FYI: AZ Fed Ct Holds No FDCPA Violation for Collecting on Ex-Spouse's Discharged Debt

The U.S. District Court for the District of Arizona recently held that a debt collector did not violate the federal Fair Debt Collection Practices Act (FDCPA) by attempting to collect on a debt because a debtor's spouse's bankruptcy proceedings did not discharge the debt to the extent that the debtor himself may be liable for it. 

 

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

 

The debt at issue arose prior to June 2010, and both the debtor and his wife were liable on the debt.  In June 2010, the debtor's wife filed for Chapter 7 bankruptcy.  In October 2010, his wife received her Chapter 7 discharge.  In June 2011, the couple divorced.  In February 2014, a debt collector sent the debtor a demand letter stating the debtor owed a balance of $3,527.37. 

 

The debtor alleged that the debt collector violated the FDCPA by attempting to collect a debt that was no longer valid because it was discharged in the debtor's ex-wife's bankruptcy.  More specifically, the debtor claimed that the debt collector "used false, deceptive, or misleading representations or means in connection with the collection of a debt . . . by . . . attempting to collect a debt that is no longer valid."

 

The Court held that the debtor's allegations failed because the debtor's spouse's bankruptcy "did not discharge the debt to the extent he may be liable for it."

 

The general rule is that, when one spouse files for bankruptcy, the other spouse is not discharged of liability. In re Kimmel, 378 B.R. 630, 636 (B.A.P. 9th Cir. 2007) aff'd, 302 F. App'x 518 (9th Cir. 2008). 

 

"Pursuant to 11 U.S.C. § 524(a), a discharge under Chapter 11 releases the debtor from personal liability for any debts. Section 524 does not, however, provide for the release of third parties from liability."  In re Lowenschuss, 67 F.3d 1394, 1401 (9th Cir. 1995).

 

The Bankruptcy Code, at 11 U.S.C. § 524(e), provides that "[e]xcept as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt."  In turn, subsection (a)(3) provides in relevant part that a creditor cannot recover from the "interests of the debtor and the debtor's spouse in community property that is under the . . . joint management and control of the debtor." 11 U.S.C. § 524(a)(3), 541(a)(2).

 

Under Arizona law, "spouses have equal management, control and disposition rights over their community property." A.R.S. § 25-214(B).  Thus, "the effect of § 524(a)(3) is that all community property acquired post-bankruptcy is protected by the discharge."  In re Kimmel, 378 B.R. 630, 636 (B.A.P. 9th Cir. 2007) aff'd, 302 F. App'x 518 (9th Cir. 2008).

 

Thus, the Court noted that, for the duration of the marriage, "§ 524(a)(3) can operate to provide nondebtor spouses with a de facto partial discharge of their separate debts by enjoining a creditor from attaching community property in which the nondebtor spouse has an interest."  Id. 

 

The Court also noted that, "[a]lthough the personal liability of a nondebtor spouse survives the bankruptcy, this liability can only be enforced against separate property, not community property" because "a judgment creditor of the nondebtor spouse on a community claim loses the ability to collect from anything other than the judgment debtor's separate property." Id.

 

However, the Court further noted that this protection "applies only so long as there is community property," and "[d]issolution of the marriage . . . terminates the community, at which point after-acquired community property loses its § 524(a)(3) protection." Id.

 

Here, when the debt collector attempted to collect the debt, the debtor was no longer married to the ex-wife who received the bankruptcy discharge.  Accordingly, the Court found that the debtor no longer had any community property for section 524(a)(3) to protect. 

 

Therefore, the Court held that the debtor remained liable for debts discharged as to his ex-wife in his ex-wife's bankruptcy, and that the debt collector did not violate FDCPA by attempting to collect on the debt.

 

However, the Court also denied the debt collector's motion for attorney's fees and costs because it found that the debtor did not bring the action in bad faith or for the purpose of harassment. 

 

 

 

 

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: Fla App Ct (5th DCA) Reverses Dismissal of Foreclosure, Confirms "Substantial Compliance" and "Prior Servicer Records" Rulings

The District Court of Appeal of the State of Florida, Fifth District, recently reversed an involuntary dismissal of a mortgage foreclosure action, holding that the trial court erroneously ruled that the mortgagee failed to comply with the mortgage's pre-foreclosure notice requirements, and erroneously excluded from evidence the prior loan servicer's business records.

 

A copy of the opinion is available at: http://www.5dca.org/Opinions/Opin2016/012516/5D14-3626.op.pdf

 

A borrower defaulted on her mortgage and the mortgagee sued to foreclose. The foreclosure action proceeded to a non-jury trial, at which an employee of the mortgage servicer testified about the process used to verify the accuracy of loan information obtained from prior servicers. The mortgagee then offered into evidence business records obtained from the prior servicer, including a loan payment history.

 

The trial court sustained the borrower's hearsay objections, finding that the mortgagee's witness "failed to establish a proper foundation for the records' admissibility under the business records exception to the hearsay rule" set forth in subsection 90.802(6) of the Florida Evidence Code because the business records exception is "based upon a party's own records, not someone else's records" and because the witness "did not work in the boarding department" and so "lacked the requisite knowledge concerning the boarding process."

 

The trial did, however, admit into evidence a default letter which provided, in relevant part, that "you may have the right to bring a court action to assert the non-existence of a default or any other defense you may have to acceleration and foreclosure."

 

At the conclusion of the mortgagee's case in chief, the borrower moved to dismiss, arguing that the default letter did not comply with paragraph 22 of the mortgage because the letter stated the borrower would have to file an action to stop the foreclosure, rather than raising any defenses in the mortgagee's foreclosure action, and thus the borrower argued it did not properly inform the borrower of her rights with respect to foreclosure. The trial court agreed and granted an involuntary dismissal.  The mortgagee appealed.

 

On appeal, the Fifth District first addressed the mortgagee's "argument that the trial court erred by determining the default letter failed to comply with paragraph 22's pre-foreclosure notice requirements", explaining that the pre-suit notice requirements in paragraph 22 "are conditions precedent to the filing of a foreclosure action against the borrower" and that "[c]ourts require there to be at least substantial compliance with conditions precedent in order to authorize performance of a contract." In addition, the Court noted that, "[a]bsent some prejudice, the breach of a condition precedent does not constitute a defense to the enforcement of an otherwise valid contract."

 

The Appellate Court found that the default letter substantially complied with paragraph 22, and in any event that the borrower suffered no prejudice because she was not arguing that the letter completely omitted one of the requirements, but instead that it was confusing.  However, the Court noted, the borrower was not confused because she appeared in and vigorously defended the foreclosure action.

 

Turning to the trial court's exclusion of the business records, the Fifth District explained that although a trial court has broad discretion whether to admit evidence and its ruling on such matters will not be overturned absent an abuse of discretion, the general rule in Florida is that "the authenticating witness need not be the person who actually prepared the business records."

 

The Appellate Court noted that "[m]ere reliance on these records by a successor business, however, is insufficient establish admissibility." Instead, the Court explained that, relying on the Fourth District Court of Appeal's decision in Bank of New York v. Calloway, which "clarified the standard for admitting records obtained from a prior loan servicer", it previously held in Nationstar Mortgage, LLC v. Berdecia, that "a current servicer can establish a proper foundation for admission of a prior servicer's records 'so long as all the requirements of the business records exception are satisfied, the witness can testify that the successor business relies upon those records, and the circumstances indicate the records are trustworthy."

 

Based on its earlier decision in Berdecia, the Fifth District held that "the trial court abused its discretion by excluding business records obtained from the prior servicer. The trial court's assertion that a business cannot offer business records of a prior servicer does not conform with Calloway and its progeny. In addition, the trial court incorrectly determined that only a boarding department employee could testify regarding the boarding process."

 

Because the mortgagee's witness had testified in detail about the loan boarding process and particularly the procedures used to verify that the records from prior servicers were accurate, that the records were kept in the regular course of the servicer's business by persons with knowledge and that it was the servicer's regular practice to make and keep such records, the Fifth District concluded that the witness' "testimony established a sufficient foundation for the records' admissibility under section 90.802(6)(a)", reversed the involuntary dismissal, and remanded the case for a new trial. 

 

 

 

 

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: 9th Cir Upholds Dismissal of False Claims Act Allegations Involving Loans Sold to GSEs

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a federal False Claims Act, 31 U.S.C. §§3729-3733 ("FCA"), lawsuit brought by private citizen plaintiffs against various mortgage lenders and servicers for supposedly making false certifications regarding loans sold to Fannie Mae and Freddie Mac.

 

In so ruling, the Court held that Fannie Mae and Freddie Mac were not federal instrumentalities for purposes of FCA, 31 U.S.C. § 3729(b)(2)(A)(i).

 

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

 

The plaintiff private citizens brought suit under the FCA against various mortgage lenders and servicers alleging that the lenders and servicers supposedly certified mortgage loans purchased by Fannie Mae and Freddie Mac were free of certain home association liens and charges when in fact they were not. 

 

The plaintiffs alleged that the government sponsored enterprises (GSEs) were federal instrumentalities either under case law or due to the Federal Housing Finance Association's ("FHFA") conservatorship.  As such, the plaintiffs claimed that the allegedly false certifications were made to an "officer, employee, or agent" of the United States in violation of FCA, 31 U.S.C. § 729(b)(2)(A)(i).

 

The district court dismissed the action, holding that the GSEs were not federal instrumentalities for purposes of FCA, 31 U.S.C. § 3729(b)(2)(A)(i), because the entities are private, albeit sponsored or charted by the federal government.  The plaintiffs appealed.

 

The Ninth Circuit noted that a "claim" giving rise to liability under the FCA, 31 U.S.C. § 3729(b)(2)(A)(i), requires that a demand or request for payment be "presented to an officer, employee, or agent of the United States."  However, the Court found that the language of 12 U.S.C § 1716b and 12 U.S.C. §1452 illustrates that certain government sponsored entities are indeed private, and not federal instrumentalities. 

 

The plaintiffs argued that Rust v. Johnson, 597 F.2d 174 (1979), held that one of the GSEs was a federal instrumentality for state/city tax purposes.  However, the Court disagreed and explained that an entity found to be a federal instrumentality for one purpose does not mean the same entity is a federal instrumentality for another purpose. See Kuntz v. Lamar Corp., 385 F.3d 1177, 1185 (9th Cir. 2004), Lewis v. United States, 680 F.2d 1239, 1242-43 (9th Cir. 1982).  Accordingly, the Court distinguished Rust because it did not address the GSEs' status under the FCA.

 

The Ninth Circuit also disagreed with plaintiffs' argument that the FHFA conservatorship over the GSEs transformed them into federal instrumentalities.  The Court reasoned that the conservatorship gave the FHFA "all the rights, titles, powers and privileges" of the GSEs, not the other way around.

 

Further, the Court noted that Lebron v. National Railroad Passenger Corp., 513 U.S. 374, did not bolster plaintiffs' argument regarding the effect of the FHFA's conservatorship.  The Court explained that, unlike in Lebron, the conservatorship here did not represent the federal government's retention of permanent authority over the GSEs.

 

The Court did not opine on whether the plaintiffs could otherwise state a claim under False Claims Act, 31 U.S.C. § 3729(b)(2)(A)(ii), because the plaintiffs did not raise the argument at district level nor on appeal.  However, the Court noted that a properly pled claim under § 3729(b)(2)(A)(ii) could give rise to liability.

 

 

 

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   |   Maryland   |   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.

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