This week, the United States Supreme Court issued a key decision under the Fair Debt Collection Practices Act in a case litigated by Balch & Bingham lawyers, Jason Tompkins and Chase Espy. In Midland Funding, LLC v. Johnson, the Supreme Court resolved a circuit split over the issue of whether debt collectors who file bankruptcy proofs of claim for stale debts are subject to suit under the Fair Debt Collection Practices Act. Siding with Midland, one of the nation’s largest buyers of unpaid debt, the Supreme Court held that “filing a proof of claim that on its face indicates that the limitations period has run” is not actionable under the FDCPA, thereby avoiding a potential conflict between the FDCPA and the Bankruptcy Code. Although ostensibly limited to the bankruptcy context, the Johnson decision could potentially ripple into other FDCPA cases. In the meantime, though, Johnson will undoubtedly turn off the faucet for would-be FDCPA plaintiffs who had hoped to capitalize on what the Eleventh Circuit complained is a “deluge” of out-of-statute proofs of claim.
The Eleventh Circuit recently clarified that sending periodic mortgage statements following a debtor’s bankruptcy discharge is not misleading to the “least sophisticated consumer.” In Helman v. Bank of America, 15-13672, 2017 WL 1350728 (11th Cir. April 12, 2017) Gayle Helman filed suit, alleging that Bank of America violated the Fair Debt Collections Practices Act (FDCPA), Florida Consumer Collection Practices Act (FCCPA), and other state laws when it sent Ms. Helman periodic mortgage statements after her mortgage loan was discharged in bankruptcy. She claimed that the statements unlawfully attempted to collect a discharged debt and that such communications would be misleading to the least sophisticated consumer because it suggested she remained liable for the debt.
The Eleventh Circuit recently held in Nicklaw v. CitiMortgage, Inc.(No. 15-14216) that a plaintiff lacks standing to sue a creditor where the plaintiff merely alleges that the creditor failed to timely record a mortgage satisfaction, as it is statutorily required to do, but does not allege any additional concrete injury.
The Eleventh Circuit recently held in Parm v. National Bank of California, that a payday lender’s arbitration clause was unenforceable because the forum selected was unavailable and no alternative forum was provided for.
In an unpublished opinion, the Eleventh Circuit applied the Supreme Court’s recent opinion in Spokeo, Inc. v. Robins, 578 U.S. ___, 136 S. Ct. 1540 (2016) and held that a debtor who allegedly did not receive certain disclosures required by the Fair Debt Collections Practices Act (FDCPA) suffered an injury-in-fact to her statutorily created right to receive such information, and therefore had standing to pursue an FDCPA claim against the entity attempting to collect the debt.
Few issues involving the Fair Debt Collection Practices Act (FDCPA) are more hotly contested than whether filing a proof of claim on a time-barred debt violates the FDCPA. In bankruptcy, creditors have a right to file proofs of claim outlining the debt owed to them by the bankrupt debtor. In some instances, the statute of limitations for filing a lawsuit on that debt has run, and up until July 10, 2014, when the Eleventh Circuit Court of Appeals issued its decision in Crawford v. LVNV Funding, LLC, it was common practice to file a proof of claim on such a time-barred debt. Crawford—for the first time—likened the filing of a proof of claim to the filing of a lawsuit, finding that if one is wrongful, so is the other. After Crawford, debt collectors have faced a tidal wave of cases across the country, raising numerous defenses, one of which is res judicata. The argument goes like this: if a debt collector files a proof of claim to which neither the debtor nor the trustee objects and the court subsequently confirms the debtor’s plan, then a final judgment exists stating the debt is valid. Thus the debtor is barred by res judicata from further challenging the debt.
Despite a chorus of cases adopting this reasoning, the United States District Court for the Southern District of Georgia recently dealt a blow to the res judicata argument, finding that the grounds upon which the FDCPA claim was raised and the grounds upon which the proof of claim was confirmed were not sufficiently similar such that one could foreclose the other. For two years the so-called Crawford cases have raged; circuit splits exist; and this recent decision from the Southern District of Georgia shows that further disagreement is likely. Creditors and debt collectors alike should monitor the development of these cases to ensure they know how their claims will be treated in the bankruptcy courts.
Last week, the Eleventh Circuit refused to compel arbitration because the defendant financial institution failed to prove that its online deposit agreement actually included an arbitration clause. This decision reflects the importance of (1) documenting the original agreement (both the actual terms and the assent of the consumer), (2) retaining the documentation, (3) documenting any change in terms (and the customer’s assent to them) and (4) carefully proving the existence of these agreements (and the customer’s assent) in Court.
Following the Eleventh Circuit’s decision in Bishop v. Ross Earle & Bonan, P.A., No. 15-12585, creditors and debt collectors should immediately review their practices to ensure that any communication to a debtor or a debtor’s attorney complies with the Fair Debt Collection Practices Act (FDCPA). This is especially true for FDCPA § 1692g(a)’s requirement that the debtor has a right to dispute the debt and that such dispute must be in writing.
In recent years, there has been a growing consensus among the courts that a debt collector’s threat to file suit on a debt otherwise barred by the applicable state statute of limitations violates the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. §§1692-1692p (2006).
Now that consensus has been extended to proofs of claim in bankruptcy court. In a decision last week, the Eleventh Circuit became the first court of appeals to hold that filing a proof of claim in a Chapter 13 bankruptcy for a debt that is time-barred under state law violates the FDCPA.
In Crawford v. LVNV Funding, LLC, Case No. 13-12389 (11th Cir. July 10, 2014) (see opinion here), the debt collection agency argued that its proof of claim was not “collection activity.” Instead, it characterized the claim as “a request to participate in the distribution of the bankruptcy estate under court control.” See In re McMillen, 440 B.R. 907, 912 (Bkrtcy. N.D. Ga. 2010). The Eleventh Circuit rejected this argument, concluding that there was no substantive difference between threatening to initiate suit outside of the bankruptcy courts and the filing of a proof of claim with the court:
The same is true in a bankruptcy context. In bankruptcy, the limitations period provides a bright line for debt collectors and consumer debtors, signifying a time when the debtor’s right to be free of stale claims comes to prevail over a creditor’s right to legally enforce the debt. . . .
Similar to the filing of a stale lawsuit, a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt. The “least sophisticated” Chapter 13 debtor may be unaware that a claim is time barred and unenforceable and thus to object to such a claim. . . . For all of these reasons, under the “least-sophisticated consumer standard” in our binding precedent, LVNV’s filing of a time-barred proof of claim against Crawford in bankruptcy was “unfair,” “unconscionable,” “deceptive” and “misleading” within the broad scope of §1692e and §1692f.
Crawford, Case No. 13-12389, pp. 11-12. The court also declined to address whether the Bankruptcy Code preempts the FDCPA, noting that the trial court had not addressed that grounds below. Id. at 14, n. 7.
Given the spate of recent decisions in this area, debt collection agencies should be mindful of the dangers of seeking to collect stale debts. While simply requesting payment of a stale debt itself may not be a violation of the FDCPA, the courts have reached an apparent consensus that threatening or initiating legal action to collect legally unenforceable debts constitutes a misleading collection activity under the least sophisticated consumer test. Debt collectors should consider reviewing their procedures to make sure they adequately identify stale debts and implement collection procedures appropriate to such claims.
On May 8, 2014, the Eleventh Circuit Court of Appeals decided a question of first impression within the Circuit: whether a debtor may recover “mental anguish” damages for a creditor’s willful violation of the Bankruptcy Code’s automatic stay provision, 11 U.S.C. §362(k). In Lodge v. Kondaur Capital Corporation, et al., No. 13-10919 (May 8, 2014), see opinion here, the Court followed a number of other circuits in holding that such damages are recoverable for a violation of the automatic stay. The Court also created a three-part evidentiary test that a debtor must meet to be entitled to such damages.
The creditor in Lodge violated the automatic stay by referring the debtor’s mortgage to a collections firm for foreclosure. The collections firm, in turn, published a single notice of sale in the local newspaper where the debtor lived and sent several letters to the debtor stating that they were “about to be foreclosed.” The creditor cancelled the foreclosure sale several weeks later, apparently upon realizing that the bankruptcy stay was in place.
The debtors sued the creditor and its collection firm for violating the automatic stay. In support of their claim for mental anguish damages, the debtors provided testimony that the notice of sale had left them “stressed out” for several weeks, made them difficult to be around, and caused them to lose sleep. On summary judgment, the trial court held that such testimony was too speculative and generalized to show an injury sufficient to support a recovery under 11 U.S.C. §362(k).
On appeal, the Eleventh Circuit held that emotional distress damages were included within the broad term of “actual damages,” the measure of damages provided by Section 362(k). Expressing concern that such damages could be easily fabricated, however, the Court adopted a three part judicial test for proving such damages. To recover “actual” damages for emotional distress under 362(k), a plaintiff must (1) suffer significant emotional distress, (2) clearly establish the significant emotional distress, and (3) demonstrate a causal connection between the significant emotional distress and the violation of the automatic stay.
The Court found that the generalized evidence presented by the debtors in Lodge that they were “stressed out” as a result of the creditor’s actions, without any specific details or corroborating testimony, was insufficient. The Court also concluded that the debtors had failed to show that their claimed emotional distress resulted from stay violation rather than the stress of bankruptcy itself. The Court affirmed the trial court’s summary judgment denying the debtors’ mental anguish claim.
The Eleventh Circuit’s decision provides clarity to litigants within this Circuit regarding the damages recoverable for automatic stay violations. In many cases, debtors suffer little financial loss as a result of automatic stay violations, and alleged emotional distress damages are the focus of plaintiffs’ claims in such cases. The parameters set by the Eleventh Circuit will give litigants a guide for what must be proven in order to seek such damages, and will encourage early settlement of claims for automatic stay violations that do not meet those parameters.
The Court’s discussion also has potential implications for emotional distress damage claims under other federal consumer protection statutes. Many of those statutes, including RESPA and TILA, provide a private right of action for recovery of “actual damages,” the same statutory formulation used in 11 U.S.C. §362(k). The lower courts have been divided on whether this term included emotional distress damages or was limited to financial damages. Compare Ploog v. Homeside Lending, 209 F.Supp.2d 863 (N.D. Ill. 2002) (emotional distress damages may be recovered for RESPA violation) with Katz v. Dime Sav. Bank, 992 F.Supp. 250, 255-56 (W.D.N.Y. 1997) (only pecuniary damages are “actual damages” under RESPA).
The Eleventh Court’s holding that emotional distress damages are “actual damages” under 11 U.S.C. §362(k) might be argued to support plaintiffs claiming that such damages are likewise recoverable under TILA and RESPA. At the same time, defendants will be able to argue that the judicial test that the Lodge court adopted for proving such damages applies to claims made under these other statutes as well.