FYI: 9th Cir Rules Letter's 'Benefits' of Paying Time-Barred Debt Not Misleading Under FDCPA, CFPB to Address SOL Disclosures

The U.S. Court of Appeals for the Ninth Circuit recently held that a collection letter offering payment options on a time-barred debt and listing "benefits" of paying the debt was not deceptive or misleading under the federal Fair Debt Collection Practices Act.

 

Meanwhile, the CFPB is expected to take up the issue of time-barred debt disclosures early next year.

 

The Ninth Circuit's opinion is available at:  Link to Opinion

 

Consumer Not Mislead by "Will Not Sue" Disclosure

 

The consumer received a letter that offered three payment options, two of which involved monthly payments. The letter then listed "benefits" to paying the debt, including saving money, stopping collection communications, and obtaining "peace of mind."

 

The letter contained the following statute-of-limitations (SOL) disclosure about two-thirds of the way down the first page: "The law limits how long you can be sued on a debt and how long a debt can appear on your credit report. Due to the age of this debt, we will not sue you for it or report payment or non-payment of it to a credit bureau."

 

The consumer argued that the letter was deceptive or misleading under 15 U.S.C. § 1692e because (1) the SOL disclosure said that the creditor "will not sue," instead of conveying that the collector could not sue as a matter of law; (2) the letter did not warn the recipient that a payment could revive or restart the statute of limitations; and (3) the letter touted various "benefits" to paying the debt but did not inform the consumer that the best option for dealing with a time-barred debt is to ignore it. The Ninth Circuit rejected each argument.

 

The Court held that the least sophisticated consumer would not be deceived or misled by the SOL disclosure because the statement that the collector "will not sue" was immediately preceded by a sentence explaining that "[t]he law limits how long you can be sued on a debt…" Therefore, the Court found that a consumer would naturally conclude that the debt was time barred. The Court also noted that nothing in the letter falsely implied that the collector could sue the consumer; and the Court specifically pointed out that the letter did not include a "settlement offer," which other circuits found could falsely imply that the debt is enforceable in court.

 

The consumer resided in Idaho, where a partial payment on a time-barred debt can restart the statute of limitations. However, the card agreement between the original creditor and the consumer provided that Nevada law governed the account. Under Nevada law, a partial payment on a time-barred debt will not restart the limitation period.

 

Not Required to Disclose "Partial Payment" Can Revive SOL

 

The consumer asserted that a revival warning was required regardless of which state's law applied. If Idaho law applied, then he could lose the protection of the statute of limitations by making a payment on his debt. If Nevada law applied, he argued that a payment, even if it did not restart the limitation period, would leave him in a worse position because he would be forced to argue complicated choice-of-law issues in response to a lawsuit.

 

The Court disagreed and explained that while the FDCPA requires collectors to give certain disclosures, such as the "Mini-Miranda" and the disclosures required by 15 U.S.C. § 1692g, "nothing in the FDCPA requires debt collectors to disclose that partial payments on debts may revive the statute of limitations in certain states."

 

"Benefits" of Payment Language Not Deceptive

 

Finally, the Court rejected the consumer's argument that the letter was deceptive because it listed "benefits" to paying the time-barred debt and failed to convey that consumers have the option of paying nothing. The Court noted that in most states, including Idaho and Nevada, the running of the statute of limitations does not extinguish the debt, it merely forecloses a judicial remedy. Therefore, there is "nothing inherently deceptive or misleading in attempting to collect a valid, outstanding debt, even if it is unenforceable in court."

 

The Court explained that because in most states a time-barred debt is still legally owed, it is not deceptive to say that the consumer will save money by paying a discounted amount. Also, collectors are not obligated to inform consumers that they do not have to pay their debt to stop communications because they can also stop communications by exercising their rights under 15 U.S.C. § 1692c(c). Finally, saying that a consumer can obtain "peace of mind" by paying the debt does not imply a threat of suit when the communication also discloses that the creditor will not sue the consumer.

 

Ruling Aligns With 6th and 11th Circuits, But Not 7^th Circuit

 

The SOL disclosure at issue in this case is one that was mandated by the FTC and the CFPB in consent orders, and it is substantially similar to those required by legislation in California, Connecticut, and Texas. Furthermore, the Sixth Circuit and the Eleventh Circuit have each noted that the use of a similar SOL disclosure could remedy any false implication that a time-barred debt is enforceable in court.

 

On the other hand, the Seventh Circuit has held that using only the second sentence of the disclosure (informing the consumer that the creditor will not sue) is insufficient without the first sentence informing the consumer that "the law limits how long you can be sued on a debt." The Seventh Circuit also found that "the FDCPA prohibits a debt collector from luring debtors away from the shelter of the statute of limitations without providing an unambiguous warning that an unsophisticated consumer would understand."

 

CFPB Likely to Propose Disclosures in 2020

 

Further clarity might come in the form of supplemental CFPB rulemaking. The Bureau's Notice of Proposed Rulemaking released in May 2019 did not address time-barred debt disclosures but the NPRM noted that the Bureau planned to test disclosures and might issue a disclosure proposal at a later date. Earlier this month, Director Kraninger told a group of state attorneys general that the Bureau intends to release a Supplemental Notice of Proposed Rulemaking on this issue "very early in 2020."

 

 

 

 

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 

 

FYI: 6th Cir BAP Holds So-Called "910 Claims" To Be Treated Like Other Allowed Secured Claims

The Bankruptcy Appellate Panel for the U.S. Court of Appeals for the Sixth Circuit ("Sixth Circuit BAP") recently reversed a lower bankruptcy court's ruling that rejected an objection to the confirmation of debtors' chapter 13 plan asserted by the holder of a claim relating to vehicle financing incurred within 910 days of the bankruptcy petition (a "910 claim").

 

In so ruling, the Sixth Circuit BAP held that a creditor's objection to confirmation must be sustained when a chapter 13 plan fails to provide that the holder of a 910 claim retains the lien securing its claim until the earlier of payment of the underlying debt determined under non-bankruptcy law or discharge under section 1328.

 

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

 

In March 2017, a consumer financed the purchase of a used vehicle through financing provided by a creditor (the "Creditor").  In July 2018 — less than 910 days after purchase of the vehicle — the consumer and his wife ("Debtors") filed for chapter 13 bankruptcy petition. 

 

The proposed Chapter 13 plan listed the Creditor's claim secured by the vehicle valued at $10,000 (the "910 claim") under Official Form 113, Section 3.3 ("Secured claims exclude from 11 U.S.C. 506"), which provided for monthly plan payments to the Creditor. 

 

Unlike Section 3.2 ("Request for valuation of security, payment of fully secured claims, and modification of undersecured claims"), Section 3.3 does not discuss lien retention for claims treated thereunder.  Thus, the proposed plan did not include language addressing the Creditor's retention of its lien and did not include a nonstandard plan provision I Section 8.1 concerning retention of the Creditor's lien.

 

The Creditor timely filed the 910 Claim secured by the vehicle, and objected to the confirmation of Debtor's plan, contending that it did not provide that the lien upon the vehicle would be retained until the Debtors paid their entire debt under non-bankruptcy law or received their discharge under Section 1328 (the "Lien Retention Language").  In November 2018, the bankruptcy court confirmed the Debtor's plan subject to resolution of the Creditor's objection.

 

Thereafter, the bankruptcy court overruled the Creditor's objection, holding that although the Creditor held a secured claim that was not subject to bifurcation under section 506 of the bankruptcy code owing to the so-called "hanging paragraph" in § 1325(a) (stating that section 506 does not apply to claims where the collateral for the debt is a motor vehicle for debtor's personal use, the creditor has a purchase money security interest securing the debt, and the debt was incurred within the 910 days preceding the date of the filing of the petition) the court was "not convinced that this means § 1325(a)(5) applies to a 910-day claim exactly as it would to any other allowed, secured claim."

 

After the Creditor's motion for reconsideration was denied, the creditor appealed the order overruling its objection to the 6th BAP.

 

On appeal, the lone issue presented to the BAP was whether an objection to confirmation must be sustained when a chapter 13 plan fails to provide that the holder of a '910 claim' retain[s] the lien securing its claim until the earlier of payment of the underlying debt determined under non-bankruptcy law or discharge under section 1328.

 

Initially, the Sixth Circuit BAP cited its holding in holding in Shaw v. Aurgroup Fin. Credit Union, 552 F.3d 447 (6th Cir. 2009)  which rejected the debtor's proposal to bifurcate (i.e. cramdown) a 910 claim, holding that the "hanging paragraph" of § 1325(a)(5) cannot be bifurcated.  Shaw, 552 F.3d at 451–52.

 

Here, as in Shaw, there was no dispute that the Creditor holds a valid 910 claim.  Thus, the Court noted, the imperative question was whether the Debtor's plan properly treated the 910 claim under one of the three available options under section 1325(a)(5).  Shaw, 552 F.3d at 462 (bankruptcy courts have no discretion to confirm a plan if fails to satisfy the provisions of section 1325(a)(5) in treating a secured claim).

 

As you may recall, a debtor's proposed plan must accommodate each allowed, secured creditor in one of three ways under § 1325(a)(5): (1) by obtaining the creditor's acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by permitting the creditor to both retain the lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total "value, as of the effective date of the plan, . . . is not less than the allowed amount of such claim." § 1325(a)(5); Till v. SCS Credit Corp., 541 U.S. 465, 468, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (2004). 

 

Here, Creditor did not accept the treatment of its claim under Debtors' proposed plan (which would satisfy § 1325(a)(5)(A)) and Debtors did not surrender the Vehicle (which would satisfy § 1325(a)(5)(C)). Therefore, Debtors' plan was required to satisfy § 1325(a)(5)(B) to achieve confirmation over Creditor's objection. 

 

Although Debtors' plan included deferred cash payments to Creditor in equal monthly amounts, satisfying § 1325(a)(5)(B)(ii) and (iii), it failed to "provide that" Creditor retains its lien on the Vehicle as § 1325(a)(5)(B)(i)(I) requires.  See 11 U.S.C. § 1325(a)(5)(B) ("the plan must provide that (I) the holder of such claim retain the lien securing such claim until the earlier of—(aa) the payment of the underlying debt determined under non-bankruptcy law; or (bb) discharge under section 1328… "). 

 

Thus, the Sixth Circuit BAP concluded that the bankruptcy court erred in confirming Debtors' plan over Creditor's objection based on the statute's plain language and the Sixth Circuit's prior holding in Shaw, because the plan failed to satisfy § 1325(a)(5) by not treating the 910 Claim in full compliance with § 1325(a)(5)(B). 

 

Lastly, the BAP rejected the Debtors' argument that inclusion of Lien Retention Language in a nonstandard provision in Debtors' plan to address the Creditors' objection violated Rule 9009(a), as the rule does not prohibit a chapter 13 plan, crafted from Official Form 113, from containing a nonstandard provision affording a 910 claimant lien retention rights in accordance with § 1325(a)(5)(B)(i)(I).

 

Accordingly, the bankruptcy court's order overruling the Creditor's objection to the confirmation of Debtors' chapter 13 plan was reversed, and the case was 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

 

 

 

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