FYI: Legislation Introduced in New York, Illinois Would Require Debt Collection Notices

Legislation has been introduced in Illinois and New York that would require debt collectors to provide consumers with specific notices.

 

In New York, Assembly Bill 876 would require the initial written communication to a debtor to include the following:

 

 

"Debtor's Rights

 

As a debtor who owes or may owe a consumer claim, you are given some protection and rights by the New York and federal laws regulating debt collection procedures. You should be aware of your rights.

 

1.  A debt collector may contact you or any member of your family or household directly. However, they may not contact you with such frequency, at unusual hours, or in a manner that can be expected to abuse or harass you. They also cannot threaten action which they do not take in the usual course of business.

 

2.  A debt collector may not threaten to contact your employer regarding a debt prior to obtaining a final judgment against you. However, a debt collector may contact your employer to execute a wage assignment agreement if you, the debtor, have agreed to the assignment.

 

3.  A debt collector cannot use a communication which appears to be authorized, issued, or approved by a government agency or attorney when it is not.

 

4.  A debt collector cannot disclose or threaten to disclose information affecting your reputation for creditworthiness if the collector knows or has reason to know the information is false. A debt collector also cannot attempt or threaten to enforce a right when it knows or has reason to know the right does not exist.

 

For more information about your rights under state and federal debt collection procedures law, contact the Consumer Protection Division of the New York State Department of State at (insert the current telephone number or internet website established by the consumer protection division for receiving inquiries from consumers). You may also contact the New York State Attorney General at (insert the current telephone number established by the department of law for receiving inquiries from consumers) or (insert the current address of the website of the department of law)."

 

 

Although the legislation is obviously well-meaning, it would require the addition of a huge amount of additional text in addition to the extraordinary amount already required by the regulations of the New York Department of Financial Services.  Many have noted that there comes a point where additional notices simply overwhelm consumers instead of aiding them.

 

The Illinois legislation, House Bill 281, would require that a summons in a debt collection lawsuit include the following notice (format included in the legislation):

 

 

"IF YOU OWE A DEBT, YOU HAVE RIGHTS

 

You Can PROTECT:

 

Your Social Security

 

Your SSI

 

Your Public Benefits

 

Your Veterans Benefits

 

Your Retirement Benefits

 

$7,500 in Equity in a Motor Vehicle

 

$150,000 to $200,000 in Equity in your Home

 

$15,000 in your Bank Account

 

You Can STOP:

 

Phone Calls from Debt Collectors

 

Verbal Abuse from Debt Collectors

 

Threats from Debt Collectors

 

You Have the RIGHT:

 

To Privacy

 

To Have the Court Review Any Agreement to Settle Your Case

 

To Ask for a Reasonable Payment Plan."

 

 

The exemption numbers above differ from existing Illinois law; the legislation also increases the following judgment or attachment exemptions:

 

Homestead:  increased from $15,000 to $150,000 for an individual, from $30,000 to $200,000 for two or more individuals

Other property:  increased from $4,000 to $15,000

Any one motor vehicle:  increased from $2,400 to $7,500

Implements, professional books or tools of the trade:  increased from $1,500 to $3,000

 

Additionally, the legislation would modify the amount of wages subject to garnishment, decreases the time to revive a judgment from seven years to five and sets the interest rate on consumer debt judgments of $25,000 or less at 2% per annum.

 

 

 

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: 5th Cir Finds Ambiguity in DOT's Provisions for Real Estate Taxes and Escrow

The U.S. Court of Appeals for the Fifth Circuit held that ambiguity in the deed of trust regarding the lender's right to pay real estate taxes and establish an escrow account precluded entry of summary judgment in favor of the loan servicer on the borrower's breach of contract claim. 

 

Additionally, the Court vacated a counterclaim for foreclosure in favor of the loan servicer and remanded the claim for reconsideration, noting that foreclosure would only be available if the servicer could show that it complied with contractual requirements.

 

Finally, the Fifth Circuit affirmed the trial court's rulings in favor of the servicer on the borrower's claims under federal Real Estate Settlement Procedures Act ("RESPA"), the Texas Debt Collection Practices Act ("TDCA"), and for unclean hands.

 

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

 

The borrower ("Borrower") executed a home equity note on his property and secured the loan with a deed of trust, which contained an escrow waiver agreement ("Waiver Agreement").

 

The Waiver Agreement provided that the lender would "elect[] not to collect monthly escrow deposits to pay real estate taxes" subject to the condition that "[a]ll real estate taxes are paid when due, and evidence is furnished to Lender at that time." 

 

The Waiver Agreement also permitted the lender to revoke the escrow waiver at any time.

 

In April 2010, the Borrower's former loan servicer sent him a letter advising him that it had discovered that the Borrower was delinquent on his taxers for 2009.  The letter further requested that the Borrower pay the taxes within 30 days of the date of the notice or, if he had already paid the taxes, that he forward proof of payment.

 

The Borrower did not pay his taxes until June 30, 2010. 

 

The Borrower subsequently received a "Notice of Transfer" that informed him that a new servicer ("Servicer") would replace the prior servicer, but that the terms of the financing agreement would remain in place. 

 

The Notice of Transfer further stated that "[i]f you are currently responsible for payment of your real estate taxes you will continue to be responsible for payment of these items after your account transfers to [Servicer]."

 

Finally, the Notice of Transfer provided an address for the borrower to send any qualified written request ("QWR") under RESPA. 

 

On December 16, 2010, and without prior notice, the Servicer paid the Borrower's 2010 property taxes.  Unaware of this payment, the Borrower also paid his 2010 taxes in January 2011, and the tax authorities subsequently refunded that amount.

 

On June 6, 2011, the Servicer sent the Borrower a letter labeled "Annual Escrow Account Disclosure Statement Account History" that stated the Borrower had a total shortage of $4,740.64 for the escrow period.  The letter did not mention the Waiver Agreement. 

 

The Borrower defaulted on the loan in August 2011, and on January 3, 2012 the Servicer sent a notice of default and intent to accelerate. 

 

On January 27, 2012, the Borrower sent a purported QWR, but did not send it to the designated address listed in the Notice of Transfer.

 

The Servicer responded anyway, and also indicated that the Borrower "may" send written correspondence to the same address where he sent the purported QWR, which was different than the designated QWR address.

 

The Borrower sent two more purported QWRs, but neither went to the Servicer's designated address listed in the Notice of Transfer.  The Servicer did not respond to either purported QWR.

 

The Borrower then filed a lawsuit against the Servicer asserting claims for: (1) breach of contract, (2) unclean hands, (3) violation of RESPA, and (4) violation of the TDCA.  The Servicer filed a counterclaim for foreclosure.

 

After the Servicer prevailed entirely on its motion for summary judgment, the Borrower appealed.

 

On appeal, the Fifth Circuit first analyzed the claims for breach of contract, unclean hands, and foreclosure.  The Borrower argued that the Servicer breached the deed of trust by paying his 2010 taxes, starting to escrow, and then increasing his monthly mortgage payments without notice.

 

In analyzing the issue, the Fifth Circuit noted that "[t]he first breach-of-contract question is whether the contract permitted [the Servicer] to pay [the Borrower's] non-delinquent 2010 taxes on December 16, 2010," and "[t]he second issue is whether [the Servicer] provided contractually required notice of that action and of [the Servicer's] revocation of the Waiver Agreement." 

 

The Servicer argued that it was permitted to pay the 2010 taxes, because the deed of trust provided that the Borrower's "fail[ure] to perform the covenants and agreements contained in" the deed of trust permitted it to "do and pay for whatever is reasonable or appropriate to protect Lender's interest in the Property and rights under this Security Instrument."

 

The Servicer further argued that because the Borrower failed to timely pay his 2009 taxes, it had the right to pay the 2010 taxes, even though at the time the Servicer paid the 2010 taxes the Borrower had already paid the 2009 taxes and the 2010 taxes were not yet delinquent.

 

However, the Fifth Circuit noted that the contractual provision only permitted what is "reasonable or appropriate," and also that other provisions in the deed of trust could be interpreted to only permit the Servicer to pay for past due taxes, even though yet other provisions permitted the Servicer to revoke the escrow waiver at any time, which "would suggest that [the Servicer] might have the right to pay taxes preemptively without a triggering condition." 

 

The Fifth Circuit therefore held that "[g]iven the two plausible readings . . ., the deed of trust is ambiguous," and "ambiguity precludes summary judgment." 

 

Accordingly, the Court ruled that the Borrower "was entitled to proceed to trial on his claim that [the Servicer] breached the contract by paying his 2010 taxes before the tax lien attached and before they became delinquent." 

 

Moreover, the Court determined that because the Servicer did not give notice to the Borrower that it would begin collecting taxes through an escrow account until June 6, 2011, which was six months after it paid the 2010 taxes, notice was also insufficient and "it was error for the trial court to conclude as a matter of law that [the Servicer] had provided contractually adequate notice of its revocation of the Waiver Agreement."

 

The Fifth Circuit affirmed the trial court's granting summary judgment on the unclean hands claim, because "unclean hands is only a defense to a request for equitable relief." 

 

With respect to the Servicer's foreclosure counterclaim, the Fifth Circuit noted that "the foreclosure remedy would only be available if [the Servicer] shows that it complied with contractual requirements," and "[a]t this state, it is premature to conclude that [the Servicer is entitled to summary judgment on its foreclosure counterclaim."

Accordingly, the Court "vacate[d] the foreclosure ruling and remand[ed] for reconsideration." 

 

With respect to the Borrower's RESPA claim, the Fifth Circuit noted that "a loan servicer need not answer a misaddressed QWR," and "responding to such letter does not trigger RESPA duties . . . if the servicer set an exclusive address." 

 

Thus, the Fifth Circuit affirmed the trial court's grant of summary judgment in the Servicer's favor on the RESPA claim.

 

With respect to the Borrower's TDCPA claim, the Fifth Circuit noted that "[w]hen [the Servicer] moved for summary judgment on the TDCA claim," the Borrower's "opposing focused exclusively on the other actions."

 

Accordingly, the Fifth Circuit held that "the trial court properly concluded that [the Borrower] elected not to address his TDCA claim based on [the Servicer's] alleged harassing phone calls and therefore deemed that claim 'abandoned.'"

 

Summary judgment in the Servicer's favor on the TDCA claim was therefore 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: 9th Cir Holds Debtor Who Successfully Challenges Automatic Stay Fee Award Also Entitled to Appellate Fees

In a case of first impression, the U.S. Court of Appeals for the Ninth Circuit recently held that a debtor who successfully challenges -- as opposed to a debtor who defends -- an award of attorney's fees and costs for violations of the automatic stay under § 362(k) of the Bankruptcy Code is entitled to an award of appellate fees and costs.

 

In so ruling, the Court reversed the trial court's order denying the debtor's motion for appellate attorney's fees and costs, and remanded the matter to the trial court with instructions to remand to the bankruptcy court to calculate reasonable attorney's fees and costs on appeal. 

 

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

 

Husband and wife debtors filed a petition under Chapter 13 of the Bankruptcy Code in October of 2012, which triggered the automatic stay under section 362 of the Code. The debtors listed a $3,535 unsecured, nonpriority debt in their schedules owed to a medical services company. The debt, however, had previously been assigned to a collection agency in July of 2012.

 

The collection agency, which did not receive notice of the bankruptcy, filed a collection action against the wife in July 2013. The parties entered into a payment plan, but the debtor defaulted.

 

The collection agency served a writ of garnishment on the debtors in April of 2014. The debtor's counsel demanded that the garnishment be dissolved, but the wife's wages were garnished for several more weeks before stopping.

 

In June of 2014, debtors filed a motion for contempt in the bankruptcy court against the collection agency for violating the automatic stay. The motion was unopposed and the bankruptcy court granted it in August of 2014, awarding $1,295 in damages and $1,277 for attorney's fees and costs. The debtors appealed both awards, arguing that "the bankruptcy court erred in failing to account for several days of attorneys' work needed to end the stay violation."

 

While the appeal was pending, the Ninth Circuit held in In re Schwartz-Tallard that section 362(K)(1) of the Bankruptcy Code authorized an award of reasonable attorney's fees and costs incurred on appeal in defending a judgment under section 362(k).

 

The trial court affirmed the damages award, "but remanded to the bankruptcy court the attorneys' fees calculation in light of Schwartz-Tallard. The bankruptcy court then awarded attorneys' fees and costs of $16,324.40, in addition to the $1,277 initially awarded[, but] refused to award attorneys' fees and costs incurred on appeal, claiming it lacked jurisdiction due to a pending application for these fees before the trial court."

 

In June of 2017, the trial court denied the debtors' motion for appellate attorney's fees and costs because debtors failed to file a memorandum of "points and authority" required by the court's local rules. In the alternative the trial court held that section 362(k) "does not allow for recovery of appellate work when a party is prosecuting, and not defending, the judgment on appeal." The debtors appealed to the Ninth Circuit.

 

The Ninth Circuit first addressed the trial court's applicable local rule, which provides relevant part that "[t]he failure of a moving party to file points and authorities in support of the motion constitutes a consent to the denial of the motion…."

 

The Ninth Circuit reasoned that, although "[o]nly in rare cases will we question the exercise of jurisdiction in connection with the application of local rules[,]" the case before it was "one of those rare cases." It then concluded that the trial court abused its discretion because the debtor's motion "clearly indicated that the attorney's fees and costs requested pertained solely to the appeal, and did not need to be further segregated."

 

Turning to the issue of appellate attorney's fee and costs, the Court began by explaining that section 362(k)(1) of the Bankruptcy Code provides in relevant part that "an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages."

 

The Ninth Circuit then disagreed with the trial court's reading of its Schwartz-Tallard ruling, explaining that "[p]reviously, [in Sternberg v. Johnston] we interpreted § 362(k)(1) as limiting attorneys' fees and costs awards to those incurred in stopping a stay violation. 'Once the violation has ended, any fees debtor incurs after that point in pursuit of a damage award would not be to compensate for 'actual damages under § 362(k)(1),' and thus fees incurred pursuing damages for a stay violation were not recoverable under the statute. … However, Schwartz-Tallard overruled Sternberg in 2015."

 

The Court reasoned that, as it explained in Schwartz-Tallard, "'Congress undoubtedly knew that unless debtors could recover the attorney's fees they incurred in prosecuting an action for damages, many would lack the means or financial incentive (or both) to pursue such actions.' … Allowing for attorneys' fees and costs while prosecuting an action for damages is likely the only way debtors in bankruptcy can afford to pursue damages. As is the case here, damages themselves may be too limited to justify an action if attorneys' fees and costs in pursuit of those damages are not recoverable."

 

The Court noted that "[u]nlike most fee-shifting statutes, the language does not explicitly refer to a 'prevailing party.' … Still, § 362(k)'s 'phrasing signals an intent to permit, not preclude, an award of fees incurred in pursuing a damages recovery.' … The statute clearly provides for damages and attorney's fees and costs for an injured debtor when a creditor violates the automatic stay. … Section 362(k)(1) also serves a deterrent function much like many fee-shifting statutes."

 

In addition, the Ninth Circuit continued, "fee shifting statutes allow for recovery of attorneys' fees incurred in establishing a party's claim for fees. … This principle ensures that the fee award is not diluted by the time and effort spent on the claim itself, … and includes appellate attorney's fees when a party successfully challenges the trial court's award or when a party successfully defends a favorable judgment on appeal."

 

"Most fee-shifting statute cases that award appellate attorneys' fees do so for successfully defending a judgment on appeal. … Significantly, Schwartz-Tallard also reached this outcome after carefully considering the purpose of § 362(k). If a creditor unsuccessfully appeals a bankruptcy court's judgment in favor of a debtor, it stands to reason that the party who violated the stay should continue to pay for its harmful behavior by compensating the debtor for its appellate attorneys' fees and costs."

 

The Ninth Circuit then noted that "courts also grant appellate attorneys' fees in fee-shifting statute cases when, as here, parties successfully challenge initial judgments on appeal. … Indeed, we are not aware of any authority suggesting that, although fees may be awarded under a fee-shifting statute for defending a judgment on appeal, they are not available for successfully challenging the judgment as inadequate. As note, the firmly established principle is that 'attorneys fees may be awarded for time devoted in successfully defending appeals of or challenges to the trial court's award of attorney's fees.'"

 

The Court concluded that although it was "unaware of any previous case that has analyzed § 362(k)'s application of this principle, the purpose of § 362(k) strongly favors the outcome we now reach." Because the Ninth Circuit found that § 362(k) is meant to protect debtors when a creditor violates the automatic stay and "thus seeks to make debtors whole, as if the violation never happened, to the degree possible[,] [t]his reasonably includes awarding attorney's fees and costs on appeal to a successful debtor, even when the debtor must bring the appeal."

 

Accordingly, the trial court's order refusing to award the debtors their attorneys' fees and costs incurred on appeal was reversed, and the case remanded to the trial court, with instructions to remand to the bankruptcy court to determine the amount of reasonable appellate attorney's fees and costs.

 

 

 

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

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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