Tuesday, September 16, 2014

Payday Lender Liable for Expenses Incurred Prosecuting its Bankruptcy Violation

By Michael FullerThe Underdog Lawyer ®

Last week, the Ninth Circuit Court of Appeals held that a bankruptcy violation doesn't "end" until a creditor either admits to liability or loses at trial.

The holding is important because it affects the ability of consumers to recover expenses incurred enforcing the bankruptcy rules.

Ninth Circuit Clarifies Sternberg

Last week's opinion, In re Snowden, clarifies a 2010 opinion called Sternberg v Johnston. In Sternberg, the Ninth Circuit held a consumer may not recover fees incurred solely seeking damages resulting from a stay violation.

The Ninth Circuit already clarified Sternberg once this year in its April opinion, In re Schwartz-Tallard. In Schwartz-Tallard, the court held that a consumer may recover expenses incurred litigating a disputed stay violation on appeal.

What Snowden Means for Consumers

"The Snowden and Schwartz-Tallard opinions both recognize the strong Congressional intent to ensure America's bankruptcy rules are enforced by consumers," says California consumer bankruptcy attorney Austin Houvener.

Snowden involved a payday lender who refused to return money it seized from a consumer in violation of the Bankruptcy Code's automatic stay.

Payday Lender Ordered to Pay

After a trial in bankruptcy court, the judge determined that the payday lender violated the automatic stay. As a result, the payday lender was ordered to return the money it seized from Ms. Snowden.

The bankruptcy court also compensated Ms. Snowden $12,000 for her emotional harm and $12,000 in punitive damages. However, the judge refused to compensate Ms. Snowden for the expenses she incurred proving the payday lender violated the stay.

The Ninth Circuit remanded the case back to bankruptcy court so Ms. Snowden could be compensated for the litigation expenses she incurred bringing the payday lender to justice. While she could not recover compensation pursuing her emotional harm and punitive damages, she was entitled to reimbursement for the attorney fees required to hold the payday lender liable at trial.

In her majority opinion, Judge McKeown appeared careful not to overturn Sternberg. The dissenting opinion in Schwartz-Tallard (substantially amended in a superseding filing in August 2014) raised serious concerns about whether overturning Sternberg required an en banc panel.

In his concurrence in Snowden, Judge Watford raised serious questions about whether Sternberg was correctly decided in the first place.

Wednesday, August 27, 2014

Wells Fargo Gets Free Pass in 9th Cir. Bankruptcy Cases

By Michael FullerThe Underdog Lawyer ®

Yesterday, the Ninth Circuit Court of Appeals ruled that Wells Fargo was immune from suit, despite the bank's intentional refusal to return bank funds subject to the automatic stay.

The opinion, In re Matter of Mwangi, highlights an exception to the general rule that creditors must promptly turn over bankruptcy estate property.

Wells Fargo Seizes Bank Funds

After the Mwangi Family filed for bankruptcy protection, Wells Fargo seized the funds in their bank accounts.

Wells Fargo's seizure allegedly violated a bankruptcy rule known as the "automatic stay" because the bank funds belonged to the trustee upon commencement of the case. See 11 U.S. Code § 362(a)(3).

After seizing the funds, Wells Fargo refused to turn the money over to the Mwangi Family or the trustee.

Wells Fargo Immune From Suit by Consumers

Despite Wells Fargo's policy, yesterday's opinion effectively immunizes the bank from suit by consumers under certain circumstances.

The opinion reasoned that the Mwangi Family had no technical legal interest in the bank funds when Wells Fargo seized them. Based on this technicality, the Court ruled the Mwangi Family was not "injured", and thus could not sue Wells Fargo for its alleged violation.


Wells Fargo frequently dismisses bankruptcy violations on appeal based on technicality loopholes.


- Walls v. Wells Fargo (9th Cir. 2002) (dismissed on technicality)
- Barrientos v. Wells Fargo (9th Cir. 2011) (dismissed on technicality)

When Wells Fargo can't find loopholes, it often forces consumers into confidential settlements:


- Espinosa v Wells Fargo (Ore. 2014) (Wells Fargo pays $35,000)
Thoma v Wells Fargo (Ore. 2013) (Wells Fargo pays $19,000)
- Culpepper v Wells Fargo (Ore. 2013) (Wells Fargo pays $37,500)

Wells Fargo's remorseless conduct in yesterday's Mwangi case reinforces its reign as bankruptcy's "bad boy" of banking.

The Bankruptcy Appellate Panel ("BAP") initially refused to dismiss the Mwangi lawsuit against Wells Fargo. The BAP is a special panel of appellate justices who are also practicing bankruptcy judges.

The BAP judges likely understood what consumer bankruptcy attorneys know all too well: Wells Fargo regularly disregards bankruptcy rules without consequence due to loopholes.

Loopholes exist, in large part because Congress allowed banking lobbyists to essentially draft their own amendments to the Bankruptcy Code.

Nowhere in the Ninth Circuit's opinion does the Court address the fact that Wells Fargo's nationwide policy seemingly violates federal law. Wells Fargo's own letter in the case admits the funds it seized were property of the estate.

The Ninth Circuit characterizes Wells Fargo's seizure as a "temporary administrative pledge". However, the facts indicate the freeze was far from "temporary", and the bank ultimately refused to "pledge" or otherwise turn over the funds to the trustee.

In practice, trustees commonly allow debtors to eat food, drive cars, and access bank accounts during bankruptcy that constitute "property of the estate." The Court's mechanical approach to "vesting" under section 541, even if correct, doesn't necessarily mean the Mwangi Family was not injured by the bank's seizure.

The Mwangi opinion may open the door to further creditor abuses in consumer bankruptcy. Specifically, the opinion helps immunize aggressive auto lenders that intentionally repossess family vehicles during the automatic stay.

Tuesday, August 5, 2014

Ninth Circuit Says Diversity Removal Deadline Is Not Jurisdictional

By Michael FullerThe Underdog Lawyer ®

For the second time this year, the Ninth Circuit upheld the rights of corporate defendants to remove state court lawsuits to federal court under questionable circumstances.

Yesterday, in Smith v. Mylan, Inc. the Court held that the one-year diversity removal deadline is not jurisdictional, and may be waived.

28 U.S.C. § 1332 governs "diversity" jurisdiction, and generally requires a plaintiff and defendant be citizens of different states.

(for more on the Ninth Circuit's March 2014 National Banking Act removal opinion in Rouse v. Wachovia Mortgage, click here)

How does removal work?

Certain lawsuits that qualify under 28 U.S.C. § 1441 et seq. may be removed by defendants from state court to federal court. To learn why corporations prefer federal court, click here.

Generally, the deadline to remove is 30 days from service of the lawsuit. See § 1446(b).

However, if a lawsuit doesn't qualify for removal when it is filed, and is later amended to qualify for diversity jurisdiction, the case may be removed within one year after the original filing date. See § 1446(c).

Diversity jurisdiction in this context may occur when out-of-state defendants are added or dismissed from a lawsuit after it is filed. See § 1332.

What is the impact of yesterday's holding?

Yesterday's holding in Smith v. Mylan, Inc. favors corporate defendants but it's impact is negligible.

Unless you've sued an out-of-state corporation, the holding has no impact on your case.

Even then, the holding is only relevant if your lawsuit adds or dismisses an out-of-state defendant more than one year after filing.

And even if that rare scenario, all you must do is timely object by filing a motion to remand the case back to state court.

In the Smith case, the consumer didn't object to the corporation's late notice of removal. When the district court judge filed his own objection (called 'sua sponte'), the Court of Appeals reversed him.

Pro tip: 'sua sponte' is Latin for "of their own accord".

The Court of Appeals held the one-year requirement under § 1446(c) is not jurisdictional, meaning the requirement may be waived if a consumer fails to object. For this reason, the Court held the remand was improper.


I rarely deal with removal issues because I'm a plaintiff's lawyer and almost exclusively file cases in federal court. That being said, the two golden rules I remember about removal issues from law school are:

(1) orders to remand are generally not reviewable, and 
(2) federal courts must always maintain subject matter jurisdiction.

Both of these rules run contrary to yesterday's fairly unique holding. Before reading the opinion, and having never reviewed the legislative history on point, I might have sided with the district court judge.

But now I know, and as they say, that's half the battle.

Monday, August 4, 2014

Vote for the Underdog Law Blog ®

By Michael FullerThe Underdog Lawyer ®

In the last seven months, the Underdog Law Blog ® received over 41,000 unique visitors, making it the self-proclaimed "fastest-growing outlaw law blog in North America!"

If you like my Blog, or if you just like America, or if the power of Christ compels you, please cast your vote by Aug. 8 in the ABA Journal 2014 Blawg 100 here.

If you know me, you know how much pointless professional popularity contests mean to me. And remember Mom, IP addresses are traceable, so no double-voting.

Take 30 seconds, vote here: ABA 2014 Blawg Top 100 Contest

Take care,

- The Underdog Lawyer ®

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.