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|DAVID N. ANTHONY, MICHAEL E. LACY, ANDREW BUXBAUM AND VIRGINIA BELL FLYNN
On May 15, 2017, the United States Supreme Court ruled that the Eleventh Circuit erred when it found a debt buyer liable under the Fair Debt Collection Practices Act for filing proofs of claim in bankruptcy on debts that had become time-barred. A copy of the Court’s opinion can be found here. Background In Johnson v. Midland, the Eleventh Circuit revisited the issue of whether debt collectors violate the FDCPA when filing proofs of claims in bankruptcy cases when those claims are based on unenforceable, time-barred consumer debts. The Eleventh Circuit affirmed its prior decision in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), concluding that when a “creditor is also a ‘debt collector’ as defined by the FDCPA, the creditor may be liable under the FDCPA for ‘misleading’ or ‘unfair’ practices when it files a proof of claim on a debt that it knows to be time-barred, and in doing so ‘creates the misleading impression to the debtor that the debt collector can legally enforce the debt.’” Many courts have rejected Crawford. The Eighth Circuit, in Nelson v. Midland Credit Management, Inc., 828 F.3d 739 (8th Cir. 2016), was especially critical of the Crawford rationale, noting that the bankruptcy process protects debtors against harassment and deception. The Eighth Circuit noted, “[u]nlike defendants facing a collection suit, bankruptcy debtors are aided by ‘trustees who owe fiduciary duties to all parties and have a statutory obligation to object to unenforceable claims.’” The Eighth Circuit reasoned that “[d]efending a lawsuit to recover a time-barred debt is more burdensome than objecting to a time-barred proof of claim.” The Court found, “there is no need to protect debtors who are already under the protection of the bankruptcy court, and there is no need to supplement the remedies afforded by bankruptcy itself.” Beyond the substantive arguments about whether the filing of a proof of claim on a debt outside the statute of limitations violates the FDCPA, courts began wrestling with whether the Bankruptcy Code preempts the FDCPA, an issue specifically left unanswered in Crawford. As with the substantive analysis, Circuit Courts have been split on the preemption issue. The Ninth Circuit in Walls v. Wells Fargo Bank N.A., 276 F.3d 502 (9th Cir. 2002), held that the FDCPA is not needed to protect debtors protected by the automatic stay and other provisions of the Bankruptcy Code. Since the preemption argument was not addressed in Crawford, the District Court in Johnson was the first to confront the preclusion question that the Eleventh Circuit left open. In Johnson, the debtor filed for Chapter 13 bankruptcy relief. A debt collector filed a proof of claim that disclosed on its face that the claim was barred by the statute of limitations. The debtor sued the debt collector, alleging that the filing of the proof of claim was deceptive and misleading under § 1692e and unfair and unconscionable under § 1692f. The District Court found that there was an irreconcilable conflict between the Bankruptcy Code and the FDCPA, because a creditor can properly file a proof of claim on a time-barred debt under the Bankruptcy Code but the same creditor cannot file the proof of claim without violating the FDCPA, as construed by Crawford. In other words, the District Court said, “the Code authorizes filing a proof of claim on a debt known to be stale, while the [FDCPA] (as construed by Crawford) prohibits that precise practice,” and “those contradictory provisions cannot possibly be given effect simultaneously.” And in the face of that conflict, the District Court ruled that the FDCPA “must give way” to the Bankruptcy Code. The Eleventh Circuit reversed stating that it saw no irreconcilable conflict between the Bankruptcy Code and the FDCPA. The Court pointedly ruled: “[A]lthough the (Bankruptcy) Code certainly allows all creditors to file proofs of claim in bankruptcy cases, the Code does not at the same time protect those creditors from all liability. A particular subset of creditors – debt collectors – may be liable under the FDCPA for bankruptcy filings they know to be time-barred.” In finding no conflict between the federal statutes, the Eleventh Circuit noted “when a particular type of creditor” – a “debt collector” as defined under the FDCPA – files a proof of claim for a debt it knows is out-of-statute, the creditor must “still face the consequences” imposed by the FDCPA for a ‘misleading’ or ’unfair’ claim.” Midland petitioned the Supreme Court to grant certiorari and the reply by Johnson agreed with the need for review. As Midland pointed out in its reply brief, the case presented an unusual situation where both petitioner and respondent agreed that the questions presented implicate clear circuit conflicts on important issues of federal law. The Opinion The majority’s opinion analyzed the FDCPA application in two parts. Justice Breyer, writing for the Court, first analyzed whether the filing of a proof of claim on its face that is time-barred is not “false, deceptive or misleading.” The Court noted first that under the Bankruptcy Code, a “claim” is defined as a “right to payment” and relevant state law usually determines whether a person has such a right. In this case, Alabama law, “like the law of many states, provides that a creditor has a right to payment of a debt even after the limitations period has expired.” The opinion specifically rejects the consumer’s attempt to redefine “claim” to require a claim be enforceable. The Court noted “the word ‘enforceable’ does not appear in the Code’s definition of ‘claim.” Moreover, Section 502(b)(1) “says that, if a ‘claim’ is unenforceable,’ it will be disallowed. It does not say that an ‘unenforceable’ claim is not a claim.” The Court relied on the presence of the Chapter 13 trustee and his or her understating that “a proof of claim is a statement by the creditor that he or she has a right to payment subject to disallowance (including disallowance based upon, and following, the trustee’s objection for untimeliness)” to conclude that filing a claim on a time-barred debt is neither misleading or deceptive. The Court then turned to whether assertion of a time-barred claim is “unfair” or “unconscionable” under the FDCPA. In concluding that such activity is neither the Court distinguished claims administration in bankruptcy proceedings from ordinary state court collection litigation. The Court found that unlike a collection case, in bankruptcy the consumer initiates the judicial proceeding, aided by the benefit of a bankruptcy trustee who “bears the burden of investigating claims and pointing out that a claim is stale.” The Court was clearly troubled about the potential slippery slope of adopting Johnson’s argument that would change untimeliness as an affirmative defense that must be raised by the debtor or trustee. Creating an exception to the simple affirmative defense approach, the Court noted, “would required defining the boundaries of” such an exception, including whether such an exception was limited to facially time-barred claims or whether other affirmative defenses would be affected. “The law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense. And we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the code’s similar system.” Although the Court ruled that the Code does not preempt the FDCPA, finding the statutes “have different purposes and structural features,” the Court held that substantively, the conduct of filing time-barred claims does not violate the FDCPA. The Court rejected the United States’ amicus argument that the Advisory Committee on the Rules of Bankruptcy Procedure settled the issue when in adopted Bankruptcy Rule 9011, authorizing sanctions against a party submitting any paper that to the best of their knowing was not warranted by existing law. Instead, the Court noted that the Committed rejected a proposal that would have required a creditor to make a prefiling investigation based on a time-bar defense.” In a dissent joined by Justices Ginsburg and Kagan, Justice Sotomayor disagreed with many of the justifications of the majority. In response to the majority’s view that the Chapter 13 trustees can serve as gatekeepers in the proof of claim administration, the dissent noted that time-barred claims have “deluged” the courts and “overworked trustees.” The dissent noted the application of the opinion was limited to Chapter 13 cases and left open the possibility of legislative action if Congress wanted to amend the FDCPA to prohibit filing of time-barred debt. Conclusion The opinion settles an issue that has led to tremendous litigation (and divergence) throughout the country – a creditor can no longer face FDCPA liability for filing a proof of claim in a Chapter 13 case on account of a debt beyond the statute of limitations. Johnson, however, makes clear that filing of lawsuit to collect a time-barred debt outside of bankruptcy could have a different result.
| JASON E. MANNING AND JESSICA CLARK
Senate Bill No. 563 amends several provisions of the West Virginia Consumer Credit Protection Act (WVCCPA). The Bill passed the West Virginia Senate and the House of Delegates with high approval margins, and was signed into law by Governor Jim Justice on April 21, 2017. These amendments to the WVCCPA will have an impact on claims that are frequently litigated in West Virginia. Here is a summary of the material amendments and relevant effective dates. Balloon Payment Disclosure (§ 46A-2-105) When disclosing balloon payments, the loan agreement now must contain a disclosure “in form and substance substantially similar to the” the statutory disclosure. This ends the common argument for strict compliance under the former version of the section. Notice of Attorney Representation (§ 46A-2-128(e)) Debt collectors now have three (3) business days, rather than 72 hours, to cease communication with a consumer that has sent notice of attorney representation. Further, consumers must send notice of attorney representation via certified mail, return receipt requested to the debt collector’s registered agent in West Virginia. Statute of Limitations Disclosure (§ 46A-2-128(f)) Disclosure that a debt is beyond the statute of limitations for a legal collection action must now be disclosed in every written communication, not just the initial written communication. Anticipate increased litigation on this disclosure to continue. Protecting Foreclosure Sales (§ 46A-5-101) WVCCPA Actions that seek to set aside a foreclosure sale must now be brought within one (1) year of the final foreclosure sale. This means actions brought more than one year after the final foreclosure sale are barred. Creating a Right to Cure (§ 46A-5-108) Significant new provision: creditors and debt collectors now have a right to cure before a consumer can file a WVCCPA complaint. Completing a cure offer serves as a complete defense to liability. Right to Cure Timeline – (notice, offer, acceptance, completion) Creditor has 45 days to respond once notified of the alleged violation and underlying facts via certified mail, return receipt requested; Consumer has 20 days from receipt to accept a cure offer; and Creditor has 20 days from acceptance to “begin effectuating” the cure, which must be completed in a “reasonable time.” Creditor cure offer may be admissible in litigation and will bar liability of consumer’s attorneys’ fees and costs unless the award exceeds cure offer. Pleadings Cannot be Grounds for a Cause of Action (§ 46A-2-140) This new provision makes clear that “[n]othing contained in or omitted from a pleading filed in a court of this state shall be the basis of a cause of action under” the WVCCPA. These amendments will take effect on July 4, 2017 (90 days after the Bill passed the House on April 5, 2017), and will provide additional clarity to the WVCCPA and its application to frequently litigated issues. While Bill 563’s amendments take effect on July 4, 2017, their application to loans and litigation in West Virginia varies by provision: The Balloon Payment Disclosure (§ 46A-2-105) applies to consumer credit sales or consumer loans entered on or after July 4, 2017; Notice of Attorney Representation (§ 46A-2-128(e), Statute of Limitations Disclosure (§ 46A-2-128(f)), and Pleadings Cannot be Grounds for a Cause of Action (§ 46A-2-140) apply to causes of action that accrue on or after July 4, 2017; and The Right to Cure (§ 46A-5-108) applies to causes of action filed on or after July 4, 2017. Should you have questions or would like more information regarding these amendments and their anticipated effect on litigation in West Virginia, please feel free to contact John Lynch, Jason Manning, or Kyle Deak. The Financial Services Litigation group at Troutman Sanders has handled hundreds of contested matters in West Virginia, including individual and class action cases and arbitrations, and also appeals to the Supreme Court of Appeals of West Virginia and the Fourth Circuit.
| Chris Koegel Assistant Director, Division of Financial Practices, FTC
Making a plan is one thing. Sticking to it: quite another. During 2015, the FTC made a plan to address some new and troubling issues in debt collection. Throughout the course of the year, we stuck to that plan – bringing a record number of new cases, banning bad debt collectors, talking with industry, and finding new ways to do outreach.
The FTC gets more complaints against debt collectors than against any other industry. But this year, we hope, we put a dent in the bad practices we hear so much about. During 2015, we not only coordinated the first federal-state-local enforcement initiative against debt collectors – including actions by more than 70 different partners – we also filed 12 new cases against 52 different defendants. And we resolved 9 cases, getting nearly $94 million in judgments.
We added to our list of banned debt collectors in 2015 – and published the list. These are people and companies that – because of serious and repeated violations of the law – have been banned by federal court orders from ever doing business in debt collection again. This has the result of putting these folks out of business, but it’s also a message to law-abiding debt collectors everywhere: don’t do debt collection business with these folks or you may find yourself in hot water.
One of the really important things we did this year was talk with the debt collection industry. The Debt Collection Dialogues kicked off in Buffalo, and then continued in Dallas and Atlanta. At all three, to sold-out houses, we brought together the debt collection industry with the state and federal agencies that regulate them – allowing all perspectives to be heard.
In consumer education, 2015 saw the release of a Spanish-language graphic novel – or fotonovela – about debt collection. It shows how you can deal with questionable debt collection tactics – and people ordered more than 113,000 copies of the publication last year.
But 2016 is another year – and we have more plans. So watch this space to see what else is coming – and to learn how to spot and avoid bad debt collection practices.
|JUSTIN BRANDT, ALAN D. WINGFIELD AND CHAD FULLER
On February 2, following a joint investigation of the Consumer Financial Protection Bureau and the Civil Rights Division of the Department of Justice, Toyota Motor Credit Corporation, the financing arm and subsidiary of the Japanese auto giant, agreed to pay up to $21.9 million in restitution to thousands of minority borrowers who allegedly were charged higher interest rates than white borrowers for auto loans without regard to their creditworthiness.
The administrative action, In the Matter of Toyota Motor Credit Corporation, and a civil lawsuit filed the same day in the United States District Court for the Central District of California, resulted in a Consent Order between the CFPB, DOJ, and Toyota. The CFPB and DOJ charged Toyota with violating the Equal Credit Opportunity Act and its implementing regulation “by permitting dealers to charge higher interest rates to consumer auto loan borrowers on the basis of race and national origin.”
The CFPB and DOJ alleged that, in comparison to the average borrower over the course of the loan, affected African-American borrowers paid at least $200 more and were charged approximately 27 basis points higher, and Asian and Pacific Islander borrowers paid $100 more and were charged approximately 18 basis points higher.
Notably, a CFPB statement released concurrently with the Consent Order said that “the investigation did not find that Toyota Motor Credit intentionally discriminated against its customers, but rather that its discretionary pricing and compensation policies resulted in discriminatory outcomes.” No civil money penalties were assessed, and in a press release, Toyota denied any wrongdoing.
As part of the settlement, Toyota will pay $19.9 million to compensate affected borrowers whose auto loans Toyota financed between January 2011 and the entry of the Consent Order on February 2, 2016. Toyota is also responsible for up to $2 million to compensate any similarly affected borrowers in the interim period until Toyota “implements its new pricing and compensation structure.” This structure includes, alongside other restrictions, a substantial reduction in its dealers’ discretion to mark up interest rates. The DOJ’s statementnoted that these new policies must be in place by August 2016.
Troutman Sanders LLP has extensive experience representing lenders in the auto finance industry, and will continue to monitor CFPB and other regulatory activity in this area.
| JUSTIN BRANDT, ALAN D. WINGFIELD AND CHAD FULLER
As we previously reported, on November 4, 2015, U. S. Senator Edward Markey (D-Mass.) introduced the Help Americans Never Get Unwanted Phone calls Act of 2015—or HANGUP Act for short. The legislation, which has 14 Democratic co-sponsors, would repeal section 301(b) of the Bipartisan Budget Act of 2015, which permitted an exception to the Telephone Consumer Protection Act of 1991 (“TCPA”) for calls and text messages “made solely to collect a debt owed to or guaranteed by the United States.”
Section 301(b) is scheduled to take effect by August 2016 following guidance from the Federal Communications Commission. The amendment to the TCPA was applauded by trade groups, including ACA International, which stated that “it shows an understanding in government that limiting dialing technology for legitimate debt collection doesn’t make sense.”
On February 10, a coalition of state attorneys general, spearheaded by Indiana Attorney General Greg Zoeller, a Republican, and Missouri Attorney General Chris Koster, a Democrat, sent a letter urging passage of the HANGUP Act to Senators John Thune (R-S.D.) and Bill Nelson (D-Fla.), the chairman and ranking member, respectively, of the U.S. Senate Committee on Commerce, Science, and Transportation. The letter is signed by 25 state attorneys general in total, including 19 Democrats and six Republicans. It claims that the recent enactment of section 301(b) “is a step backward in our law enforcement efforts” and is an inappropriate distinction permitted “simply because the debt has a nexus to the federal government.”
With Republicans in the majority in the Senate and election season heating up, the bill is unlikely to gain traction in the current legislative session. However, in the 2016 election, Republicans will be defending 24 Senate seats, including many in traditionally blue states, compared to just 10 for Democrats. If Democrats retake the Senate, one can reasonably expect the same or similar legislation to be reintroduced in the next Congress. Holders of government-backed debt should continue to monitor this situation and stay tuned for relevant guidelines from the FCC later this year regarding implementation of the new exception.
Troutman Sanders LLP has unique industry-leading expertise with the TCPA, with experience gained trying TCPA cases to verdict and advising Fortune 50 companies regarding their compliance strategies. We will continue to monitor legislative developments and regulatory implementation of the TCPA in order to identify and advise on potential risks.
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