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DOJ and DOE share success after first year of student loan bankruptcy discharge process
On November 16, the DOJ and DOE announced a successful first year of their new student loan bankruptcy discharge process during 2022. The discharge process extinguishes a borrower’s obligation to pay back either some or all of a student loan in bankruptcy based on undue hardship. The DOJ cites two previous standards used by bankruptcy courts to determine if a borrower’s repayment would cause an undue hardship: the Brunner and Totality Tests. The DOJ’s guidance simplified the current standards to enhance “consistency and equity in the handling of these cases” and applies in both Burner and Totality Test jurisdictions. The guide permits a court to grant a discharge if three conditions are satisfied: (i) “the debtor presently lacks an ability to pay the loan”; (ii) “the debtor’s inability to pay the loan is likely to persist in the future”; and (iii) “the debtor has acted in good faith in attempting to repay the loan.”
The DOJ reported the success of their new guidance with several findings: (i) there were 632 cases filed in the first 10 months of the new process, a significant increase from recent years; (ii) this process was used by 97 percent of all borrowers; (iii) 99 percent of borrowers received either full or partial discharges; and (iv) two bankruptcy courts adopted this process. The DOJ is optimistic that some or all these trends will continue.
FTC settles with bankrupt crypto company and bans asset management
On October 12, the FTC announced it has reached a settlement with a bankrupt crypto company, which will permanently ban the company from managing consumer assets. According to the federal court complaint, the FTC alleged that from at least 2018, respondent attracted customers by promising their deposits would be secure, but when the company failed, consumers lost access to significant assets, resulting in over $1 billion in cryptocurrency asset losses. The FTC alleges violations of the FTC Act and the Gramm-Leach-Bliley Act's prohibition on obtaining financial information through false statements. Respondent allegedly misled consumers by claiming their assets were safe on the platform, stating that "YOUR USD IS FDIC INSURED." However, respondent is not a bank and the deposits were not eligible for FDIC insurance. The FTC complaint also alleged that the FDIC does not insure cryptocurrency assets, and consumers' cash deposits were placed in an account held by respondent at a traditional bank. Consumers' funds were protected only if that bank failed, but their cryptocurrency was not protected at all.
The proposed settlement with respondent and its affiliates permanently bans them from offering, marketing, or promoting any product or service related to depositing, exchanging, investing, or withdrawing assets. Respondent and its affiliates have agreed to a judgment of $1.65 billion, which will be suspended to allow the bankrupt company to return its remaining assets to consumers through bankruptcy proceedings. The proposed settlement also prohibits respondent and its affiliates from managing consumer assets, misrepresenting product benefits, making false representations to obtain financial information, and disclosing nonpublic personal information without consent.
The FTC also announced that it is filing a lawsuit against the respondent’s CEO for making false claims that consumer accounts were FDIC-insured. Respondent’s CEO has not agreed to a settlement, and the FTC's case against him will proceed in federal court. “In a parallel action, on October 12, the Commodity Futures Trading Commission separately charged [respondent’s CEO] with fraud and registration failures,” the FTC added.
9th Circuit partially reverses FDCPA dismissal
On July 14, the U.S. Court of Appeals for the Ninth Circuit partially affirmed and partially reversed a district court’s dismissal of an FDCPA suit. The district court reviewed plaintiff’s claims under the FDCPA, which alleged that defendants violated the bankruptcy court’s order discharging his debt and knowingly filed a baseless debt collection lawsuit. The district court determined that the claims should be dismissed because (i) debtors do not have a private right of action for violations of the Bankruptcy Code; and (ii) the claim was time-barred due to the FDCPA’s one-year statute of limitations. On appeal, the 9th Circuit affirmed the dismissal of the plaintiff’s claims based on a violation of his bankruptcy discharge order but reversed the dismissal of the plaintiff’s baseless lawsuit claim, holding that it was not barred by the FDCPA’s statute of limitations.
The 9th Circuit reasoned that the plaintiff “correctly asserts that some litigation acts can constitute independent FDCPA violations and that each such violation triggers its own one-year statute of limitations under the FDCPA.” In making its decision “to determine whether a litigation act constitutes an independent violation of the FDCPA and thus has its own statute of limitations,” the appellate court derived a test, stating: “Under this test, if a debt collector decides to take a certain action during litigation, courts must assess whether that act was the debt collector’s ‘last opportunity to comply’ with the FDCPA.” Because the appellate court determined that service and filing are separate FDCPA violations and plaintiff brought suit within one year of defendants’ state law claim, the 9th Circuit held that plaintiff’s action was timely.
Crypto lender to provide refunds to Californians
On March 27, the California Department of Financial Protection and Innovation (DFPI) announced that a New Jersey-based crypto lending platform has agreed to provide more than $100,000 in refunds to California residents. The refunds, subject to bankruptcy court approval, stem from the lender’s conduct following the collapse of a major crypto exchange last November. As previously covered by InfoBytes, in December, DFPI moved to revoke the lender’s California Financing Law license following an examination, which found that the lender “failed to perform adequate underwriting when making loans and failed to consider borrowers’ ability to repay these loans, in violation of California’s financing laws and regulations.” At the time the lender announced it was limiting platform activity and pausing client withdrawals. The lender eventually filed a petition for chapter 11 bankruptcy. An investigation also revealed that due to the lender’s failure to timely notify borrowers that they could stop repaying their loans, borrowers remitted at least $103,471 in loan repayments to the lender’s servicer while they were unable to withdraw funds and collateral from the platform. A hearing on the lender’s petition to direct its servicer to return borrowers’ loan repayments is scheduled for April 19.
The lender agreed to an interim suspension of its lending license while the bankruptcy and revocation actions are pending. It also agreed to a final order to discontinue unsafe or injurious practices, as well as a desist and refrain order. Among other things, the lender has agreed to continue to direct its agents to pause collection of repayments on loans belonging to California residents while its license is suspended (including turning off autopay), will continue to set interest rates to 0 percent, and continue to not levy any late fees associated with any payments or report any loans that became delinquent or defaulted on or after November 11, 2022, to credit reporting agencies while the bankruptcy and revocation actions are pending.
2nd Circuit affirms dismissal in FCRA suit
On January 4, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s decision to grant summary judgment for a credit reporting agency (defendant) in a suit alleging FCRA violations. According to the opinion, four years after the plaintiff took out a student loan, he filed for bankruptcy protection. The bankruptcy court issued a final decree of discharge, which released the plaintiff from all “dischargeable debts,” but did not specifically indicate that the loan was discharged. The student loan servicer indicated that the student loan was not discharged, and the plaintiff executed a loan modification agreement with the loan holder and made payments for several years. The plaintiff filed suit against the defendant consumer reporting agency, alleging that it violated the FCRA and New York law for including the loan on his credit report. The district court granted summary judgment in favor of the defendant after determining that the consumer’s loan had not been discharged. The plaintiff appealed.
On appeal, the 2nd Circuit noted that the plaintiff’s claim “hinges on the resolution of an unsettled legal question”: whether the loan was in fact discharged in the bankruptcy proceeding. Making such a determination would have required the defendant to resolve a legal question related to the debt, which the appellate court concluded was not required under the FCRA. As a result, the appellate court affirmed the dismissal of the plaintiff’s complaint because the alleged inaccuracy is not considered to not be an actionable “inaccuracy” under the FCRA.
6th Circuit affirms FCRA summary judgment
On November 4, the U.S. Court of Appeals for the Sixth Circuit affirmed a district court’s summary judgment ruling in favor of a credit reporting agency (defendant) accused of violating the FCRA. According to the opinion, a father and son (plaintiff) filed Chapter 7 bankruptcy petitions just over a year apart with the same attorney. Both petitions had their similar names, identical address, and, mistakenly, the plaintiff’s social security number. Although the attorney corrected the social security number on the father’s bankruptcy petition the day after it was filed, the defendant allegedly failed to catch the amendment and erroneously reported the father’s bankruptcy on the plaintiff’s credit report for nine years. When the plaintiff noticed the error, he sent the defendant a letter and demanded a sum in settlement. The defendant removed the father’s bankruptcy filing from the plaintiff’s credit report. The plaintiff sued two credit reporting agencies, alleging they violated the FCRA by failing to “follow reasonable procedures to assure maximum possible accuracy” of his reported information. One of the agencies settled with the plaintiff. A district court granted the other defendant’s motion for summary judgment, which the plaintiff appealed.
On the appeal, the 6th Circuit noted that the plaintiff “has standing to bring this action, but also agree that he cannot establish that [defendant’s] procedures were unreasonable as a matter of law.” The appellate court found that, because the defendant gathered information from reliable sources and because someone “with at least some legal training” would have had to manually review the bankruptcy docket to notice that the Social Security number had been updated, the defendant did not violate the FCRA. The appellate court wrote that the defendant’s “processes strike the right balance between ensuring accuracy and avoiding ‘an enormous burden’ on consumer credit reporting agencies.” Furthermore, the 6th Circuit stated that, “[g]iven the sheer amount of data maintained by these companies, we know that consumers are ‘in a better position . . . to detect errors’ in their credit reports and inquire about a fix.”
District court partially grants summary judgment in FDCPA suit
On July 12, the U.S. District Court for the Northern District of Alabama partially granted a plaintiff’s motion for summary judgment in an FDCPA case. According to the memorandum opinion, the plaintiff purchased a home security system, which, after a period of time, she transferred to someone else. The account became delinquent and the plaintiff began receiving collection letters from a debt collection agency regarding the debt owed to the security company. The plaintiff filed for bankruptcy protection. More than two years later, the debt collection agency assigned plaintiff’s account to the defendant for collection. The plaintiff contended that the defendant violated the FDCPA because when it contacted her – via a text message and several alleged telephone calls – to collect a debt on behalf of the debt collection agency, she was a party to Chapter 13 bankruptcy proceedings in which the alleged debt was listed. The defendant argued that the text message was not an attempt to collect on the debt because it made no demand or request for payment. The district court disagreed, based on the “plain language” of the text message, which stated, “This communication is from a debt collector, this is an attempt to collect a debt.” The text message also referenced a specific debt, thus making the text a “false representation” because it asserted that money was due. The defendant also argued that it should be entitled to the FDCPA’s bona fide error defense. The district court found that the defendant’s actions were “not intentional,” stating that “[w]hen it sent the text message, [the defendant] was not aware that [the plaintiff] had filed for bankruptcy or was represented by an attorney in connection with the debt.” The district court continued, “Moreover, [the plaintiff] had not notified [the defendant] in writing that she refused to pay the debt or that she wished communications to cease. Thus, [the defendant] did not deliberately contact a debtor who had filed for bankruptcy, was represented by an attorney, was refusing to pay the debt, or wished communications to cease.” Though the district court found that the defendant’s error was bona fide, it held that the defendant’s procedure of “relying exclusively” on the collection agency that had assigned the debt to defendant, without any “internal controls,” was “not reasonably adapted to avoid” the error at issue—and thus the defendant was not entitled to the bona fide error defense.
8th Circuit says bank is entitled to proceeds from condo sale
On June 24, the U.S. Court of Appeals for the Eighth Circuit affirmed a trial court’s decision that a plaintiff bank is entitled to the proceeds from the sale of a condominium despite the defendant’s ex-husband’s bankruptcy and an outstanding balance owed to the bank on a business loan. When the defendant signed and initialed a mortgage securing the financing of a condominium, she consented to her ex-husband’s execution of the note but was not a signatory. The mortgage contained three provisions, including (i) a choice-of-law provision specifying that Iowa law governed the mortgage; (ii) a homestead waiver, in which the defendant and her ex-husband “waive[d] all appraisement and homestead exemption rights relating to” the condominium, except as prohibited by law; and (iii) a future advances clause or “dragnet clause,” which granted the plaintiff a security interest in the mortgage that covered future funds the ex-husband may borrow. The plaintiff initiated litigation against the defendant seeking a declaratory judgment that the defendant’s portion of the escrowed sale proceeds was subject to the mortgage’s future advances clause, and that the plaintiff could apply the proceeds to her ex-husband’s business loan. The trial court concluded that the bank was entitled to the proceeds.
On appeal, the 8th Circuit concluded that the mortgage’s future advances clause encompassed and secured the defendant’s ex-husband's business loan. Among other things, the appellate court rejected the defendant’s arguments that (i) the plaintiff failed to make a prima facie case that it was entitled to the condo sale proceeds because it purportedly “did not prove the proceeds comported with the mortgage’s maximum obligation limit clause (finding “no miscarriage of justice in declining to analyze her claim”); and (ii) the mortgage forced “her to waive her homestead rights in contravention of public policy” and in violation of the FTC’s “unfair credit practices” regulation (16 C.F.R. § 444.2)—a regulation, the appellate court pointed out, that does not apply to “banks” by its own terms. The 8th Circuit also rejected defendant’s unconscionability claim under Iowa law, stating that the “doctrine of unconscionability does not exist to rescue parties from bad bargains.” The appellate court further rejected the defendant’s other “equitable arguments” as “untenable” primarily because the mortgage is a “credit agreement” regulated under Iowa Code § 535.17(5)(c), and that statute expressly displaces equitable remedies.
1st Circuit: Bankruptcy Code “unequivocally strips tribes” of their sovereign immunity to sue
On May 6, the U.S. Court of Appeals for the First Circuit reversed a district court’s decision, ruling that American tribes are not exempt from federal law barring suits against debtors once they file for bankruptcy. The debtor (plaintiff) in 2019 took out a $1,100 payday loan from a creditor (appellee), who is a subsidiary of a tribe. He voluntarily filed a Chapter 13 bankruptcy petition, listing his debt to the appellee, which had increased to approximately $1,600, as a nonpriority unsecured claim. He also listed the appellee on the petition’s creditor matrix, and his attorney mailed the appellee a copy of the proposed Chapter 13 plan. When the plaintiff filed the petition, the Bankruptcy Code imposed an automatic stay enjoining “debt-collection efforts outside the umbrella of the bankruptcy case.” The appellee continued to attempt to contact the plaintiff regarding the debt, but the plaintiff had allegedly previously notified the appellee’s representatives that he had filed for bankruptcy. Two months after the plaintiff filed the petition, he claimed that his “mental and financial agony would never end,” and blamed his agony on the appellee’s “regular and incessant telephone calls, emails and voicemails.” To stop the appellee’s collection efforts, the plaintiff relocated to enforce the automatic stay against the appellee and its corporate parents and sought an order prohibiting future collection efforts, as well as damages, attorney's fees, and expenses. In response, the tribe and its affiliates asserted tribal sovereign immunity and moved to dismiss the enforcement proceeding. The bankruptcy court agreed with the tribe and granted the motions to dismiss.
On the appeal, the tribe argued that the Bankruptcy Code cannot abrogate tribal sovereign immunity because it never uses the word “tribe.” The appellate court noted that the argument “boils down to a magic-words requirement” that tribes must be mentioned in order to be covered by a law, but U.S. Supreme Court precedent “forbids us from adopting a magic-words test.” However, the appellate court further noted that Congress did not determine that tribes were subject to the Code, stating that “[e]ven if Congress need not use magic words to make clear that its abrogation provision applies to Indian tribes, it must at least use words that clearly and unequivocally refer to Indian tribes if it wishes to make that abrogation provision apply to them.” The appellate court ruled that Congress took away tribes' sovereign immunity as “domestic governments” covered by the Bankruptcy Code, stating that even though tribes are not explicitly named in the Code, “we have no doubt that Congress understood tribes to be domestic dependent nations,” and since those “are a form of domestic government, it follows that Congress understood tribes to be domestic governments.”
3rd Circuit confirms adversary proceeding required to discharge student debt in bankruptcy
On March 25, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s dismissal of an FDCPA and FCRA case against a student loan servicer and three credit reporting companies for attempting to collect a loan debt after it had been discharged in bankruptcy. After the discharge and completion of his bankruptcy case, the plaintiff filed suit, alleging the defendants violated the FDCPA and the FCRA by attempting to collect student loan debt that had been discharged. The district court granted the defendants’ motion to dismiss, ruling that the plaintiff failed to state a claim because under Section 523(a)(8) of the Bankruptcy Code, student loan debt is presumptively non-dischargeable and the plaintiff had not filed an adversary proceeding to determine otherwise.
On appeal, the plaintiff “argued that he was not required to file an adversary proceeding in Bankruptcy Court to determine the dischargeability of his student loan debt,” and that the Bankruptcy Court’s determination that the plaintiff was indigent rebuts “the presumption that his debt was nondischargeable by satisfying the exception in §523(a)(8) for undue hardship.” However, the appellate court held that “a finding of indigence is not the same as an undue hardship determination under §538(a)(8)” and that while the Bankruptcy Code does not require an adversary proceeding to discharge student loan debt, the procedures established in the Bankruptcy Rules do include such a requirement by providing that adversary proceedings include “a proceeding to determine the dischargeability of a debt” and are commenced by serving a summons and complaint on affected creditors. Accordingly, the appellate court affirmed dismissal.