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.   

Continue Reading Eleventh Circuit: No arbitration because bank failed to prove existence of arbitration agreement

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.

Continue Reading Eleventh Circuit holds that debt collection letters sent to a consumer’s attorney qualifies as a communication with a consumer under the Fair Debt Collection Practices Act.

In Gloor v. BancorpSouth Bank, No. 2140914 (Ala. Civ. App. April 1, 2016), the Alabama Court of Civil Appeals held that a creditor may revive and collect on an unpaid judgment that is older than 10 years, further clarifying a significant protection afforded to financial institutions charged with recovering past due amounts owed by judgment debtors.

Continue Reading Alabama Court of Civil Appeals affirms revival of 11-year old uncollected judgment based on affidavit testimony of creditor’s corporate officer with knowledge of debtor’s nonpayment

From the moment it was published in July 2014, Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014)—the first reported appellate decision holding that a plaintiff may state a claim under the Fair Debt Collection Practices Act based on a creditor’s bankruptcy proof of claim for an out-of-statute debt—spawned a flurry of litigation both within and outside the Eleventh Circuit. Looking back, however, district courts have largely rebuffed attempts at expanding Crawford’s holding and have refused to sanction enterprising attempts at exporting the Eleventh Circuit’s decision to other jurisdictions. The fallout from Crawford is far from over, however, as several cases are now pending before the various Courts of Appeals, setting up a potential circuit split that could eventually make its way to the Supreme Court.

Most recently, in Castellanos v. Midland Funding, LLC, No. 2:15-CV-559, 2016 WL 25918, at *2 (M.D. Fla. Jan. 4, 2016), the court adopted what is quickly becoming the majority view. Like most of the other lower courts in the Eleventh Circuit that have considered the issue that the Crawford court did not address—“[w]hether the [Bankruptcy] Code ‘preempts’ the FDCPA when creditors misbehave in bankruptcy”—the district court in Castellanos concluded that “the FDCPA and the Bankruptcy Code are at an irreconcilable conflict because the FDCPA prohibits filing a time-barred claim while the Bankruptcy Code permits it. In such cases, the FDCPA must yield to the Bankruptcy Code, which already provides protections for debtors faced with stale proofs of claim” in the form of the bankruptcy claims-allowance process.”

Though the plaintiff in Castellanos has already appealed the dismissal of her FDPCA claims, the issue has already reached the Eleventh Circuit in the form of Johnson v. Midland Funding, LLC, 528 B.R. 462 (S.D. Ala. 2015). As the progenitor of Castellanos and the cases that it followed, the district court in Johnson was the first to confront the preclusion question that the Eleventh Circuit expressly left open. Chief Judge Steele held in Johnson that even if a debtor could otherwise state a claim under the FDCPA, any such claim irreconcilably conflicts with, and therefore is precluded by, the Bankruptcy Code, which gives all creditors (even those who are also debt collectors under the FDCPA) the express right to file a proof of claim for any debt for which they have a right to payment. In other words, “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 Act must give way to the Code.” Accordingly, the court dismissed the plaintiff’s would-be nationwide Crawford class action.

Meanwhile, a similar movement has been afoot in the other circuits in which plaintiffs have attempted to assert FDCPA claims in the same vein as Crawford. However, unlike federal district courts in Alabama, Florida, and Georgia, none of the lower courts in any other jurisdiction in the country is constrained by the Eleventh Circuit’s conclusion that filing a time-barred proof of claim is a per se violation of the FDCPA. To date, Crawford still stands alone in that regard. Thus, courts outside the Eleventh Circuit have been able to fashion their own ways of handling copycat Crawford claims without necessarily confronting the issue of whether application of the FDCPA to proofs of claim is precluded by the Bankruptcy Code, and several such cases have percolated their way up to the various Courts of Appeals.

For example, a bankruptcy court in the Sixth Circuit and a district court in the Eighth Circuit both reasoned that “the FDCPA should not be implicated with regard to stale debts when a creditor merely … files an accurate proof of claim … [that] includes all the required information including the timing of the debt … [and] the applicable statute of limitations is one that does not extinguish the right to collect the debt but merely limits the remedies.” Nelson v. Midland Credit Mgmt., Inc., No. 4:15-CV-00816-ERW, 2015 WL 5093437, at *3 (E.D. Mo. Aug. 28, 2015) (quoting In re Broadrick, 532 B.R. 60, 75 (Bankr. M.D. Tenn. 2015)). Now, both Courts of Appeals are set to review those decisions. At the same time, the Sixth Circuit’s Bankruptcy Appellate Panel will also be confronted with appeals in two other cases that followed the Broadrick court’s analysis—In re Deborah Ash and In re Candace Gabay, Nos. 16-8001 & 16-8002 (6th Cir. B.A.P. 2016).

Rather than base its decision on anything particular to proofs of claim, the district court in Torres v. Asset Acceptance, LLC, 96 F. Supp. 3d 541 (E.D. Pa. 2015) took a slightly different tack in dismissing yet another nationwide Crawford class action. In particular, the court opted to follow the rationale of an earlier decision from the Second Circuit, in which that court had more broadly held that a proof of claim “cannot serve as the basis for an FDCPA action” because there “is no need to protect debtors who are already under the protection of the bankruptcy court.” The Torres court agreed, and likewise declined to “insert judicially created remedies into Congress’s carefully calibrated bankruptcy scheme, thus tilting the balance of rights and obligations between debtors and creditors.” The plaintiff’s appeal in Torres is now pending before the Third Circuit Court of Appeals.

Related cases are also presently pending before the Fourth and Seventh Circuits. Regardless of how the issue shakes out in any given case, however, an ultimate showdown before the Supreme Court to decide the destiny of Crawford claims almost seems inevitable at this point. Until then, however, courts across the country appear to be coalescing around the view that the Bankruptcy Code either provides debtors with sufficient protection from potentially abusive debt collection practices, or that the Code provides creditors with the right to file proofs of claim even for stale debts notwithstanding the FDCPA.

To date, Balch attorneys Jason Tompkins and Chase Espy have handled and managed nearly 150 Crawford cases, including the above-referenced cases now pending before the Third, Eighth, and Eleventh Circuit Courts of Appeals and the Sixth Circuit Bankruptcy Appellate Panel, with the assistance of Geremy Gregory, Chris Heinss, and Jonathan Hoffmann of Balch, Joshua Dickinson of Spencer Fane, and Andrew Schwartz of Marshall Dennehey.

A Hillsborough County Court recently held that Florida’s offer of judgment statute, Fla. Stat. § 768.79, is preempted by the Florida Consumer Collection Practices Act (the “FCCPA”), Fla. Stat. § 559.72.  This decision and, others like it, have stripped defendants in lender liability suits of valuable settlement tools.  In May 2013, the plaintiff in Hall v. Deutsche Bank Nat’l Tr. Co. & Ocwen Loan Servicing LLC, No. 13-CC-13185 (Fla. Hillsborough County Ct. Aug. 25, 2015), filed a one count complaint against a mortgagee and a mortgage servicer alleging a violation of the FCCPA.  The defendants filed an offer of judgment and the plaintiff moved to strike the offer of judgment arguing that the offer of judgment statute is preempted by the FCCPA.  Florida’s offer of judgment statute, Section 768.79, is used by plaintiffs and defendants alike to resolve cases prior to trial.  The statute was enacted to encourage settlement by taxing attorneys’ fees against a party that rejects a reasonable offer or demand for judgment.  Florida courts, however, have held that the offer of judgment statute is preempted in a number of actions including actions under Florida’s FCCPA, the Federal Fair Debt Collection Practices Act (the “FDCPA) and 42 U.S.C. § 1983.  See, e.g., Clayton v. Bryan, 753 So. 2d 632, 633 (Fla. 5th DCA 2000).

In striking the offer of judgment, the Hillsborough County Court cited Clayton as the controlling appellate authority on this issue.  Clayton, 753 So. 2d at 634.  In Clayton, Florida’s Fifth District Court of Appeal held that the FDCPA preempts a defendant’s use of an offer of judgment under § 768.79 in actions arising under either the federal FDCPA or the state law FCCPA.  Specifically, the offer of judgment statute is preempted by the FDCPA because the FDCPA only allows a prevailing defendant to recover its attorneys’ fees if the court expressly finds that the plaintiff’s case was brought in bad faith for the purpose of harassment.  Id. at 633.  Even though the state law FCCPA is silent as to awarding attorneys’ fees to successful defendants, the FCCPA is bound by the rule that it must be at least as protective of a consumer as the FDCPA.  Id. at 634.  In the event of an inconsistency in the application of these two consumer protection statutes, the FCCPA must adopt whichever provision is more protective of the consumer.  See Fla. Stat. § 559.552; Clayton, 753 So. 2d at 634.  The Fifth DCA found that the attorneys’ fee shifting provision of the FDCPA is more protective of the consumer and therefore that provision also applies under the FCCPA.  Clayton, 753 So. 2d at 634.  As a result, offers of judgment under § 768.79 are also preempted for state law FCCPA claims. Id.

While the Hillsborough County Court noted that its decision striking the offer of judgment was not a final order, it stated that if its decision were a final order, it would certify the following as a question of great public importance for review by the Second District Court of Appeal: “Does a claim made pursuant to Fla. Stat. 559.72 (FCCPA) pre-empt the application of the offer of judgment provisions of Fla. Stat. 768.79?”  It is worth noting that other circuits within the Second District Court of Appeal have also expressed agreement with the preemption analysis in Clayton, including the neighboring Sixth Judicial Circuit in Pinellas County, which, in its appellate capacity, stated that “a proposal of settlement made pursuant Florida Statute, § 768.79, is not applicable to claims filed under the Florida Consumer Collection Practices Act.”  Townsend v. Asset Acceptance Corp., No. 03-1921CI-88A (Fla. 6th Cir. App. Ct. Aug. 6, 2004).

Though it eventually reached the Eleventh Circuit, the Court’s decision in Miljkovic v. Shafritz & Dinkin, P.A., — F. 3d. –, No. 14-13715, 2015 WL 3956570 (11th Cir. June 30, 2015), had its origins in Florida state court, where Publix Federal Credit Union obtained a judgment and continuing writ of garnishment against Nedzad Miljkovic after he had failed to repay his automobile loan. Miljkovic filed a claim of exemption from the garnishment, and Publix responded by filing a sworn opposition, serving discovery requests, and offering to settle the debt for less than the judgment amount. Miljkovic refused the settlement offer and responded to the discovery requests, but the garnishment was dissolved on Publix’s motion shortly thereafter.

Miljkovic sued Shafritz & Dinkin, P.A., and Mitchell A. Dinkin, attorneys for Publix, alleging that they had violated several provisions of the FDCPA, because they had “no factual basis” for opposing his claim of exemption and their sworn reply was a calculated effort to coerce a settlement. The district court granted the defendants’ motion to dismiss, concluding that Miljkovic failed to state a claim under the FDCPA because the defendants’ sworn opposition to his exemption claim was a mere procedural filing required by state law, and because it was directed to the state court and to his attorney, rather than to Miljkovic himself. Alternatively, the district court also found that even if the FDCPA did apply, he still had failed to state a claim under the FDCPA.

Miljkovic’s appeal from the district court’s dismissal presented the Eleventh Circuit with an issue of first impression: whether representations made in court filings by attorneys during the course of debt-collection litigation are actionable under the Fair Debt Collection Practices Act. Based on the plain language of the statute, the Court concluded that the FDCPA applies equally to conduct directed at a consumer’s attorney (or any other non-consumer), declining to follow cases from the Second, Third, Eighth, and Ninth Circuits.

As the Court explained, according to its plain language (and the Supreme Court’s decision in Heintz v. Jenkins, 514 U.S. 291 (1995)), the FDCPA applies to lawyers and law firms who regularly engage in debt-collection activity, and categorically prohibits abusive conduct in the course of collecting a debt, even when that activity involves litigation, and even when that conduct is directed at someone other than the debtor. Thus, “in the absence of statutory language to the contrary,” the Court declined to recognize an exemption from the FDCPA for conduct that otherwise would be actionable simply because it is directed at someone other than the consumer and reversed the district court’s holding that the FDCPA did not apply to the defendants’ conduct in opposing Miljkovic’s exemption claim.

On the other hand, the Court affirmed the district court’s alternative holding, agreeing that Miljkovic had failed to allege facts sufficient to state a claim under the FDCPA. First, the Court rejected Miljkovic’s claim under § 1692d, which prohibits conduct with the natural consequence of “harassing, abusing, or oppressing” the least sophisticated consumer. Though § 1692d proscribes such conduct generally, the statute also contains examples of prohibited conduct such as the “use of violence,” the “use of obscene or profane language,” and repeated phone calls intended to annoy or harass “any person at the called number.” In the context of litigation, the Eleventh Circuit previously had held that, absent conduct exhibiting a “tone of intimidation,” the mere filing of a collection lawsuit against a consumer does not fall within the ambit of § 1692d. Reasoning that the same was true of the defendants’ opposition to Miljkovic’s exemption, the Court held that he likewise failed to state a claim under § 1692d.

Miljkovic also claimed that the defendants had violated § 1692e(10), alleging that their opposition to his exemption claim constituted a “false representation or deceptive means” of collecting a debt because it lacked any “factual basis.” The Eleventh Circuit affirmed the district court’s dismissal, however, because the defendants’ oppositional statement was “not misleading or deceptive in the traditional sense,” in that it did not “misrepresent the nature or effect of the writ of garnishment,” “erroneously state the amount of the debt owed,” “incorrectly identify the holder of the alleged debt,” or “contain ‘false or deliberately ambiguous threats’ of future litigation.” Thus, the Court concluded that Miljkovic failed to allege that the defendants’ communication was deceptive or misleading to the least sophisticated consumer.

In doing so, the panel dodged the issue of whether the Eleventh Circuit should adopt the “competent lawyer” standard applied by the Seventh and Eighth Circuits for adjudging the deceptive capacity of communications with consumers’ attorneys. Because he had failed as a matter of law to show that the defendants’ conduct would be deceptive or misleading even to the least sophisticated consumer, Miljkovic was “necessarily unable to demonstrate that individuals held to a higher standard of competence, be it an attorney or a state court judge, could be misled or deceived by the sworn reply.” Accordingly, the Court declined to “adopt or reject” the “competent lawyer” standard, though it did acknowledge that the defendants had “reasonably” suggested that “the ‘least sophisticated consumer’ standard is inappropriate for evaluating the tendency of conduct or language to deceive or mislead a consumer’s attorney.”

Lastly, the Eleventh Circuit also affirmed the district court’s conclusion that Miljkovic failed to state a claim under § 1692f, which prohibits the use of “unfair or unconscionable means to collect or attempt to collect any debt.” Though Miljkovic had alleged that the defendants’ opposition was a bad faith attempt to coerce a settlement, the Court determined that his assertion was merely a legal conclusion that it was not required to accept as true. And “by failing to identify how the defendants’ conduct “was either unfair or unconscionable in addition to being abusive, deceptive, or misleading,” Miljkovic “fail[ed] to allege any conduct beyond that which he assert[ed] violates the other provisions of the FDCPA.” Thus, the Court held that he could not state a claim under § 1692f, often referred to as the FDCPA’s “catch-all” provision, because “a catch-all is not a free-for-all.”

The Eleventh Circuit’s decision in Miljkovic will no doubt be most remembered for its notable holding on an issue of first impression: that the FDCPA applies categorically to conduct falling within the plain language of the statute, even in the context of litigation, and even when the conduct in question is directed at someone other than the consumer. But it will likely be cited for much more. For example, though many district courts had reached the same conclusion, and while it did not expressly acknowledge it as another issue of first impression, the Eleventh Circuit had never before declared that, in order to state a claim for violation of § 1692f, a plaintiff must either allege improper acts specifically enumerated in that section or allege misconduct beyond that which allegedly violates some other provision of the FDCPA. Thus, even though the Court saved for another day whether the “competent lawyer” standard should apply to debt collectors’ communications with consumers’ attorneys, the Eleventh Circuit’s opinion in Miljkovic is still likely to prove instructive on the sufficiency of allegations necessary to sustain a claim under the FDCPA, not just in the course of litigation, but in other contexts, as well.

In Maignan v. Seterus, Inc., No. 14-CV-22488 (S.D. Fla. Feb. 11, 2015), the United States District Court for the Southern District of Florida found that an allegedly deceptive communication to a plaintiff’s attorney, as opposed to the plaintiff himself, is not actionable under either the federal Fair Debt Collection Practices Act (FDCPA) or its state counterpart, the Florida Consumer Collection Practices Act (FCCPA).  Following a foreclosure action, Seterus, Inc., mailed a payoff statement to counsel for Ronald Maignan, which demanded a total amount and stated an interest rate higher than those contained in the final judgment in the foreclosure action.  Maignan sued, contending that the payoff statement falsely represented the character, amount, or legal status of the loan, and that the defendant had unlawfully attempted to collect an amount not expressly authorized by the parties’ agreement or permitted by law.

Seterus moved to dismiss, arguing that the payoff statement was not actionable under either the FDCPA or the FCCPA because it was sent to Maignan’s counsel, rather than to Maignan himself.  The district court agreed, and dismissed Maignan’s claims with prejudice.  While courts ordinarily assess whether a communication runs afoul of the FDCPA from the standpoint of the “least sophisticated consumer,” the district court agreed that it makes little sense to apply this standard to communications sent to a consumer’s attorney, rather than to the consumer himself.  Likewise, because great weight must be given to federal courts’ interpretation of the FDCPA when interpreting similar provisions of the FCCPA, the district court also found that the plaintiff’s FCCPA claim failed for the same reason.

The Eleventh Circuit’s opinion in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), cert. denied, — U.S. –, 2015 WL 246891 (Apr. 20, 2015), was the first reported decision holding that a plaintiff may state a claim under the Fair Debt Collection Practices Act based on a creditor’s proof of claim in bankruptcy for a debt that is time-barred under state law.  But just as the Eleventh Circuit’s decision in Crawford was aimed at stemming the tide of “proofs of claim on debts deemed unenforceable under state statutes of limitations,” another “deluge has swept through U.S. bankruptcy courts of late” in the form of copycat Crawford claims.

The tide may be turning, however, as two federal district courts recently dismissed nationwide class actions based on Crawford.  In both cases, the courts answered the question that the Eleventh Circuit left open in the most famous footnote since Footnote 4 (at least in the world of FDCPA litigation): “Whether the [Bankruptcy] Code ‘preempts’ the FDCPA when creditors misbehave in bankruptcy.”  Crawford, 758 F.3d at 1262 n.7.

In Johnson v. Midland Funding, LLC, No. 14-CV-0322-WS-C, 2015 WL 1345431 (S.D. Ala. Mar. 23, 2015), the plaintiff asserted FDCPA claims against Midland Funding, LLC, in a nationwide class action based on its filing of a proof of claim for a stale debt. Midland moved to dismiss Johnson’s claim and argued, among other things, that “the tension between the Bankruptcy Code and [the FDCPA] precludes the plaintiff from pursuing her claim” under the FDCPA.  The district court agreed, noting that “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.”  As the court explained, for “creditors under the Code that are also debt collectors under the Act, those contradictory provisions cannot possibly be given effect simultaneously.”  To the court, “[a] clearer demonstration of irreconcilable conflict would be difficult to imagine,” and in the face of that conflict, “the Act must give way to the Code.”

The district court in Torres v. Asset Acceptance, LLC, No. 14-CV-6542, 2015 WL 1529297 (E.D. Pa. Apr. 7, 2015) reached a similar result.  Though unconstrained by the Eleventh Circuit’s decision in Crawford, the court in Torres also found no guidance from the Third Circuit’s decision in Simon v. FIA Card Servs., N.A., 732 F.3d 259 (3d Cir. 2013).  While Simon likewise involved the intersection of the FDCPA and the Bankruptcy Code, the two sets of overlapping claims in that case “involved (1) mutually prohibited conduct (yielding no conflict), and (2) contradictory obligations (yielding a direct conflict).”  In Torres, on the other hand, the court recognized that “the Code invests creditors with the right—but not the obligation—to file time-barred proofs of claim, while the FDCPA would oblige creditors not to file them.”  Reasoning that this “rights-versus-obligations dichotomy does not easily fit within the Simon court’s direct conflicts framework,” the court instead based its decision on “larger systemic concerns with respect to the two statutory schemes.”

Thus, the district court in Torres adopted the rationale of the Second Circuit’s decision in Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2d Cir. 2010).  There, the court held that a proof of claim “cannot serve as the basis for an FDCPA action” because there “is no need to protect debtors who are already under the protection of the bankruptcy court,” and because “[n]othing in either the Bankruptcy Code or the FDCPA suggests that a debtor should be permitted to bypass the procedural safeguards in the Code in favor of asserting potentially more lucrative claims under the FDCPA.”  The Torres court agreed, and declined to “insert judicially created remedies into Congress’s carefully calibrated bankruptcy scheme, thus tilting the balance of rights and obligations between debtors and creditors.”  Accordingly, the court held in no uncertain terms “that filing a time-barred proof of claim in bankruptcy court cannot form the basis for an FDCPA claim.”

If the decisions in Johnson and Torres are any indication, the floodgates may be closing on FDCPA claims based on time-barred proofs of claim in bankruptcy.  But in the meantime, the Eleventh Circuit likely will have another chance to speak on the topic it previously declined to address, as the Supreme Court denied LVNV’s cert petition in Crawford and the plaintiff in Johnson already has filed a notice of appeal.

Balch attorneys Jason Tompkins and Chase Espy represented Midland Funding in the Johnson case and Asset Acceptance in the Torres case (with the assistance of Marshall Dennehey attorney Andrew Schwartz).

The Eleventh Circuit Court of Appeals recently issued an opinion resolving any question as to whether or not a chapter 11 plan of reorganization may include enforceable releases of third parties who are not in bankruptcy.[1]  This ruling reinforces the importance of carefully reviewing proposed chapter 11 plans as these plans could impact a creditor’s rights against third parties that are not in bankruptcy such as guarantors and co-borrowers.

The Facts

Seaside Engineering & Surveying, Inc. (“Seaside”) was a civil engineering and surveying firm principally owned by five individuals.  Prior to Seaside filing bankruptcy, the principals branched out into real estate development and formed other entities to further those endeavors.  These entities borrowed money from a creditor that was secured by personal guaranties from the principals.  After the loans went into default, the creditor filed suit to collect under the personal guaranties. Three of the principals/guarantors filed chapter 7 bankruptcy and listed their ownership interest in Seaside as assets of the bankruptcy estate.  Through the bankruptcy case, one of the principal’s ownership interest in Seaside was sold to the creditor. Seaside then commenced its chapter 11 bankruptcy case.

Seaside proposed a chapter 11 plan of reorganization in which Seaside would continue operations as an entity named Gulf Atlantic, LLC (“Gulf”).  Some of the owners of Gulf were the same owners of Seaside.  The proposed chapter 11 plan provided that non-debtors (including officers, directors and members of Seaside and Gulf) would not be liable for claims related to the bankruptcy case except to the extent such liability is based on fraud, gross negligence or willful conduct.  The bankruptcy court confirmed the chapter 11 plan over the creditor’s objection and the district court affirmed the ruling.  The creditor then appealed to the Eleventh Circuit Court of Appeals.

The Court’s Ruling

In its analysis, the court recognized the split among circuits as to whether a chapter 11 plan can effectively release a non-debtor from claims.  The Court of Appeals for the Fifth, Ninth and Tenth Circuits prohibit such releases while the Second, Third, Fourth, Sixth and Seventh Circuits allow such releases under certain circumstances.  Citing the case of In re Munford, 97 F.3d 449 (11th Cir. 1996), the Court of Appeals for the Eleventh Circuit stated that its circuit was within the majority view.

The minority view looks to Section 524(e) of the Bankruptcy Code[2] as the reason why a chapter 11 plan cannot effectuate the release of a non-debtor third party.  The majority view interprets this statute as providing that while a discharge itself does not release a third party from liability, it does not limit a bankruptcy court’s equitable powers under Section 105 of the Bankruptcy Code to approve such a release.

While the Court of Appeals for the Eleventh Circuit finds itself in the majority view, it states that such releases “ought not to be issued lightly, and should be reserved for those unusual cases in which such an order is necessary for the success of the reorganization, and only in situations in which such an order is fair and equitable under all the facts and circumstances. The inquiry is fact intensive in the extreme.”[3]  The court set out seven factors adopted by the Sixth Circuit[4] to be considered when determining if a release of third parties should be approved:

  1. existence of an identity of interest between the debtor and the third party, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate;
  2. the non-debtor has contributed substantial assets to the reorganization;
  3. the release is essential to the reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor;
  4. the impacted class (or classes) has overwhelmingly voted to accept the plan;
  5. the plan provides a mechanism to pay all, or substantially all, of the class or classes affected by the release;
  6. the plan provides an opportunity for those claimants who choose not to settle to recover in full; and
  7. the bankruptcy court made a record of specific factual findings that support its conclusions.[5]

While adopting these seven factors, the Eleventh Circuit cautioned that these factors should be viewed as a non-exclusive list to be applied flexibly and that bankruptcy courts should remember that releases of non-debtor third parties should be used “cautiously and infrequently.”[6]

In the Seaside bankruptcy, the court of appeals concluded that an analysis of the above-cited factors supported the non-debtor releases. The court stated that the releases “prevent claims against non-debtors that would undermine the operations of, and doom the possibility of success for, the reorganized entity, Gulf.”[7] The court based its conclusion on the fact that it was the principals who provided the services being sold by Gulf and that if required to defend such claims, the principals would be unable to devote proper time and resources to seeing that Gulf succeeds. In reaching its conclusion, the court also noted that the fact the plan provided for payment in full of the creditor “weighs heavily in favor of the releases.” [8]

Takeaways for Creditors

Creditors often take solace that they have personal guarantors or co-borrowers when a borrower files bankruptcy. Creditors may even go so far as to elect not to take an active role in the bankruptcy case on the assumption that they will be able to pursue the other obligors. However, rather than completely disregarding a borrower’s bankruptcy case and focusing solely upon those other obligors, it is critical that creditors stay engaged in the bankruptcy process. Otherwise, a chapter 11 plan of reorganization may be confirmed that prevents the creditor from pursuing co-obligors.


[1] In re Seaside Engineering & Surveying, Inc., 2015 U.S. App. LEXIS 3831, at *1 (11th Cir. March 12, 2015).

[2] This statute provides in relevant part that the “discharge of a debt of the debtor does not affect the liability of another entity on . . . such debt.”  11 U.S.C. § 524(e).

[3] In re Seaside, 2015 U.S. App. LEXIS 3831 at *14.

[4] In re Dow Corning Corp., 280 F.3d 648, 658 (6th Cir. 2002).

[5] Id.

[6] In re Seaside, 2015 U.S. App. LEXIS 3831 at *15.

[7] Id. at *8.

[8] Id. at *19.

Atlanta litigators Matthew Ames, Walt Jones, and Jamie Cohen recently received a favorable decision from the Georgia Supreme Court, which confirmed the rule that a secured creditor cannot be forced to accept possession of the collateral in satisfaction of an indebtedness when the creditor did not, in fact, seek this relief.  In Hamilton State Bank v. Nelson, et al., S14A1892, (Ga. Feb. 16, 2015), the Georgia Supreme Court held that, under Georgia law, the mere tender of possession of collateral by a debtor to a creditor does not transfer possession unless and until possession is accepted by the transferee.  In support of its holding, the Georgia Supreme Court referenced several landlord-tenant cases holding that a tenant’s abandonment of possession of the leased premises does not in and of itself operate as a “surrender” of the premises, unless and until the landlord accepts the surrender, as well.  In Nelson, the trial court directed the borrowers to tender possession of the property to the Bank, which the Supreme Court held was not tantamount to effectively transferring possession of the property unless the creditor accepted the tender.  While this makes practical sense (since a tenant or mortgagor cannot simply hand over his keys to a landlord or lender and effectively transfer possession of the leased or mortgaged property), it is helpful for lenders to see this position solidified by the Georgia Supreme Court.