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7th Circuit reverses district court, holds settlement with debt collector moots claims against law firm
On August 13, the U.S. Court of Appeals for the 7th Circuit vacated a district court’s decision, holding that a consumer who settled with a debt collector is not entitled to pursue Fair Debt Collection Practices Act statutory damages claims against the debt collector’s law firm. Under the single recovery for a single injury principle, a consumer can only obtain one recovery for a single injury “regardless of how many defendants could be liable for that single injury, or how many different theories of recovery could apply to that single injury.” In this instance, the consumer settled the claim with the debt collector for $5,000 plus release of the consumer’s original debt. The consumer later sued the debt collector’s law firm, spending over $69,000 on attorneys’ fees to argue that the law firm filed suit to collect the debt in the wrong court. While the district court ordered the law firm to pay the attorneys’ fees to the consumer, the 7th Circuit reversed, holding that the settlement with the creditor rendered the consumer’s claim against the law firm moot and thus the consumer could not recover attorneys’ fees or costs.
7th Circuit says inspection company that left door hangers is not a debt collector
On August 10, the U.S. Court of Appeals for the 7th Circuit affirmed a lower court’s ruling that a company (defendant) that performed inspections for a mortgage servicer is not a “debt collector” under the Fair Debt Collection Practices Act (FDCPA) and was not liable for claims brought by a putative class of homeowners. According to the opinion, the defendant entered into a contract with the mortgage servicer to perform inspections to determine whether properties were still occupied for homes with defaulted mortgage payments of 45 days or more if the servicer was unable to contact the homeowner directly. When performing the inspections, the defendants left door hangers on the plaintiffs’ properties containing instructions to contact the mortgage servicer, which the plaintiffs claimed violated the FDCPA's disclosure requirements, including the requirement to disclose the creditor’s name, the amount owed, and that the debtor can dispute the debt. However, the lower court ruled—and the appellate court affirmed—that the defendant was not a “debt collector” for purposes of the FDCPA. The court found that the activities did not constitute direct debt collection because the door hangers did not demand payment and did not reference the underlying debt. The court also held that the defendant was not engaged in “indirect” debt collection, agreeing with the characterization of the lower court that the activities were more akin to those of a “messenger” than those of an “indirect” debt collector.
5th Circuit affirms dismissal of automatic stay violation claim on grounds of judicial estoppel
On July 27, the U.S. Court of Appeals for the 5th Circuit affirmed a district court’s decision following a bench trial to dismiss plaintiffs’ allegations that a bank violated an automatic stay imposed during one of the plaintiff’s (debtor) bankruptcy schedules when it took foreclosure action, holding that the plaintiffs were barred by judicial estoppel from pursuing claims because the debtor failed to amend his bankruptcy schedules to disclose a quitclaim deed for his mortgage or note a change in his financial status. In this case, the debtor filed a Chapter 13 bankruptcy, but failed to list the address or creditor information for a property in which he had entered into an equity sharing agreement with his son. When the son signed a quitclaim deed conveying the property to the debtor, the deed was recorded but not listed on the bankruptcy schedules.
According to the appellate court, the debtor failed to “disclose an asset to a bankruptcy court, but then pursue[d] a claim in a separate tribunal based on that undisclosed asset” when it filed a lawsuit against the bank for wrongful foreclosure. The doctrine of judicial estoppel requires that three elements be met: (i) “the party against whom estoppel is sought has asserted a position plainly inconsistent with a prior position”; (ii) “a court accepted the prior position”; and (iii) "the party did not act inadvertently.” The court held the first two elements were met by the plaintiff’s failure to amend his bankruptcy schedules to disclose the quitclaim deed or his legal action against the bank. The court noted, however, the debtor’s actions were not inadvertent because he was aware of the inconsistency and had a motive to conceal the asset. The appellate court specifically noted the motive to conceal was “self-evident” because the debtor’s failure to disclose his changed financial status had the potential to provide a financial benefit to the debtor. The appellate court further held that the district court did not abuse its discretion in denying plaintiffs' motion for a new trial, and that, moreover, the plaintiffs failed to show that the district court abused its discretion when it chose to exclude several of their exhibits.
2nd Circuit holds NCUA lacks standing to bring derivative suit against two national banks regarding RMBS claims
On August 2, the U.S. Court of Appeals for the 2nd Circuit held that the National Credit Union Administration (NCUA) lacked standing to bring a suit against two national banks on behalf of trusts created by the agency that held residential mortgage-backed securities (RMBS). According to the opinion, in 2009 and 2010, NCUA took control of five failing credit unions, including ownership of certificates the credit unions held in RMBS trusts. NCUA then transferred the certificates into new trusts and a financial institution was appointed, pursuant to an Indenture Agreement, as Indenture Trustee. NCUA subsequently brought derivative claims on behalf of the trusts against two national banks, trustees of the original RMBS trusts. In affirming the lower court’s dismissal of the claims, the appellate panel found that the NCUA did not have derivative standing to sue on behalf of the trusts because the trusts had granted the right, title, and interest to their assets, including the RMBS trusts, to the Indenture Trustee. The 2nd Circuit reasoned that therefore only the Indenture Trustee possesses the claims, and the NCUA did not have the right to sue on behalf of the Indenture Trustee under the Indenture Agreement.
3rd Circuit holds unpaid highway tolls are not “debts” under the FDCPA
On August 7, the U.S. Court of Appeals for the 3rd Circuit held that unpaid highway tolls are not “debts” under the FDCPA because they are not transactions primarily for a “personal, family, or household” purpose. According to the amended class action complaint at issue in the case, after a consumer’s electronic toll payment system account became delinquent, a debt collection agency sent notices containing the consumer’s account information in the viewable display of the notice envelope. The consumer filed suit alleging the collection agency violated the FDCPA. While the lower court held that the consumer had standing to bring the claim, it dismissed the action on the ground that the unpaid highway tolls fell outside the FDCPA’s definition of a debt. The 3rd Circuit affirmed the lower court’s decision. On the issue of standing, citing the Supreme Court’s 2016 ruling in Spokeo, Inc. v. Robins (covered by a Buckley Sandler Special Alert), the panel reasoned that the exposed account number “implicates a core concern animating the FDCPA—the invasion of privacy” and is a legally cognizable injury that confers standing. The panel agreed with the consumer that the obligation to pay the highway tolls arose out of a “transaction” for purposes of the FDCPA because he voluntarily chose to drive on the toll roads, but found the purpose of the transaction was “public benefit of highway maintenance and repair”—not the private benefit of a “personal, family, or household” service or good as required by the FDCPA. Moreover, the court concluded that while the consumer chose to drive on the roads for personal purposes, the money being rendered was primarily for public services, as required by the statute to collect tolls “to acquire, construct, maintain, improve, manage, repair and operate transportation projects.”
3rd Circuit says business meets “principal purpose” definition of collector under the FDCPA
On August 7, the U.S. Court of Appeals for the 3rd Circuit held that a company using the mail and wires to collect “any debts” meets the “principal purpose” definition under the FDCPA. According to the opinion, after homeowners defaulted on a home equity line of credit, the debt was sold and the mortgage assigned to a company whose sole business is the purchase of debts entered into by third parties and collecting on those debts. After several attempts to collect the debt, the company filed a foreclosure action in Pennsylvania. The homeowners contacted the company requesting loan statements to resolve the debt but the company refused to provide statements. The homeowners later received a collection email with an even higher amount than previously communicated and filed an action alleging the company violated the FDCPA. The lower court rejected the company’s arguments that it was not a debt collector under the FDCPA’s “principal purpose” definition—any person “who uses any instrumentality of interstate commerce or the mails in any business, the principal purpose of which is the collection of any debts”—and held that the company violated the act.
The company appealed, challenging the lower court’s determination that it met the definition of debt collector, instead arguing it was a “creditor.” The 3rd Circuit, following the plain text of the FDCPA, held that “an entity whose principal purpose of business is the collection of any debts is a debt collector regardless whether the entity owns the debts it collects.” Affirming the lower court’s determination, the appellate panel disagreed with the company, reasoning that the company admitted its sole business is collecting purchased debts and it uses “mails and wires for its business,” such that it could be “no plainer” that the company fits the “principal purpose” definition under the FDCPA.
6th Circuit cites Spokeo, but holds plaintiffs alleged sufficient harm from deficient debt collection letters
On July 30, the U.S. Court of Appeals for the 6th Circuit held that consumers had standing to sue a debt collector whose letters allegedly failed to instruct them that the Fair Debt Collection Practices Act (FDCPA) makes certain debt verification information available only if the debt is disputed “in writing.” The court found that these alleged violations of the FDCPA presented sufficiently concrete harm to satisfy the “injury-in-fact” required for standing under Article III of the Constitution.
The debt collector had filed a motion to dismiss in the lower court, arguing that the putative class action plaintiffs lacked Article III standing under the Supreme Court’s 2016 ruling in Spokeo, Inc. v. Robins (covered by a Buckley Sandler Special Alert). The district court denied the motion, determining that the letters “created a ‘substantial’ risk that consumers would waive important protections afforded to them by the FDCPA” due to the insufficient instructions. The 6th Circuit affirmed. After analyzing Spokeo, the court agreed that the “purported FDCPA violations created a material risk of harm to the interests recognized by Congress in enacting the FDCPA,” namely the risk of unintentionally waiving the verification and suspension rights afforded by the FDCPA when a debt is disputed.
9th Circuit affirms dismissal of SCRA private action, applies federal four-year catch-all statute of limitations
On July 26, the U.S. Court of Appeals for the 9th Circuit affirmed the dismissal of a private suit alleging a mortgage servicer violated the Servicemembers Civil Relief Act (SCRA) prohibition on foreclosure on the grounds that the claim was time-barred, holding that the federal catchall four-year statute of limitations applies to private suits under the SCRA. The decision results from a 2016 lawsuit filed by a United States Marine veteran (the plaintiff) alleging that the August 2010 foreclosure sale on his home violated section 303(c) of the SCRA as it occurred within nine months of the end of his active military service. While the SCRA does not provide a specific statute of limitations for a private right of action, the defendants moved to dismiss the case as time-barred, arguing that the court should apply the closest state-law analogue to the SCRA. The plaintiff argued that the court should look to the Uniformed Services Employment and Reemployment Rights Act (USERRA) as the most analogous statute, which does not limit the period for filing claims. In response to the plaintiff, the defendants added an alternative argument that the court should apply 28 U.S.C. § 1658(a), which establishes a four-year limitation period for any claims arising from a federal law enacted after 1990, which does not delineate a specific limitations period. The district court granted the motion to dismiss, rejecting the plaintiff’s arguments, and applied the four-year statute of limitations found in the Washington State Consumer Protection Act.
In affirming the dismissal of the plaintiff’s case on an alternate ground, the court noted that while the SCRA’s protection against foreclosure existed prior to 1990, Congress did not add a private right of action until 2010. The court rejected the plaintiff’s argument that the private right of action was “implied” prior to the 2010 because there was no evidence Congress intended to create one under the SCRA’s predecessor, the Soldiers’ and Sailors’ Civil Relief Act. The court held that because a private right of action was not provided until 2010, the four-year catch-all provision of 28 U.S.C. § 1658(a) applied, and the plaintiff’s claim under the SCRA was time-barred.
2nd Circuit reverses district court, holds fair debt collection claim can proceed when dispute notice is included
On July 27, the U.S. Court of Appeals for the 2nd Circuit held that a lower court erred when it concluded that a consumer was prevented from alleging violations of the Fair Debt Collection Practices Act where a debt collector sought payment on a previously settled debt because the debt collector had included a notice of the right to dispute the debt, which the consumer did not exercise. According to the 2nd Circuit panel, the consumer plausibly argued that consumers could be misled by collection notices that misstate debts whether or not there is an option to dispute the debt, especially because the debt collector told her it might report her account information to credit bureaus. “A least sophisticated consumer who was so advised might understand her right to dispute the misstated debt but, nevertheless, pay the debt out of fear that there was already an adverse effect on her credit that would continue as long as the obligation remained outstanding,” the panel opined. Moreover, a debt dispute notice does not preclude claims for misrepresenting the debt. The appellate court vacated the lower court’s judgment and remanded for further proceedings.
2nd Circuit affirms no securities fraud in mortgage bundle sale
On July 24, the U.S. Court of Appeals for the 2nd Circuit affirmed a district court’s decision, holding that a group of securities investment firms (defendants-appellees) did not unlawfully hide concerns about a mortgage bundle it sold to a Luxemburg-based financial institution (plaintiff-appellant) when it marked down the value of certain junior securities within the bundle. The three judge panel affirmed the lower court’s decision to dismiss securities fraud and breach of contract claims, which alleged that the defendants-appellees’ undisclosed markdown concealed its view that the mortgage bundle would underperform. The defendants-appellees contended that the markdown was related to commonly-used accounting strategies designed to manage risk tied to the preference shares, to which the lower court agreed—ruling that the plaintiff-appellant had failed to show evidence proving its claims of fraud. The appellate court agreed, holding that the plaintiff-appellant “has thus failed to raise a material issue of fact as to [the defendants-appellees’] knowledge that there was anything wrong with the underlying assets, which is essential to establishing its theory of fraud.” The appellate court further upheld the breach of contract dismissal because the offering circular and marketing materials for the mortgage bundle did not specify the value of the preference shares.