Thursday, October 31, 2019

FYI: 5th Cir Holds BK Courts Cannot Enforce Discharge Injunctions from Other Districts

The U.S. Court of Appeals for the Fifth Circuit recently held that a bankruptcy court lacks the power to enforce discharge injunctions entered in other districts, and that the debtors' particular private education loans were not excepted from discharge.

 

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

 

Two debtors obtained student loans, one to prepare for his bar exam, and the other to fund tuition and expenses to attend a vocational school, from a "for-profit, public corporation whose loans are not part of any governmental loan program." The loans were then transferred to a loan servicing company.

 

Both debtors filed for Chapter 7 bankruptcy, one in Texas and the other in Virginia. Both listed the loans on their schedules and neither disputed the debt. Both received general discharges. After the discharges, the loan servicer made telephone calls and sent e-mails demanding repayment.

 

One of the debtors filed an adversary proceeding in the same Texas bankruptcy court that granted him the discharge, seeking a temporary injunction barring further collection efforts, a declaratory judgment that his student loan had been discharged, and an order holding the loan servicer in contempt for violating the discharge injunction.

 

The second debtor joined in an amended complaint "seeking to certify a nationwide class of those who (1) obtained prepetition private education loans from [the loan servicer] or related companies to cover expenses at an institution not accredited under Title IV; (2) later filed for bankruptcy and were issued discharge orders; (3) have never reaffirmed their prepetition private education loan debt; and (4) are being induced to pay their allegedly discharged private education loans."

 

The loan servicer moved for summary judgment, "arguing that a bankruptcy court has no jurisdiction to interpret and enforce discharge orders entered by courts in other judicial districts and that the plaintiffs' education loans were nondischargeable."

 

The bankruptcy court denied the motion, finding that "the general rule giving an issuing court sole authority to enforce its own injunctions [did not apply] to the automatic injunction created by statute when a bankruptcy court grants a discharge under 11 U.S.C. § 727." The court also held that the subject "private loans" "were not within the ambit of the Bankruptcy Code's bar on the discharge of some student loans."

 

The bankruptcy court "authorized an interlocutory appeal, then certified the order for direct appeal [to the 5th Circuit], eschewing the usual initial appellate review by a district court." A panel of the Fifth Circuit "granted the unopposed motion to authorize the appeal."

 

On appeal, the loan servicer argued "that the bankruptcy court either has no jurisdiction to enforce the statutory injunctions arising from a bankruptcy discharge that another bankruptcy court ordered, or at least for prudential reasons may not do so. Second, … that the plaintiffs' education loans are within the category of loans that under the Bankruptcy Code are nondischargeable."

 

The Fifth Circuit first addressed whether "a bankruptcy court other than the one that granted the discharge [may] enforce the injunction[,]" finding that "[t]he question of a bankruptcy judge's injunctive reach within its own district has not been answered."

 

After analyzing the history of the bankruptcy discharge injunction, the Court found that "Congress's decision to eliminate language that seemed to allow enforcement of the discharge injunction in a new district gives weight to the argument that after the 1978 Bankruptcy Code was adopted, enforcement in … a different district was prohibited."

 

Turning to "the law that exists today[,]" the Fifth Circuit reviewed opinions from "[o]ther circuits [that] have insisted on a return to the bankruptcy court whose discharge order created the injunction[,] including the Eleventh Circuit, which] has held that only the bankruptcy court issuing the discharge has jurisdiction to enforce the injunction through contempt."

 

Although not willing to go as far as the Eleventh Circuit, the Fifth Circuit "adopt[ed] the language of the Second Circuit that returning to the issuing bankruptcy court to enforce an injunction is required at least in order to uphold 'respect for judicial process[,]' concluding that …[t]he bankruptcy court erred in holding that it could address contempt for violations of injunctions arising from discharges by bankruptcy courts in other districts."

 

Because "the bankruptcy court did not reach the issue of certification of a class," the Court warned "that because of the limitation on enforcement we have just identified, and indeed because we are aware of no prior certification of a class that includes debtors whose discharges were entered by bankruptcy courts in other districts, certifying such a class would be highly dubious."

 

The Court also left "for the court on remand the separate issue … of whether that court has authority to enforce the injunctions arising from discharges entered by any bankruptcy court in the same judicial district."

 

Turning to the issue of whether the subject loans were dischargeable, the Court examined the language of 11 U.S.C. § 523(a), which excepts from discharge certain educational loans "unless excepting such debt from discharge … would impose an undue hardship on the debtor and the debtor's dependents[.]" It then discussed "some of the prior statutory language that the current statute has replaced or supplemented" before concluding that "[t]he loans at issue here, though obtained in order to pay expenses of education, do not qualify as 'an obligation to repay funds received as an educational benefit, scholarship, or stipend' [under subsection 523(a)(8)(A)(ii)] because their repayment was unconditional. They therefore are dischargeable."

 

Accordingly, the Fifth Circuit reversed "the bankruptcy court's determination that it has authority to enforce a discharge injunction entered by a different district's bankruptcy court[,] … [affirmed] the determination that loans such as those in issue here are dischargeable" and remanded the case to the bankruptcy court.

 

 

 

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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Tuesday, October 29, 2019

FYI: 5th Cir Holds Bankruptcy Discharge Violations Not Always Subject to Arbitration

The U.S. Court of Appeals for the Fifth Circuit recently affirmed a bankruptcy court order denying a bank's motion to compel arbitration, holding that when a debtor seeks to enforce a discharge injunction, a bankruptcy court may decline to compel arbitration because it implicates a bankruptcy court ability to enforce its own orders.

 

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

 

A borrower took out a student loan and subsequently filed for Chapter 13 bankruptcy. The bankruptcy court confirmed the plan.  The borrower made the payments to her creditors, including her student loan owner ("bank"), and received a discharge. 

 

The borrower initiated an adversary action in bankruptcy court alleging that the discharge included her student loan.  The bank disagreed and moved to compel arbitration.

 

The loan agreement contained the following arbitration provision:

 

"Any controversy or claim arising out of or related to this Note, or an alleged breach of this Note, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon the arbitration award may be entered in any court having jurisdiction."

 

The bankruptcy court denied the motion to compel arbitration, and certified its order for interlocutory review.  This appeal followed.

 

The Fifth Circuit began its analysis by noting that under the Federal Arbitration Act courts must enforce "covered arbitration agreements according to their terms."

 

However, "a contrary congressional command" may override this mandate. Shearson v. McMahon, 482 U.S. 220, 226 (1987). A party arguing that it is not possible to reconcile the two statutes, "and that one displaces the other, bears the heavy burden of showing a clearly expressed congressional intention that such a result should follow." Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, 1624 (2018).

 

The Fifth Circuit observed that is has applied McMahon to hold "that bankruptcy courts may decline to enforce arbitration clauses when two requirements are met." To do so, "the proceeding must adjudicate statutory rights conferred by the Bankruptcy Code and not the debtor's prepetition legal or equitable rights." In re Nat'l Gypsum Co., 118 F.3d 1059, 1069 (5th Cir. 1997).

 

Further, a bankruptcy court may only decline to enforce arbitration agreements when compelling arbitration "would conflict with the purposes of the Bankruptcy Code." The Bankruptcy Code's purposes include "centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders."

 

Thus, in National Gypsum, the Fifth Circuit "held that bankruptcy courts need not enforce agreements to arbitrate whether a creditor's efforts to collect a debt violated a discharge order." 11 U.S.C. § 524(a). This is because an action to enforce a debtor's right to be free from collections efforts on a discharged debt implicates a bankruptcy court ability to enforce its own orders. It "would be inconsistent with the Bankruptcy Code" to require arbitration in this situation.

 

The bank argued that the Fifth Circuit's holding in National Gypsum — that bankruptcy courts may refuse to compel arbitration when a debtor seeks to enforce a discharge injunction— is no longer good law after the Supreme Court's decision in Epic Systems. The Fifth Circuit rejected this argument finding that Epic Systems actually supports National Gypsum's "doctrinal foundation, i.e., McMahon, remains sound."

Initially, the Court noted, Epic Systems cites McMahon for support. Further, although there is a difference of tone, McMahon and Epic Systems apply a nearly identical test to determine if a statute overrides the FAA's requirement "to enforce arbitration agreements according to their terms."

 

The Fifth Circuit reasoned that the only difference is that Epic Systems indicates that the party arguing that two statutes cannot be harmonized bears the heavy burden to show a "clearly expressed" congressional intention mandating this result whereas McMahon requires the moving party to show a "deducible" congressional intent. This slight difference in emphasis "is not an unequivocal direction to overrule our precedent."

 

Moreover, the Court continued, even if the legislative history discussion in Epic Systems partially overrules McMahon to require a "clearly expressed" congressional intent instead of a "deducible" congressional intent, that would not affect National Gypsum's validity because National Gypsum did not rely on congressional intent. Instead, National Gypsum looked to the Bankruptcy Code's purpose, which "remains a valid tool for determining whether a given statute displaces the FAA."  Consequently, the Fifth Circuit determined "that National Gypsum's application of McMahon remains good law following Epic Systems."

 

Therefore, the Fifth Circuit affirmed the bankruptcy court's order denying the bank's motion to compel arbitration.

 

 

 

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

 

 

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Sunday, October 27, 2019

FYI: 7th Cir Confirms Charging Unconscionably High Prices Alone is Not Sufficient for UDAP Claim

The U.S Court of Appeals for the Seventh Circuit recently held that charging too much for goods or services, standing alone, is insufficient to assert a claim under the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA").

 

Accordingly, the Seventh Circuit affirmed the trial court's dismissal of a putative class action filed by condominium owners related to fees charged by a property management company and its vendor to provide various documents required to be provided to prospective purchasers of condominium units.

 

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

 

The plaintiffs ("Plaintiffs") were owners of condominium units in two different buildings.  The condominium associations for both buildings retained a property management company ("Company") to manage the day-to-day operations. 

 

The Plaintiffs put their units on the market and found willing buyers.  Under the Illinois Condominium Property Act ("Condominium Act"), the condo owners were then required to provide the prospective purchasers with a number of documents, including the condo association's rules, declarations, and other documents, which are commonly referred to as the "disclosure documents."

 

Section 605/22.1(b) of the Condominium Act provides that the condo association shall furnish a unit owner with the required documents within 30 days of a written request.  Section 605/22.1(c) provides that the association may charge the unit owner a "reasonable fee covering the direct out-of-pocket cost of providing such information and copying."

 

The Company contracted with an online document service company ("Vendor") to provide a service that assembles the required disclosure documents in portable document form ("PDF"), giving condominium owners almost instantaneous electronic access to the disclosure documents.  The two Plaintiffs were charged $240 and $365, respectively, for their disclosure documents.

 

The Plaintiffs then filed a lawsuit against the Company and Vendor seeking to represent a proposed class of condominium owners "who were charged by or paid a fee" to the Vendor for disclosure documents in connection with a condominium resale.  The Complaint asserted claims for: (1) violation of the Condominium Act, (2) violation of ICFA, (3) breach of fiduciary duty, (4) civil conspiracy, and (5) unjust enrichment.

 

After the trial court dismissed the complaint, the Plaintiffs appealed. 

 

On appeal, the Seventh Circuit first analyzed the Plaintiffs' claim under the Condominium Act.  The Court noted that "[t]he statute doesn't provide an express private remedy, so the plaintiffs advance an argument that a right of action exists by necessary implication." 

 

Under Illinois law, "courts will recognize an implied right of action only if (1) the plaintiff is within the class of members the statute was enacted to benefit; (2) the plaintiff's injury is one the statute was designed to prevent; (3) a private right of action is consistent with the underlying purpose of the statute; and (4) inferring a private right of action is necessary to provide an adequate remedy for statutory violations."  

 

"All four factors must be met before a court will recognize an implied remedy," but the Seventh Circuit determined that "[n]ot one of them is satisfied here."

As the Court explained, Illinois courts have previously concluded that section 22.1 of the Condominium Act "was clearly designed to protect prospective purchasers of condominium units," as its purpose was "to prevent prospective purchasers from buying a unit without being fully informed . . ."

 

Thus, owners/sellers "are not within the class of persons the statute was designed to protect, nor have they suffered an injury the statute was designed to prevent."  Therefore, "implying a remedy for condominium sellers is neither consistent with nor necessary to effectuate the statute's purpose."

 

Accordingly, the Seventh Circuit held "that section 22.1 does not confer an implied right of action on condominium owners," and the district court "properly dismissed the Condominium Act claim."

 

Turning to the ICFA claim, the Seventh Circuit first explained that it was effectuated to protect consumers "against fraud, unfair methods of competition, and other unfair and deceptive business practices."

 

"A trade practice may be deemed unfair if it (1) 'offends public policy'; (2) is 'immoral, unethical, oppressive or unscrupulous'; or (3) 'causes substantial injury to consumers.'"  It is not necessary to establish all three criteria.

 

The Seventh Circuit determined that the Plaintiffs' ICFA claim failed for several reasons. 

 

First, the Plaintiffs' claim relied almost entirely on the alleged violation of section 22.1 of the Condominium Act, but that provision places a duty on a condominium association, which was not named in the complaint. The Plaintiffs argued that the Company and Vendor could be liable for violating ICFA because they acted on behalf of the condominium association, but the Court noted that "[t]his argument distorts basic agency law; it is essentially 'the reverse vicarious liability.'"

 

"Thus stripped of its Condominium Act premise, the [ICFA] claim rests on nothing more than a generic allegation that [the Vendor] charged too much for a PDF of the disclosure documents."  However, "Illinois courts have held that 'charging an unconscionably high price generally is insufficient to establish a claim for unfairness.'"

 

Accordingly, the Seventh Circuit held that the trial court correctly dismissed the ICFA claim.

 

With respect to the three common law claims, the Seventh Circuit held that the unjust enrichment and civil conspiracy claims failed because they are not separate causes of action under Illinois law. 

 

Moreover, the breach of fiduciary duty claim failed because it alleged only that the Company and Vendor "aided and abetted" the breach of a fiduciary duty by the condominium associations, but "the complaint does not allege facts that, if true, could support an inference that the officers or board members of either condominium association committed a fiduciary breach." 

 

 

 

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

 

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and

 

Webinars

 

and

 

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