Divided Court Rules Proof of Claim for Stale Debt Does Not Violate FDCPA

With its recent opinion in In re Eric Dubois, Case No. 15-1945, the Fourth Circuit has joined Second, Third, and Seventh Circuits in ruling that proofs of claim filed for stale debt does not violate the Fair Debt Collection Practices Act.

Two debtors in separate bankruptcy cases filed Adversary Proceeding complaints against Atlas Acquisitions LLC, which had bought claims from pay-day lenders and filed proofs of claim in the bankruptcy cases. The adversary complaints asserted that Atlas had violated the FDCPA because the underlying claims were not enforceable under applicable state law because the statute of limitations had expired. The bankruptcy court concluded that Atlas’s filing of proofs of claims did not constitute debt collection activity proscribed by the FDCPA and granted Atlas’s s motions to dismiss the Adversary Proceedings. The debtors appealed.

The Fourth Circuit analyzed both the Bankruptcy Code provisions relating to claims and the FDCPA. Disagreeing with the bankruptcy court, the Fourth Circuit found that filing a proof of claim in a bankruptcy case does constitute collections activity regulated by the FDCPA. Digging deeper, and noting in particular that under applicable (Maryland) state law, the running of the statute of limitations did not completely “extinguish” a claim, the Court of Appeals also ruled that the Atlas claims were also properly asserted as claims under the Bankruptcy Code. 

Having found that the debt in this case was not extinguished, the court then analyzed whether filing a proof of claim for a time-barred debt violated the FDCPA and concluded that it did not. First, the court stated that if the bankruptcy system worked as it is statutorily written, there are safeguards against such claims being allowed, such as an objection by a trustee, the debtor or even other creditors. Second, the court noted that asserted claims can be discharged with finality in a properly-administered bankruptcy. The court posited that the harm to the debtor in a bankruptcy case was less than the harm to a consumer outside the bankruptcy context because of all of the protections and benefits available to a debtor under the Bankruptcy Code. Ultimately, the Court majority concluded that the filing of a proof of claim on a debt that is time-barred does not violate the FDCPA where the statute of limitations does not extinguish the debt.

Judge Diaz dissented, arguing that companies such as Atlas are gaming the bankruptcy system to try to obtain payments for unenforceable claims due to inattention of other parties in interest.

Thus far, only the Eleventh Circuit has found that filing a proof of claim for a stale debt violates the FDCPA. The issue is on appeal in other jurisdictions. As with much of law in bankruptcy, a creditor should have a firm grasp of the law in the jurisdiction where the bankruptcy case is pending before asserting claims. For any assistance with claims in bankruptcy cases, contact Preti Flaherty’s Bankruptcy, Creditors’ Rights, and Restructuring Practice Group.

Ch. 7 Trustee Avoids Maine Mortgage Due to Incomplete Acknowledgment

Chapter 7 trustees’ success in avoiding mortgages with defective certificates of acknowledgement occurs with some regularity in Massachusetts.  See e.g. In re Giroux, 2009 WL 1458173 (D. Ma. Bankr. Jul. 27, 2011).  But it has not been that common in Maine.  Last month, however, a Chapter 7 trustee successfully avoided a Maine mortgage because of a defective acknowledgment and obtained the right to sell the property.  In re Bishop, No. 15-10554 (D. Me. Bankr. Jul. 28, 2016).  The Debtor’s mortgage included a certificate of acknowledgment which failed to state the location of the notary (Aroostook County, Maine) when he acknowledged the mortgage.

Pursuant to the Chapter 7 trustee’s strong-arm powers, 11 U.S.C. § 544(a)(3), the trustee argued that he could avoid the mortgage as a hypothetical bona fide purchaser for value.  As in other defective acknowledgment cases, the trustee argued that a defective mortgage or a mortgage which fails to meet recording requirements under applicable state law does not provide constructive notice, at least with respect to attaching lien creditors.  The Court rejected the bank’s argument that the acknowledgment was sufficient because it was clear the property and notary were located in Maine.  The Court noted that it is critical for an acknowledgement to state the location of the notary at the time of execution.  Without that statement, one cannot determine whether the notary had the authority required by the statute to acknowledge the mortgage.

Maine practitioners facing a certificate of acknowledgment issue should closely review 33 M.R.S. § 352, which governs defective acknowledgments.  § 352 offers protection to mortgagees against defects like this for mortgages made prior to January 1, 2013, and with respect to bankruptcies filed on or after October 15, 2015.

New Article Discusses whether a Late-Filed Tax Return Is a “Return”

As part of the American Bankruptcy Institute Northeast Bankruptcy Conference and Consumer Forum, Tony Manhart presented an article, which I co-wrote with him, on whether a late-filed tax return is a “return” under section 523(a) of the Bankruptcy Code. Courts are divided on whether the definition of “return” added by the Bankruptcy Abuse and Consumer Protection Act makes tax debt associated with all late-filed returns non-dischargeable. Courts in the First Circuit have found that late-filed returns are not “returns” and the associated tax debt cannot be discharged in bankruptcy.

The article discusses recent cases including: In re Fahey, 779 F.3d 1 (1st Cir. 2015), In re Nilsen, 542 B.R. 640 (Bankr. D. Mass. 2015) and Berry v. Massachusetts Department of Revenue, Case No. 15-41218-CJP (Bankr. D. Mass. June 30, 2016).

The full article is available for download on Preti Flaherty's website.

Debtors’ Lien-Stripping Attempt Likely Would Have Succeeded in New Hampshire

A North Carolina bankruptcy court recently denied a Debtors’ attempt to “strip off” a junior lien on their primary residence by rejecting the argument that the property should be valued near the time of plan confirmation.  In re Cooper, No. 11-02804-8 (Bankr. E.D. N.C. Jun. 8, 2016). § 506(a) provides that for purposes of determining the secured status of a creditor “value should be determined in light of the purpose of the valuation and of the proposed distribution or use of such property…or use or on a plan affecting such creditor’s interest.”   

The question before the Court was whether the home should be assigned a value as of the petition date or a date closer to plan confirmation for purposes of § 506(a).  In 2011, Debtors filed a Chapter 13 petition reporting two liens on their home a first lien of $90,000 and a second lien of $160,000.  If the Court used the value as of the petition date there would be enough equity to protect the second lien through plan confirmation.  If the Court used the value as of the confirmation date (less than $90,000), then the Debtors would succeed in stripping the second and wholly unsecured lien.  The North Carolina court invoked the majority rule which applies the petition date for valuing collateral, and therefore ruled that the second mortgage lien could not be “stripped” and remained in place, at least to the extent of the property’s value as of the petition date.

A Massachusetts bankruptcy court would have reached the same result.  In re Landry, 479 B.R. 1 (D. Mass. 2011).  But in New Hampshire bankruptcy court, the outcome would have been more favorable for the debtors, and the lien would have been stripped.  In 2013, Chief Judge Harwood adopted the “flexible approach” and ordered a valuation date for residential property near confirmation in the context of an individual Chapter 11.  In re Cahill, 503 B.R. 535 (Bankr. D. N.H. 2013).  Judge Harwood explained using the petition date for valuation fails to take into account the language in § 506(a) that value should be determined in conjunction with the purposes of the plan and the attendant valuation. 

Had the Debtors resided in New Hampshire they most likely would have succeeded in stripping the second lien.  At some point, the First Circuit Court of Appeals and/or the Bankruptcy Appellate Court will have to determine which approach should be the prevailing rule.  We think Judge Harwood has it right.     

This Week: Join Us at the ABI Northeast Bankruptcy Conference

The 23rd annual Northeast Bankruptcy Conference takes place this week, from July 14-17, at the Omni Mount Washington Resort in Bretton Woods, New Hampshire. This conference provides a great opportunity to gain insight into our industry. It also offers a forum to discuss current topics and network with knowledgeable colleagues.

On Friday, from 11:00 a.m. to 12:15 p.m., I will be moderating a consumer track panel session entitled, "Many Unhappy Returns - Another Hanging Paragraph Creates a Trap for Consumer Bankruptcy Lawyers."

The session's panelists include: Carl D. Aframe (Aframe & Barnhill, P.A.; Worcester, Mass.), Hon. Mildred Caban (U.S. Bankruptcy Court (D.P.R.); San Juan), and Celine E. de la Foscade-Condon (Department of Revenue (D. Mass.); Boston).

Here is a brief overview of the our session's focus:

"When is a tax return not a tax return? Bankruptcy can be very useful when seeking to discharge personal income tax obligations, but if the return has not been filed on time, dischargeability may be in jeopardy. Many courts have addressed this issue and have issued widely divergent views, including the First Circuit’s strict interpretation of what constitutes a tax return as announced by the majority in In re Fahey. This panel will focus on the development of the case law in the First Circuit, the information you must obtain from the taxing authority to determine when a tax return has been filed, what constitutes a return, and strategies to employ in the event that the tax return your client filed is defective and the taxes reported on that return are nondischargeable."

The Mt. Washington resort, located in the White Mountain National Forest, is a beautiful setting for what will prove to be an impressive collection of speakers and sessions.

For more information about the conference, visit the ABI conference website.

Ex Parte Attachment, and Priority, Reinstated to First in Time Creditor

In Estate of Summers v. Nisbet, the Maine Supreme Judicial Court reinforced the first in time, first in right nature of attachment and trustee process under Maine law.  Attachment and trustee process are powerful enforcement tools with which a plaintiff can place a lien on a defendant’s real or personal property while the case is pending, so that the defendant cannot transfer or abscond with property while being sued.
 
After a tragic fire at an apartment building in Portland, Maine that resulted in five deaths, the probate estate of Steven Summers, one of the victims, obtained a December 2014 ex parte attachment against the property of the building owner.  The probate estates of several other victims subsequently obtained attachments in February 2015 and asked the Superior Court to have the Summers ex parte attachment dissolved, asserting that the Summers estate had failed to demonstrate the “exigent circumstances” necessary for the grant of an attachment without hearing.
 
The Superior Court granted that motion, and dissolved the Summers estate’s original ex parte attachment and reinstated it as of February 2015.  As a consequence of the Court’s ruling, all five of the victims’ probate estates were left with attachments that were deemed to have been granted simultaneously.

The Summers estate appealed.  The Law Court vacated the trial court’s dissolution of the Summer ex parte attachment, ruling that the trial court had erred because no one had asserted or established that the Summers estate had failed to make the basic showing required for an attachment, and ordered the Summers attachment reinstated as of the date it was ordered, in first place.  In doing so the Court confirmed that under Maine attachment law, first in time is first in right, and that creditors in Maine must act expeditiously to protect their rights.

Creditors Benefit from Seventh Circuit’s Interpretation of “Ordinary Course of Business” Defense to Preferences

The Court of Appeals for the Seventh Circuit recently discussed the standard for whether payments made to vendors in the 90 days prior to a bankruptcy filing are within the “ordinary course of business” defense.  In making that determination, courts look at the transactions between the debtor and the creditor prior to the bankruptcy filing to set a baseline for what the parties’ “ordinary course” dealings were.  Typically, courts use one of two methods to create a baseline.  The first—the average age method— calculates the average number of days payments were late to determine which payments were within that “ordinary” range.  The second method creates an “ordinary” range using the minimum and maximum invoice ages during the historical period prior to bankruptcy.   The second approach—the “total range method”—considers any payment made in the 90 days before bankruptcy “ordinary” as long as it was paid anywhere within the minimum and maximum number of days late during the history of the parties’ dealings.  The Bankruptcy Court for the Southern District of New York discussed, and rejected, the total range method in In re Quebecor World (USA), Inc., 491 B.R. 379 (Bankr. S.D.N.Y. 2013)).  Of the two methods, the average-age method is more commonly used by courts. 

Using the average-age method, the Court of Appeals for the Seventh Circuit broadened the window for which payments fall within the “ordinary course.”  In the case, the baseline for payments was between 16 to 28 days from the invoice with an average invoice age of 22 days.  The bankruptcy court below determined that payments more than 6 days from the average were outside the ordinary course.  The Court of Appeals added two days on either side of the window to include all payments within 14 to 30 days as ordinary course.  The bankruptcy court’s approach only took 64% of the historical payments into account.  By broadening the window, the Circuit Court included 88% of the historical payments.  As a result, the ordinary course defense dropped the preference liability from approximately $306,000 to approximately $60,000.  Jason Foods Inc. v. Unsecured Creditors’ Committee, Case No. 15-2356 (7th Cir. June 10, 2016)