January 2011 Bankruptcy Section Newsletter

Sua Sponte

Peter Califano, Bankruptcy Section Chair
Cooper, White & Cooper LLC
San Francisco, CA

In late December 2010, Professor David Skeel, a law professor at the University of Pennsylvania, proposed a new "Chapter 8" to allow states to file for bankruptcy. This novel idea would allow for the assumption and rejection of contracts with public employees, restructuring of state bonds and modification of retiree benefits. Holdout creditors would also be forced to accept proposed plan treatment under "cramdown" provisions pursuant to this new chapter under Title 11. Apparently, this was all motivated by the anticipated request for a federal bailout of states that are mired under mountains of debt and in danger of defaulting to their various creditors. The question came down to simply this:  Why should responsible states (and more specifically, their taxpaying citizens) be forced to bail out fiscally irresponsible states?  Since I live in California, also known as the Lindsey Lohan of States,* I have a special vantage point on the topic. I completely agree with the sentiment that California should be forced to address its own financial predicament – and what better way than to provide for a Chapter 8-like procedure to help incentivize the political process in states like California, if the politicians are unable to do so. Chapter 8 is an idea that should not be rejected out of hand.

In Section news, our Legislative Committee continues to work on CLLA's position on S 3675, which proposes a Chapter 12-like bankruptcy case for small businesses and bigger Chapter 13 limits for individuals. Since our membership typically is involved in these types of bankruptcy cases, the CLLA's comments will bring a relevant practitioner's point of view to the proposed legislation. 

In addition, don't forget to mark your calendars for the CLLA's Southern Region Conference, being held in New Orleans on February 24 through February 26, 2011, which means you will be able to attend the conference and Mardi Gras (or vice versa). Either way, we hope to see you at a very "lively" conference.

Finally, our Section continues to develop a CLLA Bankruptcy Academy Program for young insolvency lawyers, designed to provide unparalleled experiences to new lawyers in assisting in amicus briefing, legislative analysis, new case development and designing educational programs for bankruptcy conferences. We hope to see you soon at one of our Section's events.

* Allysia Finley, The Wall Street Journal, November 8, 2010, "California - the Lindsey Lohan of States"

Case Analysis: Third Circuit Holds That Attorney Letter Can Form Basis for FDCPA Claim

Stephen Sather
Barron, Newburger & Sinsley, PLLC
Austin, TX

A new opinion from the Third Circuit Court of Appeals could lead to more claims under the Fair Debt Collection Practices Act being filed in Bankruptcy Court. Allen v. LaSalle Bank, N.A., No. 09-1466 (3rd Cir. 1/12/11) held that correspondence from a debt collector to a consumer's attorney could be actionable under the FDCPA. Although Allen did not arise in a bankruptcy case, it involved a fact pattern likely to be seen in bankruptcies.

The Facts

The case began when Dorothy Rhue Allen failed to make the final payment on her 30 year mortgage. LaSalle Bank retained Fein, Such, Kahn & Shephard, P.C. ("FSKS") to file a foreclosure action. At the request of Allen's attorney, FSKS provided a payoff letter. Less than three weeks later, Allen filed a class action counterclaim and third party complaint asserting that FSKS's response violated the FDCPA.   LaSalle promptly released the mortgage and dismissed the foreclosure action.

Not content with this result, Allen filed a class action against FSKS, LaSalle and the servicer for the loan in the U.S. District Court for the District of New Jersey. Although she initially made other arguments, she later conceded that her complaint was based solely on a violation of 15 U.S.C. §1692f(1), which prohibits "the collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law."   She alleged that the amounts charged to her exceeded the actual charges or the amounts allowed by court rule. For example, she alleged that FSKS demanded $910 in attorney's fees when a court rule permitted only $15.43, $335 for searches when court rule permits only $75, $160 for recording fees when the actual fee was only $60 and $475 for service of process when statute and court rule limited reimbursement to $175.

The defendants moved to dismiss. The District Court, relying on precedent from the Seventh Circuit, held that a communication from a debt collector to a consumer's attorney should be analyzed under the standard of a competent attorney. Because a competent attorney would have recognized the charges as being excessive and objected to them, the District Court held that the complaint failed to state a cause of action.

The Third Circuit's Opinion

The Court of Appeals reversed. It found that §1692f(1) was a strict liability statute which did not depend upon the nature of the recipient (which would be the least sophisticated consumer or competent attorney under other FDCPA provisions). Attorneys who regularly collect debts through litigation are considered to be debt collectors.   The FDCPA defines "communication" as "the conveying of information regarding a debt directly or indirectly to any person through any medium." Thus, the attorneys were debt collectors and the letter to the consumer's attorney constituted an indirect communication with the consumer herself.  

The Court wrote:

The FDCPA is a strict liability statute to the extent it imposes liability without proof of an intentional violation.   If an otherwise improper communication would escape FDCPA liability simply because that communication was directed to a consumer's attorney, it would undermine the deterrent effect of strict liability.

In this case, the District Court sub silentio concluded that a communication from a debt collector to a consumer's attorney was generally covered by the FDCPA but that it is to be analyzed from the perspective of a competent attorney. The District Court, however, did not have the benefit of Allen's concession that her claims were predicated only upon § 1692f(1), which defines the collection of an unauthorized debt as a per se "unfair or unconscionable" debt collection method. The only inquiry under § 1692f(1) is whether the amount collected was expressly authorized by the agreement creating the debt or permitted by law, an issue we leave for the District Court.

Opinion, pp. 8-9.

The Third Circuit's ruling places it in agreement with the Fourth Circuit, Sayyed v. Wolfpoff & Abramson, 485 F.3d 226, 232-33 (4th Cir. 2007) and in conflict with the Second and Ninth Circuits, Guerrero v. RJM Acquisitions LLC, 499 F.3d 926, 934-39 (9th Cir. 2007); Kropelnicki v. Siegel, 290 F.3d 118, 129-31 (2d Cir. 2002).

The Third Circuit also rejected a claim that New Jersey's litigation privilege claim would bar the claim.

Nonetheless, the FDCPA does not contain an exemption from liability for common law privileges. "[C]ommon law immunities cannot trump the [FDCPA]"s clear application to the litigating activities of attorneys," (citation omitted), and, like the Fourth Circuit, we will not "disregard the statutory text in order to imply some sort of common law privilege."
Opinion, p. 9. Other courts have split over whether there is a litigation privilege defense to FDCPA claims. Newburger & Barron, Fair Debt Collection Practices, ¶1.07[11][k] (A.S. Pratt & Sons 2009).

Bankruptcy Implications

The Third Circuit's holding has tremendous implications for bankruptcy cases. Debt collectors regularly communicate information regarding consumer debts in bankruptcy cases. Proofs of claims, motions for relief from the automatic stay and objections to plans all involve as "the conveying of information regarding a debt directly or indirectly to any person through any medium."   It is not unknown for these documents to include charges prohibited for law, such as post-petition interest or attorney's fees on an unsecured or under secured debt.   Under the Allen decision, it is possible that courts could impose strict liability on creditor communications and filings in bankruptcy court.

It is important to note that the Second Circuit recently held that "the filing of a proof of claim in bankruptcy court cannot form the basis for an FDCPA claim."  Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2nd Cir. 2010). This is just one facet of the ongoing debate over the relationship between bankruptcy law and the Fair Debt Collection Practices Act. While Allen does not directly address this controversy, it seems likely that it will add fuel to the fire. 

Legislative Update

David Goch, CLLA General Counsel
Webster, Chamberlain & Bean
Washington, D.C.

On January 7, 2011, HR 220, The Identity Theft Prevention Act of 2011, was introduced by Rep Ron Paul (TX-R). This measure amends title II of the Social Security Act and the Internal Revenue Code to prohibit using a Social Security number except for specified Social Security and tax purposes. It also amends the Privacy Act of 1974 by prohibiting any federal, state, or local government agency from requesting an individual to disclose his/her social security number.

On January 3rd, Attorney General Eric Holder made the following appointments:

  • Henry G. Hobbs Jr., Acting U.S. Trustee for Louisiana and Mississippi (Region 5) (effective immediately); and
  • Daniel M. McDermott, UST for Michigan and Ohio (Region 9) (effective immediately).

Previously, Hobbs has headed the USTP's office in Austin, Texas, as Assistant U.S. Trustee since 1992. From 2005 to 2007, he was detailed to the EOUST in Washington, D.C., as Acting Chief of the USTP's new Credit Counseling and Debtor Education (CCDE) Unit.

McDermott was appointed UST for Region 9 in 2008, after heading the Cleveland office of the USTP as Assistant U.S. Trustee from 1991 through 2008, according to the EOUST news release.

Case Law Update

Louis Robin
Fitzgerald, O'Brien & Robin
Longmeadow, MA

There have been two significant decisions  within the past week that will be of interest to attorneys practicing creditors' rights and bankruptcy; the first by the Massachusetts Supreme Judicial Court (that state's highest court), U.S. Bank N.A. v. Ibanez (Docket No. 10694, January 7, 2011) and the Supreme Court, Ransom v. FIA Card Services, N.A. (Docket No. 09-907, January 11, 2011)  Each has similarities in the they have a principal opinion that relies upon very legal arguments, while they are followed by additional opinions (consenting and dissenting) that provide broader stokes.

U.S. Bank N.A. v. Ibanez

In Ibanez, the issue was the prerequisites for an assignment when a party, claiming to hold a mortgage by assignment, seeks foreclosure. In Massachusetts it is important to note that Massachusetts is a non-judicial foreclosure state – that is, it is not necessary to get judicial authority for a foreclosure sale. There is a limited judicial action under the "Servicemembers Act", where service members in our armed forces are protected and for which a foreclosing party seeks a judgment declaring that the mortgagee is not a soldier or sailor serving overseas, but this is usually for title purpose only. The actions before the court were seeking confirmation of the propriety of the foreclosures.

The Supreme Judicial Court (SJC) ruled plainly that an assignment of the mortgage "requires a writing signed by the grantor". The SJC did not require "that an assignment must be in recordable form at the time of the notice of sale or the subsequent foreclosure sale," although a recording was advisable. Still, none of the documents in the record satisfied this requirement – they were often unsigned, noted a future intent to assign, did not satisfactory identify the mortgage, or was otherwise insufficient.

Although this reported decision has been viewed as drastic by some observers (including the credit markets), it should hardly be seen as a surprise to expect that the foreclosing party actually own the mortgage. Is it too much to expect that a mortgage holder get the assignment in writing? Well, at one point an actual assignment needs to be recorded – and, in comparison, is it too much to ask that deeds be drafted and executed?  Although Ibanez is a Massachusetts decision dependent upon Massachusetts law, it is certainly a warning to other jurisdictions.

If there is anything surprising about this decision, it is because earlier in the opinion, the SJC stated that under the Massachusetts foreclosure statute (M.G.L.A Ch. 183, §21), after a default, "the mortgage holder may sell the property at a public auction and convey the property to the purchaser in fee simple, ‘and such sale shall forever bar the mortgagor and all persons claiming under him from all right and interest in the mortgaged premises, whether at law or in equity.'  Even where there is a dispute as to whether the mortgagor was in default or whether the party claiming to be the mortgage holder is the true mortgage holder, the foreclosure goes forward unless the mortgagor files an action and obtains an court order enjoining the foreclosure."  This would have seemed to negate the failure to properly document an assignment. However, the SJC stated that "[r]recognizing the substantial power that the statutory scheme affords to a mortgage holder to foreclose without immediate judicial oversight, we adhere to the familiar rule that ‘one who sells under a power [of sale] must follow strictly its terms. If he fails to do so there is no valid execution of the power, and the sale is wholly void.'" Ibanez at 20, citing other opinions. The SJC plainly believed that the failure to have an executed assignment prior to the sale to negate the sale despite the prior rule, but this raises the question of what is the next issue that can void a sale? Whether there was a default? Or whether there was some fraud in the original mortgage (which is alleged often) that voids the default?

Ransom v. FIA Card Services, N.A.

Here the issue was whether the debtor could use the "ownership" expense on the means test for a car for which there is no loan. There has been a split among the circuits on this issue, with the Eighth, Fifth and Seventh Circuits all ruling  that strict compliance with the statute permits the inclusion of the ownership expense while the Ninth Circuit below in Ransom cases relied upon the position that the only reason for the expense is the loan, which if paid, negates the expense.

Justice Kagan, writing for the majority opinion, ruled that the statutory instructions are, under §707(b)(2)(A)(ii)(I), "[t]he debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards ... " (emphasis added). Justice Kagan continued "[T]he key word in this provision is ‘applicable': A debtor may claim not all, but only ‘applicable' expense amounts listed in the Standards ... If Congress had not wanted to separate in this way debtors who qualify for an allowance from those who do not, it could have omitted the term "applicable" altogether. Without that word, all debtors would be eligible to claim a deduction for each category listed in the Standards. Congress presumably included ‘applicable" to achieve a different result. ("[W]e must give effect to every word of a statute wherever possible"). Although the debtor's counsel made arguments to the contrary, in short, this was the reasoning behind the Justice Kagan's ruling excluding an ownership expense for a vehicle for which there is no loan – use of the word "applicable" which required a meaning, excluded use of this expense.
Justice Scalia was the sole dissenter. His dissent is a wonderful tribute to those that toil through mundane bankruptcy provisions to provide real meaning to the words and the principles set forth. Although grounded in the plain reading of the words of statutes that he requires, he dispels with the majority's reliance upon the principle that "we must give effect to every word of a statute wherever possible" by countering that the "canon against superfluity is not a canon against verbosity".   In following the logic of the majority and the statute, he finds a fairer meaning of the word "applicable" to mean the number of automobiles, not whether there were any outstanding loans. But his conclusion places the real issue in its place – "The reality is, to describe it in the Court's own terms, that that occasional overallowance (or, for that matter, underallowance) is the inevitable result of a standardized formula like the means test . . . . Congress chose to tolerate the occasional peculiarity that a brighter-line test produces. Our job, it seems to me, is not to eliminate or reduce those oddities, but to give the formula Congress adopted its fairest meaning."

This "realty" of the means test cannot be minimized. Congress intended it to be a brightline test, with no real flexibility. That this produces "oddities", or unfair results, should hardly surprise anyone. Still, creditors find certain expenses to be unnecessary, arguing that equity or some other reading should exclude them. In contrast, debtors argue that actual expenses compared to real income make the application of the means test limits impractical or inequitable. On this last point, one could easily compare Ramson to the First Circuit Bankruptcy Appellate Panel's decision in In re Kibbe, 361 B.R. 302 (B.A.P. 1st Cir. 2007), which read the word "projected" as minimizing, if not eliminating, the means test for determining the amount for a Chapter 13 plan. But, as Justice Scalia states much more eloquently, the harsh realities of practical circumstances does not require one from diverging from the words of a statute. With these decisions in place, however, perhaps we are again approaching the pre-BAPCPA procedure of a case by case analysis.   This case means that chapter 13 debtors who own cars will not be able to take a deduction for an auto loan expense unless they are actually paying an auto loan. The case is helpful to creditors who receive payment through chapter 13 plans, such as banks and financial institutions that issue consumer credit cards, as it may increase the level of payment required under chapter 13 plans.