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Secured Creditors Must File Timely Proofs of Claims to be Paid: Seventh Circuit

Profile Imageby Monette CopeJunior Partner

The Seventh Circuit (1) just issued an opinion holding that if secured creditors wish to participate in Chapter 13 bankruptcy plan distributions, they must not only file a secured proof of claim, but also file it in a timely manner.(2) Up until now, it was widely held that the proof of claims deadline only applied to unsecured claims.(3)

This is especially important in the Northern District of Illinois because the practice has been that if a secured creditor was provided for in the plan with monthly payments from the Chapter 13 trustee, that creditor did not need to file a claim to get paid. Read more here.

The FDCPA takes a seat in the bankruptcy code, or does it?

Profile ImageBy Monette Cope, Attorney

The Eleventh Circuit Court of Appeals recently held that a creditor may be held liable for an FDCPA violation if it files a claim in a bankruptcy case on a debt that is barred by the statute of limitations. The Supreme Court refused to review it, so it now stands as the law in that Circuit. While this should give pause to any creditor who files claims in the Eleventh Circuit, the case is just as important for what it does not say as what it does.

In this case, a creditor purchased a consumer debt that had been charged off. The statute of limitations expired a few years after the purchase. The debtor then filed a Chapter 13 bankruptcy case, and the creditor filed a proof of claim even though the debt was time-barred. Rather than object to the claim under the Bankruptcy Rules, the debtor filed an adversary proceeding claiming that the filing of the claim violated the FDCPA. Both the bankruptcy and district courts dismissed the adversary proceeding, but the debtor appealed and the Eleventh Circuit overturned the lower courts.

Instead of analyzing the adversary and claim under the Bankruptcy Code and Rules, the court started with the assumption that the FDCPA is the governing statute. Non—bankruptcy courts review FDCPA claims on whether or not “a debt collector’s conduct is “deceptive,” “misleading,” “unconscionable,” or “unfair” under the statute” to a “least-sophisticated consumer”. These claims are commonly raised when a debt collector is threatening legal action or has filed a lawsuit against a debtor to collect a debt. Essentially, the Eleventh Circuit held that because attempting to collect or collecting on a time-barred debt in state court is an FDCPA violation, filing a proof of claim on such a debt in bankruptcy is also a violation.

While debtors in state court collection matters are defendants, debtors in bankruptcy file their cases against their debts. Debtors in state court collections are not usually represented by an attorney and so do not have counsel to protect them against FDCPA violations. However, debtors in bankruptcy are highly likely to have attorneys. Moreover, Chapter 13 trustees are charged with objecting to claims A debtor in a Chapter 13 bankruptcy is therefore, hardly a “least-sophisticate consumer” because of the debtor’s own counsel’s knowledge and the trustee’s duty to object to claims. Debtors in bankruptcy have more protections than debtors in state court.

Claims are allowed in bankruptcy unless objected to. Claims may be disallowed if they are unenforceable against the debtor as time-barred debts are. While the Bankruptcy Code provides a mechanism to object to time-barred claims, it does not impose fines or fees against a creditor who files them. The consequence is only that the claims are disallowed.

The Bankruptcy Rules require that consumer claims based on open-ended or revolving credit agreements attach a statement to the claim that includes the date of the last transaction on the account. Statutes of limitations are calculated in many states based on the date of the last transaction . As long as this is disclosed, there is no deception, and the claim is not misleading, unconscionable or unfair.

This writer is not advocating a regular practice of filing claims in bankruptcy that are time-barred, but the Bankruptcy Code and Rules provide safeguards to protect debtors if these claims are filed. As a result, the FDCPA appears as an interloper in the claims process in Crawford. Indeed, the Eleventh Circuit specifically stated that it was not ruling on whether the Bankruptcy Code preempts the FDCPA in the claims process because that argument was not raised in the briefs. Therefore, this case makes no ruling on whether the Bankruptcy Code and Rules should have been applied over the FDCPA in resolving the objection to the claim.

Not all Circuits follow this reasoning and the appearance of FDCPA claims in bankruptcy are not always welcome in every Circuit. This may be a developing area of the law; that is, to what extent, if any, does the FDCPA overlap or intrude on the claims process set by the Bankruptcy Code and Rules. The best practice in any event is to ensure that any consumer claims you file are within the statute of limitations as of the date that the bankruptcy case was filed.

Secured Creditors Must File Timely Proofs of Claims to be Paid: Seventh Circuit

Profile ImageBy Monette Cope, Attorney

The Seventh Circuit just issued an opinion holding that if secured creditors wish to participate in Chapter 13 bankruptcy plan distributions, they must not only file a secured proof of claim, but also file it in a timely manner. Up until now, it was widely held that the proof of claims deadline only applied to unsecured claims.

This is especially important in the Northern District of Illinois because the practice has been that if a secured creditor was provided for in the plan with monthly payments from the Chapter 13 trustee, that creditor did not need to file a claim to get paid.

Read more.

What are a Debtor’s Obligations to accomplish surrender of Personal Property under 11 U.S.C. 1325 (a)(5)(C)?

Profile ImageBy Casey Hicks, Attorney

The Bankruptcy Code does not provide specific instructions on how to accomplish the surrender of personal property. In some jurisdictions, a “surrender” can only occur when physical possession is tendered. In others, the debtor does not need to tender possession of the property or provide sufficient location information for repossession.

In some jurisdictions, proposing to surrender property but not actually making the property available for turnover to the secured creditor is not a surrender of property under section 1325(a)(5)(C). IRS v. White (In re White), 487 F.3d 199 203, 204 (4th Cir. 2007). The Court states, in the absence of actual turnover of possession the creditor can only collect the value of the property through judicial enforcement. Id at 206. Thus, the debtor’s proposal is not a “surrender” under the statute. By admitting the creditor could obtain the property with adversarial litigation, the debtors all but admit their proposed surrender would not result in the relinquishment of all of their legal rights in the property. Id at 206. Likewise, at issue in In re Robertson, was debtor’s intention to surrender a vehicle pursuant to section 1325(a)(5)C). In re Robertson, 72 B.R. 2, 4 (Bankr. D. Colo. 1985). The debtor stated his wife was in possession of the vehicle and it was the creditor’s duty to discover its whereabouts. The Court held that “surrender” meant the debtor had to provide the secured creditor with possession of the vehicle. Id.

Other courts have found the debtor does not need to deliver the vehicle to accomplish a surrender. See In re Gabor, 155 B.R. 391 (Bankr. N.D. W. Va. 1993). In fact, a debtor may be able to surrender a vehicle without having knowledge of its whereabouts. See In re Alexander, 225 B.R. 665, 667 (Bankr. E.D. Ark. 1998). Debtor’s husband, whose whereabouts were unknown, was purportedly in possession of the vehicle. The court stated, the fact that debtor cannot physically drive the vehicle to creditor’s place of business, through no fault of her own, does not prohibit surrender. Id. The Court added, evidence of bad faith or fraud on the part of the debtor may lead to a different result. Id.

Despite the courts differing opinions on what constitutes a “surrender” of property under 11 U.S.C. 1325(a)(5)(C), there are penalties creditors can pursue if a debtor fails to turn over collateral. Pursuant to 11 U.S.C. 727(a)(2), the transfer, removal, destruction mutilation or concealment of property of the estate with the intent to hinder, delay or defraud a creditor or an officer of the estate is grounds for a denial of discharge. Additionally, pursuant to 11 U.S.C. 1307(c)(6), a creditor may file a motion to dismiss if the debtor fails to surrender the property in accordance with the terms of a confirmed Chapter 13 plan. Further, the debtor’s actions might also be criminal. The U.S. Code contains a number of bankruptcy related crimes including knowing and fraudulent concealment of property from creditors. See 18 U.S.C. § 152, et seq. Many states also have laws that criminalize concealing property with the intent to defraud creditors. See 720 ILCS 5/17-27(a); Wis. Stat. § 943.84; Ind. Code § 35-43-5-4(8).

Third Circuit Case Law Update: Mortgage Foreclosure Complaints are under the Purview of FDCPA

Profile ImageBy Keri Ebeck, Partner

On April 7, 2015, the Third Circuit Court of Appeals issued a decision in the case of Kaymark v. Bank Of America; Udren Law Offices, P.C., holding that attorney fees and costs alleged in a mortgage foreclosure complaint must be actually incurred and in accordance with the mortgage loan documents and Pennsylvania law. In the Kaymark case, the dispute stemmed from allegations in a foreclosure complaint for amounts listed as attorney fees due and owing that had not been actually incurred but were estimated. These alleged misrepresentations as to the amounts actually due and owing by the borrower were sufficient to bring a cause of action under the Fair Debt Collections Practices Act (FDCPA). The Court in Kaymark relied upon its decision in McLaughlin v. Phelan Hallinan & Schmieg, LLP, 756 F.3d. 240 (3d Cir. 2014), in which its opinion was based upon very similar facts of estimated fees in a demand letter, those estimated fees were held to be violations under the FDCPA as misrepresentations as to the actual amounts due and owing. The Court here expands its view and reaching of the FDCPA to mortgage foreclosure complaints filed within the courts.

That being said and in light of the recent case law, our firm has taken steps to ensure that our practice is and has been in compliance with the recent decision. It is and has been our firm’s best practices to only include those attorney fees and expenses which have already been incurred in the mortgage foreclosure complaints filed with the various courts. In the Third Circuit, mainly, the active real estate default practice in Pennsylvania, has already taken steps to add language to the complaint averments specifically addressing that any and all attorney fees and costs alleged in the complaint are incurred as of the date of filing.

Weltman, Weinberg & Reis, Co. LPA continues to update its clients with recent case law decisions, including but not limited to those stemming from FDCPA applications. Should you have any questions or concerns regarding the above, please reach out directly to counsel for further clarification on the decision and the best practice.