4th Cir. Holds Express Demand For Payment Not Required to State FDCPA Claim Against Foreclosure Firm

In McCray v. Federal Home Loan Mortgage Corp., the U.S. Court of Appeals for the Fourth Circuit determined that a borrower stated a claim under the Fair Debt Collection Practices Act, 15 U.S.C. §1692 et seq., (“FDCPA”) against a foreclosure law firm, noting that the definition of a “debt collector” does not require an “express demand for payment.” Rather, relying on its prior holding inWilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 374-76 (2006), the Court determined that Borrower sufficiently alleged that a law firm and substitute trustees were engaged in conduct regulated by the FDCPA, because their foreclosure activities were “in connection with” the collection of a debt or “an attempt” to collect a debt. 

The Court also determined inapplicable the FDCPA’s exclusion from the definition of a “debt collector” for  collection activities “incidental to a bona fide fiduciary obligation” noting that foreclosure is “central to,” not incidental, to the trustees’ obligation under the deed of trust.   

A copy of the opinion can be found here.

Background

Shortly after foreclosure proceedings commenced against her Maryland home, Borrower brought an action for damages under the FDCPA in federal court against the law firm (“Law Firm”), and attorneys within the firm who were appointed as substitute trustees under the deed of trust securing her mortgage loan (collectively “Substitute Trustees”).   Borrower also sued the owner of the loan and her loan servicer, claiming, among other things, that they violated the federal Truth-in-Lending Act (“TILA), 15 U.S.C. § 1601, et seq.  As to all defendants, Borrower alleged that defendants failed to provide her with certain notices and requested information purportedly required by these statutes.  Regarding the owner of the loan, she claimed that it failed to provide her notice when it purchased the loan, as required under TILA, 15 U.S.C. § 1641(g).  As to her loan servicer, she asserted that an assignment of her deed of trust also required it to afford her notice under TILA.

The district court dismissed the FDCPA claims against Law Firm and the Substitute Trustees, distinguishing their role in initiating foreclosure proceedings, from a role focused on collecting the debt.  The district court noted that, even where a communication included a provision indicating that it was “an attempt to collect a debt,” it does not qualify as an attempt to collect a debt under Blagogee v. Equity Trustees, LLC, 2010 Wl 2933962 at *5-6, “unless there is an express demand for payment and other ‘specific information about the debt, including the amount of the debt, the creditor to the debt is owned, the procedure for validating the debt, and to whom the debt should be paid.” Id.  Applying the Blagogee factors, the district court concluded that Borrower had failed to “allege any facts indicating that [Law Firm] or the [Substitute Trustees] were engaged in any attempt to collect a debt.”  Op. at 7.

The district court also either dismissed or granted summary judgment as to Borrower’s remaining claims against the lender and loan servicer.  Borrower thereafter appealed.

Discussion

Reversing the dismissal of the FDCPA claims against the Law Firm and Substitute Trustees, the Fourth Circuit concluded that Borrower had adequately alleged that they were debt collectors, and that their actions constituted debt collection activity regulated by the FDCPA.  Op. at 16.

Citing the definition of a “debt collector” under Section 1692a(6), the Court determined that such definition does not include any requirement that a debt collector be engaged in an activity by which it makes a “demand for payment.”  Op. at 11.  Rather, to be actionable, a debt collector need only have used a prohibited practice “in connection with” the collection of a debt or in an “attempt” to collect a debt.” Op. at 12 (citing Powell v. Palisades Acquisition XVI, LLC, 782 F. 3d 119, 123 (4th Cir. 2014)).

The Court found dispositive its prior holding in Wilson, in which it determined that a law firm that sent the borrower notice that it was preparing foreclosure papers, and who later initiated foreclosure proceedings, could be a debt collector under the meaning of the FDCPA because those foreclosure actions constitute attempts to collect a debt.

Thus, here, the Court concluded that “[i]t is clear from the complaint in this case that the whole reason that the [Law Firm] and its members were retained by [the creditor] was to attempt, through the process of foreclosure to collect on the $66,500 loan in default.”  Op. at 14.  The Court observed that documents furnished by the Law Firm and/or Substitute Trustees to Borrower indicated that they were pursuing foreclosure because she missed one or more payments; indicated that if she did not bring the loan current, such as by repayment, a foreclosure action may be filed in court; and provided Borrower with the nature of the default and the amount necessary to cure.  “Thus, all of the defendants’ activities were taken in connection with the collection of a debt or an attempt to collect a debt.” Op. at 15 (Emphasis in original).

The Fourth Circuit also found inapplicable the fiduciary exclusion to the definition of debt collector under Section 1692a(6)(F)(i) for collections activities “incidental to a bona fide fiduciary obligation.”  Op. at 15-16.  The Court noted that foreclosure was “central” – not incidental – to the trustee’s obligation under the deed of trust.

As to the TILA claim regarding allegations of failure to provide notice of the transfer of ownership of the loan under 15 U.S.C. § 1641(g), the Court noted that Borrower failed to challenge the trial court’s determination that she was required to allege that the loan transferred after 2009, when the subject provision was enacted.  Further, the Court also determined that, because Borrower conceded that she had notice of the transfer to the owner of the loan more than one-year prior to filing the lawsuit, the claim was barred by TILA’s one-year statute of limitations. 

The Court also affirmed the district court’s dismissal of the TILA claim against her loan servicer, determining that allegations of assignment of the beneficial interest under a deed of trust (as opposed to legal title) did not implicate the statute.  In addition to failing to challenge such ruling, the Court observed that her allegations were inconsistent with her claims against the loan owner.

Consequently, the Court reversed only the dismissal of the FDCPA claims against the Law Firm and Substitute Trustees and remanded the case for further proceedings, expressly stating that its conclusion “is not to be construed to indicate, one way or the other, whether they, as debt collectors, violated the FDCPA.”  Op. at 20.

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.

4th Cir. Holds Safe Harbor Under Md. CLEC Allows Self-Correction Of Usurious Interest Rate Within 60 Days Of “Discovery Of The Error”

In Askew v. HRFC, LLC, the U.S. Court of Appeals for the Fourth Circuit affirmed the grant of summary judgment in favor an automobile finance company on claims of breach of contract and violation of the Maryland Credit Grantor Closed End Credit Provisions (“CLEC”), Md. Code, Comm. Law § 12-1001, et seq., where the Finance Company self-corrected an otherwise usurious interest rate within the 60-day statutory safe harbor period following “discovery of the error.”

The Court rejected Borrower’s claim that the “discovery rule” required the Finance Company to correct the error within 60 days of its acquisition of the loan.  Although Borrower argued that Finance Company should have known upon acquisition that the interest rate exceeded the 24% maximum, the Court held that “discovery of the error means when the Defendant actually knew about” a mistake—in this case, charging an excessive interest rate.  Op. at 12.  To that end, the Court observed that the safe harbor under CLEC was intended to encourage credit grantors to self-correct, who would otherwise “have little incentive to correct their mistakes and make debtors whole” particularly given that the borrower is unlikely to discover on his own that the interest rate charged on a loan exceeds CLEC’s maximum.  Op. at 13.

However, the Court vacated dismissal of the claims under the Maryland Consumer Debt Collection Act (“MCDCA”), Md. Code., Com. Law § 14-201 et seq., which were premised upon alleged misconduct in collection of amounts owed. A copy of the opinion can be found here. 

Background

Borrower obtained financing of a vehicle under a retail installment contract from a dealership that subsequently assigned the contract to Finance Company.  The contract, which was subject to CLEC, charged a 26.99% interest rate, exceeding CLEC’s maximum allowable rate of 24%.  When Finance Company discovered the discrepancy, it sent Borrower a letter informing him that “the interest rate applied to [his] contract was not correct,” that it would compute interest at the new rate of 23.99%, that it was crediting Borrower’s account the difference, and that he would repay his loan earlier if he continued the same monthly payments, but that Finance Company would adjust his monthly payments so that the contract will be repaid on the date originally scheduled if he so requested.  Op. at 3.

Thereafter, Borrower fell behind on his payments, whereupon Finance Company contacted Borrower by letter and by telephone.   Borrower claimed that over the course of those contacts Finance Company allegedly made false and threatening statements to induce him to repay his debt, including alleged statements regarding a preparation of a lawsuit against him.

Borrower filed suit alleging violations of CLEC and the MCDCA, as well as asserting that Finance Company breached its contract with him by failing to comply with CLEC.  The District Court dismissed Borrower’s lawsuit, noting that Finance Company was protected under CLEC’s safe harbor allowing for correction of an error, that the contract claim could not survive absent a CLEC violation, and that Borrower’s allegations did not rise to the level of abuse or harassment to constitute an MCDCA violation.  Borrower appealed.

Discussion

In Maryland, a credit grantor may opt upon written election to make certain loans covered by CLEC.  If the statute applies, CLEC sets a maximum interest rate of 24% and mandates that “[t]he rate of interest chargeable on a loan must be expressed in the agreement as a simple interest rate or rates.” Op. a 5 (citing CLEC § 12-1003(a).  Generally, if a credit grantor violates this provision, it may collect only the loan principal rather than “any interest, costs, fees, or other charges.” § 12-1018(a)(2).  If a credit grantor “knowingly violates [CLEC],” it “shall forfeit to the borrower 3 times the amount of interest, fees, and charges collected in excess of that authorized by [the statute].” § 12-1018(b).

The statute also provides two safe harbors, one of which was applicable to this case.  “Section 12- 1020 affords credit grantors the opportunity to avoid liability through self-correction.”  Op. at 7.  That section provides:

A credit grantor is not liable for any failure to comply with [CLEC] if, within 60 days after discovering an error and prior to institution of an action under [CLEC] or the receipt of written notice from the borrower, the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error.

CLEC, Section 12-1020. 

Borrower claimed that Finance Company violated CLEC by failing to disclose an interest rate below the statutory maximum, which he claimed was not curable.  Additionally, Borrower claimed that the “discovery rule” required the Finance Company to correct the error within 60 days of its acquisition of the loan, because it should have known at that time that the interest rate exceeded the 24% maximum.   Borrower also claimed that the Finance Company failed to notify him of the error and make necessary judgments.

The Fourth Circuit rejected these claims.  Interpreting the statute, the Court determined that “the first sentence of section 12-1003(a) bars credit grantors from collecting or charging interest above 24%, while the second sentence, quoted above, requires credit grantors to express the rate as a simple interest rate.” Op. at 9.  Otherwise, the Court determined that the statute would impose a “meaningless technical requirement while doing little to help consumers. . . . Instead, read as a whole and in context, the provision targets far more immediate dangers to consumers: being charged excessive interest and being duped into accepting a deceptively high rate.” Op. at 9.

The Court also rejected Borrower’s claim that Finance Company should have discovered the that the interest rate exceeded 24% maximum interest rate when the contract was assigned to it.  The Court declined to adopt Borrower’s interpretation of “discovering” in Section 12-1020, noting that such interpretation was typically used in cases involving the running of statutes of limitation, rather than “a safe-harbor provision placing a deadline on a defendant.” Op. at 12.  Instead, the Court determined that “interpreting the term ‘discovering an error’ in section 12-1020 as actually uncovering a mistake constituting a violation of the statute better comports with CLEC’s text, public policy, and the statute’s purpose.”  Op. at 12. Accordingly, “discovery of the error means when the Defendant actually knew about” a mistake—in this case, charging an excessive interest rate. Op. at 12.

The Court also determined that the Finance Company’s cure letter provided Borrower notice of the error, “albeit somewhat cryptically.”  Op. at 15.  It identified a “problem” with Borrower’s interest rate and then told him that he was due a credit of $845.40.  “Taken together, this information implies that [Borrower]’s interest rate was too high—the ‘error’ that [Finance Company] cured under section 12-1020. We think this was enough to comply with the statute’s notice requirement.”  Op. at 15.  The Court distinguished the notice requirements from cases involving disclosure errors, explaining that “[d]isclosure errors are rooted in some defect in conveying information. . . .  An anti-usury provision, on the other hand, exists to stop the collection of excessive interest. Requiring more specificity strikes us as a far more useful remedy in the former case than in the latter.” Op. at 15-16.

Addressing Borrower’s Breach of Contract claim, which was premised upon a CLEC violation, the Court determined that the “contract incorporates all of CLEC—including its safe harbors.” Op. at 19.  “[J]ust as liability under CLEC begets a breach of the contract, a defense under CLEC precludes contract liability. A contrary outcome would nullify the effect of CLEC’s safe harbors because credit grantors that properly cure mistakes—as CLEC encourages—would still face contract liability. We decline to accept such an anomalous result.”  Op. at 19.

The Court determined, however, that the Finance Company was not entitled to summary judgment on the MCDCA claim.  The Court noted that a jury could find that attempting to collect a debt by falsely claiming that legal actions have been taken against a debtor violates section 14-202(6), which prohibits a debt collector from “[communicating] with the debtor or a person related to him with the frequency, at the unusual hours, or in any other manner as reasonably can be expected to abuse or harass the debtor.” Op. at 20.  The Court also observed that “[t]here is a line between truthful or future threats of appropriate legal action, which would not give rise to liability, and false representations that legal action has already been taken against a debtor, as HRFC allegedly made here.” Op. at 21-22.  Because Finance Company allegedly told Borrower on at least three occasions that it had taken legal action against him when it had not, the Court determined that a jury could find that such conduct, “at least in the aggregate, could reasonably be expected to abuse or harass [Borrower].”  Op. at 22.  The Court therefore reversed the grant of summary judgment on the MCDCA claim, while affirming judgment in favor of the Finance Company on the CLEC and breach of contract claims.