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Financial Services Law Insights and Observations


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  • District court applies OCC’s valid-when-made final rule but raises true lender question


    On August 12, the U.S. District Court for the District of Colorado reversed in part a bankruptcy court judgment, concluding that the OCC’s valid-when-made rule applied but that discovery was needed to determine whether a nonbank entity was the true lender. According to the opinion, a debtor corporation commenced an adversary proceeding against a creditor in their bankruptcy, alleging, among other things, that the interest rate of the underlying debt’s promissory note is usurious under Colorado law. The promissory note was executed between a Wisconsin state-charted bank and a Colorado-based corporation, with an interest rate of nearly 121 percent. The note included a choice of law provision dictating that federal law and Wisconsin law govern. A deed of trust, dictating that Colorado law (the property’s location) governs, was pledged as security on the promissory note and incorporated by referencing the terms of the note. Subsequently, the Wisconsin bank assigned its rights under the note and deed of trust to a nonbank entity registered in New York with a principal place of business in New Jersey. The bankruptcy court denied the debtor’s claims, concluding that the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) applied, which dictated the application of Wisconsin law, making the interest rate valid.

    On appeal, the district court applied the OCC’s valid-when-made rule (which was finalized in June and covered by a Buckley Special Alert), concluding that “a promissory note with an interest rate that was valid when made under DIDMCA § 1831d remains valid upon assignment to a non-bank.” However, the district court noted that DIDMCA § 1831d does not apply to promissory notes “with a nonbank true lender” and the parties did not “conduct discovery on the factual question of whether [the nonbank entity] was the true lender.” Thus, the court reversed and remanded to the Bankruptcy Court to determine whether the nonbank entity was the true lender.

    Courts OCC Bankruptcy Madden True Lender Interest Rate State Issues

  • Southern District of New York Bankruptcy Court issues general order addressing certain filings, documentation requirements, and deadlines

    State Issues

    On April 9, the U.S. Bankruptcy Court for the Southern District of New York issued General Order M-545 regarding court operations under the exigent circumstances created by Covid-19. Effective immediately, with respect to cases filed by an individual under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code, the general order:

    • Suspends the requirement that a CM/ECF user secure the signer’s original signature prior to electronically filing a document bearing the signature, provided certain requirements are met.
    • Provides guidance on documentation that creditors (mortgage holders or servicers) must file in connection with a temporary suspension of mortgage payments.
    • Extends any deadline under the Loss Mitigation Program Procedures or Student Loan Mediation Program Procedures that has not expired as of March 16, 2020, to July 1, 2020.
    • Provides an alternate standard for establishing a debtor’s identification for purposes of a meeting of creditors under section 341 of the bankruptcy code.

    The order expires on July 1, 2020 unless modified by further order.

    State Issues Covid-19 New York Bankruptcy Mortgages Student Lending

  • 11th Circuit: District Court erred in denying class certification over bankruptcy preemption defense


    On October 29, the U.S. Court of Appeals for the Eleventh Circuit vacated a district court decision denying class certification, concluding the court erred in its determination that each FDCPA and Florida Consumer Collection Practices Act (FCCPA) claim’s individualized inquiries predominated over issues common to the proposed class. According to the opinion, two plaintiffs filed a class action against their mortgage servicer alleging the servicer violated the FDCPA and the FCCPA by sending monthly mortgage statements after the debt was discharged in a Chapter 7 bankruptcy and they moved out of the home. The servicer objected to class certification that included both consumers who vacated their homes and those who remained in their homes because the Bankruptcy Code treats the two groups differently, thus requiring an individualized review to decide how the rules would be applied. Additionally, the servicer argued that the court would be required to decide whether the Bankruptcy Code precluded or preempted the claims for only class members who chose to remain in their homes. The district court denied class certification, concluding that individualized claims predominated over common issues, because “the question of ‘whether the Bankruptcy Code precluded and/or preempted the FDCPA and FCCPA’ presented an individualized rather than a common issue.”

    On appeal, the 11th Circuit disagreed. The appellate court noted that the district court erred when it concluded that the question of whether the Bankruptcy Code precluded or preempted the FDCPA only applied to those consumers who chose to remain in their homes, because the preemption defense “potentially barred every class member’s FDCPA claim,” thus requiring the court to treat it as a common issue. The appellate court made a similar determination for the FCCPA claims. The appellate court cautioned that its conclusion was not an opinion about whether the servicer’s “defense is meritorious,” but was “limited to the conclusion that [the] defense raises questions common to all class members.” The appellate court, therefore, vacated and remanded the case back to district court.

    Courts Bankruptcy Class Action Debt Collection Appellate Eleventh Circuit

  • 3rd Circuit affirms summary judgment in bankruptcy, FDCPA action


    On October 23, the U.S. Court of Appeals for the Third Circuit affirmed summary judgment for a debt collection law firm and attorney (collectively, “defendants”) in an action alleging the defendants violated the U.S. Bankruptcy Code and the FDCPA. According to the opinion, the plaintiffs had to make monthly payments to their condominium association as part of a special assessment to pay for an improvement project. The plaintiffs made payments until filing for bankruptcy in 2014. After the bankruptcy closed, the plaintiffs did not resume payments to the association for the improvement project. The balance continued to accrue and a lien was filed for the outstanding balance of $10,137.38. The association also created a “Certificate of Amount of Unpaid Assessments” that referenced the outstanding balance and explained over $8,000 of the total balance had been discharged in the 2014 bankruptcy. The plaintiffs sued the defendants, asserting that the bankruptcy discharged all the debt owed, including the post-discharge payments, and that the defendants’ collection efforts “were coercive and misleading.” The district court granted summary judgment in favor of the defendants.

    On appeal, the 3rd Circuit affirmed. The court concluded that the payment owed to the condominium association was a “fee or assessment” under the Bankruptcy Code that was not discharged here because the plaintiffs retained ownership interest in the property and the assessment payment became due after the bankruptcy. The court also rejected the plaintiffs’ FDCPA claims against the defendants. The court explained that the defendants were not responsible for the amount listed in the condominium association’s certificate and, in any event, the amount the defendants’ attempted to collect did not include the discharged amount. The court concluded that the plaintiffs failed to provide any evidence that would create an issue of material fact on the FDCPA claim and affirmed the district court’s summary judgment ruling.

    Courts Appellate Third Circuit Bankruptcy FDCPA Debt Collection

  • CFPB report examines bankruptcy trends

    Federal Issues

    On September 25, the CFPB released the latest quarterly consumer credit trends report, which examines how the volume and types of bankruptcy filings have changed from 2001 to 2018. The report focuses on consumers who filed for Chapter 7 or Chapter 13 bankruptcy during the reported timeframe. Key findings of the report include: (i) in 2005, there was a rush to file for bankruptcy before the income limits of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect, increasing the share of Chapter 7 filings to 80 percent of all personal bankruptcy filings that year; (ii) from 2015 to 2018, with the effects of the recession fading, Chapter 7 filings appear to have stabilized at about 63 percent; (iii) Chapter 7 and 13 filers, on average, had more than twice the mortgage debt during the recession than in the periods before and after; and (iv) median credit scores increase steadily from year-to-year after consumers file a bankruptcy petition, with Chapter 7 filers’ scores increasing more quickly than Chapter 13, on average.

    Federal Issues CFPB Consumer Finance Bankruptcy Credit Scores

  • 5th Circuit says Congress, not courts, is responsible for changing rules for discharging student loans in bankruptcy


    On July 30, the U.S. Court of Appeals for the 5th Circuit affirmed decisions by a bankruptcy court and a district court to dismiss a borrower’s student loan discharge request under the Bankruptcy Code, holding that Congress, not the courts, is responsible for changing the rules for discharging student loan debt in bankruptcy.

    The borrower, who became unable to make payments on her student loans and other debts, initiated an adversarial action against the Department of Education in bankruptcy court after receiving a general discharge of her debts, in an attempt to have two student loans discharged as well. While the borrower was able to prove that her monthly expenses exceed her income, the bankruptcy and district courts found that she failed the three-prong test for evaluating claims of “undue hardship” established by the 2nd Circuit in Brunner v. New York State Higher Education Services Corp. and adopted in the 5th Circuit in In re Gerhardt. Primarily, the courts stated that the borrower failed to (i) show that she was “completely incapable of employment now or in the future”; or (ii) prove that her present state of affairs was likely to persist through the bulk of the loan repayment period. The borrower appealed, arguing that the three-prong test “is inconsistent with the plain meaning of the term ‘undue hardship’” and urged the appellate court to adopt instead “a ‘totality of the circumstances’ test.”

    On appeal, the 5th Circuit agreed with the lower courts, stating that when Congress amended the bankruptcy law regarding the discharge of federal student loans, the intent was to limit it to cases of “undue hardship” in order to prevent the use of bankruptcy except in the most compelling circumstances. According to the appellate court, until an en banc panel or the Supreme Court reviews the standard, the panel finds no error in the lower courts’ decision. “Policy-based arguments do not change this interpretation; the role of this court is to interpret the laws passed by Congress, not to set bankruptcy policy,” the appellate court wrote. Moreover, reducing the test to a “totality of the circumstances” standard would create an “intolerable inconsistency” in decisions on loan discharges, and expand an area of bankruptcy law that Congress has sought to constrict.

    Courts Fifth Circuit Appellate Student Lending Bankruptcy

  • Supreme Court holds that creditor may be held in civil contempt for violation of bankruptcy discharge injunction


    On June 3, the U.S. Supreme Court unanimously held that a creditor may be held in civil contempt for violating a bankruptcy court’s discharge order “if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” At issue was Section 524(a)(2) of the Bankruptcy Code, which specifies that a discharge order triggers an automatic injunction against any creditor that attempts to collect a pre-bankruptcy discharged debt.  In the case before the Court, a defendant to a lawsuit proceeding in state court filed for Chapter 7 bankruptcy during the course of that litigation.  After the bankruptcy court entered a discharge order, the state court ordered the debtor to pay the plaintiffs’ attorneys’ fees. While the monetary judgment would have ordinarily violated the discharge, the state court concluded that it was permissible under a lower-court doctrine holding that the discharge no longer applies when a debtor “return[s] to the fray” of litigation after filing for bankruptcy. The bankruptcy court appellate panel vacated the bankruptcy court’s decision and the  9th Circuit affirmed, concluding that a creditor may not be held in contempt for violating a discharge order if the creditor held a subjective good faith belief—even if “unreasonable”—that its actions did not violate the injunction.

    Upon review, the Supreme Court reversed the 9th Circuit’s opinion, noting that the standard for civil contempt “is generally an objective one,” and nothing about a bankruptcy court discharge order should modify that principle.  The Supreme Court emphasized that “a party’s subjective belief that [the party] was complying with an order ordinarily will not insulate [the party] from civil contempt if that belief was objectively unreasonable,” and that civil contempt “may be appropriate when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.” The -debtor’s argument for a standard that would operate like a “strict-liability” standard—where creditors who are unsure of whether a debt has been discharged can obtain an advance determination from the bankruptcy court prior to attempting to collect the debt—was also rejected. The Supreme Court stated that because “there will often be at least some doubt as to the scope of such orders,” a preclearance requirement may “lead to frequent use of the advance determination procedure,” as well as additional costs and delays.

    Courts U.S. Supreme Court Bankruptcy

  • 4th Circuit overrules own precedent, holds undersecured homestead mortgage claims can be bifurcated


    Recently, the U.S. Court of Appeals for the 4th Circuit overruled its own precedent, holding that the plain language of the Bankruptcy Code authorizes modification of undersecured homestead mortgage claims—not just the payment schedule for such claims—including through bifurcation and cram down. According to the opinion, a creditor initiated a foreclosure action against a mortgage debtor alleging that the debtor failed to repay approximately $136,000 due under the mortgage. The debtor filed Chapter 13 bankruptcy and valued the mortgaged property at $40,000 in his petition. The debtor proposed a bankruptcy plan that would bifurcate the creditor’s claim into a secured component commensurate with the value of the mortgaged property, and an unsecured component for the remainder. The bankruptcy court rejected the debtor’s proposal on the grounds that the 4th Circuit’s 1997 holding in Witt v. United Cos. Lending Corp (In re Wiit) barred any modification or bifurcation of the creditor’s claim, and thus entitled her to a secured claim in the full amount due under the mortgage, plus interest. The district court and a 4th Circuit panel affirmed.

    Following an en banc rehearing, the 4th Circuit reversed, overruling its decision in Witt. The en banc appellate court concluded that the plain text of Section 1322(c)(2) authorizes modification of covered homestead mortgage payments and claims, and allows for the bifurcation of undersecured homestead mortgages into secured and unsecured components. The appellate court noted that its initial interpretation in Witt had been “universally” criticized by courts and commentators, including for running “contrary to accepted canons of statutory construction.” Therefore, the appellate court reversed the district court’s judgment relying on Witt and remanded the case.

    In dissent, three circuit judges stated that the majority went too far in its interpretation of Section 1322, and that Section 1322(c)(2) allows debtors to repay their mortgages over the full duration of their plan. The dissent’s view was that the majority’s decision essentially overturns the Supreme Court’s holding in Nobelman v. American Savings Bank without “any clear desire by Congress to do so.” Moreover, the dissent argued that, while it agreed that “Congress meant for [Section] 1322(c)(2) to create an exception to Nobelman’s prohibition against modifying the timing of loan repayments,” Congress did not intend to “eviscerate Nobelman altogether.”

    Courts Appellate Fourth Circuit Mortgages Bankruptcy

  • 9th Circuit: Plaintiffs failed to show harm in FCRA action


    On March 25, the U.S. Court of Appeals for the 9th Circuit affirmed dismissal of five plaintiffs’ allegations against two credit reporting agencies, concluding the plaintiffs failed to show they suffered or will suffer concrete injury from alleged information inaccuracies. According to the opinion, the court reviewed five related cases of individual plaintiffs who alleged that the credit reporting agencies violated the FCRA and the California Consumer Credit Report Agencies Act (CCRAA), by not properly reflecting their Chapter 13 bankruptcy plans across their affected accounts after they requested that the information be updated. The lower court dismissed the action, holding that the information in their credit reports was not inaccurate under the FCRA. On appeal, the 9th Circuit, citing to U.S. Supreme Court’s 2016 ruling in Spokeo v. Robins (covered by a Buckley Special Alert), concluded that the plaintiffs failed to show how the alleged misstatements in their credit reports would affect any current or future financial transaction, stating “it is not obvious that they would, given that Plaintiffs’ bankruptcies themselves cause them to have lower credit scores with or without the alleged misstatements.” Because the plaintiffs failed to allege a concrete injury, the court affirmed the dismissal for lack of standing, but vacated the lower court’s dismissal with prejudice, noting that the information may indeed have been inaccurate and leaving the door open for the plaintiffs to refile the action.

    Courts Ninth Circuit Appellate Spokeo FCRA Bankruptcy Credit Reporting Agency

  • District Court approves $13.8 million class settlement for loan modifications


    On March 14, the U.S. District Court for the Western District of North Carolina issued an order certifying a settlement class of individuals who alleged that, while they were subject to Chapter 13 bankruptcy proceedings, a national bank imposed “no-application loan modifications” (NAMs) to their mortgages without consent. The class members claimed that the bank filed payment change notices in their bankruptcy proceedings around the time it sent out the NAM solicitations, which asserted that the mortgage payments had been adjusted to the amount of the proposed NAM payment, even though borrowers had not requested or accepted the changes. As a result, class members’ mortgage loans went into contractual default. According to the class, the bank has since ended the alleged practice. Under the terms of the settlement approved by the court, the bank has agreed to pay approximately $13.8 million into a common fund that will go to class members, account remediation, and attorneys’ fees and costs, as well as to injunctive relief.

    Courts Mortgages Class Action Bankruptcy Settlement Loan Modification


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