Friday, July 11, 2014

Collector Liable Under FDCPA for Filing Time-Barred Bankruptcy Claim

By Michael FullerThe Underdog Lawyer ®

On Thursday, the Eleventh Circuit Court of Appeals found a collector liable under the FDCPA for filing a proof of claim on a time-barred debt in bankruptcy.

A debt is considered 'time-barred' after the statute of limitations has expired. Time-barred debts are also known as 'zombie' debts or 'stale' debts.

Thursday's opinion, Crawford v. LVNV Funding, involved a consumer who agreed to pay his debts over time in a chapter 13 reorganization bankruptcy. The debt at issue was originally used to purchase furniture, before being transferred back and forth between various debt buyers.

What is the FDCPA?

The Fair Debt Collection Practices Act (FDCPA) is a federal consumer protection law. The FDCPA generally prohibits collectors from pursuing time-barred debts.

What is a Proof of Claim?

After a bankruptcy is filed, creditors can file proofs of claim to be paid by the trustee.

In this case, debt buyer LVNV Funding filed a proof of claim in Mr. Crawford's bankruptcy case.

The applicable Alabama statute of limitations expired three years after the last transaction date on Mr. Crawford's account. LVNV's claim was considered time-barred because Mr. Crawford's last payment was in 2001.

Thursday's Eleventh Circuit opinion touches on a decade-old Circuit split as to whether the Bankruptcy Code's remedial scheme impliedly repeals the FDCPA.

What is the Circuit Split?

A Circuit split occurs when Courts of Appeals differ about a legal issue. Circuit splits are disfavored because they create different sets of rules depending on what part of the country a consumer lives in.

The Circuit split in this case involves the issue of whether the Bankruptcy Code impliedly repeals the FDCPA. Under the "implied repeal" doctrine, an older law is repealed if its requirements contradict the requirements of a newer law.

Which States Allow FDCPA Protection in Bankruptcy?

Consumers in the following states ARE protected under the FDCPA from bankruptcy-related collections abuses:

- Delaware
- Illinois
- Indiana
- New Jersey
- Pennsylvania
- Wisconsin

See Simon v. FIA Card Services (3rd Cir. 2013) and Randolph v. IMBS (7th Cir. 2004).

Consumers in the following states are NOT protected under the FDCPA from bankruptcy-related collector abuses:

- Alaska
- California
- Connecticut
- Hawaii
- Idaho
- Montana
- Nevada
- New York
- Oregon
- Vermont
- Washington

See Simmons v. Roundup Funding, (2nd Cir. 2010) and Walls v. Wells Fargo (9th Cir. 2002).

Thursday, June 26, 2014

9th Circuit Holds Collector Liable under FDCPA for Letter Consumer Never Read

By Michael FullerThe Underdog Lawyer ®

Yesterday, the Ninth Circuit Court of Appeals ruled in favor of a consumer whose parents received a misleading collection letter resulting from the purchase of a Dell computer.

The Court's opinion, Tourgeman v Collins Financial Services, is very important for two reasons.

First, the opinion holds collectors liable under the FDCPA for failing to correctly list the name of original creditors. Second, the opinion holds collectors liable under the FDCPA for sending misleading letters, even if the letters aren't actually read by consumers.

How Does the FDCPA Work?

The FDCPA is the Fair Debt Collection Practices Act. 

An FDCPA violation is generally decided on a "strict liability" standard, similar to a speeding ticket. 

It doesn't matter if you didn't know you were speeding, or if your speedometer was broken. If your vehicle exceeds the speed limit, you generally get a ticket.

Similarly, it doesn't matter if a collector accidentally violated the FDCPA, or got bad advice from its attorney. If a collector violates any of the various FDCPA rules, it generally must compensate the consumer.

What If My Original Creditor Isn't Named Correctly?

Yesterday's opinion is clear: failure to accurately list the name of an original creditor violates the FDCPA.

The collector in the Tourgeman case listed "American Investment Bank, N.A." as the original creditor, when in fact CIT Online Bank originated the Dell computer loan.

Mr. Tourgeman successfully argued this misrepresentation was "material" because it could mislead some consumers into suspecting an attempted fraud.

What if I Didn't Actually Receive the Collection Letter?

The Court's opinion clarifies that the mere violation of a statutory right (i.e. the right under the FDCPA not to be sent misleading letters) gives a consumer standing to sue a collector.

The collection letter in Tourgeman never actually went to the consumer; it was mailed to his parents' house.

The court reasoned that although the consumer did not suffer an emotional harm or economic loss as a result of the letter, no injury is actually required to bring an FDCPA claim.

What Happens If the FDCPA is Violated?

Collectors who violate the FDCPA must generally compensate consumers for any emotional harm or economic loss caused, plus up to $1,000 statutory damages and reimbursed attorney fees and costs.

Consumers can generally prosecute FDCPA violations in small claims court. However, debt collectors are often very well versed in defending small claims FDCPA lawsuits. For this reason, consumers should consult with an experienced attorney before taking any action.

Friday, June 20, 2014

11th Circuit Allows Second Mortgage "Strip Off" in Chapter 20 Bankruptcy

By Michael FullerThe Underdog Lawyer ®

On Wednesday, the Eleventh Circuit Court of Appeals issued an important ruling for homeowners looking to wipe out second mortgage liens in bankruptcy.

The Court's opinion in Wells Fargo v. Scantling held that homeowners can "strip off" wholly unsecured second mortgages in so-called "Chapter 20" bankruptcy cases.

How Do I Wipe Out A Mortgage in Bankruptcy?

Straight Chapter 7 bankruptcy discharges mortgage debts, meaning homeowners are no longer personally obligated to pay.

Most bankruptcies are straight Chapter 7 cases where consumers get a fresh start by keeping their assets and wiping out their debts.

However, even though a homeowner discharges mortgage debt in Chapter 7, the lender can still foreclose if the loan is in default after bankruptcy. This is because the mortgage "lien" is not affected in Chapter 7.

Chapter 13 bankruptcy discharges mortgage debts, and allows homeowners to strip off mortgage liens.

Mortgages have two components: a debt and a lien. When the debt is discharged and the lien is wiped out (the technical term is "avoided"), bankruptcy litigators call the mortgage "stripped".

Once a mortgage is stripped, it's as if it doesn't exist. A homeowner can stop payment on the debt without fear of foreclosure, and can sell the home free and clear of the mortgage.

How Do I Strip a Second Mortgage Lien?

As discussed earlier, only Chapter 13 allows homeowners to strip second mortgage liens.

In order to strip a second mortgage, the Bankruptcy Code (Section 1322(b)(2)) requires that the lien be 100% unsecured, meaning the first mortgage balance is more than the home's fair market value.

If a home is worth less than the first mortgage, bankruptcy litigators may refer to the home as "underwater", meaning the second mortgage lien-holder cannot object to a plan to avoid the lien under Section 1325(a)(5).

Why File a Chapter 20?

"Chapter 20" is a shorthand name for a homeowner who files a Chapter 13 bankruptcy after having received a prior discharge in Chapter 7. Chapter 20's are usually filed to pay off underwater vehicles for their fair market values, pay nondischargeable taxes, avoid foreclosure, and strip second mortgages.

Sometimes homeowners don't find out about lien stripping until after they've already filed a basic Chapter 7 bankruptcy. For this reason, it's important to interview bankruptcy attorneys until you find a firm with expertise and experience in filing all Chapters of bankruptcy.

In other cases, a home's value drops significantly after a Chapter 7 is filed, making it now possible to strip a second mortgage.

Other strategic reasons to file Chapter 20 exist. For instance, homeowners with large amounts of debts do not qualify for Chapter 13. The current debt limits are $1,149,525 for secured debt and $383,175 for unsecured debts. However, the homeowner can strategically file Chapter 7, discharge the debts, then qualify for Chapter 13 to strip a second mortgage.

Does My State Allow Chapter 20 Lien Stips?

Whether you can strip a second mortgage in Chapter 20 bankruptcy depends on where you live.

The following states ALLOW Chapter 20 second mortgage strips:

AlabamaFloridaGeorgia (Wells Fargo v. Scantling (11th Cir. 2014)); Maryland, North CarolinaSouth CarolinaVirginiaWest Virginia (Branigan v. Davis (4th Cir. 2013)); Oregon (In re Grignon/Hendrix (D. Or. 2010)); Nevada (In re Okosisi (Bankr. D. Nev. 2011))

The following states MOST LIKELY allow Chapter 20 second mortgage strips:

Arkansas, Iowa, Minnesota, Missouri, Nebraska (Fisette v. Zeller (8th Cir. BAP 2011)); Northern California (In re Tran (Bankr. N.D. Cal. 2010)); Western Washington (In re Blenheim (Bankr. W.D. Wash. 2011)); New York (In re Wapshare (Bankr. S.D.N.Y. 2013)) (In re Wong (Bankr. E.D.N.Y. 2011))

The following states do NOT allow Chapter 20 second mortgage strips:

Southern California (In re Victorio (Bankr. S.D. Cal. 2011)); Northern Illinois (In re Fenn (Bankr. N.D. Ill. 2010)); Central Illinois (In re Jarvis (Bankr. C.D. Ill. 2008))

Call an experienced bankruptcy firm in your area and ask about Chapter 20. If the attorney doesn't immediately know the answer, I suggest calling a different attorney who does.

Monday, June 9, 2014

Supreme Court Clarifies "Stern Claim" Treatment in Bankruptcy Litigation

By Michael FullerThe Underdog Lawyer ®

Today, the Supreme Court's opinion in Executive Benefits Ins. Agency v. Arkinson clarified how so-called "Stern claims" should be treated in bankruptcy litigation.

What is a "Stern claim"?

A "Stern claim" refers to the type of bankruptcy proceeding at issue in the epic legal battle over the estates of Anna Nicole Smith and her billionaire husband, J. Howard Marshall.

Complex "Stern claim" issues are why bankruptcy attorneys like Harvey Miller at Weil, Gotshal & Manges can command $1,045 an hour.

To understand "Stern claims", it's helpful to know a little background.

"Core" Proceedings

The Bankruptcy Amendments Act of 1984 permits bankruptcy courts to enter "final judgments" in certain "core" proceedings. The Act contains a list of "core" proceedings.

The Act only permits bankruptcy courts to enter "proposed findings" in proceedings that are "not core" but otherwise related to bankruptcy.

Stern v. Marshall

Here's where it gets kind of tricky.

In Stern, The Supreme Court held a bankruptcy judge lacked authority to enter final judgment on the Smith bankruptcy estate's counterclaim because it wouldn't necessarily be resolved in the process of ruling on the Marshall estate's proof of claim.

The Court determined that while Congress defined a creditor's counterclaim for tortious interference as a "core" proceeding, the bankruptcy court nonetheless lacked Constitutional authority to enter final judgment on the claim.

The Constitution only permits district judges, not bankruptcy judges, to enter judgment on private rights of action like tortious interference counterclaims. Further, the Seventh Amendment gives creditors the right to demand a jury trial in district court, not bankruptcy court.

Thus, a "Stern claim" arises when bankruptcy courts have statutory permission to enter final judgment but lack Constitutional authority.

The Executive Benefits Opinion

Circling back to today's Supreme Court opinion in Executive Benefits case:

Today's opinion holds that when bankruptcy courts are presented with "Stern claims", they should issue proposed findings of fact and conclusions of law.

That is all.

And now you know the types of things bankruptcy litigators get paid to argue about.


As most of us bankruptcy litigators predicted, the Supreme Court unanimously rejected the Sixth Circuit's restrictive approach to "Stern claims".

In its 2012 Waldman v. Stone opinion, the Sixth Circuit stated in dicta that bankruptcy courts cannot propose findings in "core" proceedings.

The Supreme Court's decision to sidestep the waiver issue and focus on the severability provision provides for a broader, more useful opinion that litigators can rely on in future cases.

Thursday, June 5, 2014

Ninth Circuit Rejects "The Judge Told Me To" Defense in Bankruptcy Stay Litigation

By Michael FullerThe Underdog Lawyer ®

Yesterday, the Ninth Circuit ruled that an attorney who prepared an order for a judge could not invoke absolute quasi-judicial immunity as a defense in a subsequent automatic stay violation case.

The Ninth Circuit opinion, captioned Burton v. Infinity Capital Management, is found here.

Yesterday's ruling is peculiar because it refused to extend the doctrine of absolute quasi-judicial immunity to a private attorney who was simply following a judge's instruction.

The opinion was clear that its ruling did not reflect on the merits of the underlying automatic stay claim brought under section 362(k) of the Bankruptcy Code.

What is Absolute Judicial Immunity?

The legal doctrine of "absolute judicial immunity" generally protects judges from being sued for making bad rulings.

The doctrine indirectly protects underdogs because it helps ensure judges resolve disputes without regard to whether or not the more powerful party might have the resources to personally sue them later.

What is Absolute Quasi-Judicial Immunity?

Absolute "quasi"-judicial immunity is a doctrine that sometimes protects non-judges who perform judge-like tasks.

In the Ninth Circuit, bankruptcy trustees, judicial clerks, the US Trustee's office, and criminal prosecutors generally receive absolute quasi-judicial immunity.

To qualify for absolute quasi-judicial immunity, the decision-maker must be using their independent judgment to resolve a legal dispute. For this reason, court reporters generally do not qualify.

The Ninth Circuit's opinion yesterday reasoned that the absolute quasi-judicial immunity doctrine does not protect an attorney who drafts an order because the act does not involve "substantial discretion."


The Burton opinion highlights the important policy objectives of the Bankruptcy Code's automatic stay, as applied to civil litigants.

As the majority's closing policy argument highlights:

"...affording immunity to attorneys for drafting orders might immunize improper actions where attorneys did knowingly and wilfully violate the automatic stay by presenting orders violating the stay to judges who were not apprised of the bankruptcy filing."

However, even in cases where a state court judge is aware of the bankruptcy filing, attorneys have nonetheless been held liable for failing to abide by the automatic stay. See Sternberg v. Johnston for a case in point.

It's unclear why Mr. Gugino's defense attorney didn't focus the initial motion to dismiss on failure to state a claim under section 362(k), or otherwise seek relief nunc pro tunc.

Monday, May 19, 2014

Openly Charitable Judge to Decide Same-Sex Marriage Case

By Michael FullerThe Underdog Lawyer ®

Today at noon, District Judge Michael McShane will make history.

His highly anticipated ruling will decide the constitutionality of Oregon's ban on same-sex marriages.

If he rules in favor of Plaintiffs Ben West and Paul Rummell (below), thousands of other same-sex couples in Oregon will immediately gain the right to marry.

Recent articles about the historic case have highlighted Judge McShane's sexual orientation.

However, in all fairness, there's another aspect of his personal life that deserves equal attention.

Judge McShane is Openly Charitable

I first heard Judge McShane speak at a volunteer event for the non-profit Classroom Law Project in 2012. At that time, he was a Multnomah County Circuit Court Judge in Portland.

His inspiring presentation touched on the important of public service through law-related education programs. I remember being surprised that an overworked judge chose to make time in his personal schedule to actively volunteer with the project.

A few months later, I ran into Judge McShane unexpectedly.

In response to a call for volunteers in the Multnomah Lawyer magazine, Judge McShane showed up, ready to work on a Sunday afternoon to help feed Portland's hungry.

Judge McShane (pictured left) helped serve hot meals at the Potluck in the Park event in downtown Portland's O'Bryant Square.

Months later, I wasn't surprised to learn he'd been honored with the Oregon State Bar's Public Service Award.

I don't know Judge McShane but my few interactions with him have been the result of his choices to help others in his personal time.

If Judge McShane's personal life receives attention in light of his historical ruling today, I'm hopeful it includes mention of his quiet, steadfast dedication to public service.

Tuesday, April 29, 2014

Nerd Alert: New Bankruptcy Litigation Rules!

By Michael Fuller, The Underdog Lawyer ®

Yesterday, social media was abuzz with news of the Supreme Court's newly proposed amendments to the bankruptcy litigation rules.

Newly Adopted Rules of Bankruptcy Procedure

Okay, no one really cared. But Michelle Olsen with @AppellateDaily did tweet this link to the new rule proposals at 2:45 PM.

View the current bankruptcy litigation rules here.

New Proposals Favor Wall Street

Consumer protection advocates worry that the proposed amendments favor Wall Street, Corporate America, and the defense bar. I tend to agree, but I'm used to it.

Key changes that affect bankruptcy litigators are as follows:

7 Day Service of Summons Deadline

Under the current rules, an adversary proceeding summons and complaint must be served within 14 days of issuance.

The proposed amendment to Rule 7004(e) shortens the deadline from 14 to 7 days.

In bankruptcy litigation, the time to respond to a complaint is based on summons issuance date, not service date. Thus, this amendment benefits defendants (often banks and corporations in consumer cases) by ensuring a minimum 23 days to respond to a complaint.

What kind of plaintiff's lawyer would intentionally sit on a summons and complaint a full 14 days after issuance to minimize a defendant's response time?

Not me. Seriously. But in any event, the practice is largely curbed by the new rule change.

Attorney's Fees Need Not be Pleaded As a Claim

Currently, Rule 7008(b) requires a claim for attorney's fees be pleaded as a claim in a complaint, answer, etc.

The proposed amendment eliminates subsection (b) entirely, returning bankruptcy litigation to the default claim pleading provisions of Federal Rule of Civil Procedure 8(a).

I'm not old enough to know the history of subsection (b), but the proposed amendment makes sense to me.

Local Rules Allowed to Resolve Fee Issues

The proposed amendments make two substantial changes to Rule 7054 titled, "Judgments; Costs".

First, the new rule requires 14 days notice (opposed to one day under the current rule) before the clerk may enter a cost award to a prevailing party.

Second, the new rule allows local court rules to resolve fee-related issues without the need for "extensive evidentiary hearings".

In other words, the amendment makes it harder for prevailing consumers to recover their entitlement to attorney fees and costs from guilty Wall Street defendants because it removes procedural safeguards without lessening the burden of proof.

Consumers are the most frequent type of party entitled to bankruptcy judgments of attorney fees. These Rule 7054 amendments stand to benefit the defense bar, especially in fee-shifting cases under consumer protection statutes like the FDCPA and the discharge injunction.

Wall Street and Corporate America have teams of expensive attorneys on permanent retainer.

Thus, they have no need for the "fees on fees" rule, which provides reimbursement to a prevailing party in a fee-shifting case when fees are at issue.

Most fee-shifting statutes promote consumer protection, and contain "one way" provisions, meaning it's highly unlikely a corporation would ever be entitled to its attorney fees.


All in all, I endorse the Supreme Court's proposed amendments to the Federal Rules of Bankruptcy Procedure.

While the changes tend to favor Wall Street, Corporate America, and the defense bar, the practical advantage is negligible.