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.
In an unpublished opinion, the Eleventh Circuit applied the Supreme Court’s recent opinion in Spokeo, Inc. v. Robins, 578 U.S. ___, 136 S. Ct. 1540 (2016) and held that a debtor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.
On July 14th, the Consumer Financial Protection Bureau filed suit against a debt collection law firm in federal district court in Atlanta, alleging in broad strokes that its practices— including some which are fairly common in the debt purchaser industry– systematically violate the Fair Debt Collection Practices Act (“FDCPA”) and the Consumer Financial Protection Act (“CFPA”). The complaint leaves little doubt that the debt purchaser industry and the law firms that support it now face increased scrutiny from the CFPB.
In CFPB v. Frederick J. Hanna & Associates, P.C., et al. , Case No. 1:14-cv-02211-AT-WEJ (N.D. Ga. July 14, 2014) (attached), the CFPB alleges that the law firm of Frederick J. Hanna and Associates, P.C. (the “Hanna firm”) is “a lawsuit mill” that has improperly filed hundreds of thousands of lawsuits in the last five years seeking to collect small, unsecured debts from consumers on behalf of various financial institutions. The most serious allegations of wrongdoing focus on the firm’s alleged practices in filing collection lawsuits on behalf of debt buyer firms. The CFPB claims that two of the firm’s alleged practices in filing these suits violate the FDCPA and the CFPA.
First, according to the CFPB, the Hanna firm files lawsuits without “meaningful attorney review.” Instead, the firm allegedly uses an “automated system” and staff to determine whether the consumers are “suit worthy,” including whether the claims might be barred by limitations. The non-attorney staff then draft complaints and forward them to the attorneys for their signature. The firm allegedly expects its attorneys to spend no more than one minute reviewing and signing each complaint before it is filed. As a result, the complaint alleges, the firm routinely files suit seeking debts that are not owed. The CFPB alleges that this conduct violates the FDCPA and CFPA by falsely representing to consumers that licensed attorneys are “meaningfully involved” in filing valid legal actions against them when they are not.
Second, the complaint alleges that the Hanna firm supports its complaints with affidavits concerning the character, amount, and legal status of consumers’ alleged debts which are prepared by individuals without personal knowledge. The complaint specifically identifies the firm’s debt buyer clients as the source of many of these affidavits, and alleges that these companies initiate collection activity without “basic documents, such as the original contracts underlying the alleged debt or the chain of title evidencing that the debt buyer has standing to sue the consumer.” Id. at 8. The CFPB alleges that this conduct, which is reminiscent of the “robo-signing” allegations made in the recent mortgage foreclosure litigation, is deceptive and unconscionable.
As with a recent consent order against an Alabama real estate firm (see discussion here), the CFPB has chosen to assert a legal theory against the Hanna firm that potentially has broader application to other actors in the financial industry. This is notable because the factual allegations in the complaint suggest that the CFPB could have pursued a narrower but more well-established legal theory against the Hanna firm under the FDCPA based upon its alleged filing of lawsuits without the intent or ability to prove those cases. The CFPB’s proclivity to use court cases as de facto rule-makings is well-noted. This latest case appears to be consistent with that practice. Debt buyer companies and their collections law firms should take note of this action and the positions the agency is staking out regarding their industry.
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.