FYI: 9th Cir Holds "Free and Clear" Bankruptcy Sale Was Not Rejection of Unexpired Leases, Did Not Implicate 11 U.S.C. § 365(h)

The U.S. Court of Appeals for the Ninth Circuit recent held that a bankruptcy trustee was authorized to sell real estate free and clear of unexpired leases under 11 U.S.C. § 363(f), and the sale was not a rejection of the unexpired leases and therefore did not implicate 11 U.S.C. § 365(h).

 

In so ruling, the Ninth Circuit adopted the minority approach established in Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003), which held that sections 363 and 365 may be given full effect without coming into conflict with one another. 

 

By allowing the bankruptcy trustee to sell the property free and clear of the unexpired leases, in the Ninth Circuit's view, the estate was able to fetch higher price for the property and maximized recovery for all creditors.

 

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

 

The developer ("Developer") of a 5,700-acre resort in Montana obtained a $130 million loan secured by a mortgage and assignment of rents from a lender, who later assigned the note and mortgage to a limited liability company.  A collection of interrelated entities owned the resort and managed its amenities, including a ski club, golf course, and residential and commercial real-estate sales and rentals.  At issue are two leases of commercial property at the resort.

 

The Developer defaulted on loan payments and petitioned for bankruptcy protection.  The limited liability company had a claim of more than $122 million secured by the mortgage on the property, making it the largest creditor in the bankruptcy, and subsequently assigned its interest to an assignee ("Creditor").  The bankruptcy trustee and Creditor agreed to a plan for liquidating "substantially" all of Developer's real and personal property, and stated that the sale would be "free and clear of all liens."

 

The trustee moved the bankruptcy court for an order authorizing and approving the sale free and clear of all liens except for certain specified encumbrances, and provided that other specified liens would be paid out of the proceeds of the sale or otherwise protected. 

 

The two leases at issue were not mentioned in either the list of encumbrances that would survive the sale, or the list of liens which protection would be provided.  The lessees ("Lessees") objected and argued that 11 U.S.C. § 365 gave them the right to retain possession of the property notwithstanding the trustee's sale.

 

After the bankruptcy court authorized the sale, Creditor won the auction with a bid of $26.1 million and argued that its bid was contingent on the property being free and clear of the leases.  The bankruptcy court approved the sale, and the order stated that the sale was free and clear of any "Interests," a term defined to include any leases "(except any right a lessee may have under 11 U.S.C. § 365(h), with respect to a valid and enforceable lease, all as determined through a motion brought before the Court by proper procedure)."

 

The trustee then requested leave to reject the two leases because the subject property was no longer property of the estate.  Meanwhile, Creditor moved for a determination that the property was free and clear of the leases.  Lessees renewed their prior arguments as objections to Creditor's motion.

 

At the evidentiary hearing, the bankruptcy court determined, among other things, that one of the leases was below fair market rental value, that the leases were junior to Creditor's mortgage, and were not protected from foreclosure of Creditor's mortgage by subordination or non-disturbance agreements.  Based on these findings, the bankruptcy court held that the sale was free and clear of the two commercial leases.  Lessees appealed to the district court, which affirmed, and this appeal followed.

 

The principal issue on appeal is whether the two leases survived the trustee's sale of the property to Creditor. 

 

As you may recall, 11 U.S.C. § 363 authorizes the trustee to sell property of the estate, both within the ordinary course of business and outside of bankruptcy.  See 11 U.S.C. § 363(b), (c).  Sales may be "free and clear of any interest in such property of an entity other than the estate," only if:

 

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;

(2) such entity consents;

(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on the property;

(4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

 

11 U.S.C. § 363(f).

 

Meanwhile, 11 U.S.C. § 365 of the Code authorizes the trustee, "subject to the court's approval," to "assume or reject any executory contract or unexpired lease of the debtor."  11 U.S.C. § 365(a).  The rejection of an unexpired lease leaves a lessee in possession with two options:  treat the lease as terminated (and make a claim against the estate for any breach), or retain any rights—including a right of continued possession—to the extent those rights are enforceable outside of bankruptcy.  11 U.S.C. § 365(h).

 

When the trustee sells property free and clear of encumbrances, and one of the encumbrances is an unexpired lease—federal courts have addressed the interplay between 11 U.S.C § 363 and 11 U.S.C. § 365 in different ways.

 

The majority of bankruptcy courts that have addressed this issue held that sections 363 and 365 conflict when they overlap because "each provision seems to provide an exclusive right that when invoked would override the interest of the other."  In re Churchill Props., 197 B.R. 283, 286 (Bankr. N.D. Ill. 1996); see also In re Haskell, L.P., 321 B.R. 1, 8-9 (Bankr. D. Mass. 2005); In re Taylor, 198 B.R. 142, 164-66 (Bankr. D.S.C. 1996).  These courts held that section 365 trumps section 363 under the canon of statutory construction that the specific prevails over the general, and the legislative history regarding section 365 evinced a clear intent by Congress to protect a tenant's estate when the landlord files bankruptcy.

 

However, in Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003), the U.S. Court of Appeals for the Seventh Circuit held that sections 363 and 365 may be given full effect without coming into conflict with one another, because lessees are entitled to seek "adequate protection" under 11 U.S.C. § 363(e), and were not without recourse in the event of a sale free and clear of their interests. 

 

The Ninth Circuit here followed the Seventh Circuit, and held that sections 363 and 365 did not conflict.  Section 363 governed the sale of estate property and section 365 governed the rejection of a lease, and according to the Ninth Circuit, where there was a sale but no rejection (or a rejection, but no sale), there was no conflict between the statutes.  Here, because the parties agreed that the two leases were not rejected prior to the sale, the Ninth Circuit ruled that section 365 was not triggered. 

 

The Ninth Circuit noted that a limitation in the majority approach was that while it protected lessees, a property subject to a lease would presumably fetch a lower price and therefore reduce the value of the property of the estate.  Therefore, this approach is contrary to the goal of maximizing creditor recovery, which was a core purpose of the Bankruptcy Code.

 

Accordingly, the Ninth Circuit affirmed the lower courts' ruling that the bankruptcy trustee's sale of Debtor's property was free and clear of unexpired leases.

 

 

 

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: SD Fla Holds Website That "Operates as Gateway to Physical Locations" Is Subject to ADA

The U.S. District Court for the Southern District of Florida recently held, after a non-jury trial, that a regional supermarket chain violated the federal Americans with Disabilities Act ("ADA") because its website was inaccessible to the visually impaired.

 

A copy of the Verdict and Order is available at:  Link to Opinion

 

The plaintiff, a legally-blind customer of the supermarket who also suffers from cerebral palsy, sued under the ADA, 42 U.S.C. §§ 12181-12189, alleging that its website was not accessible, seeking declaratory and injunctive relief, attorney's fees and costs.

 

The parties did not dispute that the plaintiff had a qualifying disability under the ADA or that the stores, some of which also had pharmacies, were "public accommodations" as defined by the ADA. The issues in dispute were: (1) whether the supermarket's website was subject to the ADA as a public accommodation or was itself a public accommodation; (2) whether the plaintiff "was denied the full and equal enjoyment of [the supermarket's] goods, services, facilities, privileges, advantages, or accommodations because of his disability; and (3) whether the requested modifications to [the] website are reasonable and readily achievable."

 

After a non-jury trial, the Court held that "the Defendant has violated the Plaintiff's rights under the ADA", and found in favor of the Plaintiff.

 

The plaintiff testified that he could use a computer, but could not see the screen. Instead, he "uses access technology software" called "JAWS" that "reads" the screen for him by telling him what is happening on the screen and "what he needs to type." He also used other access programs, but they didn't work as well as JAWS.

 

The plaintiff frequently shopped at the defendant grocery chain because of its low prices, and also filled his prescriptions at the stores that had a pharmacy, the last time bring two and a half to three years ago.

 

In 2015 or 2016, the plaintiff learned that the defendant had a website that was supposedly accessible. He wanted to use the website because he found it embarrassing to have to go the store in person to ask for help filling a prescription.

 

He testified that 90% of the website's functions did not work properly with the JAWS program. This deterred him from "enjoying [the supermarket's] goods and services." In contrast, the plaintiff "has used other grocery stores because from their website he can create a shopping list and just hand it to the employee and he could use coupons he obtains from the website and he can pick up prescriptions in privacy." In addition, the plaintiff testified, these competitors "have websites which he can use with his screen reader software."

 

The defendant's corporate representative "testified that the defendant was in the process of designing an ADA policy for its website but did not currently have one in place," and that the supermarket was taking steps to modify its website to make it more accessible to those with disabilities, but that the current website had "not been tested … for use with universal screen readers." He also testified that his employer "knows that it is feasible to make its website accessible to screen reader software and has set aside $250,000 to do this."

 

The plaintiff's expert, who works at a company in Washington state "that tests mobile and web software for accessibility issues[,]" testified that "[i]f the web page is using the common industry standards or following the World Wide Web Consortium accessibility guidelines then the screen reader software should work on the web page. The consortium is made up of a group of committees and subcommittees with representatives from government and industry."

 

Having performed an analysis of the defendant's website, which included manual and automated testing of the "main website as well as the digital coupon, store locator and pharmacy sections[,]" the expert "opin[ed] that most of the accessibility issues can be corrected with simple modifications of one or two source codes." Finally , he testified that "his company could fix all the problems for $37,000 or less."

 

The Court found that "whether the cost to modify the website is $250,00 or $37,000 is of no moment" because it "pales in comparison to the $2 million [defendant] spent in 2015 to open the website and the $7 million it spent in 2016 to remake the website…." In addition, the Court stressed the expert's unrebutted testimony that it was feasible to modify the website and was, in fact, in process of doing so.

 

The Court also found that "the fact the third party vendors operate certain parts of the … website is not a legal impediment to [defendant's] obligation to make its website accessible to the disabled" because "many, if not most, of the third party vendors may already be accessible to the disabled and, if not, [defendant] has a legal obligation to require them to be accessible if they choose to operate within the [defendant's] website."

 

Turning to its conclusions of law, the Court first addressed whether the plaintiff had standing to sue under the ADA, concluding that he did because "[a] plaintiff's allegation that he intends on visiting the subject premises in the near future is sufficient to establish standing to seek injunctive relief under the ADA." Since the plaintiff testified that "he tried unsuccessfully to access [the defendant's] website and that he intends to patronize [defendant's] stores again if he can access [its] website[,] [and,] [i]n addition, there is a causal connection between the injury and the alleged inaccessibility of the website, and it is likely that the injury will be redressed by a favorable decision[,]" the Court concluded that plaintiff "has standing to bring his claim."

 

The Court then turned to the question of "whether, as a result of the fact that he is visually impaired, [plaintiff] was denied the full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of a place of public accommodation[,]" which is what the ADA prohibits.

 

The Court pointed out that "[c]ourts are split on whether the ADA limits places of public accommodation to physical spaces" and that "[t]he Eleventh Circuit has not addressed whether websites are public accommodations for purposes of the ADA."

 

"Where a website is heavily integrated with physical store locations and operates as a gateway to the physical store locations, courts have found that the website is a service of a public accommodation and is covered by the ADA. … On the other hand, where a website is wholly unconnected to a physical location, courts within the Eleventh Circuit have held that the website is not covered by the ADA."

 

The Court, however, ultimately determined that it "need not decide whether [defendant's] website is a public accommodation in and of itself, because the factual findings demonstrate that the website is heavily integrated with [defendant's] physical store locations and operates as a gateway to the physical store locations."

 

The Court rejected defendant's argument that plaintiff was not denied access to defendant's stores "as a result of the inaccessibility of the website" because "the ADA does not merely require physical access to place of public accommodation. Rather, the ADA requires that disabled individuals be provided 'full and equal enjoyment of the goods, services, facilities, privileges, advantages, and accommodations of any place of public accommodation…."

 

The Court concluded that "[t]he services offered on [defendant's] website, such as the online pharmacy management system, the ability to access digital coupons that link automatically to a customer's rewards card, and the ability to find store locations, are undoubtedly services, privileges, advantages, and accommodations offered by [defendant's] physical store locations. These … are especially important for visually impaired individuals since it is difficult, if not impossible, for such individuals to use paper coupons found in newspapers or in grocery stores, to locate the physical stores by other means, and to physically go to a pharmacy location in order to fill prescriptions."

 

The Court held that, because "[t]he factual findings demonstrate that [defendant's] website is inaccessible to visually impaired individuals who must use screen reader software[,]" the defendant "violated the ADA because the inaccessibility of its website has denied [plaintiff] the full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations that [it] offers to its sighted customers."

 

The Court then turned to the plaintiff's remedy under the ADA, explaining that "a prevailing plaintiff is not entitled to damages, but he may recover reasonable attorney's fees." In addition, "[i]injunctive relief is available under the ADA if the discrimination includes 'a failure to remove architectural barriers, and communication barriers that are structural in nature, in existing facilities … where such removal is readily achievable."

 

Because the defendant "presented no evidence that it would be unduly burdensome to make its website accessible to visually impaired individuals" and making the recommended modifications would make the website accessible to the visually impaired, the Court concluded that plaintiff was entitled to injunctive relief.

 

Finally, the Court found that plaintiff was entitled to recover his reasonable attorney's fees and costs as the prevailing party and established a briefing schedule, warning both sides that it would not hesitate to impose sanctions for unreasonably seeking or opposing fees and costs.

 

The Court then provided that parties with the basic terms of the proposed injunction, and instructed the parties to submit the dates by which the website modifications need to be completed, with the injunction to expire in three years given "the Defendant's sincere and serious intent to make its website accessible to all."

 

 

 

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: NJ Fed Ct Dismisses Technical FACTA Violation Putative Class Action Citing Spokeo

The U.S. District Court for the District of New Jersey recently concluded that a putative class representative did not have standing under Spokeo to sue for a technical violation of the federal Fair and Accurate Credit Transactions Act, 15 U.S.C. § 1681, et seq. ("FACTA"). 

 

The Court identified the issue as whether the consumer alleges a sufficiently "concrete" harm to confer standing, based on a technical violation of FACTA when a retail store printed the first six numbers and last four numbers of his credit card on his transaction receipts.  Relying on the Supreme Court's ruling in Spokeo Inc. v. Robins, 136 S. Ct. 1540, 1548 (2016), the Court identified two factors that determine whether an intangible harm is sufficiently concrete to confer standing under Article III. 

 

The first factor, according to the Court, was "whether an alleged intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts."  

 

The second factor was "whether Congress has expressed an intent to make an injury redressable." Even if a statute creates a statutory right and gives a person authority to have that right vindicated, the Court continued, Article III still requires concrete injury even if the statute has been violated. 

 

Because the plaintiff did not adequately allege a concrete injury for the technical violation, the Court dismissed his Second Amended Complaint.    

 

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

 

The defendants here were a conglomerate of clothing stores and manufacturers.  On three occasions, plaintiff purchased clothes from the defendants and defendants printed the first six and last four digits of plaintiff's credit card. 

 

As you may recall, under FACTA, "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number . . . upon any receipt provided to the cardholder at the point of the sale or transaction." See 15 U.S.C. § 1681c. The statute creates a private cause of action for "any actual damages . . . or damages of not less than $100 and not more than $1,000" for each violation. See 15 U.S.C. § 1681n(a).

 

Plaintiff filed his original, single-count FACTA complaint in January of 2015 and his first amended complaint ("FAC") in March of 2015, seeking statutory damages of $100 to $1000 per violation, as well as attorney's fees and punitive damages.  In August of 2015, the Court denied defendants' motion to dismiss under Fed. R. Civ. P. 12(b)(6).  In December of that year, the Court granted defendants' motion to stay the proceedings pending the outcome of Spokeo. 

 

In May of 2016, the Supreme Court of the United States in Spokeo held that a plaintiff does not automatically "satisf[y] the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right." Applying Spokeo, the Court determined that it lacked subject matter jurisdiction and dismissed plaintiff's FAC without prejudice. 

 

Plaintiff then filed a second amended complaint ("SAC").  Defendants again moved to dismiss for lack of standing.  While the defendants' motion to dismiss was pending, the Third Circuit decided In re Horizon Healthcare Servs. Data Breach Litig., 846 F.3d 625 (3d Cir. 2017) ("Horizon"), which applied Spokeo in the context of an alleged data breach that led to the disclosure of the plaintiff's personal information.

 

The Court first identified the issue as "whether [plaintiff] alleges a sufficiently 'concrete' harm to confer standing."  Next, the Court analyzed the two recent cases, Spokeo and Horizon, addressing issues of concreteness and standing.

 

First, the Court quoted extensively from the findings in Spokeo related to concrete injuries.  "'Concrete' injuries may be 'intangible' or non-economic, but, like other cognizable injuries, they must be 'actual or imminent, not conjectural or hypothetical.'" Spokeo, 136 S. Ct. at 1548. The Court then identified two factors from Spokeo that determine whether an intangible harm is sufficiently concrete. The first is "whether an alleged intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts." Id. If so, "it is likely to be sufficient to satisfy the injury-in-fact element of standing." Horizon, 846 F.3d at 637 (3d Cir. 2017). 

 

The second consideration, according to the Court, is "whether Congress has expressed an intent to make an injury redressable;" for, "even if an injury was previously inadequate in law, Congress may elevate it to the status of [a] legally cognizable injur[y]." Id. (quoting Spokeo, 846 F.3d at 637). 

 

The Court continued, "a plaintiff does not automatically satisf[y] the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right. Article III standing requires a concrete injury even in the context of a statutory violation.'" See Spokeo, 136 S. Ct. at 1549.

 

Next, the Court analyzed the findings from Horizon.  In that case, two laptop computers containing unencrypted personal information of over 800,000 health insurance customers were stolen from defendant's headquarters.  The breach ultimately led to a fraudulent tax return being filed in plaintiff's name and to an attempted credit card fraud.  Plaintiff was also denied credit because his social security number had been associated with identity theft.  The plaintiff's complaint alleged several violations of the federal Fair Credit Reporting Act ("FCRA"), including the unauthorized furnishing of personal information.

 

Applying Spokeo, the Third Circuit denied the defendant's facial challenge, holding that the alleged injuries were sufficiently "concrete" to confer constitutional standing. The Court acknowledged that, under Anglo-American law, the "unauthorized disclosures of information have long been seen as injurious," and, by passing the FCRA, Congress clearly intended to establish "that the unauthorized dissemination of personal information by a credit reporting agency causes an injury in and of itself—whether or not the disclosure of that information increased the risk of identity theft or some other future harm." 

 

The Third Circuit concluded that the alleged injury in Horizon was "concrete" because it sufficiently resembled a common law injury (invasion of privacy), such that Congress could "elevat[e] [it] to the status of legally cognizable injur[y]." Id at 640. The New Jersey District Court acknowledged that the Horizon majority declined to consider "the full reach of congressional power to elevate a procedural violation to an injury in fact," because the case before it "[did] not strain that reach." Id. at 638.

 

Relying on the findings from Spokeo and Horizon, the Court turned its attention to the facts of this case, where plaintiff attempted to identify two "concrete" injuries: (1) disclosure of information considered by law to be intrinsically private, and (2) the increased risk of identity theft or credit card fraud in the future.  According to the Court, neither theory alleged an adequate "concrete" injury, so plaintiff failed to satisfy the injury-in-fact element of constitutional standing.

 

Applying the factors from Spokeo, the Court determined that there was no meaningful relationship between defendants' conduct and any privacy interest historically recognized at common law.  "Unlike in Horizon, plaintiff's personal information was not disclosed to third parties or used to perpetrate credit-card or tax fraud."  According to the Court, the defendants did not "disclose" plaintiff's personal information.  Instead, he gave his credit card to defendants and they printed some of the numbers on his receipt.  "[P]rinting a card's first six and last four digits—rather than only the last five digits—does not implicate the historic 'right to be let alone,' particularly when the first six digits do not pertain to the customer's individual bank account."

 

As to the second factor under Spokeo, "the judgment of Congress," the Court concluded that it did not support plaintiff's argument.  "[I]t does not follow that Congress contemplated private actions by individuals who have not sustained any actual harm." 

 

The Court next addressed plaintiff's allegation of increased risk of identity theft in the future. The Court acknowledged that, based on the holdings from Spokeo, "if [plaintiff] adequately alleges that [defendants'] statutory violation creates a material risk of future harm, then [plaintiff] likely has constitutional standing."  The Court, however, quickly concluded plaintiff had not sufficiently alleged a risk of future harm.

 

The Court observed that credit card numbers are 16 digits long, with the first six relating to the issuing bank and the last 10 referring to the card holder.  Thus, by printing the first six and last four, the defendants did not increase the risk of future harm because the personal information given – the last four digits – did not exceed the five digits permitted by Congress.

 

Next, the Court addressed plaintiff's allegations that "dumpster divers" or "sophisticated criminals" could use the receipts to perpetrate fraud.  According to the Court, plaintiff had not presented sufficient information to establish these alleged harm-causing scenarios were anything other than hypothetical and too remote.  Accordingly, the Court rejected those allegations.

 

Finally, the Court summarized its findings: "Congress cannot empower individuals to manufacture a 'case' or 'controversy' where none exists. As Spokeo explained and Horizon acknowledged, the 'congressional power to elevate intangible harms into concrete injuries is not without limits.' Those limits are established by Article III of the Constitution, as interpreted by the Supreme Court. This Court finds that [defendants'] technical violation of FACTA lies beyond these limits."

 

Accordingly, the Court granted the defendants' motion to dismiss and dismissed plaintiff's SAC.

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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:

 

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and

 

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and

 

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FYI: 5th Cir Holds Debt Collector's Obligation to Report Debt as Disputed Not Limited By § 1692g

The U.S. Court of Appeals for the Fifth Circuit recently affirmed summary judgment under the Fair Debt Collection Practices Act (FDCPA) in favor of the debtor and against a debt collector, where the debt collector failed to mark the debtor's account as disputed when it credit reported the account.

 

The debt collector admitted that it had not marked the account as disputed because it incorrectly believed that credit reporting a debt as disputed was subject to the requirements of 15 U.S.C. § 1692g, which governs validation of a debt and the treatment of disputed debts.

 

In so ruling, the Fifth Circuit also rejected the debt collector's Spokeo argument, holding that the alleged violation provided sufficient standing.

 

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

 

The debt collector sent two letters to the debtor about a debt.  Nearly a year later, the debtor ran his credit report and discovered a debt that he did not recognize.  He sent a letter to the debt collector disputing the validity of the debt but got no response.  The debtor ran his credit report again six weeks later and found that the debt collector had updated the trade line to reflect some of the information from his letter but had failed to mark the account as disputed. The debtor sued the debt collector asserting that it had violated section 1692e(8) of the FDCPA.

 

As you may recall, section 1692e(8) of the FDCPA (15 U.S.C. § 1692e(8)) prohibits a debt collector from communicating or threatening to communicate false credit information, which includes the failure to communicate that a disputed debt is disputed. 

 

Entirely separate from that prohibition are the requirements in section 1692g of the FDCPA (15 U.S.C. § 1692g) concerning the validation and verification of debts.  Section 1692g(b) requires, among other things, that a consumer must dispute the debt in writing within thirty days after receiving the validation notice from a debt collector.

 

The debt collection agency admitted that it had not reported the account as disputed to the credit reporting agencies, but argued that it was not required to do so because the debtor had not disputed the debt in writing within thirty days after receiving the validation notice.  The debt collector reasoned that section 1692e(8) incorporates the requirements of section 1692g, perhaps because both address "disputes."

 

However, the Fifth Circuit held that is where the debt collector went wrong. 

 

The Court held that the requirements of section 1692g are unique to the validation process in which the debt collector validates the debt and the debtor has the opportunity to get additional information to verify the debt.  The debt validation process does not apply to credit reporting of disputed debts, the Fifth Circuit held.  Under section 1692e(8), disputed debts, no matter how or when they are disputed, must be credit reported as disputed. 

 

The Fifth Circuit held that a debtor can contact a debt collector at any time in any manner to state that the debtor disputes the debt and the debt collector will have to credit report it as disputed.  Thus, the Court held, if the debtor calls the debt collector months or years after the validation letter has gone out and disputes the debt, the debt collector does not have to verify the debt under section 1692g but it does have to mark that debt as disputed in its credit reporting.

 

The Court went a step further and explained that the language of section 1692e(8) "requires no notification by the consumer, written or oral" for the requirement to credit report a debt as disputed to kick in.  The Fifth Circuit noted that section 1692e(8) state that a debt collector must report a debt as disputed where it "knows or should know" that the debt is disputed. 

 

The Court explained that this means that, if the debt collector has any information or knowledge that a debt is disputed, even if the knowledge did not come from the debtor, the debt collector must report it as disputed.  While it may be difficult to imagine what knowledge a debt collector might have that could independently inform it of a dispute apart from some type of communication from the debtor, this ruling makes clear that it is something debt collectors should be on the lookout for.

 

The Fifth Circuit also rejected the debt collector's Spokeo argument finding that the stated violation provided sufficient standing. Accordingly, the Court affirmed summary judgment in favor of the debtor and against the debt collector.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
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FYI: 11th Cir Holds Bankruptcy Chpt 13 to 7 Conversions May Be Dismissed for "Abuse" Under 11 U.S.C. § 707(b)

The U.S. Court of Appeals for the Eleventh Circuit recently held that section 707(b) of the Bankruptcy Code, which allows a bankruptcy court to dismiss a Chapter 7 petition if it finds that relief would be an "abuse" as defined in that section, applies to a petition initially filed under Chapter 13 and converted to Chapter 7.

 

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

 

A debtor filed bankruptcy under Chapter 13 of the Bankruptcy Code, which allows a debtor to restructure his debts and keep his assets by submitting a plan that provides for repayment over 3-5 years from the debtor's future earnings.

 

After making plan payments for over two years, the debtor exercised his right to convert the case to a Chapter 7 liquidation, which "requires a debtor to transfer nearly all of his prepetition assets to the bankruptcy court for distribution to creditors, but allows the debtor to shield from creditors postpetition income and assets."

 

The bankruptcy trustee moved to dismiss the converted petition as "abusive" under § 707(b) of the Code, which Congress enacted to prevent debtors who could afford to repay their debts over time from shielding their postpetition income from creditors by filing for relief under Chapter 7.

 

Specifically, section 707(b) provides that after notice and hearing, "the court, on its own or on a motion filed by the United States trustee, … may dismiss a case filed by an individual debtor under this chapter … if it finds that the granting of relief would be an abuse of the provisions of this chapter."  The Bankruptcy Code "creates a means-test codified at 11 U.S.C. § 707(b)(2)(A)(i) …[which], if met, requires the court to presume the petition to be abusive."

 

The bankruptcy trustee argued that because the debtor's disposable income was much more than the means-test allowed, he could repay his unsecured creditors.  The debtor argued in opposition that § 707(b) does not apply to a Chapter 13 case that is later converted to Chapter 7.

 

The bankruptcy court held that § 707(b) applies to converted cases and dismissed the debtor's petition. The U.S. District Court affirmed, and the debtor appealed to the Eleventh Circuit.

 

On appeal, the Eleventh Circuit rejected the debtor's textual argument that since his case was not filed under Chapter 7, but under Chapter 13 instead, § 707(b) does not apply. The U.S. trustee, also relying on the text, argued the opposite: namely, that the phrase "'under this chapter" modifies the phrase to which it is immediately adjacent, 'an individual debtor[,]' [a]nd, .. because [the debtor] is 'an individual debtor under [Chapter 7],' § 707(b) applies."

 

The Court pointed out that both parties' interpretations of § 707(b) "are defensible[,]" but "[b]ecause there are unmistakable indications in the Code that Congress intended § 707(b) to apply to converted cases," it rejected the debtor's argument.

 

The Eleventh Circuit began by discussing the "textual evolution of § 707[,]" explaining that Congress initially adopted it in 1984 because it believed courts were not sufficiently exercising their existing power to dismiss petitions "for cause."

 

Two decades later, Congress was still dissatisfied with bankruptcy courts' perceived reluctance to dismiss petitions filed by debtors who could substantially repay their debts, so it "significantly strengthened § 707(b) in 2005" by making "it even easier for bankruptcy courts to dismiss abusive petitions."

 

The Court concluded that "[t]his history and statutory evolution" showed that "Congress intended the current version of § 707(b) to be a potent tool for bankruptcy courts to expeditiously dismiss Chapter 7 petitions filed by debtors with income sufficient to pay their creditors." Such clear congressional intent "would be eviscerated" if the Court adopted the debtor's argument because "a debtor could file a Chapter 13 petition and, the following day, convert it to a Chapter 7 petition and thereby avoid the [abuse language] incorporated into § 707(b)."

 

Because this would be an absurd result was clearly not intended or authorized by Congress, the Eleventh Circuit affirmed the trial court's dismissal of the debtor's petition.

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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