskey filed a complaint in district court alleging violation of the FDCPA’s requirement that, upon notification of a disputed claim, a debt collector must cease collection activities and obtain verification of the debt. The district court found that McCarthy was not a debt collector to which the FDCPA requirements applied. The Tenth Circuit affirmed. Obduskey v. Wells Fargo, 879 F. 3d 1216 (2018).
The Supreme Court agreed. Justice Breyer’s majority opinion relied primarily on textual interpretation. Section 1692(a)(6) of the FDCPA sets forth a two-part definition of “debt collector.” First, a “debt collector” is “any person . . . in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts.” The FDCPA then provides what the Court called a “limited-purpose” definition, stating that “[f]or the purpose of section 1692f(6) . . . [the] term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”
The Court found that, in the absence of the “limited-purpose” phrase, an entity carrying out a nonjudicial foreclosure would fall under the FDCPA’s primary definition of debt collector. But Congress’s use of the phrase “also includes,” suggests that entities whose sole purpose is to enforce security interests, would not otherwise be deemed a debt collector. As the text is structured, therefore, the entity against which the FDCPA is being wielded must first be in the business of debt collection and, only if that is the case, have as its principal purpose enforcement of security interests.
In so holding, the Court reasoned that this structure could indicate congressional intent not to interfere with state nonjudicial foreclosure procedures. In fact, the definition appeared to be a legislative compromise between including entities enforcing security interests in the primary definition of “debt collector,” and excluding them from the definition altogether.
The Court went on to address and reject Mr. Obduskey’s counterarguments. First, the Court was unpersuaded that the limited-purpose provision was intended to draw repo-men into the definition of debt collector, finding instead that the text was broadly written to include all security interests, not just personal property. Furthermore, the fact that McCarthy sent letters seeking payment of the debt prior to taking foreclosure action was attributable to state nonjudicial foreclosure requirements rather than an indication that McCarthy was acting as a debt collector. There was no indication that McCarthy engaged in other debt collection activities.
The Court noted that its holding was limited to instances of conduct involving adherence to state nonjudicial foreclosure requirements and that had McCarthy engaged in more extensive, abusive, conduct, it might not have escaped liability under the FDCPA’s primary definition.
In her concurring opinion, Justice Sotomayor emphasized the narrow nature of the Court’s majority opinion as applying to good faith conduct, and voiced her concern that in enacting section 1692(a)(6)’s definition, Congress may not have anticipated the conclusion reached by the Court.
FDCPA and Discharge Injunction Not Incompatible
An FDCPA claim based on efforts to collect a debt discharged in bankruptcy is not precluded by the Code’s discharge injunction. Barnhill v. FirstPoint, Inc., No.15-892 (M.D. N.C. May 17, 2017).
Lara Barnhill filed a class action complaint in district court alleging that FirstPoint, Inc. and FirstPoint Collection Resources made efforts to collect a debt after her debt had been discharged in chapter 7 bankruptcy in violation of the FDCPA, North Carolina Collection Agency Act (NCCAA). The complaint also made a claim for injunctive relief. FirstPoint moved to dismiss under section 12(b)(1) and (6) for lack of subject matter jurisdiction and for failure to state a claim.
FirstPoint argued that the district court lacked subject matter jurisdiction over the FDCPA and NCCAA claims because both consumer protection laws are preempted by the Bankruptcy Code’s discharge injunction. FirstPoint further argued that Ms. Barnhill failed to allege injury-in-fact and therefore lacked Article III standing.
With respect to the FDCPA, the district court noted that one federal law does not preempt another but that, where they deal with same subject matter one may repeal the other either by express direction by Congress or by implication if the two statutes are irreconcilable.
The Fourth Circuit has not decided the issue of FDCPA and Code compatibility, but the district court agreed with other courts finding that an action based on post-discharge collection efforts may be sustained under both statutes simultaneously [though, in this case, Ms. Barnhill did not include a claim based on violation of the discharge injunction]. The court specifically discussed Garfield v. Ocwen Loan Servicing, LLC, 811 F.3d 86, 89 (2d Cir. 2016), where the Second Circuit distinguished between actions under the FDCPA brought for conduct occurring while the bankruptcy case was open and cases in which the conduct occurred post-discharge. The Garfield court was persuaded that the Code and the FDCPA were compatible in the latter instance in part because, unlike automatic stay violations, the Code does not create a cause of action for violations of the discharge injunction. Furthermore, because the same conduct underlies both causes of action, a creditor can avoid violations of both the FDCPA and the Code by not trying to collect a discharged debt.
Turning to whether the Code preempts the NCCAA, the court explored the doctrines of field preemption, where Congress specifies that a federal law supplants state authority in a particular field, and conflict preemption, where a state law must yield to a federal law with which it actually conflicts. Where states traditionally have the power to create and enforce consumer protection laws, a court will find field preemption only where Congress has made clear that such preemption was its purpose. Because no such indication is found in the Bankruptcy Code, the court turned to whether the NCCAA was preempted as conflicting with the Code. To find such preemption, the Fourth Circuit looks to “whether it is impossible to comply with both the state and federal law or whether the state law presents an obstacle to the accomplishment of the purposes of the federal law.” The court found no such conflict. Violation of the NCCAA was based on the allegation that FirstPoint had attempted to collect an uncollectible debt. The fact that the debt was rendered uncollectible due to bankruptcy discharge, was irrelevant.
The court thus concluded that neither the FDCPA nor the NCCAA claims were preempted or precluded by the Bankruptcy Code.
FirstPoint next argued that Ms. Barnhill had not suffered any “concrete and particularized” injury-in-fact and therefore had no Article III standing to bring this action. While cautioning that generally mere violation of a statute does not satisfy the injury-in-fact requirement in the absence of evidence of its effect on the plaintiff, a “majority of courts have held that FDCPA violations, like the ones asserted in this case, are substantive violations and thus produce ‘concrete injuries’ sufficient to satisfy Article III’s requirement of injury-in-fact.” Furthermore, Ms. Barnhill alleged particularized injury in the form of emotional distress and harm to her credit rating. The court concluded that her allegations were sufficient to withstand a motion to dismiss.
Having found that subject matter jurisdiction survived the 12(b)(1) motion, the court turned to whether the complaint stated a claim for purposes of Rule 12(b)(6). To state a claim for violation of the FDCPA, a plaintiff must show that 1) she has been the object of collection activity, 2) by a debt collector, 3) engaging in conduct that violates the FDCPA. Here, FirstPoint, Inc. drew a distinction between itself and FirstPoint Collection Resources, arguing that unlike its counterpart, FirstPoint, Inc. is not a debt collector, and cannot be held vicariously liable for the conduct of FirstPoint Collection Resources.
Rejecting this argument, the court noted that Ms. Barnhill alleged that both FirstPoint, Inc. and FirstPoint Collection Resources, were debt collectors and that both made efforts to collect the discharged debt. These allegations were sufficient to withstand a motion to dismiss. The fact that FirstPoint, Inc. did not hold a state license to collect debts was not relevant to the inquiry as licensure is not necessary to a finding of an FDCPA violation. As to the conduct giving rise to the FDCPA claim, the court found it was enough that Ms. Barnhill alleged that she received a phone call from the defendants informing her that her discharged debt was owing and in collection and that it was affecting her credit.
For the same reasons, the complaint stated a claim under the NCCAA. The fact that the state law does require a permit for debt collectors did not defeat this claim as the court found that a debt collector acting in violation of the licensing law could still violate the NCCAA.
Finally, the defendants argued that injunctive relief is not available under either the FDCPA or the NCCAA and that claim should, therefore, be dismissed. Without deciding whether the relief sought was available, the court granted the motion to dismiss to the extent that the claim for injunctive relief was presented as a cause of action rather than as a form of remedy.
SCOTUS Finds Time-Barred POC Not FDCPA Violation
“Midland’s filing of a proof of claim that on its face indicates that the limitations period has run does not fall within the scope of any of the five relevant words of the Fair Debt Collection Practices Act.” Midland Funding, LLC v. Johnson, 2017 WL 2039159 (May 15, 2017) (case no. 16-348), reversing Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016).
Justice Breyer delivered the majority opinion finding that, because, under state law, the holder of a debt that is uncollectible due to lapse of the statute of limitations, retains a “right to payment,” a proof of claim on a time-barred debt falls within the meaning of “claim” in section 101(5)(A), and is not “false, deceptive, or misleading,” within the meaning of the FDCPA. Relying on the language and structure of Bankruptcy Code provisions, the Court noted that the Code provides for the possibility that a claim, while prima facie valid, may be contingent or disputed. Upon objection, section 502(b)(1) provides a method for disallowing an unenforceable claim. Under this structure the statute of limitations is an affirmative defense.
Moreover, when considering whether a statement is false, deceptive or misleading, the sophistication of the recipient is a relevant factor. Here, the Court found the bankruptcy trustee was likely to understand that a time-barred debt is subject to disallowance.
The Court turned to the “closer question” of whether assertion of a time-barred debt is “unfair” or “unconscionable.” In answering this question in the negative, the Court distinguished civil cases from bankruptcy. Factors in a civil suit, such as debtor ignorance of the statute of limitations defense, loss of records, and general embarrassment, may cause a debtor with a valid defense to nonetheless pay an uncollectible debt. Those considerations are attenuated in bankruptcy where the debtor has herself initiated litigation, there is a trustee to oversee the process and the Code provides for evaluation of claims.
Both the debtor, Aleida Johnson, and the United States as amicus argued that debt-buyers filing time-barred claims solely in the hope that they will successfully slip them past busy trustees and unsuspecting debtors is sanctionable and, therefore, “unfair” conduct. The Court disagreed, finding that the inherent protections in the Bankruptcy Code, as well as the possibility that the debtor herself could benefit from the stale claim being disallowed and discharged in bankruptcy, militated against carving out an exception to the affirmative defense rule.
The Court added that the differing purposes of the FDCPA—to protect consumers and possibly prevent bankruptcies, and the Bankruptcy Code—to strike a balance between rights of debtors and creditors, further supported treating the assertion of stale claims in bankruptcy differently from the way they are treated in the civil context.
Justice Breyer was joined in the majority by Chief Justice Roberts and Justices Thomas, Kennedy, and Alito.
Taking a real-world approach to the subject in which she recognized the extent of consumer debt and the proliferation of debt buyers, Justice Sotomayor dissented.
“Professional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy proceedings to collect it, and hoping that no one notices that the debt is too old to be enforced by the courts. This practice is both ‘unfair’ and ‘unconscionable.’”
Citing NACBA’s amicus brief, Justice Sotomayor discussed the ever-growing industry of buying stale debts for pennies on the dollar. The practice relies on the likelihood that, after an extensive lapse of time, the debtor will not know or care to raise the affirmative defense of staleness. Because the state courts have uniformly found that filing suit on a stale claim violates the FDCPA debt-buyers have increasingly turned to the bankruptcy system to achieve their goals.
Justice Sotomayor reasoned that the same considerations in state court findings of FDCPA violations, are present in the bankruptcy context. Bankruptcy debtors may feel pressure to make a small payment on the debt, thereby unwittingly restarting the running of the limitations period, or simply fail to realize that they have the ability to object to the claim. The gatekeeping function of the trustee is illusory. “The problem with the majority’s ipse dixit [that the presence of the trustee is protection enough] is that everyone with actual experience in the matter insists that it is false.”
Justice Sotomayor disagreed with the majority’s reasoning that because the debtor in bankruptcy has initiated the legal process she should be held to a higher level of sophistication than a defendant in a civil debt collection action, noting that debtors are in bankruptcy often as a result of lack of sophistication. To the majority’s reasoning that debtors could benefit from the filing of a stale claim because it may lead to disallowance and discharge, the dissent again interjected reality. In fact, a stale claim that slips through the bankruptcy process may result in resuscitation of an otherwise uncollectible debt and a debtor may find herself worse off after bankruptcy than before.
Justice Sotomayor ended with a ray of hope, “I take comfort only in the knowledge that the Court’s decision today need not be the last word on the matter. If Congress wants to amend the FDCPA to make explicit what in my view is already implicit in the law, it need only say so.”
Justice Sotomayor was joined her dissent by Justices Kagan and Ginsburg.
Justice Gorsuch did not take part in the decision.
Battle Lines Have Been Drawn – Midland v. Johnson
In a flurry of party and amici briefs, the issue of whether a proof of claim for a stale debt gives rise to an FDCPA claim has been briefed before the Supreme Court. Midland Funding v. Johnson, No. 16-348 (petition filed Sept. 16, 2016). The case is on appeal from the Eleventh Circuit decision that the “Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time-barred.” Johnson v. Midland Funding, LLC, C.A. No. 15-11240, 2016 U.S. App. LEXIS 9478 (11th Cir. May 24, 2016). The issue is currently pending in courts around the country including the First, Third, Sixth, Seventh and Eighth Circuits. Oral argument is scheduled for January 17.
Johnson ACA Intl amicus
Johnson Brunstad Amicus
Johnson Chamber of Commerce amicus
Johnson DBA intl amicus
Johnson NABT Amicus
Johnson NACBA Amicus SCt Dec 2016
Johnson NARCA amicus
Johnson NCLC etc amicus
Johnson Petition brief
Johnson petition reply
Johnson Reprinted brief of respondent
Johnson Resurgent Capital Amicus
Johnson US amicus
Midland Funding v. Johnson, No. 16-348 (USSCt)
Type: Amicus
Date: December 21, 2016
Description: Whether filing a proof of claim for a stale debt violates the FDCPA.
Result: Pending
Johnson NACBA Amicus SCt Dec 2016
Nelson v. Midland Credit Management, No. 15-2984 (8th Cir.)
Type: Amicus
Date: January 25, 2016
Description: Whether filing a proof of claim for a time-barred debt violates the FDCPA.
Result: Judgment affirmed, July 11, 2016. Debtor lost.