FYI: 11th Cir Holds No Violation of Bankruptcy Discharge For "Informational Statement"

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the bankruptcy court's denial of a debtor-borrower's motion for sanctions, which alleged that her mortgage loan servicer violated her bankruptcy discharge by mailing a communication in a purported attempt to collect upon a discharged debt.

 

In so ruling, the Eleventh Circuit held that the purportedly violative letter, entitled "Informational Statement," which provided an amount due, due date, and payment instructions, coupled with a disclaimer, did not constitute an unlawful attempt at debt collection, because the servicer had not foreclosed the subject property and the borrower had the option to repay the debt under section 524(f) of the Bankruptcy Code, and thus, was not designed to have the objective effect of pressuring the borrower to pay a discharged debt.

 

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

 

In December 2010, a borrower on a mortgage loan ("Borrower") filed a voluntary petition for bankruptcy under Chapter 13.  Her bankruptcy schedules listed the mortgage on non-homestead property, which she indicated she would surrender.  Her Chapter 13 plan provided that "[s]ecured creditors, whether or not dealt with under the Plan, shall retain the liens securing such claims." Prior to the Borrower's completion of payments under her Chapter 13 plan and discharge of the debt, the Mortgage was transferred to a new loan servicer ("Servicer"). 

 

The Servicer was notified of the discharge, which prohibited any attempt to collect debts from the Borrower.  However, the discharge order also provided that "a creditor may have the right to enforce a valid lien, such as a mortgage or security interest, against the [Borrower's] property after the bankruptcy, if that lien was not avoided or eliminated in the bankruptcy case," and that the Borrower may voluntarily pay any debt that has been discharged." 

 

Even after the discharge, the Servicer did not foreclose the property; thus, the Borrower could have voluntarily paid the amounts due to retain the property.

 

About four months after entry of the discharge order, the Servicer began mailing monthly mortgage statements to the Borrower, providing the amount due, due date, payment instructions, and a disclaimer that the statements were not debt collection.  After the Servicer continued to mail statements to the Borrower despite receipt of a cease and desist letter from her attorney, the Borrower filed a motion for sanctions in bankruptcy court alleging violations of the discharge injunction under section 11 U.S.C. § 524 of the bankruptcy code, the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA") and the Florida Consumer Collection Practices Act, Fla. Stat. § 559.55, et seq. ("FCCPA").  The parties reached a settlement to resolve the Borrower's motion for sanctions.

 

After the settlement, the Borrower received a communication from the Servicer entitled "Informational Statement" which again contained an amount due, and deadline and instructions to tender payment. 

 

The Informational Statement also contained a lengthy disclaimer, that "[the] statement is sent for informational purposes only and is not intended as an attempt to collect, assess, or recover a discharged debt from you, or as a demand for payment from any individual protected by the United States Bankruptcy Code. If this account is active or has been discharged in a bankruptcy proceeding, be advised this communication is for informational purposes only and is not an attempt to collect a debt. Please note, however [Servicer] reserves the right to exercise its legal rights, including but not limited to foreclosure of its lien interest, only against the property securing the original obligation."

 

In response to the Informational Statement, the Borrower: (i) filed suit against the Servicer in federal trial court alleging a violation of the FDCPA, and; (ii) filed a second motion for sanctions against the Servicer in the bankruptcy proceedings, again alleging violations of the discharge injunction under section 11 U.S.C. § 524 of the bankruptcy code.  The federal trial court case settled, while the bankruptcy court denied the Borrower's motion for sanctions, holding that the Information Statement was not an attempt to collect the discharged mortgage loan debt, and therefore did not violate the discharge injunction. 

 

The Borrower appealed the denial of the motion for sanctions to the trial court, which affirmed the bankruptcy court's opinion, and rejected her request to apply the FDCPA's "least sophisticated consumer" standard to section 524.  The instant appeal followed.

 

Initially, the Eleventh Circuit noted that it "sits as a second court of review and thus examines independently the factual and legal determinations of the bankruptcy and employs the same standards of review as the district court." In re Ocean Warrior, Inc., 835 F.3d 1310, 1315 (11th Cir. 2016) (internal citations omitted).

 

Here, the Borrower appealed the trial court's affirmation of the bankruptcy court's denial of her motion for sanctions, and separately, its decision to dispose of the motion without an evidentiary hearing.

 

As you may recall, Section 524(a)(2) provides that a discharge of debt in a bankruptcy proceeding "operates as an injunction against the commencement or continuation of . . . an act . . . to collect . . . any such [discharged] debt." 11 U.S.C. § 524(a)(2).  This injunction is enforced through section 105, whereby the bankruptcy court "may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a).  

 

Together, the Court held, the sections authorize the bankruptcy court to impose civil contempt sanctions "when there is no objectively reasonable basis for concluding that the creditor's conduct might be lawful under the discharge order" or "no fair ground of doubt as to whether the order barred the creditor's conduct."  Taggart v. Lorenzen, 139 S. Ct. 1795, 1799, 1801 (2019).

 

Thus, the Eleventh Circuit was first tasked first with determining whether the Information Statement's objective was to pressure the Borrower to repay a discharged debt, and if so, to evaluate whether it was sanctionable under section 105.  In re McLean, 794 F.3d 1313, 1322 (11th Cir. 2015); Taggert, 139 S. Ct. at 1799.

 

Reviewing the Informational Statement, the Eleventh Circuit found that the inclusion of an "amount due," "due date" and negative escrow balance did not diminish the disclaimer language in bold typeface on the first page of the communication.  The Court further noted that the Borrower had the option to repay the debt under section 524(f) of the bankruptcy code, because the Servicer had not completed a foreclosure on the property. 

 

The Borrower submitted that the Eleventh Circuit should adopt the "least sophisticated consumer" standard—the standards applied by the trial court in denying the Servicer's motion to dismiss in the separate FDCPA action—arguing that "underlying questions [of § 524 and the FDCPA] are designed to protect the same vulnerable parties from the same improper conduct." 

 

The Eleventh Circuit declined to incorporate the "least sophisticated consumer" analysis for alleged bankruptcy discharge violations, noting that what is considered "debt collection" may vary between statutory schemes.  See Midland Funding, LLC v. Johnson, 137 S. Ct. 1407, 1414 (2017) ("The [FDCPA] and the [Bankruptcy] Code have different purposes and structural features. The [FDCPA] seeks to help consumers . . . . The Bankruptcy Code, by way of contrast, creates and maintains what we have called the delicate balance of a debtor's protections and obligations.") (citation and internal quotations marks omitted).

 

Here, the Court noted, the statutory scheme under section 524 of the Bankruptcy Code allows for creditors, such as the Servicer, to send potentially helpful informational statements to debtors, such as Borrower, without simultaneously casting those statements as debt collection. 

 

Accordingly, the Eleventh Circuit concluded that the Informational Statement was not designed to have the "objective effect" of "pressur[ing] the debtor to pay a discharged debt," (In re McLean, 794 F.3d at 1322), and was not an unlawful attempt at debt collection in violation of § 524.

 

Because the Eleventh Circuit held that the Informational Statement did not violate the bankruptcy discharge injunction, it did not have to consider whether sanctions were appropriate under section 105 of the Bankruptcy Code. 

 

However, the Eleventh Circuit nonetheless noted that sanctions were unavailable under the rigorous "no fair ground of doubt" standard recently established by the Supreme Court in Taggert, which would require the court to hold that "there [was] no objectively reasonable basis for concluding that [Servicer's] conduct might be lawful."  Taggard, 139 S. Ct. at 1799.

 

Lastly, the Court declined to accept the Borrower's argument that she was improperly denied an evidentiary hearing on her motion for sanctions, noting that it was not requested by either party, and the bankruptcy court needed only to review the Informational Statement to determine whether its objective effect was to pressure a debtor to repay a discharged debt, and that the Borrower's subjective belief was irrelevant.  In re McLean, 794 F.3d at 1324.

 

For the above reasons, the bankruptcy court's denial of the Borrower's motion for sanctions without hearing was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 3rd Cir Vacates Cy Pres Class Settlement Citing Trial Court's Failure to Scrutinize Scope of Release

The U.S. Court of Appeals for the Third Circuit recently vacated an order approving the settlement of a class action certified under Rule 23(b)(2), where the only benefit to the class was the defendant's payment of a cy pres award to organizations that promoted data privacy.

 

In so ruling, the Third Circuit held that the trial court did not adequately scrutinize the settlement agreement's broad release of claims for money damages, and the parties' designation of cy pres recipients, as required by Rule 23(e).

 

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

 

An internet technology company created a web browser "cookie" that tracked an internet user's data.  For some users, the cookie may have operated even if the user configured the browser's privacy settings to prevent tracking.

 

The class plaintiffs claimed that the defendant invaded their privacy under the California constitution and the state tort of intrusion upon seclusion.  The plaintiffs asserted additional claims that were dismissed with the dismissal previously affirmed on appeal.

 

On remand, the parties agreed to a settlement and moved for certification under Rule 23(b)(2) and approval of the settlement. 

 

As you may recall, Rule 23(e) requires that courts review proposed settlements for fairness, reasonableness, and adequacy.

 

In deciding whether to approve a class action settlement, a court considers the Girsh factors:  "(1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class action through trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; [and] (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation."  Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975).

 

The defendant agreed to stop using the cookies and to pay $5.5 million to cover class counsel's fees and costs, incentive awards for the named class representatives, and cy pres distributions.  The class members did not receive any direct compensation.  The six cy pres recipients were data privacy organizations selected by both parties.

 

In exchange, the defendant would obtain, among other things, a class wide release of all class member claims, including for money damages that did or could stem from the subject matter of the litigation.

 

The lone objector challenged the certification and the terms of the approved settlement.  He argued that (1) the cy pres money belonged to the class as compensation, (2) the class should not have been certified due to inadequate representation, and (3) the cy pres recipients raised a conflict of interest concern because of the pre-existing relationship between the defendant and class counsel.

 

The trial court rejected these arguments and approved the settlement, finding that "the nature of the likely compensation to the class members has always been complicated by the substantial problems of identifying the millions of potential class members and then translating their alleged loss of privacy into individual cash amounts." 

 

It further found that "payments to absent class members would be logistically burdensome, impractical, and economically infeasible, resulting (at best) with direct compensation of a de minim[i]s amount."

 

Because the cy pres money would be used by "preeminent institutions for research and advocating for online privacy," the trial court held that the cy pres awards bore "a direct and substantial nexus to the interests of the class members."

 

The trial court noted the objections to the pre-existing relationships between defendant, class counsel, and the cy pres recipients, and in one sentence concluded that "no conflict of interest" had "undermine[d] the selected cy pres recipients."

 

The objector timely appealed.

 

After oral argument, the Third Circuit held the appeal in abeyance pending the Supreme Court's resolution of Frank v. Gaos, which also involved a cy pres-only class action settlement based on alleged privacy violations.  139 S. Ct. 1041, 1043-44 (2019).

 

The Gaos court did not review the class action settlement in that case.  Instead, it vacated the settlement under its decision in Spokeo, Inc. v. Robins, which clarified the concreteness requirement of the injury-in-fact prong of Article III standing, and remanded the case to resolve the standing question. 

 

In the wake of Spokeo, the Third Circuit held that the defendant's alleged tracking of a person's internet browser activity without authorization was an intrusion to privacy and conferred Article III standing. 

 

Next, the Third Circuit observed that a settlement is presumed to be fair if: "(1) the negotiations occurred at arms length; (2) there was sufficient discovery; (3) the proponents of the settlement are experienced in similar litigation; and (4) only a small fraction of the class objected."  NFL Concussion Litig., 821 F.3d 410, 436 (3d Cir. 2016).

 

The Third Circuit described the usual cy pres case, where money is leftover after distributions because class members cannot be located or the parties overestimated the projected distribution.  In those cases, parties may seek to distribute the excess settlement funds for their next best use -- a charitable purpose reasonably approximating the interest pursued by the class.

 

The Third Circuit noted that a settlement whose only monetary distributions are to class counsel, class representatives, and cy pres recipients present a heightened risk of conflict because the settlement clearly benefits these parties, "while any benefit to other class members [was] indirect and inconsequential monetarily."

 

The defendant argued that the settlement fund was never intended to compensate class members monetarily.  Rather, the fund enhanced the settlement deterrent effect by funding data privacy institutions that will work to prevent similar potential privacy invasions from occurring in the future. 

 

The Third Circuit agreed, explaining that "[d]irect monetary distributions typically would not accomplish the purpose of a (b)(2) class," and it was not an inherent abuse of discretion for the trial court to allow a cy pres only settlement.

 

However, in the Third Circuit's view, the trial court failed to adequately consider two features of the settlement agreement.

 

First, the parties sought to certify an injunction class under Rule 23(b)(2), not a damages class under Rule 23(b)(3), and thus avoided the heightened certification and notice requirements that apply to the latter.

 

Nevertheless, the defendant obtained the benefits that a Rule 23(b)(3) class gives to the defendant and class counsel, namely a broad class wide release of claims for money damages and a percentage of fund calculation of attorneys' fees for class counsel. 

 

The Third Circuit held that the trial court's failure to scrutinize this aspect of the settlement agreement prevented it from reviewing its fairness, reasonableness, and adequacy.

 

On remand, the Third Circuit instructed the trial court to determine whether the defendant can obtain a class wide release of claims for money damages in a Rule 23(b)(2) settlement, and if so, whether a release of that kind requires a heightened form of notice either under Rule 23(c)(2)(B) or due process tenets.

 

Second, the Third Circuit observed that the trial court did not adequately scrutinize the selection of the specific cy pres recipients due to the longstanding ties that the defendant had to a number of the cy pres recipients.

 

Moreover, the trial court made no finding that the class's nationwide nature was reflected in the geographical scope of the cy pres recipients' work. 

 

The Third Circuit acknowledged that it has never addressed the issue of when a prior relationship between a cy pres recipient and one of the litigants in a class actions undermines the proposed settlement's fairness, but regardless of the relevant standard, it concluded that the trial court's failure to conduct fact finding regarding the relationship between the cy pres recipients and the defendant warranted remand. 

 

On remand, the Third Circuit instructed the trial court to consider whether these cy pre recipients have significant prior affiliations with the defendant, class counsel, or the court, and if so, whether the selection process failed to satisfy Rule 23(e)(2) by raising substantial questions of whether the recipients were chosen on the merits.

 

Accordingly, the Third Court vacated the order approving the settlement and remanded for further proceeding consistent with its opinion.

 

 

 

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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