4th Cir. Holds No FDCPA Violation For Filing Proof of Claim on Time-Barred Debt

In Dubois v. Atlas Acquisitions, LLC, a majority panel of the Fourth Circuit recently held that, while the filing of a proof of claim in a borrower’s bankruptcy proceeding constitutes “debt collection”, filing a proof of claim in a Chapter 13 bankruptcy based upon a time-barred debt does not violate the FDCPA or state collection laws so long as the statute of limitations itself does not extinguish the debt.  The Court noted that under Maryland law, the statute of limitations does not extinguish the debt itself, but merely bars the remedy. 

Consequently, the Fourth Circuit rejected the Eleventh Circuit’s holding in Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259-60 & n.6 (11th Cir. 2014), noting that the “[t]he Eleventh Circuit in Crawford is the only court of appeals to hold that filing a proof of claim on a time-barred debt in a Chapter 13 proceeding violates the FDCPA.”

A copy of the opinion can be found here. 

 Discussion

At the outset, the Court determined that filing a proof of claim is debt collection activity subject to the FDCPA.  The Court explained that “[d]etermining whether a communication constitutes an attempt to collect a debt is a ‘commonsense inquiry’ that evaluates the ‘nature of the parties’ relationship,’ the ‘[objective] purpose and context of the communication[],’ and whether the communication includes a demand for payment.”  Op. at 9 (citations omitted).

In the bankruptcy context, the “only relationship between [the parties] [is] that of a debtor and debt collector. . . . [and] the ‘animating purpose’ in filing a proof of claim is to obtain payment by sharing in the distribution of the debtor’s bankruptcy estate.” Op. at 9-10.  Consequently, “[p]recedent and common sense dictate that filing a proof of claim is an attempt to collect a debt.  The absence of an explicit demand for payment does not alter that conclusion, . . . nor does the fact that the bankruptcy court may ultimately disallow the claim.” Op. at 10.

Nevertheless, in an explicit departure from the Eleventh Circuit’s holding in Crawford, the Court determined that filing a proof of claim based on a debt that is beyond the applicable statute of limitations does not violate the FDCPA. 

To that end, the Court considered whether a time-barred debt fell within the definition of a claim in the bankruptcy context.   The Court observed that “while the Bankruptcy Code provides that time-barred debts are to be disallowed, see, e.g., 11 U.S.C § 558, the Code nowhere suggests that such debts are not to be filed in the first place.”  Op. at 16.  Rather, recent amendments to Rule 3001 suggest that “the Code contemplates that untimely debts will be filed as claims but ultimately disallowed.”  Op. at 16-17.  As such, they fall within the definition of a claim within the bankruptcy context.

Further, the Court determined that excluding time-barred debts from the scope of bankruptcy “claims” would frustrate the Code’s intended effect to define the scope of a claim as broadly as possible, and provide the debtor the broadest possible relief.  The Court also observed that under applicable Maryland law, the statute of limitations does not extinguish the debt, but merely bars the remedy.  Accordingly, the Court concluded that “when the statute of limitations does not extinguish debts, a time-barred debt falls within the Bankruptcy Code’s broad definition of a claim.”  Op. at 17.

Moreover, the Court noted a unique consideration in the bankruptcy context: “if a bankruptcy proceeds as contemplated by the Code, a claim based on a time-barred debt will be objected to by the trustee, disallowed, and ultimately discharged, thereby stopping the creditor from engaging in any further collection activity.”  Op. at 18.  Alternatively, “[i]f the debt is unscheduled and no proof of claim is filed, the debt continues to exist and the debt collector may lawfully pursue collection activity apart from filing a lawsuit.”  Op. at 19. 

The Court rejected the borrower’s claim that trustees and creditors fail to object to time-barred debts, noting that “for most Chapter 13 debtors, the amount they pay into their bankruptcy plans is unaffected by the number of unsecured claims that are filed.”  Op. at 20.  “As additional claims are filed, unsecured creditors receive a smaller share of available funds but the total amount paid by most Chapter 13 debtors remains unchanged.  Thus, from the perspective of most Chapter 13 debtors, it may in fact be preferable for a time-barred claim to be filed even if it is not objected to, as the debtor will likely pay the same total amount to creditors and the debt can be discharged.”  Op. at 20-21 (emphasis in original).

Moreover, the Court noted various other considerations that differentiate filing a proof of claim on a time-barred debt from filing a lawsuit to collect such debt.  Op. at 21-23.  Consequently, the majority concluded that “filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the FDCPA when the statute of limitations does not extinguish the debt.”  Op. at 23.  Accordingly, the Court affirmed the dismissal of the Debtor’s FDCPA and state law collection claims.

Md. Holds Borrower Law Firm That Regularly Offered to Negotiate Loan Modifications Subject to Regulation Under Maryland Credit Services Business Act

The Court of Appeals of Maryland recently determined that a law firm engaged in the business of assisting homeowners to modify their mortgage loans constituted a “credit services business” under the Maryland Credit Services Business Act, Md. Code, Comm. Law (“CL”) § 14-1901 et seq. (“MCSBA”), and was subject to regulation and licensure.  The Court also determined that, because the law firm had engaged in the credit services business on a “regular and continuing basis,” it was not subject to the Act’s exemption for attorneys.

A copy of this opinion is available here.

Background

Several homeowners facing foreclosure hired a Virginia law firm, which promised to help renegotiate their mortgage loans in exchange for payment.  After receiving a complaint from one such homeowner, the Maryland Commissioner of Financial Regulation (“Commissioner”) instituted administrative proceedings against Law Firm and its managing partner (collectively, “Law Firm”).  Following an evidentiary hearing, Commissioner found that Law Firm committed multiple violations of the MCSBA, which regulates “credit service businesses” purporting to assist consumers in obtaining credit.  Specifically, neither Law Firm nor any of its attorneys held a license under the MCSBA.  The Commissioner also found that Law Firm violated the MCSBA’s bonding and disclosure requirements.   After settlement efforts failed, the Commissioner entered a cease and desist order prohibiting law firm from engaging in any credit services business activities with Maryland residents, imposed a civil monetary penalty of $114,000 and, determining that its violations were willful, directed law firm and its principal to pay 57 Maryland consumers treble damages totaling $720,600.

Reversing the Commissioner’s order, both the trial court and the intermediate appellate court held that that Law Firm was not a “credit services business” under the MCSBA because its attempts to obtain loan modifications for its clients were “ancillary” to its provision of legal services.  The Commissioner thereafter obtained certiorari in the Court of Appeals.

Discussion

The Court of Appeals agreed with the Commissioner that Law Firm constituted a “credit services business,” which is defined to include “any person [or entity] who, with respect to the extension of credit by others, sells, provides, or performs, or represents that such person can or will sell, provide or perform” any of certain enumerated services “in return for the payment of money or other valuable consideration.”  Md. Code, CL § 14-1901(e)(1).  Such services include “obtaining an extension of credit for a consumer,” or providing advice or assistance to a consumer in connection with obtaining an extension of credit.

Notably, the Court determined that, in undertaking to renegotiate the terms of homeowners’ mortgage loans in exchange for payment, Law Firm was offering to assist the homeowners in “obtaining an extension of credit,” thus falling within the MCSBA’s definition of a “credit services business.”  Op. at 15-16.  The Court also examined the MCSBA’s legislative history and concluded that the statute was not limited to regulating only “ordinary credit repair services” or payday lenders.  Op. at 18.  “Rather, it is intended to provide broad protection to consumers of credit services.”  Op. at 18.   Moreover, the Act’s exemption for “mortgage assistance relief providers” who were separately regulated confirmed that “the General Assembly believed that those who offer to obtain loan modifications for homeowners would be otherwise covered by the MCSBA.”  Op. at 19.

The Court then evaluated whether Law Firm met its burden to show that its activities were exempt from regulation under a statutory provision exempting attorneys.  See Md. Code, CL § 14-1901(e)(3)(vi).  For the “attorney exemption” to apply, three requirements must be met:  “(1) the individual must be admitted to the Bar of the Court of Appeals of Maryland, (2) the individual must render the services within the course and scope of practice by the individual as a lawyer, and (3) the individual must not engage in the credit services business ‘on a regular and continuing basis.’”  Op. at 22.  The Court determined that Law Firm could not satisfy the third prong because, over the relevant time period, Law Firm entered into 57 agreements with Maryland homeowners, and consulted with hundreds of others.  Further, such agreements constituted a “very significant part of the firm’s business” and “accounted for most of the work of its Maryland-licensed attorney . . . .”  Op. at 23. 

The Court noted that “[a] Maryland attorney who counsels an individual client facing foreclosure and attempts to negotiate a mortgage loan modification would . . . ordinarily be exempt from the MCSBA.”  Op. at 23.  However, “there may be cases where there is a significant question at what point an attorney who frequently provides such services has crossed the line into providing ‘regular and continuing’ credit services.  That, however, is not this case.”  Op. at 23.  To that end, the Court observed that “[t]he consultations and agreements with Maryland homeowners seeking loan modifications were not only a very significant part of the firm’s business during the month’s in question, but also accounted for most of the work of its Maryland-licensed attorney by the time he left the firm.”  Op. at 23.  Consequently, the Court determined that there was substantial evidence to support the Commissioner’s finding that the law firm engaged in a credit services business on a regular basis.  Op. at 23.

Accordingly, the Court held that Law Firm was subject to the MCSBA as a “credit services business,” but remanded the case to the trial court to determine whether Law Firm’s violations were willful.  Op. at 28.

Va. Sup. Ct. Holds General District Court Must Dismiss Unlawful Detainer Case Where Borrower Raises Bona Fide Dispute of Title from Foreclosure Sale

In Parrish v. Federal National Mortgage Association, the Supreme Court of Virginia reversed the judgment of the Circuit Court (in an appeal from the General District Court), which granted possession in favor of Fannie Mae in an unlawful detainer case (i.e. an eviction case).  Specifically, the Supreme Court held that, where a borrower raises a bona fide question as to the validity of title in a case originally filed in the General District Court (or subsequently appealed to the Circuit Court from the General District Court), the case must be dismissed without prejudice because the General District Court lacks original subject matter jurisdiction to adjudicate the validity of title.

The Court explained that in order to raise a bona fide dispute to title, a borrower is required to raise sufficient facts that would otherwise survive a Demurrer (Motion to Dismiss).  The Court noted that the jurisdictional limitations at issue did not apply to unlawful detainer actions originally brought in the Circuit Court pursuant to Virginia Code § 8.01-124, nor does such holding impact prior cases where the homeowner failed to raise such issues.

A copy of the opinion can be found here.  

Background

Borrowers owned certain property secured by a deed of trust.  Following a foreclosure sale of the property, the trustee conveyed the property to Fannie Mae.  Fannie Mae sent the Borrowers a notice to vacate, and later filed a summons for unlawful detainer in the General District Court.

Borrowers filed a response to the Unlawful Detainer Action, which argued that the foreclosure was invalid because the deed of trust incorporated 12 C.F.R. § 1024.41(g), which prohibits foreclosure if a borrower submitted a completed loss mitigation application more than 37 days before the foreclosure sale.  Borrowers claimed to have submitted a complete application within such timeframe.  Because Fannie Mae (who, according to the Borrowers’ allegations, was also their lender) instigated the foreclosure despite their allegedly timely filed loss mitigation application, Borrowers alleged that Fannie Mae breached their deed of trust.

The General District Court awarded Fannie Mae possession, and the Borrowers filed a de novo appeal to the Circuit Court.  In the Circuit Court (which was sitting as an appellate court), Fannie Mae filed a motion for summary judgment, arguing that its trustee’s deed was prima facia evidence of its right of possession.   Fannie Mae also moved to exclude evidence of any defense contesting the validity of the trustee’s deed, arguing that  the General District Court (and the circuit court sitting as an appellate court) lacked subject matter jurisdiction to adjudicate title in an unlawful detainer proceeding.   The Circuit Court agreed, granted Fannie Mae’s motions, and awarded it possession.  Borrowers thereafter filed this appeal to the Supreme Court of Virginia.

Discussion

At the outset, the Supreme Court agreed that the General District Court (or in this case the Circuit Court which was hearing an appeal from the General District Court), lacked subject matter jurisdiction to adjudicate title.

In the context of an unlawful detainer case, “[t]he validity of the plaintiff’s right of possession is an issue that, when disputed, must be determined in the adjudication of the of the unlawful detainer action.”  Op. at 4.  Where a plaintiff (such as a foreclosure purchaser) claims a right of possession acquired after the defendant’s original, lawful entry, the plaintiff must show the validity of its right of possession.   See Op. at 4.  Consequently, “[w]hen the plaintiff’s after-acquired right of possession is based on a claim of title, the plaintiff may be required to establish the validity of that title.” Op. at 5.

According to the Court, “[i]n most foreclosure cases, a trustee’s deed will satisfy the foreclosure purchaser’s burden to establish that it acquired a right of possession after the homeowner’s original, lawful entry, and the homeowner will have no good-faith basis to contest it. However, in limited circumstances, the homeowner could allege facts sufficient to place the validity of the trustee’s deed in doubt. In such cases, the General District Court’s lack of subject matter jurisdiction to try title supersedes its subject matter jurisdiction to try unlawful detainer and the court must dismiss the case without prejudice.”  Op. at 6.

The Court emphasized that “[t]he question of title raised by the homeowner’s allegations must be legitimate. . . .  Because a court always has jurisdiction to determine whether it has subject matter jurisdiction, the court has the authority to explore the allegations to determine whether, if proven, they are sufficient to state a bona fide claim that the foreclosure sale and trustee’s deed could be set aside in equity. Stated differently, the allegations must be sufficient to survive a demurrer had the homeowner filed a complaint in circuit court seeking such relief.”  Op. at 6 (citations and quotations omitted).

However, the Court noted that “[a] general allegation that the trustee breached the deed of trust is not sufficient. The homeowner’s allegations must (1) identify with specificity the precise requirements in the deed of trust that he or she asserts constitute conditions precedent to foreclosure, (2) allege facts indicating that the trustee failed to substantially comply with them so that the power to foreclose did not accrue, and (3) allege that the foreclosure purchaser knew or should have known of the defect.”  Op. at 7, n. 5.  

In this case, the Court determined that the Borrowers raised a bona fide question of title in the underlying unlawful detainer proceeding.  The Court observed that the Borrowers alleged that 12 C.F.R. § 1024.41(g) was incorporated in their deed of trust as a condition precedent, that they submitted a complete loss mitigation application, and that none of the exceptions applied.  Op. at 8-9.  The Court also inferred that Fannie Mae, as foreclosure purchaser, was aware of the alleged violation of the deed of trust “because it was the lender that allegedly committed the violation.”  Op. at 9.  Consequently, the Supreme Court concluded that these allegations were sufficient, and if proved, could satisfy a court of equity to set aside the foreclosure.”  The Court therefore vacated the judgment in favor of Fannie Mae, and dismissed the summons for unlawful retainer.