FYI: 8th Cir Upholds Limited Award of Attorney's Fees in "Coupon" Class Action Settlement

The U.S. Court of Appeals for the Eighth Circuit recently held that plaintiff's class counsel is allowed to submit proposals to the court regarding the method for calculation of reasonable attorney's fees, but the court has the discretion to accept or reject such proposals and is not required to accept the plaintiff's proposed method. 

 

In so ruling, the Court also held that CAFA's "coupon settlement" provisions at 28 U.S.C. § 1712 permit a district court to use a combination of percentage-of-coupons-used and lodestar methods to calculate reasonable attorney's fees, but CAFA does not require that any portion of the fee be based on the percentage of coupons used. 

 

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

 

The plaintiffs filed a putative class action alleging that a number of car rental outlets violated the Fair and Accurate Credit Transaction Act ("FACTA") by issuing receipts that contained more the five digits of the customer's credit card numbers.  See 15 U.S.C. § 1681c(g)(1).  The parties mediated and agreed on a proposed class action settlement. 

 

The settlement provided each class member would receive reduced prices on future car rentals and the defendants would be enjoined from violating FACTA.  The total value of certificates redeemed was $8,000.  In a "clear sailing" provision, the defendants agreed to an award of attorney's fees and costs of no more than $175,000, and a class representative incentive fee or no more than $3,000. 

 

The parties agreed that the certificates for future discounted car rentals were a non-cash benefit to the settlement class members, and that the "coupon settlements" provisions in the Class Action Fairness Act ("CAFA") provisions at 28 U.S.C. § 1712 applied. Once the redemption period for the certificate expired, the plaintiffs filed an unopposed motion for almost $148,000 in attorney fees, more than $5,500 in expenses, and a $3,000 incentive award for the class representative.   However, applying CAFA, the district court awarded only $23,137.46 in attorneys' fees and costs, and a $1,000 class representative incentive fee. 

 

The plaintiffs appealed, arguing that the trial court erred in construing section 1712, but did not argue that the court abused its discretion to award reasonable attorneys' fees.  See Hensley v. Eckerhart, 461 U.S. 424, 433-37 (1983); Travelers Prop. Cas. Ins. Co. of Am. V. Nat'l Union Ins. Co. of Pittsburg, 735 F.3d 993, 1002 (8th Cir. 2013). 

 

As you may recall, when a federal court has certified a class action, "the court may award reasonable attorney's fees and nontaxable costs that are authorized by law or by the parties' agreement."  Fed. R. Civ. P. 23(h).  The federal Fair Credit Reporting Act, including as amended by FACTA, provides for reasonable attorney's fees to be awarded to successful plaintiffs.  15 U.S.C. § 1681n(a)(3).

 

Courts may use one of two methods in exercising their discretion to award reasonable attorneys' fees.  The "lodestar" method uses the hours expended by an attorney multiplied by a reasonable hourly rate, which amount the court may adjust up or down to reflect the individualized characteristics of the action.  Johnston v. Comerica Mortg. Corp., 83 F.3d 241, 244 n.11 (8th Cir. 1996).  The percentage of the benefit method uses some fraction of the common fund that the attorney successfully gathered in litigation.  Johnston, 83 F.3d at 244-45.  The court decides which method to apply, not the parties.  Johnston, 83 F.3d at. 246. 

 

The "coupon settlements" provision in CAFA is intended to address the inequity of "settlements under which class members receive nothing but essentially valueless coupons, while the class counsel receive substantial attorneys' fees." S. Rep. No. 109-14, at 15 (2005), as reprinted in 2005-4 U.S.C.C.A.N. 3, 30.  "[N]othing in Section 1712 is intended to change current law regarding the circumstances under which an award of attorneys' fees is appropriate." Id., at 31.

 

Subsections § 1712(a)-(c) of CAFA provide:

 

(a) Contingent fees in coupon settlements. — If a proposed settlement in a class action provides for a recovery of coupons to a class member, the portion of any attorney's fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed.

(b) Other attorney's fee awards in coupon settlements. —

(1) In general. — If a proposed settlement in a class action provides for a recovery of coupons to class members, and a portion of the recovery of the coupons is not used to determine the attorney's fee to be paid to class counsel, any attorney's fee award shall be based upon the amount of time class counsel reasonably expended working on the action.

(2) Court approval. — Any attorney's fee under this subsection shall be subject to approval by the court and shall include an appropriate attorney's fee, if any, for obtaining equitable relief, including an injunction, if applicable. Nothing in this subsection shall be construed to prohibit application of a lodestar with a multiplier method of determining attorney's fees.

(c) Attorney's fee awards calculated on a mixed basis in coupon settlements. — If a proposed settlement in a class action provides for an award of coupons to class members and also provides for equitable relief, including injunctive relief —

(1) that portion of the attorney's fee to be paid to class counsel that is based upon a portion of the recovery of the coupons shall be calculated in accordance with subsection (a); and

(2) that portion of the attorney's fee to be paid to class counsel that is not based upon a portion of the recovery of coupons shall be calculated in accordance with subsection (b).

 

28 U.S.C. § 1712(a)-(c).  The Eighth Circuit noted that "[n]early every federal court to consider § 1712 has agreed with Judge Richard Posner's observation, 'This is a badly drafted statute.'" Redman v. RadioShack Corp., 768 F.3d 622, 633 (7th Cir. 2014), cert. denied, 135 S. Ct. 1429 (2015).

 

Here, the district court applied section 1712(a) and determined that a reasonable fee attributable to the certificates was 33% of the redeemed certificate value, which the trial court found was an average range attorneys typically charge for contingency work when settling cases of this nature.  Then, the trial court used § 1712(b) and the lodestar method to determine that 10% of the total fee requested was reasonable for the injunctive relief provided and no adjustments were warranted by the twelve discretionary factors listed in Allen v. Tobacco Superstore, Inc., 475 F.3d 931, 944 n.3 (8th Cir. 2007). 

 

The plaintiffs argued that CAFA gives class counsel the right to elect that all its fees be calculated under the "lodestar" method.  The district court disagreed and stated it is within the court's discretion to choose which method to apply.   Johnston v. Comerica Mortg. Corp., 83 F.3d 241, 244 n.11 (8th Cir. 1996).  

 

The Eighth Circuit agreed with the trial court, and held that class counsel is allowed to submit proposals to the court, but the court has the discretion to accept or reject proposals. 

 

The plaintiffs further argued the district court erred by construing § 1712(a) as requiring that a fee award based on the coupon portion of the settlement must be based solely on the value of the coupons redeemed.  Although the Eighth Circuit agreed that this argument had merit, it found any error to be harmless. 

 

At the time of the district court's ruling, the Ninth Circuit had recently issued a ruling in In re HP Inkjet Printer Litig., 716 F.3d 1173, 1181-83 (9th Cir. 2013), holding that that subsections 1712(a) and (b) are not permissive and that a district court must calculate attorneys' fees for coupon awards as a percentage of the redeemed value and must use the lodestar method to calculate fees for injunctive relief. 

 

The Seventh Circuit not long after issued a ruling on In re Southwest Airlines Voucher Litig., 799 F.3d 701, 707 (7th Cir.2015), which rejected the Ninth Circuit's reasoning in HP Inkjet.  The Seventh Circuit in Southwest interpreted § 1712(a) as meaning that "if any portion of the fee is attributed to the coupon benefits, then that portion of the fee must be based on the coupons used, but that is not the only method available," such that "§ 1712 permits a district court to use the lodestar method to calculate attorney fees to compensate class counsel for the coupon relief obtained for the class keeping in mind the potential for abuse."  Southwest, 799, F.3d at 710.  In addition, "[s]ubsection (c) allows a combination of percentage-of-coupons-used and lodestar, but it does not require that any portion of the fee be based on the percentage of coupons used." Id. 

 

The Eighth Circuit concluded that the Seventh Circuit's interpretation of § 1712 in Southwest was more consistent with the discretion courts have historically had in determining attorneys' fees awards in accordance with the degree of success obtained. 

 

The Court held that section 1712 leaves the court discretion to apply either the "percentage-of-benefit" or "lodestar" method for calculating reasonable attorney's fees, with or without adjustment, or some combination of the two, subject to the abuse of discretion review.

 

Thus, the Eighth Circuit concluded that the district erred in following HP Inkjet, but the plaintiffs did not argue the award was a breach of the court's discretion.  The Court noted that if it remanded the case, it would be for its discretion in applying 1712 (a) – (c), and the Court held that any greater award of fees would be unreasonable in light of the limited success.  

 

Accordingly, the judgment of the district court was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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FYI: 5th Cir Holds No Private Right of Action Under HUD Regulations for HECMs

The U.S. Court of Appeals for the Fifth Circuit recently held that HUD reverse mortgage regulations and guidelines do not give the borrower a private cause of action unless the regulations are expressly incorporated into the loan agreement.

 

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

 

A male borrower entered into a Home Equity Conversion Mortgage ("HECM") with the defendant, lender. The loan was secured by the male borrower's home, which already had two liens on it.  One of the liens was held by the male borrower's ex-wife ("ex-wife lienholder").

 

Later, the plaintiff and the male borrower were married.  While the newlyweds were honeymooning, the ex-wife lienholder foreclosed on the property, allegedly destroyed personal items of the plaintiff's. Two years after the ex-wife lienholder's foreclosure, the plaintiff's husband passed away.

 

The defendant mortgagee had sued the ex-wife lienholder in state court, challenging her right to foreclose. After two years of litigation, the state trial court granted summary judgment in favor of the defendant mortgagee. The ex-wife lienholder appealed but the matter was settled for $15,000.  The title of the property was put back in the deceased husband's name and the plaintiff's homestead rights were revived.

 

The plaintiff sued the defendant mortgagee for breach of contract, fraudulent inducement, violations of the Texas Debt Collections Act, and promissory estoppel. The plaintiff essentially alleged that the property's foreclosure by the ex-wife lienholder could have been avoided if the defendant mortgagee did not issue the HECM in violation of HUD guidelines.

 

The magistrate judge issued his report and recommendation to grant summary judgment in favor of the defendant mortgagee. The trial court granted judgment against the plaintiff because the asserted HUD regulations were not expressly incorporated into the parties' agreements and therefore could not form the basis of her claim and under the terms of the note and deed of trust, it was the plaintiff's burden to maintain lien priority. The plaintiff appealed her breach of contract and fraudulent inducement claims.

 

On appeal, the plaintiff argued that the defendant mortgagee violated the HUD regulations in the HECM loan agreement by failing to establish and maintain the priority of the HECM lien. Rejecting this argument, the Fifth Circuit noted that HUD regulations govern the relationship between the reverse mortgage lender and HUD as insurer of the loan.  The Court also noted HUD regulations do not give the borrower a private cause of action unless the regulations are expressly incorporated into the lender-borrower agreement. 

 

Accordingly, the Fifth Circuit held, because there was no evidence that the parties intended to incorporate the HUD regulations at issue into the HECM loan agreement, the plaintiff had no claim relating to any alleged violation of HUD regulations or guidelines.

 

Secondly, the plaintiff argued that the defendant mortgagee was responsible for ensuring the priority of the HECM lien.  However, the Fifth Circuit found that the HECM does not contain an implied promise that the lender will assure first lien position at the outset of the loan. The Court noted that the HECM held the position of a first lien at its inception.

 

If the other liens on the property threatened to become prior to some portion of the HECM, the Fifth Circuit held it was the plaintiff's responsibility under the contract to settle any liens that would be senior to the HECM.  The Court noted that the plaintiff never pursued any action against the lien-holder.

 

The Fifth Circuit also found that any damages allegedly suffered by the plaintiff were due to the ex-wife lienholder's wrongful foreclosure and plaintiff's inaction to protect her property, and not a result of the defendant's alleged breach of the HECM. The Court noted that the defendant mortgagee could not have reasonably foreseen that a lienholder without authority to foreclose would wrongfully do so. Thus, the Fifth Circuit held that the trial court properly dismissed the plaintiff's breach of contract claim.

 

The Fifth Circuit then noted that the plaintiff's fraudulent concealment claims were arguably moot, as there was no evidence that the HECM was invalid or that the defendant breached any of the HECMs terms.

 

As you may recall, "[u]nder Texas law, the elements of fraud are (1) that a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury." See In re VNA Inc., 403 S.W.3d 483, 487 (Tex. App.—El Paso 2013, no pet).

 

The plaintiff argued that the lender sent an email stating the ex-wife's lien did not seem to be an issue, but two years later it was an issue.  The plaintiff also argued that the defendant mortgagee admitted the HECM should not have been issued without settling the lien. The plaintiff argued that, because the defendant mortgagee was aware of the lien and the problem it created, but declined to disclose the issue to the plaintiff, the plaintiff was allegedly fraudulently induced into the HECM.

      

Again, the Fifth Circuit found that that the defendant mortgagee could not have reasonably foreseen that a lienholder without authority to foreclose, would wrongfully do so. Second, the Court held that statements that the defendant mortgagee should not have entered into the HECM without settling the lien was found to be irrelevant. Therefore, the Appellate Court held that the trial court properly dismissed the plaintiff's fraudulent inducement claim.

 

Accordingly, the trial court's judgment dismissing the plaintiff's claims was affirmed.

 

 

 

 

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 (4th DCA) Holds Lis Pendens Expires at Judgment of Foreclosure

The District Court of Appeal of Florida, Fourth District (Fourth DCA), recently held that real property liens arising after a final judgment of foreclosure are not discharged by Florida's lis pendens statute.

 

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

 

A mortgagee recorded a lis pendens on real property as part of a foreclosure proceeding against a homeowner. Subsequently, the mortgagee obtained a final judgment of foreclosure. However, the foreclosure sale was not conducted for some 4 years following entry of the judgment of foreclosure.

 

After the foreclosure, and before the foreclosure sale occurred, the town recorded seven liens on the property related to various code violations, which arose from violations that occurred after the foreclosure was entered.

 

The property was later sold at a foreclosure sale, and a certificate of title was issued.  After the sale and the issuance of the certificate of title, the town imposed three more liens on the property.

 

The purchaser filed suit to quiet title, attempting to strike the town's liens against the property. The town counterclaimed to foreclose the liens.  Both parties moved for summary judgment.

 

The trial court granted the town's motion, denied the purchaser's motion, and entered final judgment of foreclosure in favor of the town as to all ten of its liens. The purchaser appealed.

 

As you may recall, under the Florida lis pendens provisions at Florida Stat. § 48.23(1)(d):

 

[T]he recording of . . . lis pendens . . . constitutes a bar to the enforcement against the property described in the notice of all interests and liens . . . unrecorded at the time of recording the notice unless the holder of any such unrecorded interest or lien intervenes in such proceedings within 30 days after the recording of the notice. If the holder of any such unrecorded interest or lien does not intervene in the proceedings and if such proceedings are prosecuted to a judicial sale of the property described in the notice, the property shall be forever discharged from all such unrecorded interests and liens.

 

Thus, Florida Stat. § 48.23(1)(d) "not only bars enforcement of an accrued cause of action, but may also prevent the accrual of a cause of action when the final element necessary for its creation occurs beyond the time period established by the statute."  Adhin v. First Horizon Home Loans, 44 So. 3d 1245, 1253 (Fla. 5th DCA 2010).  The Court noted that the statute does not provide an end date for the lis pendens.

 

On appeal, the purchaser argued that the lis pendens continues to the date of the judicial sale, which in this case was over four years after the foreclosure. The town argued that the lis pendens applied only to liens existing or accruing prior to the date of final judgment.

 

The Appellate Court rejected the purchaser's argument, looking to a related provisions in the Florida statute. 

 

The Court noted that section 48.23(1)(a) states that "[a]n action in any of the state or federal courts in this state operates as a lis pendens . . . only if a notice of lis pendens is recorded." The Court held that the "plain meaning of this provision indicates that the action itself is the actual lis pendens, which takes effect if and when a notice is filed," and "[t]he lis pendens therefore logically must terminate along with the action." 

 

From this, the Appellate Court noted that the "action" in this case was the foreclosure action initiated by the mortgagee, "which terminated thirty days after the court's issuance of a final judgment."   

 

Relying upon De Pass v. Chitty, 105 So. 148, 149 (Fla. 1925), a Florida Supreme Court case that used the "until final judgment" phrase when describing the scope of a lis pendens, the Appellate Court held that a lis pendens in Florida" bars liens only through final judgment, and does not affect the validity of liens after that date, even if they are before the actual sale of the property."

 

The Court noted that the case revealed a misstatement of the law in Form 1.996(a) of the Florida Rules of Civil Procedure, which provide an example foreclosure judgment that includes a provision stating "[o]n filing the certificate of sale, defendant(s) and all persons claiming under or against defendant(s) since the filing of the notice of lis pendens shall be foreclosed."

 

Acknowledging the conflict between the form and its holding, the Court explained that to hold in conformity with the form would be to create a conflict between its decision and both the legislative intent and prior case law, and noted that an amendment to the Florida Civil Procedure forms would be appropriate.

 

Thus, the Fourth DCA ruled that the Florida lis pendens statute "serves to discharge liens that exist or arise prior to the final judgment of foreclosure unless the appropriate steps are taken to protect those interests," but "[i]does not affect liens that accrue after that date."

 

 

 

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 (4th DCA) Holds Victory Must Be Complete to Obtain Attorney's Fees Under FDUTPA

The District Court of Appeal of Florida, Fourth District, recently held that in order to recover fees for prevailing on a Florida Deceptive and Unfair Trade Practices Act (FDUTPA) claim, a party must prevail not only on the FDUTPA claim but also on all pleaded legal theories such that it obtains a judgment in its favor on the entire case.

 

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

 

A borrower filed a lawsuit against a lender's counsel, alleging that the lender's counsel's conduct violated FDUTPA and the Florida Consumer Collection Practices Act (FCCPA).  The trial court entered a judgment in favor of the borrower on the FCCPA claim but granted summary judgment in favor of the lender's counsel on the FDUTPA claim. 

 

The trial court's judgment was affirmed on appeal, and both parties moved for appellate attorney's fees.  The borrower was initially awarded appellate attorney's fees under the FCCPA, and the lender's counsel was initially awarded appellate attorney's fees under FDUTPA.

 

The borrower moved for rehearing on the award of appellate attorney's fees to the lender's counsel for prevailing on the FDUTPA claim.

 

As you may recall, § 501.2105, Florida Statutes, governs fee entitlement under FDUTPA.  Section 501.2105(1) provides, in relevant part, that "the prevailing party [in FDUTPA litigation], after judgment in the trial court and exhaustion of all appeals, if any, may receive his or her reasonable attorney's fees and costs from the nonprevailing party."  See § 501.2105(1), Fla. Stats.

 

The Appellate Court began its analysis by noting that the Florida Supreme Court has instructed  that "to recover attorney's fees in a FDUTPA action, a party must prevail in the litigation; meaning that the party must receive a favorable judgment from a trial court with regard to the legal action, including the exhaustion of all appeals."  See Diamond Aircraft Indus., Inc. v. Horowitch, 107 So. 3d 362, 368 (Fla. 2013) (citing Heindel v. Southside Chrysler-Plymouth, Inc., 476 So. 2d 266, 270 (Fla. 1st DCA 1985)). 

 

The Court carefully examined the Heindel approach to awarding FDUTPA attorney's fees, which reads the statute's reference to a "judgment" in "civil litigation" to refer to the entire case containing a FDUTPA claim, such that the "prevailing party" must obtain a favorable judgment in the entire case, not just on the FDUTPA claim, in order to recover FDUPTA attorney's fees.

 

Going further, the Appellate Court analyzed Hendry Tractor Co. v. Fernandez, 432 So. 2d 1315 (Fla. 1983), which the First District Court of Appeal had relied upon in reaching its Heindel decision. 

 

In Hendry Tractor, the plaintiffs had brought alternative counts for negligence and breach of warranty/strict liability.  The jury found the defendants liable for negligence, but not for breach of warranty/strict liability, and awarded damages on the negligence claim.  The trial court had awarded costs to the plaintiffs on the negligence claim but also awarded costs to the defendants under § 57.041, Fla. Stats., for prevailing on the breach of warranty/strict liability claims. 

 

At the time of the Hendry Tractor decision, Section 57.041(1) provided that "the party recovering judgment shall recover all his or her legal costs and charges which shall be included in the judgment."  See § 57.041(1), Fla. Stats. (1979).

 

There, the Florida Supreme Court reversed the award of costs to the Hendry Tractor defendants, holding that the "net judgment was, without doubt, rendered in favor of the plaintiffs," and that plaintiffs were "clearly the parties recovering judgment and should be awarded costs."  See Hendry Tractor, 432 So. 2d at 1316. 

 

Similarly, in rejecting the lender's counsel's argument that it was entitled to prevailing party FUDTPA attorney's fees like the defendant in Diamond Aircraft, the Appellate Court noted that unlike in the instant case, the Diamond Aircraft defendant had ultimately prevailed on all claims, not just the FUDTPA claim, such that the Diamond Aircraft plaintiff had recovered nothing.

 

After completing its review of the relevant case law, the Appellate Court explicitly approved the net judgment rule articulated in Heindel and Hendry Tractor, holding that where a case involves multiple counts directed at the same conduct, "a party must (1) recover judgment on the chapter 501, part II claim, and (2) recover a net judgment in the entire case" in order to recover its attorney's fees under FDUTPA.  See Heindel, 476 So. 2d at 270. 

 

Applying the net judgment rule to the case at hand, the Appellate Court determined that the lender's counsel was not entitled to recover their appellate attorney's fees under FDUTPA, as the lender's counsel had not recovered a net judgment on the entire case, since a judgment had been entered against them under the FCCPA. 

 

Accordingly, the Appellate Court withdrew its previous order granting appellate attorney's fees to the lender's counsel for prevailing on the FUDTPA claim, and entered a new opinion denying appellate attorney's fees to the lender's counsel.

 

 

 

 

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: 4th Cir Holds Time-Barred Proof of Claim Does Not Violate FDCPA

In a split decision, the U.S. Court of Appeals for the Fourth Circuit recently held that "filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the Fair Debt Collection Practices Act when the statute of limitations does not extinguish the debt."

 

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

 

This action involved two consolidated adversary proceedings. In both underlying bankruptcies, a debt buyer filed proofs of claim on loans that were beyond Maryland's three-year statute of limitations. The debtors filed adversary proceedings seeking disallowance of the claims as time-barred plus damages, costs, and attorneys' fees under the FDCPA.

 

The debt buyer stipulated that the debts were time-barred and that the claims could be disallowed, but it moved to dismiss the FDCPA claims. The bankruptcy court dismissed the claims on the grounds that filing a proof of claim is not debt collection activity within the meaning of the FDCPA. The debtors then appealed the bankruptcy court's ruling directly to the Fourth Circuit.

 

The Fourth Circuit first determined that the filing of a proof of claim is "debt collection" as defined under the FDCPA, even if there is no direct demand for payment, and even though the bankruptcy court may disallow the claim. The Court disagreed that treating a proof of claim as an attempt to collect a debt would conflict with the automatic stay, explaining that the automatic stay only prohibits debt collection outside of the debtor's bankruptcy proceeding.

 

The Court then examined whether a time-barred debt could be a "claim" under the Bankruptcy Code. The Fourth Circuit noted that the Bankruptcy Code provides a very broad definition of the term "claim," referring to a right of payment recognized under state law.

 

The Fourth Circuit also noted that, in Maryland, the statute of limitations merely bars the remedy and does not operate to extinguish the debt.  In addition, the Maryland statute of limitations can be revived if the debtor sufficiently acknowledges the debt. The Court thus found that Maryland law recognizes a right to payment on time-barred debt, and thus the holder of a time-barred debt may file a proof of claim in bankruptcy.

 

The Court next explained that a debt need not be enforceable in court to be a claim in bankruptcy. Under the Bankruptcy Code, debts that are contingent or unmatured can be claims even though they would not be enforceable in court.

 

Also, the Fourth Circuit noted that, although the Bankruptcy Code provides that time-barred debts are to be disallowed, it does not prohibit the filing of them. The Court noted that the 2012 amendments to the Bankruptcy Code made it easier to determine the timeliness of a proof of claim because creditors are now required to list the last transaction date, the last payment date, and the charge-off date. According to the Court, this provision suggests that the Bankruptcy Code contemplates that untimely claims will be filed, objected to by the trustee, disallowed, and then discharged.

 

The Court explained that, once discharged, the creditor may not engage in any further effort to collect the debt. On the other hand, if a debt is unscheduled and no proof of claim is filed, then that debt is not discharged and the creditor can continue to seek payment.

 

The Fourth Circuit was not convinced by the debtors' argument that overburdened trustees are unable to sufficiently examine and object to each time-barred claim.  The Court also noted that Chapter 13 debtors are rarely required to pay more due to the allowance of additional unsecured claims.  Although other unsecured creditors will receive a smaller share of payments when time-barred claims are included in the plan, the debtor's payments are generally unaffected. As a result, the Court did not agree that imposition of liability under the FDCPA was the best way to address time-barred claims that evade objection.

 

The Fourth Circuit then examined some important differences between collection litigation and the bankruptcy process.

 

First, in bankruptcy a creditor is required to provide specific information, such as the date of last payment, that makes it easier to detect a time-barred proof of claim. Second, the debtor in bankruptcy is protected by a trustee and, in most cases, by counsel. Third, a Chapter 13 debtor voluntarily commences a bankruptcy case, while a defendant in a collection suit is unwillingly sued.

 

The Fourth Circuit concluded that the protections afforded to a debtor in a chapter 13 bankruptcy diminish the concern that a time-barred proof of claim is "unfair" or "misleading" in the way that a collection suit on a time-barred debt might be. The Court further noted that the debtor potentially benefits from having the debt treated within the debtor's bankruptcy case, because the discharge will apply to disallowed claims or to claims included within a completed plan.

           

Finally, the Court explained that treatment of a time-barred proof of claim under the FDCPA should not change regardless of whether the debt is unscheduled, scheduled as disputed, or scheduled as undisputed.

 

The debtors conceded that a creditor would not violate the FDCPA by filing a proof of claim on a debt that is scheduled as undisputed, as the scheduling of a debt as undisputed acts as an invitation to the creditor to participate in the bankruptcy plan. But the debtors argued that creditors who are debt collectors should be subject to liability under the FDCPA for filing proofs of claim on time-barred debts that a debtor scheduled as disputed.

 

The Fourth Circuit disagreed, holding that a disputed debt is more likely to be objected to and disallowed. For time-barred proofs of claims on unscheduled debts, the Court found that FDCPA liability should not attach because of the previously-described interests in discharge and collective treatment of claims.

           

The dissenting opinion cited the United States Court of Appeals for the Eleventh Circuit's opinion in Crawford v. LVNV Funding, LLC and contended that the FDCPA's prohibition on collection suits on time-barred debts should apply equally to proofs of claim on unscheduled debts in bankruptcy. The dissent was not persuaded that the trustees provide adequate protection, noting that a time-barred proof of claim wastes the time of the attentive trustee and takes advantage of the distracted trustee. The dissent also opined that if trustees caught and objected to every time-barred proof of claim then there would be no incentive to purchase stale debts for the purpose of asserting them in Chapter 13 bankruptcies.

 

The dissent took issue with the majority's opinion that debtors benefit from the filing of time-barred proofs of claim when they are discharged, either after being disallowed or after being paid in the debtor's plan with no additional money required from the debtor. While noting that the ideal debtor would remember and list as disputed every time-barred debt, the FDCPA protects the unsophisticated debtor who is unlikely to do so. For time-barred debts that go unaddressed in the bankruptcy and are thus not included in a discharge, the dissent believed that the FDCPA's general restrictions on collection and its imposition of liability for filing a collection suit on a time-barred debt served as adequate protection.

 

The dissent also addressed whether the Bankruptcy Code and the FDCPA are in conflict, a topic that he majority did not need to reach because it found that the FDCPA does not apply to the filing of proofs of claim such as the ones involved in this case. The dissent disagreed with the Second and Ninth Circuits, which have held that the Bankruptcy Code precludes the filing of certain FDCPA claims. Instead, the dissent would, on the facts presented in this case, follow the Third, Seventh, and Eleventh Circuits in finding that the Bankruptcy Code and the FDCPA are compatible. The dissent cited the Eleventh Circuit's recent opinion in Johnson v. Midland Funding LLC, which held that creditors who are debt collectors can comply with both the Bankruptcy Code and the FDCPA by not filing proofs of claim on time-barred debts.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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