FYI: 3rd Cir Holds Entity Whose Principal Purpose is Debt Collection is a 'Debt Collector' Regardless of Whether It Owns Debts It Collects

The U.S. Court of Appeals for the Third Circuit recently held that a purchaser of defaulted debt is a "debt collector" under the federal Fair Debt Collection Practices Act, if its "principal purpose" is to liquidate or otherwise collect on debts.

 

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

 

The borrowers, a husband and wife, had a home equity line of credit with a bank secured by a mortgage on their home. They made timely payments until receiving notice that the bank was closing. The bank was taken over by the FDIC and the loan was eventually sold to a debt buyer.  While the home was under the receivership of the FDIC, the borrowers did not receive monthly statements but attempted to periodically pay the FDIC, which did not cash or return the borrowers' attempted payments.

 

The debt buyer acquired the defaulted loan from the FDIC, which notified the borrowers of the transfer and began to collect the loan.  In its collections efforts, the debt buyer sent three letters that contained different balances owing apparently because different interest rates were being assessed.  Ultimately, the debt buyer filed a foreclosure action.

 

The borrowers contacted the debt buyer to resolve the matter and requested statements which the debt buyer allegedly refused to provide. The debt buyer's representative who spoke with the borrowers also said the home now belonged to the debt buyer and that the borrowers could do nothing about it.  Subsequently, an attorney for the debt buyer sent a demand to the borrowers demanding an even higher amount than had been asked for in the prior letters.

 

The borrowers filed suit alleging violations of the FDCPA, arguing that as a "debt collector" under the Act, the debt buyer was in violation by not being registered as a foreign business in Pennsylvania when it threatened and filed the foreclosure suit.  Of importance, the debt buyer did not contest its status as a debt collector at the pre-trial proceedings.

 

After a one-day bench trial and post-trial briefing, the lower court found the debt buyer to be a debt collector and held that the loan transaction was a "debt" as defined by the FDCPA.  Thus, the court held that the debt buyer was liable under the FDCPA and the debt buyer appealed, arguing it was not a debt collector.

 

On appeal, the Third Circuit examined Henson vs. Santander, the U.S. Supreme Court opinion of last year considering similar issues in the context of a bank that purchased defaulted debts which it in turn collected. The Third Circuit noted that the FDCPA contains two definitions of a debt collector and at issue here is whether the purchaser of a defaulted debt whose "business [is] the principal purpose of which is the collection of any debts," was not decided by the Supreme Court in Henson.

 

The debt buyer argued that the terms "creditor" and "debt collector" are mutually exclusive under the FDCPA and that it could not be both.  The Court disagreed and noted that the debt buyer had not disputed, but rather admitted that its sole business was collecting debts it had purchased.  The Court acknowledged a prior Third Circuit opinion, Check Investors, 502 F.3 at 173, holding the two terms to be mutually exclusive.  However, the Court dismissed any obligation to sort out the intent of that statement and used colorful language for holding that the debt buyer's conduct makes it clear the debt buyer is a debt collector: "Asking if [the debt buyer] is a debt collector is thus akin to asking if Popeye is a sailor.  He's no cowboy."

 

However, the Third Circuit conceded that its prior analysis of the definition of "debt collector," deeming one a debt collector merely because it acquired a loan in a defaulted status, was not valid post-Henson. 

 

The Court concluded by stating that "[the debt buyer] may be one tough gazookus when it attempts to collect the defaulted debts it has purchased, but when its conduct crosses the lines prescribed by the FDCPA, it opens itself up to the Act's penalties."  (From the song I'm Popeye the Sailor Man: "I'm one tough Gazookus / Which hates all Palookas / Wot ain't on the up and square / I biffs 'em and buffs 'em / An' always out-roughs 'em / an' none of 'em gits no-where.")

 

 

 

 

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

 

 

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 

 

FYI: AZ Sup Ct Holds Action on Credit Card Debt Accrues When Payment is Missed in Absence of Acceleration

In a case of first impression, the Arizona Supreme Court recently addressed the question of when the statute of limitations commences on credit card debt that is subject to an optional acceleration clause.

 

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

 

The consumer obtained a credit card subject to an agreement that provided if he missed any payment the issuer could declare the balance "immediately due and payable."  The consumer missed a payment in February 2008, but subsequently made a $50 payment, which was less than the minimum payment due, in August 2008.  No notice of acceleration was ever issued.  The account was subsequently sold, and the purchaser filed a lawsuit to collect the debt in July 2014.

 

The statute of limitations for a credit card debt in Arizona is six years from accrual of the cause of action.  Ariz. Rev. Stat. § 12-548(A)(2).

 

The consumer moved for summary judgment, arguing the action was barred by the statute of limitations because the cause of action accrued when he missed his first payment.  The purchaser argued it could not accrue until the debt was accelerated, pursuant to the agreement.  The trial court agreed with the consumer.

 

The appellate court reversed, finding that the cause of action could not accrue on the entire amount owed until the consumer "failed to comply with a demand for payment in full or a notice by the lender [] that it was accelerating the debt."  Review of the decision was granted by the Arizona Supreme Court.

 

The Arizona Supreme Court noted that the appellate court relied on opinions dealing with closed-end, installment contracts that have a determinable date by when the account must be paid in full.  For those accounts, it explained, a creditor cannot prevent the statute of limitations from running simply by refusing to accelerate the debt.

 

The Court distinguished credit card accounts where the date the entire debt will become due is not certain.  Because the purpose of the statute of limitations is "to protect defendants from stale claims and uncertainty about potential unresolved claims," the Court declined to follow the analysis related to installment contracts.

 

The Court explained that allowing a creditor to prevent accrual of the cause of action on a credit card account by not accelerating the debt would "functionally eliminate the protection provided to defendants by the statute of limitations."

 

Thus, the Arizona Supreme Court held "that when a credit-card contract contains an optional acceleration clause, a cause of action to collect the entire outstanding debt accrues upon default: that is, when the debtor first fails to make a full, agreed-to minimum monthly payment."

 

 

 

 

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

 

 

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 

 

FYI: 5th Cir Holds Automatic Stay Violation Claim Against Mortgagee Barred by Judicial Estoppel

The U.S. Court of Appeals for the Fifth Circuit recently held that a mortgagee's foreclosure action did not violate an automatic stay imposed during one of the plaintiff's Chapter 13 bankruptcy, where the debtor failed to amend his bankruptcy schedules to disclose his recent acquisition of the subject property from his son. 

 

In so ruling, the Fifth Circuit affirmed the trial court's judgment in favor of the mortgagee because father and son plaintiffs were judicially estopped from claiming a stay violation.

 

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

 

A borrower ("Borrower") obtained a mortgage loan from a mortgage lender ("Lender").  The Borrower subsequently entered an equity sharing agreement with his father ("Father"), which provided his father with an equitable interest in the property.  The Father voluntarily made payments to the Lender for three years, but the Lender was never informed of the equitable interest and it was never recorded.

 

The father filed for Chapter 13 bankruptcy in 2012, wherein "an [e]quity sharing agreement in son's house" was listed in the bankruptcy schedules, but the schedules did not list the property's address or Lender as a creditor.  The equity sharing agreement expired on its own terms in February 2013.

 

In January 2014, the Father surrendered his own, separate homestead property in bankruptcy and moved into the Borrower son's property.  After the Borrower and his Father stopped making payments towards the Loan in November 2014, the property was conveyed from Borrower to Father via a quit claim deed ("QCD") in January 2015.  Although the QCD was recorded, the Father did not amend his bankruptcy schedules, nor provide Lender with notice of the transfer.

 

After Lender gave notice of default, the loan was accelerated and posted for foreclosure on April 6, 2015. 

 

The debtor contended that he sent Lender a check for the delinquent payments, along with copies of his bankruptcy documents, the QCD, and the equity sharing agreement on April 28, 2015.  Lender disputed receipt of the relevant bankruptcy documents, and returned the submitted funds as insufficient to bring the loan current as of May 1, 2015. 

 

The Father alleged that he resubmitted the bankruptcy package to Lender on May 4, 2015, but the property was sold at a foreclosure sale on May 5, 2018.  After the sale, the Lender contacted Borrower and provided him two weeks to redeem the property, which Borrower declined to do.

 

The Borrower and his Father (collectively, "Plaintiffs") instead filed suit against Lender alleging wrongful foreclosure and violations of the Emergency Stabilization Act and the bankruptcy automatic stay under § 362(a), seeking actual damages of $50,000 and punitive damages in the amount of $450,000.  After the Lender removed the action to federal court, Plaintiffs filed a second state court action against the Lender.  The two actions were eventually consolidated in federal court.

 

Following a bench trial, the trial court held that the Plaintiffs' claims lacked merit and that they were judicially estopped from pursing claims for violation of the automatic stay imposed by the Father's bankruptcy filing.  Accordingly, judgment was entered in Lender's favor, Plaintiffs were denied a motion for new trial, and several exhibits presented by Plaintiffs in the lower court were denied admittance upon review of Lender's objections following these Orders. 

 

This appeal followed.

 

Primarily, the Fifth Circuit noted that Plaintiffs waived their claims for wrongful foreclosure and violation of the Emergency Stabilization Act by failing to argue them in their appellate briefing.  See N.W. Enterprises, Inc. v. City of Houston, 352 F.3d 162, 183 n.24 (5th Cir. 2003).  Accordingly, the only issues on appeal were (i) the Lender's purported violation of the automatic stay under § 362(a); (ii) Plaintiff's request for a new trial, and; (iii) the post-judgment evidentiary rulings.

 

As you may recall, judicial estoppel has three elements: (1) the party against whom estoppel is sought has asserted a position plainly inconsistent with a prior position, (2) a court accepted the prior position, and (3) the party did not act inadvertently. Allen v. C & H Distribs., L.L.C., 813 F.3d 566, 572 (5th Cir. 2015).  (citing Flugence v. Axis Surplus Ins. Co. (In re Flugence), 738 F.3d 126, 129 (5th Cir. 2013)).

 

Here, the Fifth Circuit found that the first and second elements of judicial estoppel were satisfied by the Father's failure to amend his bankruptcy schedules to disclose the quitclaim deed or his putative claims against Lender.  See Love, 677 F.3d at 261-62 (quoting Jethroe v. Omnova Sols., Inc., 412 F.3d 598, 600 (5th Cir. 2005)) ("Judicial estoppel is particularly appropriate where… a party fails to disclose an asset to a bankruptcy court, but then pursues a claim in a separate tribunal based on that undisclosed asset"); Allen, 813 F.3d at 572 (quoting Flugence, 738 F. 3d at 129) (Chapter 13 debtors have a continuing obligation to amend financial schedules to disclose assets acquired post-petition).

 

As to the third element of judicial estoppel, in order to establish the defense of inadvertence, a party is require to prove (1) that it did not know about the inconsistency or (2) that it lacked a motive for concealment. See Allen, 813 F.3d at 573. 

 

Here, the Fifth Circuit concluded that the Father was aware he had received the QCD and his claims against Lender, and had a motive to conceal his changed financial status.  Id. at 574 (a motive to conceal is "self-evident" when a debtor fails to disclose an asset to the bankruptcy court due to the "potential financial benefit resulting from the nondisclosure").  Accordingly, because the Father could not establish the defense of inadvertence, the Court held that the third element of judicial estoppel was satisfied.

 

Because the trial court did not abuse its discretion in holding that the Father was judicially estopped from claiming Lender violated the automatic stay and entering judgment in Lender's favor, the Fifth Circuit held that did not abuse its discretion in denying his motion for a new trial for the same reason.

 

Lastly, the Fifth Circuit concluded that Plaintiffs failed to demonstrate, or even argue in their briefing that the lower court abused its discretion by excluding several of their exhibits over Lender's objections that such exhibits were either not adequately disclosed, irrelevant or unauthenticated.  Moreover, the excluded evidence had no bearing on lender's judicial estoppel defense.

 

Accordingly, the trial court's judgment in favor of Lender and against the Borrower and his Father 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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   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