U.S. Supreme Court Rules on Who Qualifies as a Debt Collector

The United States Supreme Court, in a 13-page unanimous decision written by newly minted Justice Gorsuch, affirmed the United States Court of Appeals decision and clarified today the issue of who qualifies as a “debt collector” subject to the Fair Debt Collection Practices Act’s scrutiny. See Henson v. Santander Consumer USA, Inc., ____U.S.___, 2017 U.S. LEXIS 3722 (June 12, 2017). The issue is extremely important for individuals and entities that purchase debts. For example, what if you purchase the debt and then try to collect it? Does that make you a debt collector subject to the scope of the statute?

The Supreme Court’s decision centered around the language of 15 U.S.C. 1692a(6) which states that the term “debt collector” is defined as anyone who “regularly collects or attempts to collect …debts owed or due…another.”  Santander did not originate the debt at issue before the Court. The debt in the case before the court had been originated by CitiFinancial and then Santander purchased the defaulted loans and Santander was trying to collect on the loans. Both parties acknowledged, and the Court pointed out that both sides agreed, at least partially, on many issues. The real remaining issue in the dispute was “how to classify individuals and entities who regularly purchase debts originated by someone else and they then try and collect on those debts for their own account.”

The United States Supreme Court held that a company may collect debts that it purchased for its own account, like Santander did, without triggering the statutory definition of debt collector and subjecting them to liability under the Fair Debt Collection Practices Act (“FDCPA”). The FDCPA definition of debt collector at 15 U.S.C. 1692a(6) focuses on third party collection agents regularly collecting for a debt owner-not a debt owner seeking to collect for itself. More importantly, the Supreme Court made clear that the key point is that to be a debt collector under this section of the FDCPA, you must attempt to collect debts owed another before you ever qualify as a debt collector.

The ruling by the United States Supreme Court resolves a split in the circuit courts on this issue as it relates to debt purchasers. Be careful. The ruling expressly did not reach the issue of whether debt collector status may be afforded a third party collection agent for debts owed to others or the use of other definitions of the term “debt collector” such as those engaged “in any business the principal purpose of which is the collection of any debts” because these issues were not before the court. For lawyers in  various states that have state versions of debt collection practice acts modeled on the FDCPA, like Chapter 392 of the Finance Code in Texas, where the definition of “Third-Party Debt Collector” specifically incorporates 15 U.S.C. 1692a(6) that was before the court, it is only a matter of time where the ruling of the United States Supreme Court in Henson is extended to various state court challenges to the scope of the state debt collection practices act.

The opinions in this blog are solely the author’s and any comments, replies or suggestions are always welcome at john@jrjoneslaw.com. Happy Father’s Day to all the Dads out there!

 

Fair Debt Collection Practices Act Update – Time-Barred Claims in Bankruptcy

The purpose of the Fair Debt Collection Practices Act (“FDCPA”) at 15 U.S.C. § 1692 –1692p is to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses. The FDCPA is designed to protect consumers from and eliminate abusive practices concerning consumer debt collection.

Under the FDCPA, the term “debt” means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment. The FDCPA has always been broadly construed to promote the goals of the statute, but a recent Supreme Court decision indicates that there are limits on the scope and reach and protections of the FDCPA.

In Midland Funding, LLC v. Johnson, __U.S.___, 2017 WL 2039159 (May 15, 2017), the United States Supreme Court in a 5-3 decision held that the filing of a proof of claim in a consumer’s Chapter 13 bankruptcy on a time-barred debt did not violate the FDCPA. This ruling resolved a split in the circuit courts between the U.S. Court of Appeals for the 11th Circuit in Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016) and the U.S. Court of Appeals for the 7th Circuit in Owens v. LVNV Funding, LLC., 832 F.3d 726 (7th Cir. 2016).

The Supreme Court opinion in Midland Funding held that unlike lawsuits filed to recover time-barred debt which have been held to violate the FDCPA, the bankruptcy code allows for “claims” to be filed and “claims” are not limited to enforceable claims. In addition, the Supreme Court held that the bankruptcy code makes statute of limitations an affirmative defense that must be raised. The Supreme Court also held that because there was a trustee who must examine proofs of claims and object to time-barred claims, filing an “accurate” proof of claim on a time barred debt was not misleading. Because of the bankruptcy trustee and his role to examine and object to time barred claims, the court opined that the debtor does not face the same pressure as he would in a lawsuit and that distinction appears to have made a big difference in the court’s holding as it did.

The Supreme Court’s holding in Midland Funding is limited to bankruptcy court. The Supreme Court’s ruling explicitly stated that it did not apply to time-barred lawsuits filed in state courts. It also preserves the many federal court decisions finding that filing a collection lawsuit on a time-barred debt is a violation of the FDCPA. It remains to be seen how the practical effect of the Midland Funding decision is on the ever increasing workload of bankruptcy trustees. It clearly adds one more burden to the trustee’s workload. The opinions in this blog are solely the author’s and any comments, suggestions, or replies can be sent to john@jrjoneslaw.com.

Foreign Judgments and Statute of Limitations on Enforcement under 28 U.S.C. § 1963

The issue of the time period for enforceability of a judgment originally entered in one state but registered in another state under 28 U.S.C. §1963 has recently come up in the United States Court of Appeals for the Fourth Circuit. See Wells Fargo Equipment Finance, Inc. v. Asterbadi, 841 F.3d 237 (2016).

CIT/Equipment Financing obtained a $2.63 million judgment against a debtor in 1993 in the Eastern District of Virginia. Under Virginia law, the judgment would be viable for 20 years. Approximately 10 years later, CIT registered the judgment on August 27, 2003 in the District of Maryland under 28 U.S.C. §1963. Under Maryland law, judgments expire 12 years after entry of the judgment.

CIT then sold the judgment to Wells Fargo Equipment Finance who began collection efforts in Maryland in 2015 by renewing the judgment on August 26, 2015. Debtor then challenged and contended that the enforcement of the judgment by Wells Fargo was barred because the efforts to enforce the judgment began more than 12 years after the judgment had been originally been entered in Virginia ( i.e. in 1993). Wells Fargo responded that the registration of the original Virginia judgment in Maryland before it had expired under Virginia law became a new judgment that was subject to Maryland law for enforcement. As a result, Wells Fargo argued that the 12 year limitation period began to run when the judgment was registered in the District of Maryland in August 27, 2003 not when the judgment was originally entered in Maryland in 1993. The district court agreed with Wells Fargo concluding that the time limitation for enforcement of the judgment began with the date of registration in Maryland. From this ruling, Debtor appealed to the United States Court of Appeals for the Fourth Circuit (“Fourth Circuit”).

The Fourth Circuit reviewed the relevant parts of §1963 which states in part:

“A judgment in an action for the recovery of money … entered in any … district court … may be registered by filing a certified copy of the judgment in any other district…. A judgment so registered shall have the same effect as a judgment of the district court of the district where registered and may be enforced in like manner.”

Further, the Fourth Circuit looked at the purpose of § 1963 which was to avoid the necessity and expenses of litigation of a judgment to obtain a judgment. The purpose was to obtain a speedier more efficient method to enforce judgments. As such, the Fourth Circuit construed § 1963 to provide for a new judgment in the district court where the judgment is registered, as if the new judgment had been entered in the district after filing an action for a judgment on a judgment. Accordingly, just as a new judgment obtained in an action on a previous judgment from another district would be enforceable as any judgment entered in the district court, so too is a registered judgment. In affirming the district court, the Fourth Circuit held that the time period for enforcement begins to run from the date of the new registration, not the date of the original judgment.

The enforcement of foreign judgments is a very commonplace event in today’s economy. It has also been my experience that judgment debtors move back and forth across different state borders all the time. Having the ability to extend the time period for enforcement of a judgment under 28 U.S.C. § 1963 from the date of the registration in the new district is a very useful tool and will help enforce judgments from debtors who too often skip across state lines. The opinions in this blog are solely the author’s and any comments, suggestions or replies are welcome at john@jrjoneslaw.com.

Arthur Andersen and the Recovery of Attorney Fees in Texas

There are a number of ways to recover attorney fees in Texas. In addition to many specific statutes that allow recovery of attorney fees, Chapter 38 of the Texas Civil Practice and Remedies Code provides the general basis to recover attorney fees in Texas.

To recover fees under Chapter 38, a party must show that (1) it has plead facts sufficient to support a claim for attorney fees; (2) the underlying claim must be one of eight types of claims authorized by Chapter 38; (3) the party must have been represented by an attorney; (4) the party who is being assessed the attorney’s fees must be an individual or a corporation (see my earlier blog on statutory interpretation of the fee statute); (5) the claim must have been presented to the opposing party or its agent and they refused to tender payment or did not timely tender payment; (6) the party awarded attorney fees prevailed on a claim that allows recovery of attorney fees; and (7) proof is provided as to reasonableness.

For claims brought under Chapter 38, there is a rebuttable presumption that the usual and customary attorney fees are reasonable. See Tex. Civ. Prac. & Rem. Code 38.003. However, despite the provisions of Chapter 38, if a written contract provides for the recovery of attorney fees, the contractual provisions will defeat the provisions and requirements of Chapter 38. See Intercontinental Group v. KB Home Lone Star L.P., 295 S.W.3d 650, 653 (Tex. 2009). Further, when a contract has a written hourly rate that is agreed upon, attorney fees can be recovered based on that rate if the rate was reasonable. See Cain v. Pruett, 938 S.W.2d 152, 158 (Tex. App. – Dallas 1996, no writ). What happens when you do not have an hourly fee arrangement, but instead you seek to recover a contingent award of attorney fees?

When you have a contingent fee agreement, attorney fees cannot be recovered from the defendant solely on evidence of the fee agreement. Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 818-819 (Tex. 1997). Before a contingent fee can be awarded the court must consider the eight factors set out by the Supreme Court of Texas in Arthur Andersen. You do not have to present evidence on all eight factors, but all factors should be considered. Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d at 818.

The eight Arthur Andersen factors are: (1) the time and labor required, the novelty and difficulty of the questions involved and the the skill required to perform the legal service properly; (2) the likelihood, if apparent to the client, that acceptance of the particular case will prevent other employment by the attorney; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and results obtained; (5) the time limitations imposed by the client or the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation and ability of the attorney performing the services; and (8) whether the fee is fixed or contingent on results obtained (i.e. uncertainty of collection). Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d at 818.

While the Arthur Andersen case has universally been applied to contingent fee awards, at least one court of appeals has also held that the Arthur Andersen factors should also apply to an hourly fee contract. See e.g., Ashton Grove, L.C. v. Jackson Walker L.L.P., 366 S.W.3d 790, 799 (Tex. App.- Dallas 2012, no pet.). There is no reason not to apply the Arthur Andersen factors to any award of attorney fees and its framework is a good starting point for any award of attorney fees by a court.

Award of attorney fees is and should not be an automatic function by the courts. Courts are the gatekeeper for what is admitted into court and should use their gatekeeper role to ensure that any award of attorney fees is reasonable and supported by appropriate evidence. Also, any award of attorney fees should be segregated so that fees are only recovered and awarded for claims in which fees are recoverable by statute, contract or in equity. See Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 310-311 (Tex. 2006). The opinions in this blog are solely the author’s and any comments, replies, or suggestions can be sent to john@jrjoneslaw.com.

IRS Form 1099-C – Cancellation and Collection of Debt

The issue that seemingly pops up every other year is whether the filing and issuance of a Form 1099-C, entitled Cancellation of a Debt, also prevents the creditor who issued the 1099-C from attempting to collect the debt from the debtor.

Before discussing that, let’s discuss what the IRS Form 1099-C is and why is it issued. The short answer is that it is an informational form that certain entities must file if they are a covered entity that cancels the debt of a debtor in the amount of $600 or more and an identifiable event has occurred.  As the IRS Instructions for Form 1099-C state, the 1099-C form must be filed regardless of whether the debtor is required to report the cancelled debt as income. The entities that most often are required to file a 1099-C are financial institutions, credit unions and finance and credit card companies. These entities have very short deadlines by which to file the 1099-C and filing is mandatory.  Both the Form 1099-C and implementing regulations clearly state that the 1099-C is an information reporting requirement. So what happens when a lender makes a loan to a borrower, the borrower defaults, a Form 1099-C is filed and issued to the borrower, and the lender then sues the borrower to recover the balance due on the loans made to the debtor?

In Flathead Bank v. Masonry by Muller, a  summary judgment case involving four loans to a debtor and his company, the Montana Supreme Court held that the issuance of a Form 1099-C did not discharge the debt, the bank was entitled to recover the balance due on the loans made to the debtor and rejected the debtor’s argument that the 1099-C discharged the loans and therefore, the bank could not recover. See Flathead Bank v. Masonry By Muller, Inc., 383 P.3d 215 (Mont. 2016). The Supreme Court of Montana’s opinion is consistent with what appears to be the majority opinion and I refer you to the opinion by the United States Court of Appeals for the Fourth Circuit in FDIC v. Cashion, 720 F.3d 169 (4th Cir. 2013).

The U.S. Court of Appeals for the Fourth Circuit’s opinion in FDIC v. Cashion outlines most of the arguments for and against the different treatments of the Form 1099-C. See FDIC v. Cashion, 720 F.3d 169, 179 (4th Cir. 2013) (holding that the 1099-C is a creditor’s required means of satisfying a reporting obligation to the IRS; it is not a means of accomplishing an actual discharge of the debt, and relying on two IRS Information Letters – IRS Info. 205-0207, 2005 WL 3561135 (Dec. 30, 2005) and IRS Info 2005-0208, 2005 WL 3561136 (Dec. 30, 2005)); see also Owens v. Commissioner, 2003 U.S. App. LEXIS 12481 (5th Cir. May 15, 2003) (per curiam) (unpublished) (holding that the 1099-C is not evidence of cancellation of a debt but at most an intent to cancel the debt at a future date).

The lead minority case consistently relied upon or referenced is In re Reed, 2013 PTC 105 (Bankr. E.D. Tenn. 2013) which rejected the majority position with a caveat. The court, readily acknowledging that it was adopting the minority position, held that the debt was discharged because the debt was reported on the Form 1099-C, the debtor relied and paid taxes on the cancelled debt and held, as a result, debtors were no longer indebted to the bank for the indebtedness reported on the Form 1099-C. However, the court noted that since the Form 1099-C did not report interest, costs and reasonable attorney’s fees, the creditor could seek to recover these items and they were still due and owing by debtor.

Remember, the 1099-C is an informational reporting requirement that has to be made to the IRS and not an admission by the covered entity. A covered entity may have to file a Form 1099-C even if there is no intent to discharge the debt or seek recovery because an event has occurred. The issue of whether a creditor that was required to file the information report can then sue to recover the balance owed will probably be litigated endlessly. Hopefully, this blog article provides a good starting point if it comes up in your practice. The opinions in this blog are solely the author’s and any suggestion, replies or comments are welcome. Please send them to me at john@jrjoneslaw.com.

 

Statute of Frauds, Guaranties and the Main Purpose Doctrine

In preparing for this month’s blog, I recently read an article where a Washington State Court, not surprisingly, refused to allow oral defenses to the enforcement of a written guaranty. Union Bank N.A. v. Blanchard, 378 P.3d 191 (Wash. Ct. App. 2016). As a result, I wondered under what circumstances you could have an oral guaranty of a debt that would be enforceable despite the statute of frauds and came across cases discussing the main purpose doctrine.

Texas Business and Commerce Code Section 26.01 entitled “Promise or Agreement Must Be In Writing” states in part that a promise or agreement in subsection (b) of this section is not enforceable unless the promise or agreement, or a memorandum of it, is in writing and signed by the person to be charged with the promise or agreement or by someone lawfully authorized to sign for him. Subsection (b) (2) covers a promise by one person to answer for the debt, default, or miscarriage of another person. In Texas, the main purpose doctrine is used to take an oral promise to pay the debt of another out of the statute of frauds. See Haas Drilling Co. v. First Nat’l Bank, 456 S.W.2d 886 (Tex. 1970), citing, Gulf Liquid Fertilizer Co. v. Titus, 163 Tex. 260, 354 S.W.2d 378, 382 (1962).

In applying the main purpose doctrine, courts must look at the consideration received for the promise and determine: (a) whether the promisor obtained, as part of the consideration, a benefit accruing directly to him personally; and (b), if so, whether the obtaining of that benefit was his main purpose for making that promise. Flo Trend Systems, Inc. v. Allwaste, Inc., 948 S.W.2d 4, 9 (Tex. App. – Houston [14th Dist.] 1997, no pet.), citingHaas Drilling Co. v. First Nat’l Bank, 456 S.W.2d 886, 891 (Tex. 1970). By this test, if an oral promise creates the relationship of a surety and principal between the promisor and the original debtor, and if the fact is known to the creditor-promisee, it is within the statute of frauds and unenforceable. An oral promise creating primary responsibility in the promisor to the creditor-promisee is without the statute of frauds and therefore enforceable. The key is that the promisor has to be the person taking and assuming primary responsibility for the payments and debt. See Flo Trend Systems, Inc. v. Allwaste, Inc., 948 S.W.2d 4, 9 (Tex. App. – Houston [14th Dist.] 1997, no pet.); Iniekpo v. Avstar Int’l Corp., 2010 U.S. Dist. LEXIS 26952 (W.D.Tex., March 19, 2010) (denying application of main purpose doctrine).

I recommend that if you are trying to enforce an oral promise to guarantee the debt of another in Texas that you look at the cases cited in this blog as a starting point. The opinions in this blog are solely the author’s and any comments or replies can be emailed to john@jrjoneslaw.com.

The Fair Notice Requirement in Texas Court Pleadings

Texas Rules of Civil Procedure 45 and 47 appear innocuous and are listed under the general pleading requirements for pleadings in the district and county courts in Texas. Buried in Rule 45 is the requirement that “fair notice to the opponent” be given.  Rule 45 states: “Pleadings in the district and county courts shall (a) be by petition and answer; (b) consist of a statement in plain and concise language of the plaintiff’s cause of action or the defendant’s grounds of defense. That an allegation be evidentiary or be of legal conclusion shall not be grounds for an objection when fair notice to the opponent is given by the allegations as a whole; and (c) contain any other matter which may be required by any law or rule authorizing or regulating any particular action or defense.” The fair notice requirement applies both to the petition filed by plaintiff and the answer filed by defendant. Rule 45 is supplemented by its sister rule, Texas Rule of Civil Procedure 47, which provides more specific requirements for “claims for relief” whether that claim is via petition, counterclaim, cross-claim or third party petition.

Rule 47 states that “An original pleading which sets forth a claim for relief, whether an original petition, counterclaim, cross-claim, or third party claim, shall contain: (a) a short statement of the cause of action sufficient to give fair notice of the claim involved(b) a statement that the damages sought are within the jurisdictional limits of the court; (c) except in suits governed by the Family Code, a statement that the party seeks monetary relief in one of five levels; and (d) a demand for judgment for all the other relief to which the party deems himself entitled.

Rarely does the issue of fair notice come up when a Defendant answers because if the pleadings lack fair notice, the Defendant simply files a special exception and asks the court to order the opposing party to replead and provide more information. However, it comes up regularly when a no-answer default judgment is taken and the judgment is challenged after the fact but still while the court has jurisdiction. In Paz v. Fatima Construction & Cleaning Company, 2016 Tex. App. LEXIS 8018 (Tex. App.- Dallas 2016, mem. opin.) the Dallas Court of Appeals discussed fair notice in the context of a no-answer default judgment.

In Paz, Paz, a pro se defendant, had meet with Plaintiff’s counsel and had even received a proposed Rule 11 Agreement extending her answer date. However, she had not agreed or signed it or filed it and therefore, it was not enforceable under the Texas Rules of CIvil Procedure. Plaintiff went ahead and took a default judgment and Paz filed an unverified motion for new trial which was denied. She then filed an appeal arguing that the pleadings did not provide fair notice to support the Default Judgment that had been entered because of the lack of specific allegations concerning her.

In reversing the entry of the default judgment because of the lack of fair notice as to specific allegations against Paz, the Dallas Court of Appeals held that a default judgment must be supported by a petition that states a cause of action. Paz v. Fatima Construction & Cleaning Company, 2016 Tex. App. LEXIS 8018 (Tex. App.- Dallas 2016, mem. opin.), citing, Fairdale Ltd. v. Sellers, 651 S.W.2d 725 (Tex. 1982). The key in determining if a cause of action is plead and provides fair notice is whether the trial court is able to determine from the pleadings alone the elements of the cause of action and the relief sought with reasonable certainty and without resorting to other sources. Id. The purpose of this rule is to ensure that defendant had fair notice of the basis of plaintiff’s cause of action. Id.; Stoner v. Thompson, 578 S.W.2d 679, 683 (Tex. 1979).

In determining fair notice, the pleadings must provide the defendant with sufficient information to enable him to determine the basis of the claims and must not disclose any invalidity in the claim on its face. Paz v. Fatima Construction & Cleaning Company, 2016 Tex. App. LEXIS 8018 (Tex. App.- Dallas 2016, mem. opin.), citing, Paramount Pipe & Supply Co. v. Muhr, 749 S.W.2d 491, 494 (Tex. 1988). Here, the petition alleging violations of the DTPA that was the basis of the default judgment did not specify that Paz made any misrepresentation or show that Paz was responsible for the actions of the other defendants. On the contrary, the petition alleged that Paz was an agent of one of the other defendants and did not plead any specific independent misrepresentations by Paz. Taking all the facts plead into consideration, the Dallas Court of Appeals could not find support for the DTPA claim against Paz and reversed the default judgment for the lack of fair notice.

There are a number of takeaways from this opinion. The main one is that, despite the low standard of fair notice compared to federal court pleading requirements, you should be as specific as possible when you plead. Texas rules are pretty lenient governing amending and supplementing pleadings so while you can clean up your pleadings later, it is better to spend a little time up front and do the best you can on your initial pleading. It will also enhance your credibility. I also recommend a checklist comparing what has been plead and the elements necessary to support your cause of action(s) versus what you are asking the court to do. While courts can give you a pass on specifically alleging each element of a cause of action if the cause of action can be reasonably inferred (see Westcliffe, Inc. v. Bear Creek Constr. Ltd., 105 S.W.3d 286, 292 (Tex. App.-Dallas 2003, no pet.), it is much easier to put it in the pleadings than explain why all the elements of a cause of action should be reasonably inferred to be present and fair notice given.

The opinions in this blog are solely the author’s and any comments or suggestions should be sent to john@jrjoneslaw.com. Happy New Year and on to 2017! Thank you for your support and encouragement.