Friday, May 30, 2014

FYI: 11th Cir Holds Bankruptcy Court May Refuse to Set Off Lender-Liability Award Against Discharged Debt

The U.S. Court of Appeals for the Eleventh Circuit recently reversed the set-off of an award under Florida’s version of the FDCPA against a consumer debt discharged in bankruptcy.  In so ruling, the Court held that the bankruptcy court may exercise its discretion and deny set-off to deter improper collection practices.


A copy of the opinion is available at:


On December 18, 2008, a borrower (“Debtor”) filed a bankruptcy petition for Chapter 7 protection.  The lender (“Creditor”) held a pre-petition claim against Debtor in the amount of approximately $30,000.00 for unpaid debt on two credit cards.  Creditor did not file a proof of claim, and the credit card debt was discharged through the bankruptcy. 


In an adversary proceeding brought by the Chapter 7 Trustee (“Trustee”) for the estate of the Debtor, the bankruptcy court found that Creditor violated Sections 559.72(7) and 559.72(18) of the Florida Consumer Collection Practices Act (“FCCPA”) while attempting to collect the credit card debt.  The bankruptcy court awarded the Trustee the maximum statutory damages of $1,000.00 and attorney’s fees.


The bankruptcy court refused to set off the FCCPA award against Creditor’s pre-petition claim against the Debtor.  Relying on Newton v. Beneficial Finance Company of New Orleans, 558 F.2d 731 (5th Cir. 1977), the bankruptcy court concluded that set-off is not available in this case because the FCCPA is a penal statute, and an award under a penal statute cannot be set-off against a debt discharged in bankruptcy.  In addition, the bankruptcy court held that the FCCPA award and the credit card debt did not satisfy the mutuality requirement for set-off under Florida law.  Additionally, the bankruptcy court held that, even if Creditor had the right to set off its FCCPA obligation against the discharged credit card debt, the bankruptcy court would employ its discretion, concluding that equity weighed against set-off.


Creditor appealed the bankruptcy court decision to the district court.  In rejecting the bankruptcy court’s reliance on Newton, the district court explained that Newton had little precedential value, and that mutuality did not exist between Creditor’s FCCPA obligation and Debtor’s debt.  The district court noted Florida’s preference for the entry of a single judgment, and concluded that Florida law required set-off.  The district court also rejected the bankruptcy court’s conclusion that it would be inequitable to allow Creditor to set-off its FCCPA obligation against the discharged debt.  Accordingly, the district court reversed the bankruptcy court.


On further appeal, the Eleventh Circuit independently examined the factual and legal determinations of the bankruptcy court. 


As you may recall, the right to set-off pre-petition mutual debts is preserved by Section 553 of the Bankruptcy Code.  See e.g., In re Prudential of Florida Leasing, Inc., 478 F.3d 1291, 1297 (11th Cir. 2007); 11 U.S.C. §553.  Set-off under Section 553 is the “right to cancel out mutual debts against one another in full or in part … to avoid ‘the absurdity of making A pay B when B owes A.’”  In re Patterson, 967 F.2d 505, 508-09 (11th Cir. 1992) (quoting Studley v. Boylston Nat’l Bank, 229 U.S. 523, 528 (1913)).  However, the right to set-off is not absolute.  Id. at 509.


Whether to allow set-off is a decision that lies within the sound discretion of the bankruptcy court.  See e.g., In re Kingsley, 518 F.3d 874, 877 (11th Cir. 2008);  In re The Sec. Group 1980, 74 F.3d 1103, 1114 (11th Cir. 1996) (“[T]he right to set-off under § 553 is merely permissible and subject to the discretion of the bankruptcy court.”).


Under this rubric, the Eleventh Circuit reviewed the bankruptcy court’s refusal to reduce the FCCPA damages and attorney’s fees award by the amount of Debtor’s credit card debt under an abuse of discretion standard.


Because the Bankruptcy Code does not create any absolute right to setoff, the Eleventh Circuit relied on In re Patterson and looked to Florida law.  As the Eleventh Circuit explained, the bankruptcy court correctly noted that Florida law is silent as to whether an obligation incurred under the FCCPA can be set-off against a pre-petition debt.  The Eleventh Circuit also held that, in reversing the bankruptcy court, the district court erred by interpreting Florida law’s silence to mean that an FCCPA obligation must be set-off against a pre-petition debt. 


In the Eleventh Circuit’s own words, “[a]s long as Florida law neither mandates nor prohibits set-off under the FCCPA — and it does not — it is entirely within the bankruptcy court’s discretion whether to allow set off under the circumstances of the case.”


By declining to set off the FCCPA award against the credit card debt, the bankruptcy court had noted that the purpose of the FCCPA is to deter bad collection practices.  Thus, the Eleventh Circuit held that the bankruptcy court was within its discretion to find that it would be inequitable to permit Creditor to set-off its FCCPA obligation because it would allow Creditor to “to take illegal action without consequence.”  In other words, the Eleventh Circuit held, if a creditor can simply set-off an award under the FCCPA against the outstanding debt the creditor is attempting to collect, there would be little to no incentive to comply with the FCCPA.


In addition, the Eleventh Circuit agreed with the bankruptcy court’s finding that the Florida legislature included a mandatory attorney’s fee provision in the FCCPA to encourage private attorneys to bring FCCPA claims.  The Eleventh Circuit held that the bankruptcy court properly exercised its discretion to deny set-off reasoning that the stated purpose of the FCCPA would be undermined if set-off were allowed as to the attorney’s fee award.


Accordingly, the Eleventh Circuit reversed the district court and remanded for a determination of the award of attorney’s fees.






Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
(312) 551-9320
(312) 284-4751
(312) 493-0874


Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





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