FYI: 2nd Cir Agrees Auto Loan for Car Surrendered w/in 910 Days of BK Gets Bifurcated

The U.S. Court of Appeal for the Second Circuit found that an undersecured creditor may maintain an unsecured claim for a deficiency not satisfied by the surrender and sale of the collateral, even where §506(a) of the Bankruptcy Code is inapplicable.  In so ruling, the Second Circuit sided with the majority of Appellate Courts that have ruled on this issue.  A copy of the opinion is attached.

 

The debtors signed a contract to finance the purchase of an automobile that granted Long Beach Corporation a purchase-money security interest in the car.  AmeriCredit is the successor in interest to Long Beach.  The debtors filed for Chapter 13 bankruptcy within 910 days of buying the car, and AmeriCredit filed their proof of claim shortly thereafter.  The debtors surrendered the automobile financed by their contract to AmeriCredit.  AmeriCredit sold the car for less than the amount of the claim, creating a deficiency that they sought to recover by filing an amended claim as a general unsecured creditor.  The Bankruptcy Court sustained the debtor’s objection to the claim finding that the Bankruptcy Code prevented AmeriCredit from maintaining its unsecured claim.

 

Section 506(a) provides that where a creditor seeks a claim secured by collateral, the value of which is less than the amount of the claim, the claim is treated as secured to the extent of the value of the collateral and any deficiency is treated as unsecured. 

 

However, §1325(a) of the Bankruptcy Code specifically removes from § 506(a) treatment creditors with a purchase money security interest in an automobile purchased within 910 days of the filing of the bankruptcy petition.  Thus, the question in this case “may an undersecured creditor, in the absence of section 506(a) and its explicit provision for dividing a claim partly secured by a lien on property into its secured and unsecured components, maintain an unsecured claim for a deficiency not satisfied by the surrender and sale of the vehicle?”

 

The Second Circuit answers this question in the affirmative and determines that a creditor is allowed to seek the deficiency as an unsecured claim if such actions are permitted under the applicable state law.  In this case, the terms of the contract between AmeriCredit and the debtors as well as the applicable state law both allow AmeriCredit to seek a deficiency.  The Second Circuit relied on the general presumption that, “claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed,” to determine that AmeriCredit should be allowed to maintain its unsecured claim.

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

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FYI: 9th Cir Says State UDAP Law Not to Be Used in Interpreting FTC Act

The U.S. Court of Appeals for the Ninth Circuit recently upheld a district court's order for injunctive and equitable relief in a case brought by the FTC against a website company that created and delivered unverified checks at the direction of registered users for violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a)   A copy of the opinion is attached.

The website required minimal information to sign up for an account and accordingly, was "highly vulnerable to con artists and fraudsters."  After the website was in operation for approximately six years, the FTC brought this action for injunctive and other equitable relief.  The district court granted summary judgment in favor of the FTC and this appeal followed. 

In affirming the district court's holding, the Ninth Circuit determined that the key issue on appeal was whether defendants were liable under Section 5 of the FTC Act for: (1) causing; (2) substantial injury to consumers; (3) that was not reasonably avoidable or outweighed by countervailing benefits.    As to the causation element, the Court rejected defendants' argument that because only users can create checks, it could not be liable for unfair creation and delivery of checks.  The Court found this to be nothing more than a semantic argument which ignored the fact that the website "created and controlled a system that facilitated fraud and that the company was on notice as to the high fraud rate." 

 

In so holding, the Court also refused to use the California Business & Professions Code § 17200 - the "Little FTC Act" as interpretive guidance, noting that it would "create a sea of inconsistent rulings" to use state consumer protection statutes to aid in interpreting the FTC Act. 

 

Finally, also as to the causation issue, the Court reasoned that businesses can cause direct consumer harm in a variety of ways, and consumers can be injured for purposes of the FTC Act "through the actions of those whose practices facilitate, or contribute to, ill intentioned schemes if the injury was a predictable consequence of those actions." 

The Court also found that the FTC had met its burden in establishing substantial injury and there was no triable issue of fact with respect to that issue, that defendants had not shown that there was a material issue of fact as to whether consumer injuries were reasonably avoidable, and that the FTC met its burden of showing that consumer injury was not outweighed by countervailing benefits to consumers or to competition.    Finally, the Court upheld the district court's injunction order and its holding that the appropriate amount of equitable damages was disgorgement of total revenue.

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

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FYI: 2nd Cir Applies Milavetz, Holds Bankruptcy Code s. 536(a)(4) is Constitutional

The United States Court of Appeals for the Second Circuit recently confirmed that Bankruptcy Code provision 11 U.S.C. § 526(a)(4) is not unconstitutionally overbroad in violation of the First Amendment, overturning a contrary lower court decision.  A copy of the opinion is attached.

 

Section 536(a)(4) prohibits a debt counselor from advising a client to incur more debt in contemplation of bankruptcy.  After the district court found § 526(a)(4) unconstitutional, the Supreme Court interpreted the section in Milavetz, Gallop & Milavetz, P.A. v. U.S..  The Appellate Court's ruling in this case was largely based on the Supreme Court's decision in Milavetz.

 

In Milavetz, the Supreme Court determined that § 526(a)(4) should not be read as prohibiting "any discussion of the advantages, disadvantages, or legality of incurring more debt."  Rather, the Supreme Court interpreted the section more narrowly to only prohibit, "a specific type of misconduct designed to manipulate the protections of the bankruptcy system." 

 

Specifically, the Supreme Court determined that § 526(a)(4) exists to prevent debt counselors from advising clients to load up on debt with the intent of having that debt discharged in bankruptcy.  The Court found that the statute leaves bankruptcy advisors "free to talk about the incurrence of debt, so long as they are not affirmatively advising a client to commit this type of abusive prefiling conduct."  Therefore, in light of the Supreme Court's decision in Milavetz, the Appellate Court determined that § 526(a)(4) was not unconstitutionally overbroad and remanded the case to the district court.

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

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FYI: FL Sup Ct Rejects Doc Prep UPL Claim on Procedural Grounds

The Supreme Court of Florida recently held that a complaint for damages and fees arising from the unauthorized practice of law must allege that the Supreme Court “has ruled that the specified conduct at issue constitutes the unauthorized practice of law.”  A copy of the opinion is attached.

 

Petitioners brought a class action suit against Merrill Lynch Credit Corporation (“Merrill Lynch”) and sought to recover document preparation fees charged by Merrill Lynch for services performed by clerical personnel in the processing of mortgage loans.  Merrill Lynch moved to dismiss, arguing that the circuit court lacked jurisdiction to hear any claims relating to the unlicensed practice of law and that only the Florida Bar could prosecute such claims.

 

The circuit court granted Merrill Lynch’s motion, and the appellate court affirmed, reasoning that a “supreme court determination on the unauthorized practice of law is a prerequisite to such suits.”  The Supreme Court of Florida affirmed, but for different reasoning.

 

The Florida Supreme Court first noted that Petitioners’ were not “jurisdictionally barred” from “bringing a private cause of action against an unlicensed practitioner” for damages caused by the unlicensed practice of law.  However, the Court affirmed the dismissals because Petitioners did not allege that “Court has ruled that the specified conduct constitutes the unauthorized practice of law,” and therefore Petitioners failed to state a claim.

 

In effect, “a plaintiff may be able to state a cause of action with proper pleading, even though the defendant accused of the unauthorized practice of law has not been subject to a Florida Bar proceeding.”  However, a plaintiff will not be able to do so for a case of first impression, or in situations where a determination has been made but the defendant “believes its identity is relevant to the determination of whether the conduct is actually the unauthorized practice of law.” 

 

In both situations, the case “may be dismissed without prejudice or the action stayed until a determination” is made by the Court pursuant to the Florida Bar advisory opinion procedures.  

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: 6th Cir Rejects Debtor's "Fraudulent Concealment" Argument in FDCPA Case

The U.S. Court of Appeals for the Sixth Circuit recently held that a consumer plaintiff's claims were barred by the FDCPA's one year statute of limitations period, and that the exception to the statute of limitations for circumstances where a party fraudulently conceals information that prevents another party from discovering its wrongdoing did not apply to the particular facts in this case.  A copy of the opinion is attached.

Defendant Unifund, a debt collector, sued plaintiff, a consumer, to collect a certain debt owed by plaintiff.  Plaintiff filed affirmative defenses and counterclaims, raising Unifund's lack of capacity to sue and alleging that Unifund violated the FDCPA by misrepresenting plaintiff's debt.  Both parties eventually dismissed their claims against one another.  Plaintiff then sued Unifund in state court, reasserting her claims from the debt collection action.  Unifund removed the case to federal court and moved to dismiss the action on statute of limitations grounds.  The district court ruled in favor of Unifund on its motion to dismiss, holding that because plaintiff filed her suit over a year after she had been served with the FDCPA complaint, which was when her claim accrued, it was barred by the FDCPA's one year statute of limitations, 15 U.S.C. § 1692k(d).  The district court further rejected plaintiff's claim that Unifund had tolled the statute of limitations by fraudulently concealing its lack of capacity to sue.  This appeal followed.

In affirming the district court's ruling in favor of Unifund, the Sixth Circuit looked to the generally accepted principle that it will not extend the statute of limitations "by even a single day," with limited exceptions.  One exception to this rule applies to defendants who fraudulently conceal their wrongdoing and thus prevent a plaintiff from filing suit during the limitations period.  The court found that plaintiff's claim did not fall into this limited exception given that she could not show that: (1) there was concealment that (2) prevented plaintiff from discovering Unifund's wrongdoing during the period and (3) that she exercised diligence in trying to uncover Unifund's conduct.  The court noted that plaintiff's own actions showed that Unifund did not prevent her from raising her FDCPA claims during the limitations period, given that plaintiff herself raised the same claims in the debt collection action. 

 

Even though Unifund had been delinquent in providing discovery to plaintiff in the debt collection action, the court found that publicly available information would have told plaintiff what she needed to know, and that the record showed that plaintiff had ample reason to look at such public records. 

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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FYI: 4th Cir Says State Law Tort Claims Preempted by Nat'l Flood Ins Act

The U.S. Court of Appeals for the Fourth Circuit recently held that state law tort claims against an independent contractors hired by the Federal Emergency Management Agency (“FEMA”) were preempted under the National Flood Insurance Act of 1968 (“NFIA”).  A copy of the opinion is attached.

 

In 1998, FEMA began a reassessment of flood elevation maps in an area of South Carolina that included Plaintiff’s property.  FEMA hired the Defendant as an independent contractor to provide engineering and related services to assist in remapping the area.  Defendant’s evaluation concluded that a large portion of Plaintiff’s property was a floodway, which significantly reduced Plaintiff’s property value.  After an unsuccessful administrative appeal pursuant to the NFIA, Plaintiff filed a number of state law claims against the Defendant for professional malpractice, civil conspiracy, injurious falsehood and for violation of the South Carolina Unfair Trade Practices Act (“SCUTPA”). 

 

The Court determined that the NFIA preempts Plaintiff’s state law claims under a theory of obstacle preemption, which applies “where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”  The Court found that the NFIA sets up a specific system for appealing the accuracy of flood maps that carefully balances the interests of landowners with the purposes of the NFIA.  Allowing state law causes of action against FEMA’s independent contractors would “undermine the primary purposes of the NFIA to strike a balance.” 

 

Importantly, the Court noted that NFIA only allowed an appeal of an assessment on the grounds that it was “scientifically or technically incorrect,” and then, “the only available remedy is modification of the determination.”  The Court thus concluded that allowing state law tort actions against independent contractors hired by FEMA would increase the costs of the program, hindering FEMA’s ability implement the law, “thus destroying the balance struck by Congress in promulgating the NFIA.”  Thus, the Appellate Court upheld the district court and concluded that Plaintiff’s claims were preempted by federal law.

 

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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