FYI: 7th Cir Holds Debt Collector May Rely on Information from Creditor

Joining with the Fourth and Ninth Circuits, the U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court's summary judgment order in favor of a debt collector and against a debtor finding that the debt collector did not violate the federal Fair Debt Collection Practices Act (FDCPA) by only verifying the information in its records instead of contacting the creditor to verify the debt.

 

In so ruling, the Court also held that the debt collector did not violate the federal Fair Credit Reporting Act ("FCRA") because it conducted a reasonable investigate into the disputed information.

 

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

 

The creditor sent a letter to the debtor advising her that she owed $268.47 on her closed account. The letter included her account number and advised the debtor that if she did not pay the debt, then the debtor may refer the account "to an outside collection agency." 

 

The debtor did not pay the debt.  The debtor later received a letter from the debt collector advising her that she owed the creditor $268.47 and that she should pay the debt "unless [she] dispute[d] the debt."  Due to an error in the records the creditor sent to the debt collector, the letter included an incorrect account number.    

 

During a subsequent call with the debt collector, the debtor disputed the debt.  The debtor verified that the section 1692g notice letter contained her correct name and mailing address.  However, the debtor falsely claimed that the last four digits of her social security number that the debt collector provided did not match her social security number.    

 

The debtor wrote a letter to the debt collector disputing the debt claiming that she did not owe any money pertaining to the listed account number.  The debt collector investigated the debtor's dispute by examining its records and sent the debtor a notice verifying the debt.  The notice verified her name, her address, the amount of the debt, and that the last four digits of her social security number matched the debt report the creditor had provided to the debt collector.  The notice once again contained the incorrect account number. 

 

The debt collector reported the debtor's debt to two credit-reporting agencies ("agencies"), including informing the agencies that the debtor disputed the debt.  The debtor twice wrote to the agencies to dispute the debt.  The agencies notified the debt collector that the debtor claimed "that the debt did not belong to her."  The debt collector investigated the dispute and again determined that the debtor's "name, address, and social security number matched the information" the creditor provided to the debt collector.  The debtor's second dispute noted that the debt-collection letter contained the wrong number for her account.  In response, the debt collector asked the agencies to delete the debtor's trade line.      

 

The debtor then filed this lawsuit alleging that the debt collector "violated (1) the FDCPA by not verifying her debt with the creditor [], and (2) the FCRA by not reasonably investigating the disputed information."  The debtor alleged that the debt collector's violations caused her emotional distress, loss of income, and to incur attorneys' fees.

The trial court entered summary judgment in favor of the debt collector and this appeal followed.

 

The Seventh Circuit first examined the FDCPA claim. As you may recall, the FDCPA provides that when a consumer "notifies the debt collector in writing within the thirty-day period" that the consumer is disputing a debt notice, "the debt collector shall cease collection of the debt until the debt collector obtains verification of the debt and a copy of such verification or judgment is mailed to the consumer by the debt collector." 15 U.S.C. § 1692g(b).

 

The Seventh Circuit noted that this case concerned what the debt collector must verify after receiving a dispute.

 

The debtor argued that § 1692(g) required the debt collector to verify "the accuracy of the underlying debt."  She maintained that the debt collector was obliged to contact the creditor "to confirm whether the account number was hers and thus whether she really owed" the debt.  In response, the creditor argued that § 1692(g) only pertains to "the accuracy of its collection notice."  Thus, the debt collector maintained that it only needed to confirm that its notice to the debtor matched the description of the debt and the debtor that the creditor provided to the debt collector.

 

The Seventh Circuit agreed with the debt collector because Congress designed the FDCPA "to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses." 15 U.S.C. ' 1692(e). The Seventh Circuit therefore construed § 1692g(b) to require "a debt collector to verify that its letters to the consumer accurately convey the information received from the creditor." 

 

The Court explained that the verification lets a consumer know that the creditor "made the demand the debt collector said it did" and allows the consumer to determine whether the creditor is correct.  Further, in the Seventh Circuit's view, it would be "burdensome and significantly beyond the Act's purpose to interpret § 1692g(b) as requiring a debt collector to undertake an investigation into whether the creditor is actually entitled to the money it seeks."  This is because § 1692g(b) serves as a check on the debt-collection agency, not the creditor.

 

The Seventh Circuit thus joined "other circuits in holding that the statute requires nothing more than the debt collector confirming in writing that the amount being demanded is what the creditor is claiming is owed.'" Chaudhry v. Gallerizzo, 174 F.3d 394, 406 (4th Cir. 1999); Clark v. Capital Credit & Collection Servs., Inc., 460 F.3d 1162, 1173-74 (9th Cir. 2006).

 

In this appeal, the debt collector "plainly satisfied § 1692g(b)" because it reviewed its records and confirmed that it sent its debt-collection letter seeking the amount the creditor sought to the same debtor the creditor identified.  The notice also included the creditor's address and contact information.  Thus, the verification provided the debtor with the necessary information to "sufficiently dispute the payment obligation." Dunham v. Portfolio Recovery Assocs., LLC, 663 F.3d 997, 1004 (8th Cir. 2011).

 

The Seventh Circuit observed that this happened here as the debtor used the information provided in the § 1692g(b) notice to dispute her debt.  As a result, "she succeeded in having the debt record deleted."

 

The Seventh Circuit next turned to the alleged FCRA claim.  As you may recall, when a credit-reporting agency notifies a "furnisher" that a debtor disputes a debt, the furnisher must "conduct an investigation with respect to the disputed information." 15 U.S.C. § 1681s-2(b)(1)(A).  Whether the furnisher conducts a sufficiently reasonable investigation is ordinarily a factual inquiry, but "summary judgment is proper if the reasonableness of the defendant's procedures is beyond question." Westra v. Credit Control of Pinellas, 409 F.3d 825, 827 (7th Cir. 2005).

 

Here, the Seventh Circuit found that the debt collector's "investigation was unquestionably reasonable." The debtor first disputed only that, "the account did not belong to her." In response, the debt collector conducted a reasonable investigation because it verified the debtor's personal information that it received from the creditor.  The debtor's second dispute notified the debt collector for the first time that the account number contained in the § 1692g(b) notice did not belong to her.  In response, the debt collector instructed the agencies to delete the debt and they did.  The FCRA required nothing more of the debt collector.

 

The Seventh Circuit also rejected the debtor's claim that the debt collector made false or misleading representations that violated the FDCPA and the FCRA. 

 

Specifically, 15 U.S.C. § 1692e(8) of the FDCPA requires debt collectors who furnish information to agencies to report if a debtor disputes a debt, and 15 U.S.C. ' 1681s-2(a)(1)(A) of the FCRA prevents debt collectors from furnishing information to agencies when they know or have "reasonable cause to believe that the information is inaccurate."  These claims fail because the undisputed evidence demonstrated that the debt collector reported the debt as disputed. 

 

Moreover, the FCRA claim separately failed because there is no private right of action for any § 1681s-2(a)(1)(A) violation. See 15 U.S.C. ' 1681s-2(c); Purcell v. Bank of America, 659 F.3d 622, 623 (7th Cir. 2011).

 

Thus, the Seventh Circuit affirmed the trial court's order granting summary judgment in favor of 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
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 Allows Chpt 13 Lien Stripping When No Proof of Claim Filed

The U.S. Court of Appeals for the Fourth Circuit recently held that a completely unsecured lien may be stripped off in a Chapter 13 bankruptcy proceeding under 11 U.S.C. § 1322(b) even though a proof of claim has not been filed.

 

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

 

Debtors filed a Chapter 13 bankruptcy petition in 2012.  At the time, the debtors' principal residence was valued at $435,000 and encumbered by four liens.

 

Creditor 1 held the mortgage lien with the highest priority in the amount due of $609,500.  Creditor 2's two junior mortgage liens had the second highest priority valued at $127,700.91. Creditor 3's mortgage lien had the lowest priority valued at $105.995.75. Thus, the three junior liens were completely unsecured and the senior lien was only partially secured.

 

Only Creditor 1 and Creditor 3 filed a proof of claim. 

 

Debtors filed an adversary proceeding seeking to avoid the liens held by Creditor 2 and Creditor 3.  The bankruptcy court entered a default judgment against Creditor 2 and Creditor 3 finding the liens completely underwater. Creditor 3's lien was stripped.

 

However, the bankruptcy court refused to strip the two liens held by Creditor 2 finding that 11 U.S.C. § 506(d)(2) ("Section 506(d)(2)") prohibits lien avoidance where no proof of claims are filed. 

 

Debtors appealed to the district court which also refused to strip Creditor 2's liens.  The district court held that a strip off could not occur without the application of 11 U.S.C. § 506, but Section 506(d)(2) barred a lien from being voided when a proof of claim is not filed, and therefore, not an "allowed secured claim." The district court found that it would reach the same result under 11 U.S.C. § 1322(b)(2) ("Section 1322(b)(2)") because that section could not be considered unless a proof of claim had been filed and allowed and valued under 11 U.S.C. § 506(a) ("Section 506(a)").  Debtors appealed the ruling of the district court.

 

On appeal, the Fourth Circuit considered whether a Chapter 13 debtor could strip off a completely unsecured junior lien under Section 1322(b)(2) when no proof of claim has been filed.

 

The Court first examined the role 11 U.S.C. § 506(d) ("Section 506(d)") plays in a Chapter 13 lien strip.  The Court noted that its past rulings made clear that the power to strip a lien in Chapter 13 proceedings stems from Section 506(a) and Section 1322(b). The Court explained that Section 506(a), which classifies valueless liens as unsecured claims, operates with Section 1322(b)(2) to permit a court in a Chapter 13 case to strip off a lien against a primary residence with no value.

 

On the other hand, the Court explained that Section 506(d) voids liens on the basis of whether the underlying claim is allowed or disallowed under 11 U.S.C. § 502.  The Fourth Circuit noted that the Supreme Court of the United States explained that the applicability of Section 506(d) depends on whether a claim is an allowed secured claim, which "gives the provision the simple and sensible function of voiding a lien whenever a claim secured by the lien itself has not been allowed."  Dewsnup v. Timm, 502 U.S. 410, 417 (1992). 

 

The Fourth Circuit noted that § 1322(b) permits a plan "to modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence." The Court explained that the critical focus under Section 1322(b)(2) concerns "rights."  By contrast, Section 506(d) speaks only of allowed "claims." 

 

The Court noted that a Chapter's 13 plan's power to modify rights has never been restricted to the universe of allowed claims, and therefore, Section 1322(b) should apply equally when it comes to avoiding an entirely unsecured lien.  In the Fourth Circuit's view, the valuation process of Section 506(a) does not determine a creditor's rights under Section 1322(b); rather, these rights turn on whether there is any value in the collateral.

 

Here, the Debtors here were not challenging the validity of the underlying debt.  Rather, the Debtors argued that Creditor 2's otherwise valid debt was now unsecured due to the value of Creditor 1's senior security interest.  Thus, the Court found that it may look to Section 506(a) to determine the status of Creditor 2's secured claim and then modify the rights Creditor 2 enjoys as a mortgagee under Section 1322(b). 

 

The Fourth Circuit explained that Creditor 2 had no incentive to file a proof of claim because its liens were entirely without value. In addition, the Court noted, bankruptcy proceedings routinely modify a non-participating creditor's rights. 

 

Thus, the Court found that the filing of a formal proof of claim is not a prerequisite to valuing a claim under Section 506(a) for the purposes of modifying a creditor's rights under Section 1322(b)(2).  Otherwise, as it stood, Creditor 3 who filed a proof of claim had its lien stripped, while Creditor 2's liens survived even though a proof of claim was not filed. The Court held that this could not be the law.

 

In sum, the Court found that the ability of a Chapter 13 debtor to strip off an underwater lien stems from Section 1322(b), not Section 506(d).  Thus, the Fourth Circuit he3ld, the valuation of claims under Section 506(a) is not limited to claims that have been filed and allowed. 

 

Section 1322(b) permits plans to modify the rights of the holders of unsecured claims and whether a creditor has an unsecured claim turns on the value of the underlying collateral, not merely the existence of a security interest.  However, the Court held, where a senior lienholder is only partially secured, any junior lienholder is by definition the holder of an unsecured claim for the purposes of Section 1322(b), and therefore, the liens may be stripped without the filing of a proof of claim.

 

Accordingly, the Fourth Circuit reversed the district court's ruling and remanded for further proceedings.

 

 

 

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: 8th Cir Rejects "Envelope Theory" in TILA Rescission Action

The U.S. Court of Appeals for the Eighth Circuit held that the plaintiff borrowers did not offer sufficient evidence to defeat the rebuttable presumption created by the signed acknowledgement that they received the required number of copies of the federal Truth in Lending Act ("TILA") notice of right to cancel disclosures.

 

In so ruling, the Court noted that the plaintiff borrowers did not claim personal knowledge of the number of copies of the disclosure provided at closing, but instead relied on the so-called "envelope theory", which the Court held was inadmissible hearsay. 

 

Accordingly, the ruling of the trial court granting summary judgment in favor of the lender was affirmed. 

 

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

 

The borrowers ("Borrowers") received TILA disclosures at their loan closing.  As you will recall, under TILA borrowers may rescind certain loans within three days of closing, but the rescission period extends to three years if the lender fails to deliver "the required notice or material disclosures."  12 C.F.R. 1026.23(a)(3)(i); see also 15 U.S.C. § 1635(a), (f).

 

The Borrowers admitted that the lender ("Lender") delivered the required notice ("Notice"), but denied they received the required number of copies, so they attempted to rescind the loan on a date just before three years lapsed from the execution of the loan.  The Lender denied rescission, and the Borrowers sued more than three years after the loan closing.

 

The trial court dismissed the lawsuit as untimely, and it was ultimately appealed to the Supreme Court of the United States, which reversed the ruling and held that the three-year limitation period applied to the provision of notice rather than the filing of suit.  See Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790, 792 (2015).

 

On remand, the trial court granted summary judgment in favor of the Lender concluding that a signed acknowledgment of the receipt of the correct number of copies of the Notice created a rebuttable presumption, and that the Borrowers failed to create a triable question of fact rebutting that presumption. 

 

The matter was then appealed. 

 

In affirming the ruling of the trial court, the Eighth Circuit analyzed the facts contained in the record. 

 

At the loan closing, the Borrowers signed their names to an acknowledgment form stating in pertinent part: "The undersigned each acknowledge receipt of two copies of NOTICE OF RIGHT TO CANCEL, and one copy of the Federal Truth in Lending Disclosure Statement.  Each borrower/owner in this transaction has the right to cancel.  The exercise of this right by one borrower/owner shall be effective to all borrowers/owners."

 

As you may recall, under TILA, a signed acknowledgment that the borrowers received the required notice creates a rebuttable presumption of proper delivery.  15 U.S.C. § 1635(c).

 

The Borrowers first argued that the presumption should not apply because since the acknowledgment did not state "each acknowledge receipt of two copies each," the acknowledgment shows receipt of only two copies total, or at least results in ambiguity that must be construed against the Lender. 

 

The Eighth Circuit disagreed, viewing the "argument as a tortured attempt to create an ambiguity where none exists." 

 

Next, the Court analyzed whether the Borrowers rebutted the presumption.  The Court noted that the Borrowers did not claim to have personal knowledge of the number of copies they received at the closing.  Instead, the Borrowers relied on the so-called "closed-envelope theory" by "focusing on the contents of their closing-document folder as it purportedly existed two years and nine months after closing." 

 

However, to prove the contents of their file, the Borrowers relied only on their own recitation of a third party's description of their file.  Specifically, the Borrowers stated that after the closing of the loan they took the file containing the closing documents and placed it in an inconvenient to access filing cabinet.  More than two years later, in an attempt to negotiate better loan terms, they contacted a mortgage specialist ("Specialist"). 

 

The Borrowers stated that the Specialist asked them to look in their mortgage file for certain documents, which they did, but they did not understand what they were looking for.  The Borrowers therefore brought the file to the Specialist, who analyzed the contents and told them they were entitled to rescind their loan because their file did not contain all necessary copies of the disclosure documents.

 

The Borrowers did not agree on whether they left the file with the Specialist, and they did not claim they produced their entire file in discovery.  Even as to documents they did produce, the Borrowers did not claim knowledge of or have an explanation for missing pages.

 

Based on these facts, the Eighth Circuit concluded that "[a] party may not defeat summary judgment with evidence that will be inadmissible at trial, and the [Borrowers'] representation about what [the Specialist] described is textbook inadmissible hearsay."  Moreover, "[g]iven the other indicia of unreliability surrounding the [Borrowers'] closing file, there exist no exceptions that might permit a court to consider the hearsay." 

 

Accordingly, the Eighth Circuit affirmed the ruling of the trial court granting summary judgment in favor of the Lender. 

 

 

 

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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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