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Financial Services Law Insights and Observations


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  • District Court denies defendant's motion in FCCPA case


    On March 25, the U.S. District Court for the Middle District of Florida denied a TV provider’s (defendant) motion for summary judgment while partially granting and partially denying a motion for partial summary judgment from the plaintiff in a Florida Consumer Collection Practices Act (FCCPA) suit. According to the order, the plaintiff allegedly signed up for the defendant’s service, but “pause[d]” the program, which permitted her to suspend her service for nine months for $5 per month. The plaintiff filed for bankruptcy protection, listed the defendant as an unsecured creditor, and obtained a discharge. The plaintiff’s lawyer sent two faxes to the defendant, which disclosed to the defendant that the plaintiff was represented by counsel. The defendant sent five billing notifications and made six calls to the plaintiff, attempting to collect on the $5 monthly payment. A district court granted the defendant summary judgment on claims that it violated the FCCPA and the TCPA. The plaintiff appealed the decision, which affirmed the ruling on the TCPA claim, but reversed the FCCPA ruling, finding that the defendant may have attempted to collect a debt that was discharged and that it contacted the plaintiff after being notified that she was represented by an attorney. According to the order, the court stated that the “[p]laintiff has proffered enough evidence in the record from which a jury could reasonably infer that [the defendant] knew the Pause debt was invalid and that it did not have the right to collect it,” but “[o]n the other hand, considering the evidence in a light most favorable to [the defendant], a jury could reach the opposite conclusion, as [the defendant] has provided record evidence from which a jury could infer [the defendant] did not know that the Pause debt was invalid.”

    Courts State Issues Florida Debt Collection Consumer Finance TCPA Bankruptcy

  • 7th Circuit: Collector did not violate FCRA by obtaining a “propensity-to-pay score”


    On December 22, the U.S. Court of Appeals for the Seventh Circuit affirmed summary judgment in favor of a defendant debt collector in an FCRA action alleging a plaintiff’s credit information was acquired without a permissible purpose. The plaintiff and her husband jointly filed for bankruptcy protection. The bankruptcy court ordered a discharge of their debts, which included a debt incurred by the plaintiff’s husband that was being serviced by the defendant. The defendant was notified of the discharge (which included each of the four former last names used by the plaintiff) and scanned its system for affected accounts; however, by the time it received notice of the bankruptcy, it had already closed the account it had been servicing. Later, another account bearing one of the plaintiff’s former names was placed with the defendant. The defendant sent the account to a third-party vendor to see if the individual had filed for bankruptcy protection and did not received any bankruptcy results. It then ordered a “propensity-to-pay-score” from a credit reporting agency. The plaintiff’s records were eventually updated by the third-party vendor with information about the bankruptcy, and the defendant closed the account. However, the plaintiff noted the soft inquiry on her credit report and sued, alleging the defendant did not have a permissible purpose to make such an inquiry. The district court granted summary judgment to the defendant.

    On appeal, the 7th Circuit determined that the plaintiff had suffered a concrete injury, concluding that an “unauthorized inquiry into a consumer’s propensity‐to‐pay score is analogous to the unlawful inspection of one’s mail, wallet, or bank account.” However, after reviewing the merits of the case, the appellate court held that an alleged invasion of privacy was not enough for it to overturn the district court’s ruling. There was no negligent violation of the FCRA “because no reasonable juror could conclude that the inquiry into [the plaintiff’s] propensity‐to‐pay score resulted in actual damages,” the appellate court wrote. Additionally, while the 7th Circuit acknowledged that the plaintiff’s debt was discharged by the time the defendant obtained her propensity-to-pay score, there was no willful violation of the FCRA because the defendant “lacked actual knowledge of the bankruptcy” and “did not recklessly disregard the possibility that debt had been discharged.” The appellate court added that the evidence showed that the defendant “had a reasonable basis for relying on its procedures.”

    Courts Bankruptcy FCRA Appellate Seventh Circuit Consumer Finance Debt Collection

  • District Court denies MSJ in FDCPA case


    On October 19, the U.S. District Court for the Middle District of Florida denied a defendant’s motion for judgment without prejudice concerning allegations that it knowingly ignored cease-and-desist letters sent by an individual while the individual had a pending bankruptcy petition. The plaintiff allegedly incurred a debt that was placed with the defendant for collection. After, the plaintiff sought protection under the Bankruptcy Code. During the bankruptcy case, the defendant allegedly sent the plaintiff text messages to collect the debt, the plaintiff responded with a cease-and-desist letter, and then the defendant sent the plaintiff a collection letter. The plaintiff sent another cease and desist letter and the defendant sent four more collection letters. Based on the defendant’s post-petition actions, the plaintiff sued for FDCPA and Florida Consumer Collection Practices Act violations. The defendant argued that the plaintiff failed to disclose this lawsuit in her bankruptcy case, which would result in the FDCPA case being dismissed on judicial estoppel grounds. However, the court found that while the plaintiff omitted the name and specific circumstances of her claims against the defendant, she “put the Bankruptcy Court, trustee, and creditors on notice she had a claim against a creditor and properly sought approval from the Bankruptcy Court before retaining counsel to pursue it.” The court went on to state that if the plaintiff “intended to deceive creditors or others in bankruptcy, filing the Application strayed from that intent,” and that “the filing mitigates any prejudice claimed by [the defendant].”

    Courts Florida FDCPA Debt Collection Bankruptcy State Issues

  • 2nd Circuit: Bankruptcy rule on post-petition mortgage fee notices does not authorize punitive sanctions


    On August 2, the U.S. Court of Appeals for the Second Circuit vacated a sanctions order imposed on a mortgage servicer in three chapter 13 cases. According to the opinion, the servicer sent the debtors monthly mortgage statements listing fees that allegedly had not been properly disclosed in the three bankruptcy cases. The United States Bankruptcy Court for the District of Vermont then sanctioned the mortgage servicer $225,000 for violating court orders issued in two of the debtors’ cases, which had declared the debtors current on their mortgages and enjoined the servicer from challenging that fact in any other proceeding. The bankruptcy court also sanctioned the servicer $75,000 for violating Bankruptcy Rule of Procedure 3002.1, which requires creditors to provide formal notice to a debtor and trustee of new post-petition fees and charges and authorizes the bankruptcy court to impose sanctions for non-compliance.

    On appeal, the 2nd Circuit held that Rule 3002.1 “does not authorize punitive monetary sanctions,” and that the servicer “did not, as a matter of law, violate the court orders.” The appellate court added that “[a] broad authorization of punitive sanctions is a poor fit with Rule 3002.1’s tailored enforcement mechanism and limited purpose,” noting that the bankruptcy court in this case is “apparently the first and only one to impose punitive monetary sanctions under the rule.” While the bankruptcy court raised “serious concerns” about whether the servicer “is making a good faith effort to comply with Rule 3002.1,” the appellate court concluded that “[a] concern, even a serious concern, is not a finding.” Concluding that the $225,000 sanction was based on an improper finding of contempt, the appellate court vacated and reversed the order.

    Courts Mortgages Bankruptcy Appellate Second Circuit

  • 2nd Circuit says private student loans not explicitly exempt from bankruptcy discharge


    On July 15, the U.S. Court of Appeals for the Second Circuit held that private student loans are not explicitly exempt from the discharge of debt granted to debtors in a Chapter 7 bankruptcy. According to the opinion, the plaintiff filed for Chapter 7, which led to an ambiguous discharge order as to how it applied to his roughly $12,000 direct-to-consumer student loans. After the plaintiff received the discharge in 2009, the student loan servicer started collection efforts. Because the plaintiff did not know whether the discharge applied to his student loans, he repaid the loans in full. In 2017, the plaintiff moved to reopen his bankruptcy case and filed an adversary proceeding against the student loan servicer and the servicer’s predecessor (collectively, “defendants”), seeking a determination that his student loans were in fact discharged during the original proceeding. The servicer moved for dismissal claiming the loans were exempt under 11 U.S.C. § 523(a)(8)(A)(ii), but the bankruptcy judge denied the motion, ruling that the bankruptcy code “does not sweep in all education-related debt.” The district court subsequently certified the bankruptcy court’s order for interlocutory appeal.

    On appeal, the 2nd Circuit reviewed whether the plaintiff’s private student loans could be discharged under bankruptcy. Under § 523(a)(8), the following types of student loans are exempt from discharge: (i) government or nonprofit institution student loans; (ii) obligations “to repay funds received as an educational benefit, scholarship, or stipend”; and (iii) qualified education loans. The defendants argued that the plaintiff’s loans fell into the “educational benefit” category, but the appellate court disagreed, concluding that § 523(a)(8) does not provide a blanket exception to the applicability of bankruptcy discharge to private student loans. In affirming the bankruptcy court’s ruling, the appellate court wrote, “if Congress had intended to except all educational loans from discharge under § 523(a)(8)(A)(ii), it would not have done so in such stilted terms.” The 2nd Circuit further added that “[i]nterpreting ‘educational benefit’ to cover all private student loans when the two terms listed in tandem describe ‘specific and quite limited kinds of payments that. . .do not usually require repayment,’. . .would improperly broaden § 523(a)(8)(A)(ii)’s scope.” 

    Courts Student Lending Student Loan Servicer Second Circuit Appellate Bankruptcy

  • DFPI announces settlement on deceptive educational financing practices

    State Issues

    On April 26, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a San Francisco-based coding school, requiring removal of a bankruptcy dischargeability provision from the school’s student contracts and notification to students that this type of financing can be discharged in a bankruptcy filing. According to the consent order, a non-dischargeability provision used in the school’s installment agreements was “misleading because, contrary to the Bankruptcy Non-Dischargeability Provision, the Contract is not . . . subject to the limitations on dischargeability pursuant to . . . the United States Bankruptcy Code.” Therefore, the school violated the California Consumer Financial Protection Law, which prohibits companies from participating in practices that are unlawful, unfair, deceptive, or abusive. As part of the settlement, the school must (i) notify students that the bankruptcy dischargeability provision language is not accurate; (ii) retain a third party to review the terms of the school’s finance contract to certify that it follows the relevant regulations and laws; and (iii) go through a marketing compliance review to certify that the information is accurate and not misleading. According to DFPI Commissioner Manuel P. Alvarez, the consent order “helps ensure that future students can confidently enter into educational financing contracts without being subjected to false or misleading terms.”

    State Issues DFPI Deceptive Bankruptcy Student Lending CCFPL Enforcement

  • Massachusetts bankruptcy court: No recoupment absent proof of emotional distress


    On April 12, the U.S. Bankruptcy Court for the District of Massachusetts entered judgment in favor of a national bank, determining that the plaintiff failed to, among other things, “carry his burden to prove that he incurred injury” concerning economic or emotional distress damages as a result of the original lender’s violations. During the plaintiff’s chapter 13 bankruptcy proceeding, he initiated an adversary proceeding against the bank and a loan servicer for violations of Massachusetts law related to the origination, underwriting, and closing of his mortgage loan. According to the memorandum, the plaintiff contended he was approved for a loan modification after he struggled to stay current on his loan. While the loan modification did not forgive any of the plaintiff’s outstanding debt, the plaintiff agreed to the terms, entered into a modification agreement with the bank (who was the successor by assignment of the original lender), and eventually filed a chapter 13 petition. The bankruptcy court was ultimately called to review the plaintiff’s objection to the bank’s proof of claim filed in his chapter 13 case, in which the plaintiff invoked the doctrine of recoupment, bringing a claim against the bank for damages under Chapter 93A of Massachusetts’ consumer protection law.

    Upon review, the court determined, among other things, that the plaintiff’s loan was “presumptively unfair and also unfair in the specific circumstances in which it was made” and that “[n]o reasonably diligent lender would have approved the loan to [the plaintiff] without taking steps to independently verify critical financial information.” Moreover, the court determined that the original lender’s conduct was “unfair and deceptive” under Chapter 93A. The court further noted that Massachusetts law states that while “an assignee ordinarily cannot be held liable for damages based upon the acts of its assignor,” under “the common law principle that an assignee stands in the assignor’s shoes, ‘assignees may be liable under [Chapter] 93A for equitable remedies such as cancellation of a debt or rescission of a contract’”—a context under which the plaintiff sought to have the bank’s claim “reduced by recoupment in the amount of his damages caused by [the original lender’s] unfair and deceptive acts.” However, the court noted that because the borrower failed to “carry his burden to prove that he incurred injury as a result of [the original lender’s] violation,” he “failed to prove an amount for recoupment in reduction” of the proof of claim the bank asserted against him.


    Courts Bankruptcy State Issues Mortgages

  • SBA clarifies bankruptcy PPP eligibility

    Federal Issues

    On April 6, the Small Business Administration (SBA) updated its Paycheck Protection Program (PPP) frequently asked questions to clarify when an applicant or owner is no longer considered to be “presently involved in any bankruptcy” for PPP loan eligibility purposes. In order to be eligible for a PPP loan, SBA requires all borrowers to certify on their applications that the applicant, as well as any owner of 20 percent or more of the applicant, is not “presently involved in any bankruptcy.” SBA’s FAQ provides that “[i]f an applicant or owner has filed a Chapter 7 bankruptcy petition, the applicant or owner is considered to be ‘presently involved in any bankruptcy’ for PPP eligibility purposes until the Bankruptcy Court has entered a discharge order in the case.” For Chapter 11, 12, or 13 bankruptcy petitions, the applicant or owner will be “considered to be ‘presently involved in any bankruptcy’ for PPP eligibility purposes until the Bankruptcy Court has entered an order confirming the plan in the case.” An applicant or owner will not be considered to be “presently involved in any bankruptcy” if the Bankruptcy Court has entered an order dismissing the case, regardless of the type of bankruptcy petition. SBA stipulates, however, that the order must be entered before the date of the PPP loan application.

    The SBA also issued a procedural notice to lenders announcing it will shut down the PPP platform to new PPP loan guaranty applications at 12 a.m. EDT on June 1.

    Federal Issues SBA Covid-19 Small Business Lending Bankruptcy

  • 9th Circuit vacates summary judgment in bankruptcy, FDCPA action


    On November 25, the U.S. Court of Appeals vacated summary judgment in favor of defendants in an action alleging the defendants violated the FDCPA by attempting to collect a debt that was discharged in a bankruptcy proceeding and no longer owed. According to the opinion, after the plaintiff fell behind on dues that were owed to his homeownership association (HOA), a law firm acting as a debt collector on behalf of the HOA obtained a lien for the unpaid debt and initiated nonjudicial foreclosure proceedings. The plaintiff filed and received approval for Chapter 13 bankruptcy protection. A separate collection agency that received the plaintiff’s HOA arrearage payments eventually informed the bankruptcy trustee that the HOA debt was “paid in full,” with a notice issued to that effect. An order of discharge was entered in the case by the bankruptcy court after the completion of payment was verified. Following the bankruptcy discharge order, the law firm—whose records still showed an unpaid balance—undertook collection efforts again. The plaintiff informed the law firm that the debt had been paid, and—after further review—the law firm acknowledged a communication from the collection agency that stated the debt had been paid in full. The plaintiff filed suit, but the defendants argued that the claims were precluded under Walls v. Wells Fargo Bank, N.A. because the debt was discharged in bankruptcy. The district court granted the defendant’s motion for summary judgment, ruling that the plaintiff’s “FDCPA claims were precluded ‘because they are premised upon violations of the bankruptcy post-discharge injunction.’”

    On appeal, the 9th Circuit concluded that the plaintiff’s claims were not precluded by the Bankruptcy Code. The appellate court observed that while its 2002 decision in Walls generally indicates that the Bankruptcy Code precludes FDCPA claims premised on a violation of a bankruptcy discharge order, it did not apply in this case. Among other things, the panel determined that the plaintiff’s FDCPA claims were not premised on an issuance or violation of the discharge order in the bankruptcy proceeding. Rather, the plaintiff’s FDCPA claims were based on a debt that was fully satisfied through arrearage payments as part of a Chapter 13 plan before a discharge order was entered. As such, the appellate court determined that “just because [the plaintiff] made his arrearage payments through operation of a bankruptcy plan” it “does not render his FDCPA claims inextricably intertwined with bankruptcy issues.”

    Courts Appellate Ninth Circuit FDCPA Bankruptcy Debt Collection

  • FTC settles with auto dealers for falsifying consumer financial documents

    Federal Issues

    On September 4, the FTC announced a settlement with group of auto dealers (defendants) with locations in Arizona and New Mexico near the Navajo Nation’s border, resolving allegations that the defendants advertised misleading discounts and incentives and falsely inflated consumers’ income and down payment information on certain financing applications. As previously covered by InfoBytes in August 2018, the FTC filed an action against the defendants alleging violations of the FTC Act, TILA, and the Consumer Leasing Act for submitting falsified consumer financing applications to make consumers appear more creditworthy, resulting in consumers—many of whom are members of the Navajo Nation—defaulting “at a higher rate than properly qualified buyers.”

    The court-approved settlement requires the defendants to cease all business operations and includes a monetary judgment of over $7 million. Because the defendants are currently in Chapter 7 bankruptcy proceedings, the settlement will make the FTC an unsecured claimant in the bankruptcy proceedings. The settlement also prohibits the bankruptcy trustee from using or selling the consumer information obtained from the defendants’ business activities as part of the bankruptcy liquidation.

    Federal Issues Consumer Finance FTC Auto Finance FTC Act TILA Consumer Leasing Act Bankruptcy


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