Wednesday, September 30, 2015

FYI: Mass Fed Ct Hands Creditors a Win on Post-Discharge Credit Reporting and FCRA Preemption

The U.S. District Court for the District of Massachusetts recently held that the federal Fair Credit Reporting Act ("FCRA") preempts Massachusetts state law claims for violations of the Massachusetts Credit Reporting Act, Mass. Gen. Laws ch. 93, § 54A, and the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A.


Importantly, the Court also held that the mere furnishing of information following a bankruptcy discharge, without more, is not actionable.


A copy of the opinion is available at:  Link to Opinion


In 2008, the plaintiff obtained a mortgage and note for his home.  In August 2010, the plaintiff filed for Chapter 7 bankruptcy, receiving a discharge order in December 2010.


In May 2013, the mortgagee began a foreclosure proceeding.  In January 2014, the plaintiff and the mortgagee reached an agreement resolving the foreclosure through a permanent modification to the mortgage loan.  According to the plaintiff, although he agreed to the modification, he was no longer personally liable for the mortgage debt because of his Chapter 7 discharge and because the mortgage debt was not "reaffirmed" by him in his bankruptcy case.


In July 2014, the plaintiff was offered employment with a bank contingent on credit and background checks.  The prospective bank employer withdrew the job offer, allegedly when the plaintiff's credit report revealed the foreclosure action and a past due balance of $99,726.


The plaintiff alleged that the mortgagee's act of reporting his discharged mortgage constituted an effort to collect a debt in violation of the bankruptcy discharge injunction.  The mortgagee argued that it did not engage in misreporting because its right to enforce the mortgage was unaffected by the plaintiff's bankruptcy discharge. 


As the Court noted, it is well established that a mortgage lien on real property, including all amounts due thereunder, passes through bankruptcy unaffected.  Absent a reaffirmation, following a Chapter 7 discharge, although a debtor is not personally liable for the mortgage loan, he still "owes" the lender in the form of the property (the collateral).  The debtor must either make new arrangements with the lender to keep the property, return it to the lender, or wait for it to be foreclosed upon.  


Because of the continuing mortgage lien, a continuing "credit relationship" exists between the lender and the debtor.  The Court also noted that, more than seven months after the discharge, the plaintiff agreed to a loan modification, evidencing the continuing credit relationship.  As a result, the Court held that the mortgagee was under no obligation under the Bankruptcy Code to change the way it reported the status of the plaintiff's mortgage loan. 


Even assuming the plaintiff had no credit relationship with the mortgagee after the bankruptcy discharge, the Court held that the act of reporting a discharge debt even standing alone is not a violation of the bankruptcy discharge injunction, at 11 U.S.C. § 524(a).  To violate § 524(a), a creditor must act in a way that improperly coerces or harasses the debtor.


The Court held that reporting a debt to a credit reporting agency – without any evidence of harassment, coercion or some other linkage to show that the act is one likely to be effective as a debt collection device – fails to qualify on its own as an "act" that violates § 524. 


Under the circumstances, the Court held that the mortgagee's single instance of failing to update the plaintiff's credit report was not so objectively coercive as to warrant relief under § 524.  Therefore, the plaintiff's allegations that the mortgagee violated the discharge were dismissed.


The Court also dismissed the plaintiff's claims which alleged that the mortgagee's credit reporting violated the Massachusetts Credit Reporting Act under Mass. Gen. Laws ch. 93, § 54A.


The mortgagee argued that the plaintiff's claim were preempted by the FCRA, which provides that "[n]o requirement or prohibition may be imposed under the laws of any State …relating to the responsibilities of persons who furnish information to consumer reporting agencies…"  15 U.S.C. § 1681t(b)(1)(F). 


The Court noted that, at first glance, the Massachusetts Credit Reporting Act claim would appear to fall directly within the FRCA's preemptive language because, FCRA explicitly preempts any requirement imposed by state law that clearly relates to the responsibilities of a furnisher of credit information. However, the FRCA also provides an express exemption for the Massachusetts Credit Reporting Act noting that § 1681t(b)(1)(F) "shall not apply - (i) with respect to section 54A(a) of chapter 93 of the Massachusetts Annotated Laws . . . ." 15 U.S.C. § 1681t(b)(1)(F). 


However, the Court held that the FCRA expressly exempts only section 54A(a) of the state law from its preemptive reach, but FCRA includes no such exemption for section 54A(g) of the Massachusetts Credit Reporting Act, which creates a private cause of action for the plaintiff to assert the state law violation. 


In the Court's view, the absence of express language exempting § 54A(g) from the FCRA's preemption provision was fatal to Lance's Massachusetts Credit Reporting Act claim. 


The Court also dismissed plaintiff's claim that the mortgagee's credit reporting violated the Massachusetts Consumer Protection Act, Mass. Gen. Laws Ch. 93A ("Chapter 93A").


The mortgagee argued that this claim was also preempted because it was based on its reporting of the plaintiff's consumer credit information.  The plaintiff argued that his Chapter 93A claim survived preemption because it was based on the existence of unfair practices independent from the subject matter of the mortgagee's credit furnishing obligations under FCRA.  Specifically, the plaintiff alleged that the Chapter 93A claim was based on the mortgagee's supposedly unlawful debt collection by means of credit reporting, rather than the inaccurate credit reporting itself. 


As the Court noted, however, the plaintiff's argument could not withstand analysis.  The Court held that the conduct at issue was the mortgagee's debt collection practices - insofar as they were coextensive with its reporting on a discharged debt - were exactly the type of conduct Congress intended to regulate under the FCRA. As a result, the Court held that the plaintiff's Chapter 93A claim was also preempted. 


Accordingly, the plaintiff's complaint was dismissed in its entirety.





Ralph T. Wutscher
Maurice Wutscher LLP
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