Eleventh Circuit Holds That Filing a Time-Barred Proof of Claim in a Bankruptcy Proceeding Violates the FDCPA

By Christian Sheehan

The Fair Debt Collection Practices Act (FDCPA) provides that debt collectors “may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” Nor may a debt collector “use unfair or unconscionable means to collect or attempt to collect any debt.”  In determining whether a debt collector’s conduct was deceptive, misleading, unfair or unconscionable, courts apply a “least-sophisticated consumer” standard.

In Crawford v. LVNV Funding, LLC, the plaintiff owed roughly $2,000 to a furniture company, which assigned the debt to the defendant, LVNV Funding, LLC.  The last transaction on the plaintiff’s account occurred in 2001, and so, under Alabama’s three-year statute of limitations, the debt became unenforceable in 2004.  In 2008, the plaintiff filed a Chapter 13 bankruptcy petition.  During the bankruptcy proceeding, LVNV filed a proof of claim to collect on the time-barred debt.  The plaintiff filed a counterclaim via an adversary proceeding, alleging that LVNV’s conduct violated the FDCPA.

The Eleventh Circuit held that a debt collector engages in deceptive, misleading, unfair, and/or unconscionable conduct (and therefore, violates the FDCPA) when it files a proof of claim in a bankruptcy proceeding to collect a time-barred debt.  The Court reasoned that the “least-sophisticated” debtor may be unaware that the debt is unenforceable, and thus, fail to object (as the plaintiff did in this case).  And if the debtor fails to object, under the Bankruptcy Code, the otherwise unenforceable debt is resurrected and will be paid from the debtor’s future wages, thereby reducing the funds available to satisfy creditors with legitimate and enforceable claims.

Prior to Crawford, several circuits had held that lawsuits to collect time-barred debts violate the FDCPA.  Crawford is significant because it extends the holdings of those cases to the bankruptcy context.

Ninth Circuit addresses TILA tender requirement and RESPA statute of limitations

By Stephen J. Shapiro

Under the Truth in Lending Act (TILA), a borrower may seek to rescind a loan under certain circumstances. The rescission process under TILA is as follows: (1) the borrower notifies his lender that he intends to rescind the loan; (2) the lender returns any security interest to the borrower; and (3) upon return of the security interest, the borrower tenders the loan proceeds to the lender.  The Ninth Circuit recently held that a borrower need not plead that he has tendered the loan proceeds or has the ability to do so in order to state a rescission claim under TILA.

In Merritt v. Countrywide Financial Corp., the plaintiffs obtained a mortgage and took out a home equity line of credit from the defendant lender in connection with a home they purchased.  The plaintiffs alleged that, despite repeated requests, their lender did not send them the loan documentation required by TILA for almost three years. When they finally received the documents, the plaintiffs concluded that they were the victims of “predatory lending” and notified the lender that they were invoking their right to rescind the loan under TILA. When the lender did not respond to the rescission request, plaintiffs sued the lender under TILA, requesting rescission of the loan. The district court dismissed the TILA claim because the plaintiffs had not pled that they tendered the loan proceeds to the lender or had the ability to do so at the time they sought rescission.

On appeal, the Ninth Circuit reversed. The Court acknowledged that, in a prior case, it held that the district courts may require a TILA plaintiff to produce evidence of his ability to tender the loan proceeds in response to a summary judgment motion brought by the lender.  However, the Court held that its prior holding does not extend to motions to dismiss. In other words, if warranted by the circumstances, a borrower may be required to present evidence that he is able to tender to defeat a motion for summary judgment on a TILA claim, but he is not required to plead that he has the ability to tender in order to state a claim under TILA.

The plaintiffs also alleged that the lender violated Section 8 of the Real Estate Settlement Procedures Act (RESPA).  The district court dismissed the claims as time barred because plaintiffs filed their claims after RESPA’s one-year statute of limitations had expired. On appeal, the Court, addressing an issue of first impression in the Ninth Circuit, held that under the appropriate circumstances RESPA’s statute of limitations may be equitably tolled. Because the district court did not address whether the plaintiffs were entitled to equitable tolling, the Court remanded for consideration of that issue.

The Court also remanded, for initial consideration by the district court, another issue of first impression in the Ninth Circuit. Plaintiffs alleged that the defendant violated Section 8(b) of RESPA, which prohibits the “giv[ing] . . . [of] any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service . . . other than for services actually performed.” Plaintiffs alleged that the defendant violated this provision by charging them more for services provided by third parties in connection with the mortgage transaction than defendant paid for those services. The Court noted the split among the Circuits as to whether such allegations – claims that a defendant “marked up” the cost of services provided by third parties – are actionable under Section 8(b) of RESPA. Specifically, the Second and Third Circuits have held that such allegations state a claim under Section 8(b), while the Fourth, Fifth, Seventh and Eighth Circuits have held that they do not.  Because the “complicated issues of statutory interpretation and administrative law” involved in these decisions were not addressed by the district court, the Court remanded the issue for further development.

Third Circuit Holds that Consumers are Not Required to Seek Validation of a Debt before Filing Suit under the FDCPA

By Christian Sheehan

On June 26, 2014, in McLaughlin v. Phelan Hallinan & Schmieg, LLP, the Third Circuit held that a consumer is not required to seek validation of a debt he believes is inaccurately described in a debt collection communication before filing suit under the Fair Debt Collection Practices Act (FDCPA).

The FDCPA provides that if the consumer “notifies the debt collector in writing . . . that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt” and mail a copy to the consumer.  15 U.S.C. § 1692g(a)(4). Although the plaintiff in McLaughlin believed the debt collection communication he received was inaccurate, he did not seek validation of the debt. Instead, he filed suit against the debt collector.  The District Court dismissed the complaint, concluding that the plaintiff could not bring an FDCPA claim without first disputing the debt and seeking validation from the collector.

The Third Circuit reversed, holding that to require the consumer to seek validation of the debt prior to filing suit under the FDCPA would be inconsistent with the text and purpose of the statute.  The Court observed that the FDCPA lists various consequences “if” the consumer disputes a debt, suggesting that the validation provisions are optional, rather than mandatory.  The Court further explained that imposing a validation prerequisite would frustrate the protective purpose of the FDCPA, and immunize misconduct by debt collectors based on a procedural nuance that many consumers would fail to understand. Finally, the Third Circuit downplayed the concern raised by other courts (which held that the validation procedures were mandatory) that the lack of a validation prerequisite would discourage the use of the statute’s validation procedures.  The Court explained that debtors will still have an incentive to utilize the validation procedures in order to facilitate the quick and inexpensive resolution of debt disputes.

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