FYI: SD Fla Holds Borrowers Have No Right to Contest Foreclosure, Despite "Surrender" and "Abandonment" of Property in BK

In a case addressing what it means to "surrender" property under the Bankruptcy Code, the U.S. District Court for the Southern District of Florida recently held that a Chapter 7 trustee's abandonment of real property only restores legal title to the debtors as if no bankruptcy petition had been filed, and does not also give the debtors the right to contest the mortgagee's foreclosure if the debtors elected to surrender the property.

 

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

 

Husband and wife debtors defaulted on their mortgage and the mortgagee sued to foreclose. The debtors then filed a chapter 7 bankruptcy case.

 

In their schedules, the debtors acknowledged that they owned the collateral and that it was encumbered by a valid first mortgage lien that was undisputed, non-contingent and liquidated. The debtors also filed a statement of intention indicating that they would surrender the property.  Although they later tried to amend their statement to reaffirm the mortgage, this effort was untimely under the Bankruptcy Code.

 

The Chapter 7 trustee eventually abandoned the property and the debtors received a discharge. The state court mortgage foreclosure action filed as to the surrendered and abandoned property was then set for trial.

 

The mortgagee filed a motion in the bankruptcy court to compel surrender of the property, which the bankruptcy court granted, reasoning that although the term "surrender" is not defined in the bankruptcy code, the Eleventh Circuit Court of Appeals' holding in Taylor v. AGE Fed. Credit Union (In re Taylor) requires a debtor who is unwilling to reaffirm or redeem the mortgage obligation to indicate an intent to surrender the home and tender the property to the mortgagee.

 

The bankruptcy court also held that although the debtors did not have to physically surrender the property to the mortgagee, they could not defend against or contest the foreclosure in state court, and if they did not surrender the property, their bankruptcy discharge would be in jeopardy.

 

On appeal to the district court, the debtors argued that the bankruptcy court erred in ruling that the debtors were required to surrender the property to the creditor instead of the bankruptcy trustee, and because the trustee had abandoned the property, the debtors argued they retained all of their rights to the property, including the right to defend the foreclosure action, as if the bankruptcy had never been filed.

 

The Southern District of Florida began its analysis by examining section 521 of the federal Bankruptcy Code, which requires a debtor with secured debts to file a statement of intention within 30 days after the petition is filed or before the meeting of creditors, whichever is first, indicating whether the property is exempt, will be retained and the debt reaffirmed, or will be surrendered.  The Court noted that section 521 also requires a debtor to "perform his intention with respect to such property" within 30 days after the first date set for the meeting of creditors or within such additional time as the court allows for cause.

 

The Court held that "[i]f a debtor retains nonexempt collateral under section 521(a)(2), the debtor has the options of reaffirmation, redemption or surrender."  It then characterized the issue before it as "whether the bankruptcy court erred in finding that the duty to surrender is owed solely to the lienholder as opposed to another entity, such as the bankruptcy trustee."

 

The debtors, relying on a Louisiana federal district court's holding in In re Lair, argued that if the bankruptcy trustee abandons the asset back to the debtor during the case due to a lack of equity or if the property is returned at the end of the case by operation of law, then the debtor and creditor are left to state law remedies and the debtor's surrender would have no effect on the debtors state law rights with respect to the creditor.

 

The Southern District of Florida pointed out that Lair disagreed with the Eleventh Circuit's ruling in Taylor, which rejected what was called the "ride-through' option," which allowed a chapter 7 debtor to retain the collateral property and make payments without either redeeming the property or reaffirming the debt because it "'gives the debtor not a 'fresh start' but a 'head start' since the debtor effectively converts his secured obligation from recourse to nonrecourse with no downside risk for failing to maintain or insure the lender's collateral.'"

 

The Court reasoned that the critical question was not whether the property should be surrendered to the trustee or the secured creditor, but rather "what is the legal effect of the debtor's decision to surrender the property?"

 

The Southern District of Florida agreed with the bankruptcy court that once the debtor decides to "surrender" secured property, the debtor has abandoned any interest or claim that he may have had to the property as against the trustee, if the trustee decides to administer the property, as well as against any secured creditor the debtor listed in the filed schedules as having a valid, undisputed, non-contingent and enforceable secured lien on the property.

 

The Court held that, although the debtor need not physically deliver the property to the secured party, the debtor is precluded from taking any action which would interfere with the secured creditor's ability to obtain legal title to, and possession of, the property through legal means. "Defending against a foreclosure proceeding relating to the secured property would be inconsistent with the debtor's stated intention to surrender the property within the meaning of 11 U.S.C § 521(a)(2)."

 

The Court rejected the debtor's argument that after the trustees abandonment, the property reverts to the debtor and stands as if no bankruptcy petition was filed, reasoning that the debtors misunderstood the case law, and if their position was correct, "there would be no discharge of their personal liability on the note associated with the mortgage on the property."

 

After examining the opinions cited by the debtors, the Southern District of Florida concluded that "the underlying principle which is being espoused is that title to the abandoned property reverts back to the debtor to the same extent as it was held prior to the filing of the bankruptcy."  Abandonment by the bankruptcy trustee, the Court held, has no effect on the "debtor's rights and responsibilities relative to the property that flow from the bankruptcy. Just as a discharge of personal liability to pay the obligation on the note survives after abandonment of the property by the trustee, so too does the legal effect of the debtor' decision to surrender the property pursuant to 11 U.S.C. § 521(c)(2). This legal effect includes a relinquishment of the debtor's interest in the secured property as against the secured creditor, as well as a prohibition against interfering or impeding the secured creditor's efforts to take possession of the property by available legal means."

 

The Southern District of Florida affirmed the bankruptcy court's order compelling the debtors to surrender the real property in accordance with their statement of intention.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Reverses Denial of Class Cert in FDCPA "Time-Barred Debt" Case

The U.S. Court of Appeals for the Seventh Circuit recently reversed a district court's denial of class certification in a putative class action alleging that a debt collector violated the federal Fair Debt Collection Practices Act ("FDCPA") by sending supposedly misleading letters to Illinois residents trying to collect time-barred debts.

 

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

 

The plaintiff alleged that the defendant debt collector violated the FDCPA because it sent "dunning letters containing language that would mislead an unsophisticated consumer into believing that the debt is legally enforceable" even though the statute of limitations had run.

 

This was the second time appeal in the case. In the first appeal, the Seventh Circuit reversed the district court's dismissal "because the offer of settlement [the] plaintiff received did not promise a full resolution of the matter and thus did not moot his interest in the case." The Court explained in the first appeal that "dunning letters such as the one [the plaintiff] received 'misrepresented the legal status of the debts, in violation of the FDCPA,' because an 'unsophisticated consumer' who read such a dunning letter 'could have been led to believe that her debt was legally enforceable.'"

 

After the first appeal, the plaintiff filed a motion to certify the class in the district court under Federal Rule of Civil Procedure 23(b)(3),"which requires the district court to find 'that questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."

 

Although the district court "was satisfied that the proposed class met the numerosity, commonality, typicality and adequacy requirements of Federal Rule of Civil Procedure 23(a)", it decided that the class did not meet the requirements of Rule 23(b)(3) because "issues commons to the class did not predominate over issues affecting individual class members."  The trial court's ruling was based on the fact that the class included persons who sought actual damages because they paid part of the debt after receiving the dunning letter, which would require individualized determinations of causation and damages.

 

The plaintiff moved for reconsideration of the order denying class certification, but the district court denied it. The plaintiff then petitioned for an interlocutory appeal under Rule 23(f), which the Seventh Circuit granted "[b]ecause it appears that the denial of class status is likely to be fatal to this litigation and that an appeal may promote the development of the law."

 

On appeal, the Seventh Circuit agreed with the plaintiff's argument that "the district court exceeded the bounds of its discretion when it denied class certification." The Court explained that the district court's analysis was inconsistent with prior rulings of the Seventh Circuit, and "suggests that the existence of individual issues of causation automatically bars class certification under Rule 23(b)(3). That overstates the case."

 

The Seventh Circuit held that, although "[p]roximate cause … is necessarily an individual issue," it had previously held that "the need for individual proof alone does not necessarily preclude class certification."  The Court went on to explain that "[it] is well established that, if a case requires determination of individual issues of causation and damage, a court may 'bifurcate the case into a liability phase and a damage phase.'"

 

The Court also reasoned that the district court's analysis was "internally inconsistent" because it simultaneously found that "the amount of each class member's actual damages is 'capable of ministerial determination' yet that the question of causation is not." This reasoning was faulty because "a plaintiff must prove causation to establish actual damages." If actual damages could be determined ministerially, "causation must likewise be capable of ministerial determination."

 

Finally, the Court reasoned that another reason proof of causation was irrelevant "to determining class membership in this case: The FDCPA is a strict-liability statute, and so members of the class would be entitled to statutory damages for a violation of the Act regardless of any actual damages."

,

The Court vacated the district court's order denying class certification and remanded the case for further proceedings consistent with its opinion.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Reverses Denial of Class Cert in FDCPA "Time-Barred Debt" Case

The U.S. Court of Appeals for the Seventh Circuit recently reversed a district court's denial of class certification in a putative class action alleging that a debt collector violated the federal Fair Debt Collection Practices Act ("FDCPA") by sending supposedly misleading letters to Illinois residents trying to collect time-barred debts.

 

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

 

The plaintiff alleged that the defendant debt collector violated the FDCPA because it sent "dunning letters containing language that would mislead an unsophisticated consumer into believing that the debt is legally enforceable" even though the statute of limitations had run.

 

This was the second time appeal in the case. In the first appeal, the Seventh Circuit reversed the district court's dismissal "because the offer of settlement [the] plaintiff received did not promise a full resolution of the matter and thus did not moot his interest in the case." The Court explained in the first appeal that "dunning letters such as the one [the plaintiff] received 'misrepresented the legal status of the debts, in violation of the FDCPA,' because an 'unsophisticated consumer' who read such a dunning letter 'could have been led to believe that her debt was legally enforceable.'"

 

After the first appeal, the plaintiff filed a motion to certify the class in the district court under Federal Rule of Civil Procedure 23(b)(3),"which requires the district court to find 'that questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."

 

Although the district court "was satisfied that the proposed class met the numerosity, commonality, typicality and adequacy requirements of Federal Rule of Civil Procedure 23(a)", it decided that the class did not meet the requirements of Rule 23(b)(3) because "issues commons to the class did not predominate over issues affecting individual class members."  The trial court's ruling was based on the fact that the class included persons who sought actual damages because they paid part of the debt after receiving the dunning letter, which would require individualized determinations of causation and damages.

 

The plaintiff moved for reconsideration of the order denying class certification, but the district court denied it. The plaintiff then petitioned for an interlocutory appeal under Rule 23(f), which the Seventh Circuit granted "[b]ecause it appears that the denial of class status is likely to be fatal to this litigation and that an appeal may promote the development of the law."

 

On appeal, the Seventh Circuit agreed with the plaintiff's argument that "the district court exceeded the bounds of its discretion when it denied class certification." The Court explained that the district court's analysis was inconsistent with prior rulings of the Seventh Circuit, and "suggests that the existence of individual issues of causation automatically bars class certification under Rule 23(b)(3). That overstates the case."

 

The Seventh Circuit held that, although "[p]roximate cause … is necessarily an individual issue," it had previously held that "the need for individual proof alone does not necessarily preclude class certification."  The Court went on to explain that "[it] is well established that, if a case requires determination of individual issues of causation and damage, a court may 'bifurcate the case into a liability phase and a damage phase.'"

 

The Court also reasoned that the district court's analysis was "internally inconsistent" because it simultaneously found that "the amount of each class member's actual damages is 'capable of ministerial determination' yet that the question of causation is not." This reasoning was faulty because "a plaintiff must prove causation to establish actual damages." If actual damages could be determined ministerially, "causation must likewise be capable of ministerial determination."

 

Finally, the Court reasoned that another reason proof of causation was irrelevant "to determining class membership in this case: The FDCPA is a strict-liability statute, and so members of the class would be entitled to statutory damages for a violation of the Act regardless of any actual damages."

,

The Court vacated the district court's order denying class certification and remanded the case for further proceedings consistent with its opinion.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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FYI: Congress Adds New Exception to GLBA Annual Privacy Act Notices

Section 75001 of the recently enacted Fixing America's Surface Transportation (FAST) Act provides a new exception to the annual privacy notice requirement under the Gramm-Leach-Bliley Act (GLBA).

 

The language of the provision is as follows:

 

 

SEC. 75001. EXCEPTION TO ANNUAL PRIVACY NOTICE REQUIREMENT UNDER THE GRAMM-LEACH-BLILEY ACT.

 

Section 503 of the Gramm-Leach-Bliley Act (15 U.S.C. 6803) is amended by adding at the end the following:

 

(f) EXCEPTION TO ANNUAL NOTICE REQUIREMENT.—A financial institution that—

(1) provides nonpublic personal information only in accordance with the provisions of subsection (b)(2) or (e) of section 502 or regulations prescribed under section 504(b), and

(2) has not changed its policies and practices with regard to disclosing nonpublic personal information from the policies and practices that were disclosed in the most recent disclosure sent to consumers in accordance with this section,

 

shall not be required to provide an annual disclosure under this section until such time as the financial institution fails to comply with any criteria described in paragraph (1) or (2).

 

 

As you may recall, 15 U.S.C. § 6802(b)(2) generally allows financial institutions to provide nonpublic personal information to nonaffiliated third parties to perform services for or functions on behalf of the financial institution, including marketing of certain products or services, if the financial institution fully discloses the providing of such information and enters into a contractual agreement with the third party that requires the third party to maintain the confidentiality of such information.

 

In addition, 15 U.S.C. § 6802(e) generally allows a number of exceptions to the GLBA's prohibition on the disclosure of nonpublic personal information.

 

Thus, if a financial institution meets the exceptions under 15 U.S.C. § 6802(b)(2) or § 6802(e), and has not changed its privacy policies and practices since the time of its most recent disclosure to consumers, a financial institution need not provide the annual privacy notices under the GLBA.

 

Section 75001 of the FAST Act was signed into law on December 4, 2015, and became effective immediately

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

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and

 

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FYI: NJ Fed Ct Confirms Debtor's Failure to Schedule Claims in Bankruptcy Requires Dismissal

The U.S. District Court for the District of New Jersey recently dismissed a debtor's claims for violations of the federal Fair Debt Collection Practices Act (FDCPA) and the New Jersey Truth in Consumer Contract Warranty and Notice Act (TCCWNA), holding the debtor's failure to schedule his lawsuit as an asset of his bankruptcy estate deprived him of standing to later assert the claims.

 

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

 

In March 2015, the debtor filed a lawsuit alleging the defendant sent him a letter in an attempt to collect a debt that contained a "mini-Miranda" warning in a box entitled "Account Details." According to the debtor, by mislabeling his legal rights as "Account Details," the defendant's correspondence was misleading and designed to confuse the debtor as to the nature of the debt and his rights.

 

Prior to filing his complaint, however, the debtor filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code. The Chapter 7 trustee appointed to his bankruptcy proceedings issued a report of no distribution. Shortly thereafter, he received a discharge. As a result, the defendant argued that the debtor lacked standing to sue because he failed to schedule the lawsuit as a personal asset.

 

Debtor Must Disclose Potential Causes of Action as Asset of Bankruptcy Estate

 

As the Court noted, Section 541(a)(1) of title 11 of the U.S. Code provides that a bankruptcy estate comprises "all legal or equitable interests of the debtor in property as of the commencement of the case." In re Allen, 768 F.3d 274, 281 (3d Cir. 2014). The scope of Section 511(a)(1) is broad, and includes possible legal causes action. Id. It imposes upon a debtor an ongoing affirmative obligation to disclose all assets and liabilities to the bankruptcy court before discharge, including pending and contingent claims. A failure to list an asset as property of the bankruptcy estate does not prevent it from becoming property of the estate.

 

As the Court reasoned, once an asset becomes part of the bankruptcy estate, all rights held by the debtor in the asset are extinguished unless the asset is expressly and unequivocally abandoned back to the debtor. As here, when a bankruptcy trustee is appointed in a Chapter 7 case, the trustee becomes the representative of the estate and succeeds to the debtor's rights to pursue causes of action that are the property of the estate. Thus, once an estate is created, the trustee has sole and exclusive authority to pursue claims on behalf of the estate.

 

Debtor Lacks Standing for Pre-Petition Claims Not Disclosed in Bankruptcy Proceeding

 

If a pre-petition claim is properly scheduled and a trustee does not pursue the claim prior to discharge of the bankruptcy petition, that claim is abandoned to the debtor upon discharge. However, in cases where a debtor has not scheduled a pre-petition claim, a discharge order does not cause unscheduled claims to revert back to the debtor. Therefore, a debtor lacks standing to pursue unscheduled claims because they remain property of the bankruptcy estate. Schafer v. Decision One Mortg. Corp., 2009 U.S. Dist. LEXIS 56639, *12 (E.D. Pa. July 1, 2009). In order for a debtor to obtain standing, the trustee must abandon the unscheduled claim, whether voluntarily or pursuant to a court order. 11 U.S.C. § 554(a)-(b).

 

Here, there was no dispute that the debtor's claims arose prior to filing for bankruptcy. Accordingly, his claims constituted pre-petition causes of action that had to be listed as assets on the "schedule of assets and liabilities" of his bankruptcy petition.

 

The debtor argued that his FDCPA and TCCWNA claims were in fact listed in his petition because his bankruptcy petition listed "lawsuits" as a joint marital asset worth $5,000. The Court disagreed, holding that a generic designation of "lawsuits" fails to notify the trustee as to whom the trustee should pursue and what causes of action should be brought.

 

Accordingly, the Court held that the debtor had not properly listed his FDCPA and TCCWNA claims against the defendant as an asset on his bankruptcy schedules, nor demonstrated that the trustee voluntarily abandoned the claims. Therefore, the FDCPA and TCCWNA claims remained part of the bankruptcy estate and, as a result, he lacked standing to pursue them in his subsequent lawsuit.

 

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services