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Supreme Court Rules that FDCPA Law Not Applied to Time-Barred Debt Bankruptcy Claim
In a ruling handed down on May 15, the United States Supreme Court held that a debt collector’s filing of a proof of claim on time-barred debt in a consumer bankruptcy proceeding is not a “false, deceptive, misleading, unfair, or unconscionable” debt collection practice within the meaning of the Fair Debt Collection Practices Act (FDCPA). See Midland Funding, LLC v. Johnson, Case No. 16-348, 581 U.S. ___ (2017). Chief Justice Roberts and Justices Kennedy, Thomas, and Alito joined in Justice Breyer’s decision. Justice Gorsuch took no part in the consideration or decision of the case.
The Midland case arises out of a 2014 Chapter 13 petition, in response to which the defendant debt-collector filed a proof of claim for the payment of decades-old unpaid credit card debt the company had acquired. After the bankruptcy court dismissed the time-barred claim, the debtor filed a separate civil action in District Court alleging that the debt collector had violated the FDCPA. Finding that application of the FDCPA was precluded by the Bankruptcy Code, the District Court dismissed the suit. However, the Court of Appeals for the Eleventh Circuit reversed, finding “no irreconcilable conflict between the FDCPA and the [Bankruptcy] Code.” See Johnson v. Midland Funding, LLC, 823 F.3d 1334, 1336 (11th Cir. 2016).
The Supreme Court reversed. Writing for a 5-3 majority, Justice Breyer explained why the Court disagreed with the Eleventh Circuit panel’s conclusion that Midland was potentially liable for damages under the FDCPA for attempting to collect in bankruptcy on decade-old credit card debt. The Court held that the filing of a time-barred claim in a bankruptcy proceeding is not “false, deceptive, or misleading” because, among other reasons, “[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense” and therefore “we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code’s similar system.” The ruling also noted several differences between bankruptcy proceedings and a civil action to collect a debt—including that the “audience in [consumer] bankruptcy cases includes a trustee . . . likely to understand” the nature of a proof of claim and the necessity of objecting where appropriate.
Justice Sotomayor filed a dissenting opinion—joined by Justice Ginsburg and Justice Kagan—arguing that attempting to collect time-barred debt is both “unfair” and “unconscionable” because, among other reasons, the business model adopted by “professional debt collectors” depends on the hope “that no one notices that the debt is too old to be enforced by the courts.” Justice Sotomayor’s dissent also took issue with the majority’s claim that “structural features of the bankruptcy process reduce the risk that state debt will go unnoticed and thus be allowed,” agreeing with the Government’s amicus brief that trustees “cannot realistically be expected to identify every time-barred . . . claim filed in every bankruptcy.”
Special Alert: Supreme Court Holds Cities Have Standing Under FHA, But Limits Potential Claims
On May 1, the Supreme Court ruled 5-3 that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the Fair Housing Act against lenders for injuries allegedly flowing from discriminatory lending practices. However, the Court held that such injuries must be proximately caused by the alleged misconduct—rather than simply a foreseeable result. Some commentators suggest that the Court’s zone of interest analysis will result in the filing of new claims. Our view of this decision is that it will reduce such litigation efforts as prospective municipal plaintiffs recognize that it will be more difficult to survive early dispositive motions focused on whether the damages claims bear a direct relationship to the conduct alleged.
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Click here to read full special alert.If you have questions about the ruling or other related issues, visit our Fair Lending practice page for more information, or contact a Buckley Sandler attorney with whom you have worked in the past.
Supreme Court Hears Arguments on Whether a Debt Collector Who Purchases the Debt is Liable Under the FDCPA
On April 18, the United States Supreme Court heard oral argument in Henson v. Santander Consumer USA, Inc., Dkt. No. 16-349, on the question of “[w]hether a company that regularly attempts to collect debts it purchased after the debts had fallen into default is a ‘debt collector’ subject to the Fair Debt Collection Practices Act [FDCPA].” The case arose out of a class action filed by four consumers who had defaulted on automobile loans made by an auto lending affiliate of a major bank. The originator hired Respondent to collect the loans on behalf of the lender and Respondent later purchased the delinquent loans as part of a pool. Though Petitioners did not allege that debt collection was the principal purpose of the Respondent’s business, the consumer-plaintiffs had claimed that the Respondent regularly buys and attempts to collect defaulted debts, and that, in this instance, the Respondent engaged in conduct that violated the FDCPA after it bought the loans. The Petitioner needed to establish, among other things, that the Respondent was a debt collector under the FDCPA and that the loans were in default when they were acquired.
In March 2016, the U.S. Court of Appeals for the Fourth Circuit rejected the consumers’ arguments, concluding that the FDCPA “generally does not regulate creditors when they collect debt on their own account and that, on the facts alleged by the plaintiffs, [the defendant] became a creditor when it purchased the loans before engaging in the challenged practices.” Accordingly, the Fourth Circuit noted that the originator of the loans was irrelevant. In September 2016, the consumer-plaintiffs filed a cert petition with the Supreme Court, which was subsequently granted on January 13. Attorneys general from 28 states and the District of Columbia also joined in an amicus brief supporting the consumers’ argument.
At oral argument before the Supreme Court, the Petitioners cited 15 U.S.C. §1692a(6)(F) and argued that the debts are "owed" to the original lender, but are "due" to the debt buyer. As such, argued Petitioner, a debt buyer should be considered to be collecting debts “owed or due another,” and thus fall within the FDCPA definition of a “debt collector”. Respondent countered that “owed or due another” could only mean that the debt is currently owed to another person. However, Respondent argued, as a debt buyer, it was collecting debts owed to itself, and thus would not be a “debt collector” under the FDCPA. Both sides also presented policy-based arguments. Petitioner suggested that because Respondent was considered a “debt collector” before purchasing the loan, it could not remove itself from the scope of the FDCPA by purchasing the debts. Conversely, Respondent noted that, by purchasing essentially all of the original lender’s loans it had “stepped into [the lender]’s shoes.” Counsel emphasized that Respondent therefore fit the FDCPA definition of “creditor,” and, as a creditor, it had an incentive to maintain a positive relationship with consumers.
Supreme Court Remands Texas Credit Card Surcharge Case
On April 3, the U.S. Supreme Court granted certiorari in a case challenging a Texas law that bars retailers from imposing credit card surcharges, and remanded the case to the Fifth Circuit in light of its ruling last week in Expressions Hair Design, that a similar statute in New York regulated merchants’ First Amendment rights. In Rowell, a landscaping business, a computer networking company, a self-storage facility, and an event design and production company sought to challenge a Texas law allowing merchants to charge different prices to customers who pay with cash and customers who pay with a credit card, but barring merchants from describing the price difference as a surcharge for credit cards, leaving them to describe it instead as a discount for using cash. The Fifth Circuit held that the Texas law did not violate the retailers’ free speech rights, aligning it with the Second Circuit in its September 2015 ruling in the Expressions Hair Design litigation against New York State.
As previously reported on InfoBytes, the Supreme Court last week in the Expressions case unanimously rejected the Second Circuit’s conclusion that the New York credit card law regulates conduct alone, rather than speech. As explained in the Supreme Court’s opinion, the law at issue “is not like a typical price regulation,” which regulates a seller’s conduct by dictating how much to charge for an item. Rather, the Court explained, the law regulates “how sellers may communicate their prices.” (emphasis added). The Supreme Court, however, did not address the question of whether the law unconstitutionally restricts speech.
Supreme Court Questions State Law Restricting Consumer Price Displays
On March 29, the U.S. Supreme Court vacated and remanded a lawsuit challenging a New York law—N.Y. Gen. Bus. Law § 518—which provides that no seller “may impose a surcharge on a holder who elects to use a credit card” instead of a cash payments. (See Expressions Hair Design, et al. v Schneiderman.) Plaintiffs, a group of New York merchants, argued that the law violates the First Amendment by regulating how they communicate their prices. Plaintiffs further alleged that the law is unconstitutionally vague. In its defense, the State of New York asserted that the law merely prevents unfair profiteering, consumer anger, and deceptive sales tactics. After the district court ruled in favor of the Plaintiffs, the Court of Appeals for the Second Circuit vacated the judgment with instructions to dismiss. The Second Circuit appellate panel reasoned that the law is a “price regulation” that regulates conduct rather than speech and, as such, is immune from scrutiny under the First Amendment.
Writing for the Supreme Court—which was unanimous in the judgment—Chief Justice John G. Roberts disagreed with the Second Circuit panel’s conclusion that the law regulates conduct alone. Specifically, Justice Roberts notes in his opinion that Section 518 “is not like a typical price regulation,” which regulates a seller’s conduct by dictating how much to charge for an item. Rather, the Chief Justice explained, the law regulates “how sellers may communicate their prices.” Notably, the majority opinion declined to delve into the First Amendment issues raised by the parties, including whether the law is a valid commercial speech regulation, citing its status as “a court of review, not of first view.”
Justice Stephen G. Breyer filed a concurring opinion in which he noted that because the law’s interpretation is unclear, on remand, the Second Circuit should ask New York's highest court to clarify it, as this “is a matter of state law.” Justice Sonia M. Sotomayor, joined by Justice Samuel A. Alito, Jr., also filed a concurring opinion in which she called the majority's ruling a “quarter-loaf outcome,” because the holding failed to address whether the law unconstitutionally restricts speech. The Second Circuit erred by not certifying the question of the statute's interpretation to the N.Y. Court of Appeals “and this Court errs by not correcting it,” Sotomayor reasoned. The Justice indicated that she would have “vacate[d] the judgment below and remand with instructions to” certify the question for a definitive interpretation.
High Court passes on opportunity to resolve circuit split over statutory requirements for whistleblower protection under Dodd-Frank Act
On March 21, the U.S. Supreme Court denied a Petition for Writ of Certiorari in Verble v. Morgan Stanley Smith Barney, LLC, (No. 16-946), thereby declining to resolve a circuit split regarding whether the protections against retaliation provided in the Dodd-Frank Act extend to whistleblowers who do not report the misconduct to the SEC. At issue were the statutory requirements for qualifying as a “whistleblower” under the Dodd-Frank Act. While the Act defines “whistleblower” as an individual who reports wrongdoing “to the Commission,”[1] a separate provision provides protection against retaliation for whistleblowers reporting wrongdoing under Sarbanes-Oxley,[2] which includes both reporting to federal agencies or internal reporting within the company.[3]
The Verble case came to the Court on appeal from a Sixth Circuit decision affirming the dismissal of Mr. Verble’s claim that he was improperly terminated in retaliation for being a confidential informant (and whistleblower) to the FBI. A U.S. District Court for the Eastern District of Tennessee dismissed the former financial advisor’s Dodd-Frank retaliation claim after finding that Dodd-Frank’s anti-retaliation provision was available only for whistleblowers who reported their concerns directly to the SEC. See Verble v. Morgan Stanley Smith Barney, 148 F. Supp. 3d 644 (E.D. Tenn. 2015). On appeal, the Sixth Circuit affirmed the dismissal, but did not reach the issue regarding the scope of Dodd-Frank’s anti-retaliation provision. Rather than taking sides on the split between circuits, the Sixth Circuit panel opted instead to base its decision solely on the ground that Mr. Verble “fail[ed] to meet the threshold requirement of providing enough facts to state a plausible claim for relief.”
On January 26, Mr. Verble filed the aforementioned unsuccessful Petition for Writ of Certiorari. The first question presented in the petition for certiorari was whether the Sixth Circuit erred by avoiding the issue; next, Mr. Verble asked the Court to settle a split between the Fifth and Second Circuits—the only two circuits to have opined on the issue. Weighing in first, the Fifth Circuit had strictly applied the Dodd-Frank Act’s definition of “whistleblower” to the later anti-retaliation provision, so as to require dismissal of the plaintiff’s action in that case because he did not make his disclosures to the SEC. See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 621 (5th Cir. 2013). In so doing, the court declined to rely upon an SEC regulation adopting a contrary interpretation. By contrast, the Second Circuit, viewing the statute itself as ambiguous, applied Chevron deference to (and accepted) the SEC’s interpretation, which extended protections to all whistleblowers. Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155 (2d Cir. 2015).
Notably, while the petition for certiorari was pending, the Ninth Circuit became the third appellate circuit to stake out a position on the existence of an external reporting requirement when, in an opinion filed on March 8, it held that the Dodd-Frank Act whistleblower provision “unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally.” See Somers v. Digital Realty Trust, No. 15-17352, 2017 WL 908245 (9th Cir. 2017).
28 State AGs File Amicus Brief with Supreme Court in Debt Collection Case
On February 24, the New Mexico Attorney General, along with 27 other states and the District of Columbia, announced that his office had joined in an amicus brief filed with the Supreme Court supporting the plaintiff in Henson v. Santander. As previously covered in Infobytes, the defendant argued below—and the Fourth Circuit agreed—that the FDCPA did not apply to a consumer finance company that purchased and then sought to collect a debt in default on its own behalf because it was not a debt collector as defined in the statute. In their amicus brief, the attorneys general oppose the Fourth Circuit holding and argue that any “company that regularly attempts to collect defaulted debt that it has purchased is a ‘debt collector’ as the FDCPA defines [the] term,” and therefore, the obligations and restrictions of the FDCPA should apply. The Supreme Court set oral arguments for April 18 of this year.
**UPDATE** PHH v. CFPB
On January 27, PHH filed a scheduled response brief to views briefed last month by the U.S. Department of Justice (DOJ) under President Obama, likely bringing to a close the parties’ briefing of the CFPB’s petition for en banc review by the full D.C. Circuit of the October 2016 three-judge panel decision in PHH Corp. v. CFPB. Also on January 27, PHH separately filed a (less significant) brief, opposing the recent-filed motion to intervene on the CFPB’s behalf submitted by 17 Attorneys General.
As previously covered on InfoBytes, late last year the Court invited briefing by President Obama’s DOJ on behalf of the United States. (Note that the DOJ does not represent the CFPB; the Bureau is legally permitted to litigate on its own behalf.) The DOJ’s brief focused on the constitutional issue (without wading into the RESPA rulings), and argued that the en banc court should either (i) review the panel’s majority holding that the CFPB’s structure was unconstitutional because the majority’s reasoning was erroneous in view of Supreme Court precedent, or (ii) review and simply adopt the dissenting panelist’s view that because the panel was in all events reversing the CFPB’s RESPA rulings and remanding to the CFPB on that basis, the panel majority should not have reached the constitutional issue.
In response to the DOJ, PHH argues that en banc review is unnecessary because the DOJ had only pointed to an error in the panel’s constitutional reasoning, without stating whether DOJ’s preferred mode of analysis would have led to a different result than the one reached by the panel, namely the severing of the “for cause” removal provision applicable to the CFPB Director under Dodd-Frank. PHH also contended that there is no precedent for an en banc court panel to review a panel decision just to determine whether the panel had properly reached a constitutional issue, and that in any event the panel’s decision to reach the issue was entirely proper (and therefore not worthy of review) because, as PHH’s framed the matter, the panel could not have remanded the case to an agency with a potentially unconstitutional structure.
In addition, on January 26, two other non-parties filed two motions to intervene on the CFPB’s side: (i) one by the Democratic Ranking Members of the Senate and House Committees with jurisdiction over the CFPB, Sen. Sherrod Brown of Ohio and Rep. Maxine Waters of California, respectively; and (ii) one by a coalition of interest groups, which included the Center for Responsible Lending, US PIRG, Americans for Financial Reform, the Leadership Conference on Civil and Human Rights, and other movants.
Supreme Court Holds that Sue-and Be-Sued Clause Does Not Create Automatic Federal Jurisdiction in Suits Involving Fannie Mae
On January 18, in Lightfoot v. Cendant Mortgage Corp., No. 14-1055, the Supreme Court of the United States unanimously held that Fannie Mae’s sue-and-be sued clause does not grant federal courts jurisdiction over all cases involving Fannie Mae. In reaching its conclusion, the Court found that the clause, which authorizes Fannie Mae “to sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal,” was distinct from other sue-and-be-sued clauses previously considered to confer jurisdiction. Unlike other clauses, which referred to suit in federal court without qualification, the Fannie Mae clause authorized suit in “any court of competent jurisdiction.” Accordingly, the Court concluded that “[i]n authorizing Fannie Mae to sue-and-be-sued ‘in any court of competent jurisdiction, State or Federal’ it permits suit in any state or federal court already endowed with subject-matter jurisdiction over the suit” and thus a suit involving Fannie Mae does not automatically create federal jurisdiction.
PHH v CFPB Update: PHH and U.S. Solicitor General Respond to CFPB's Petition for En Banc Review
On December 22, PHH filed its brief opposing the CFPB’s petition for en banc review of the October 2016 three-judge panel decision in PHH Corp. v. CFPB. PHH argued that the case is not worthy of review by the full D.C. Circuit because, although the majority of the panel determined that the CFPB’s structure violated the constitutionally-mandated separation of powers, that “conclusion, which horrifies the CFPB, simply means that an agency of the Executive Branch will be answerable to the Chief Executive.” With respect to the panel’s unanimous decision that the CFPB incorrectly interpreted RESPA, PHH argued that en banc review is inappropriate because, among other reasons, the D.C. Circuit could not side with the CFPB without “creat[ing] a circuit split with every other court to have considered the proper scope of RESPA.”
At the invitation of the D.C. Circuit, the U.S. Solicitor General also filed its brief later the same day. While the Solicitor General supported the CFPB’s petition for en banc review of the constitutional question, it also suggested that, consistent with Judge Henderson’s dissent from the panel opinion, the full D.C. Circuit could simply vacate the CFPB’s order against PHH on the grounds that the Bureau misinterpreted RESPA. Doing so, the Solicitor General notes, would be consistent with the “well-established principle … that normally the Court will not decide a constitutional question if there is some other ground upon which to dispose of the case.” This ruling would vacate the panel majority’s conclusion that the CFPB’s structure was unconstitutional, although the Solicitor General noted that PHH could renew its constitutional challenge if the CFPB continues to pursue the case on remand.
With respect to the separation of powers question itself, the Solicitor General argued that en banc review is warranted because the majority departed from the analysis used by the Supreme Court to decide such questions. Specifically, the Solicitor General suggests that the panel majority erred by concluding “that an agency with a single head poses a greater threat to individual liberty than an agency headed by a multi-member body that exercises the same powers,” noting that the President’s authority over the multi-member FTC was similarly limited and the FTC enjoyed similar powers at the time the Supreme Court upheld its constitutionality.
Finally, after the filing of the Solicitor General’s brief, PHH requested permission to file an additional brief on the grounds that the Solicitor General had raised arguments not presented in the CFPB’s petition.
For additional background, please see our summaries of the panel decision, the CFPB's petition for rehearing, and the D.C. Circuit’s order directing PHH to respond and the Solicitor General to provide views.