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THIRD CIRCUIT RULES THAT DEBT COLLECTION NOTICE DID NOT CONTAIN MISLEADING LANGUAGE

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By: Louise Bowes Marencik

In Szczurek v. PMM, the United States Court of Appeals for the Third Circuit recently affirmed the United States District Court for Eastern District of Pennsylvania’s ruling that the Plaintiff Joseph Szczurek (“Plaintiff” or “Szczurek”) failed to establish that a debt collection notice he received from the Defendant was in violation of the Fair Debt Collection Practices Act (“FDCPA”). No. 14-4775 (3d Cir. filed October 1, 2015).

In June 2014, Szczurek received a one-page notice from Professional Medical Management, Inc. (“PMM”) advising him that Mercy Fitzgerald Hospital had referred his past due account balance of $19.70 to PMM for collection. In addition to the language required by the FDCPA, the notice stated, “To avoid further contact from this office regarding your past due account, please send the balance due to our office and include the top portion of this letter with your payment.” Id. at 2.   Szczurek received four more similar letters from PMM over the next month, and filed a purported class action in the District Court, alleging that PMM had violated Sections 1692(e) and 1692(f) of the FDCPA by including deceptive and misleading language in the debt collection notice.   Specifically, Szczurek asserted that the correspondence created the false impression that the only way to stop PMM from further contact was to pay the debt. PMM moved for judgment on the pleadings, arguing that it was entitled to judgment as a matter of law because its notices complied with the FDCPA. The District Court granted the motion and dismissed the case, and the Plaintiff appealed to the Third Circuit.

On appeal, the Third Circuit applied the “least sophisticated debtor” standard, as set forth in Brown v. Card Serv. Ctr. 464 F. 3d 450 (3d Cir. 2006). The Brown court previously held that communications between debt collectors and debtors should be analyzed using this standard, which is a lower standard than the standard of a reasonable debtor. Szczurek argued that the least sophisticated debtor may interpret the language in the notice to mean that the only way to stop the debt collection notices was to pay the debt, when, in fact, debtors have other options under the FDCPA to halt debt collection communications. The Court disagreed with the Plaintiff, and ruled that the purpose of the language in question was to advise the debtor that PMM will continue its collection efforts until successful, and not to notify him of the available methods debtors may use to halt debt collection communications under the FDCPA. The Court further held that PMM was under no obligation under the FDCPA to inform a consumer that he may ask a debt collector to cease further contact pursuant to the statute.

ELEVENTH CIRCUIT COURT OF APPEALS CLARIFIES THE MEANING OF “DEBT COLLECTOR” UNDER THE FDCPA

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By: Diana M. Eng and Joshua B. Alper

In Davidson v. Capital One Bank (USA), N.A., No. 14-14200 (11th Cir. Aug. 21, 2015), the Eleventh Circuit Court of Appeals held that, for purposes of the FDCPA, a person does not qualify as a “debt collector” if the person fails to satisfy the statutory definition even though the “debt on which [the person] seek[s] to collect was in default at the time they acquired it.” Id. slip op. at 12. In essence, plaintiffs cannot use other sections of the FDCPA in an attempt to enlarge the statutory definition.

Section 1692a(6) defines the term “debt collector” as “(1) any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or (2) who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” Id. at 7–8 (quoting § 1692a(6)). The first definition of “debt collector” has been denoted as the “principal purpose” definition while the latter is often termed the “regular collection” definition. Significantly, Section 1692a(6)(A)–(F) contains a list of persons that Congress intended to exclude from the application of the FDCPA. Id. at 8. Among those excluded categories are “any person collecting or attempting to collect any debt owed or due or asserted to be owed or due to another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.” Id. (quoting § 1692a(6)(F)(iii)).

In Davidson, HSBC commenced a state court action against Davidson to collect on a past due credit card account that was used for “personal, family or household purposes.” Id. at 3. During the pendency of the state court proceeding, the parties executed a settlement agreement where Mr. Davidson agreed to pay HSBC $500.00. Id. However, after Mr. Davidson failed to pay the agreed amount, the court entered a judgment in favor of HSBC. Id. Subsequently, Capital One acquired a significant portfolio of HSBC’s United States-based credit card accounts, many of which were previously delinquent, including Davidson’s account. Id. In an attempt to collect the debt now owed to Capital One, it commenced its own lawsuit against Mr. Davidson to collect on the past due account that was previously the subject of litigation between HSBC and Davidson. Id. Upon being sued for a second time involving the same account, Davidson commenced a putative class action in the District Court for the Northern District of Georgia against Capital One, alleging that Capital One’s state court action violated the FDCPA. Id. at 4.

Based on certain events that occurred in the District Court action, Davidson filed an Amended Complaint. Id. The Amended Complaint alleged that Capital One “regularly acquires delinquent and defaulted consumer debts that were originally owed to others and has attempted to collect such delinquent or defaulted debt in the regular course of its business, using the mails and telephone system.” Id. at 15. Capital One moved to dismiss the Amended Complaint and argued that the Plaintiff failed to “plausibly allege that Capital One was a ‘debt collector’ for purposes of the FDCPA, and [as such, the Amended Complaint should be dismissed because] only debt collectors are subject to liability under the” FDCPA. Id. at 4. Specifically, Capital One argued that the debt at issue was owed to it and not to another, which is a requirement under the “regular collection” definition. Id. In response, Davidson asserted that [c]ompanies that regularly purchase and collect defaulted consumer debts . . . are regulated by the” FDCPA. Id. at 5. The District Court agreed with Capital One and granted its motion to dismiss, stating that Davidson failed to satisfy either the “principal purpose” or “regular collection” definitions. Id.

In affirming the District Court, the Eleventh Circuit held that a bank (or any person or entity) does not qualify as a “debt collector,” unless a plaintiff plausibly alleges the defendant’s purported collection activities satisfy the “principal purpose” or “regular collection” definitions, “even where the consumer’s debt was in default at the time the bank acquired it.” Id. at 2 (emphasis added). Davidson argued that whether Capital One qualified as a “debt collector” depended on the default status of the debt on the date of acquisition, which, in turn, would lead to the conclusion that a person was either a “creditor” or a “debt collector”. Id. at 8. In support of this argument, Davidson relied on the exclusionary language contained in section 1692a(6)(F)(iii). Davidson reasoned that if the debtor was in default on the date the debt was acquired, the exclusionary language exempted the person or entity from the statutory definition of “debt collector,” and, by default, the person or entity would be a “creditor.” Id. at 9. By contrast, Davidson asserted that where the debt was already in default on the acquisition date, the exception did not apply, and the party was a “debt collector” governed by the FDCPA. Id.

In rejecting Davidson’s arguments, the Eleventh Circuit relied on the plain and unambiguous meaning of “debt collector” set forth in section 1692a(6) and the standards contained therein. Id. at 11. Otherwise, Davidson’s interpretation would result in a strained reading of the statutory framework. Id. As a result, the Eleventh Circuit rejected Davidson’s attempt “to bring entities that do not otherwise meet the definition of ‘debt collector’ within the ambit of the FDCPA” solely due to the default status of the debt on the date it was acquired. Id. at 11–12. Critically, the Eleventh Circuit cautioned that the language contained in section 1692a(6)(F)(iii) “is an exclusion; it is not a trap door.” Id. at 12.

Since the Amended Complaint did not plausibly allege the “principal purpose” or the “regular collection” definitions, the Eleventh Circuit affirmed the District Court’s decision. Specifically, the Amended Complaint only alleged that some part of Capital One’s business was devoted to debt collection. Id. at 16. Based on the “principal purpose” definition, such allegations are insufficient to state a claim. Id. Likewise, the “regular collection” definition requires that the person or entity collect a debt “owed or due another at the time of collection” and not “debts originally owed or due another” and now owed to a subsequent entity by virtue of an acquisition. Id. at 16–17 (emphasis in original). Since Capital One’s conduct only concerned collection efforts related to a debt Davidson owed to Capital One, and not to another party, the Amended Complaint failed to plausibly state facts that would entitle Davidson to relief under the regular collection definition. Id. Consequently, the Eleventh Circuit affirmed the District Court’s dismissal of the Amended Complaint. Id. at 18.

In light of this decision, entities that engage in debt collection activities can be reassured that there are limits on the application of the FDCPA. Not all collection activity is governed by the statutory framework. This decision deals a significant blow to plaintiffs who have been attempting to expand the reach of the FDCPA. Davidson also confirms that the plain meaning doctrine is strictly enforced and courts should not allow litigants to enlarge a statute’s intended application or purpose. Entities that engage in debt collection activities should be mindful of this decision if faced with FDCPA claims.

Pennsylvania Federal Court Holds that Envelope with Visible Bar Code That Could Be Scanned To Reveal Consumer’s Account Number May Violate the FDCPA

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By Diana Eng and Joe Patry

In Kostik v. ARS National Services, 3:14-cv-02466, an opinion issued July 22, 2015, the United States District Court for the Middle District of Pennsylvania refused to enter judgment on the pleadings on a complaint where the sole allegation is that the debt collector violated the federal Fair Debt Collection Practices Act (“FDCPA”) because it had sent a letter with the consumer’s account number embedded in a bar code.

The court noted that the bar code was not physically printed on the envelope, but was visible through a clear plastic envelope window on the front of the envelope that exposed the letter’s return address.  When scanned, the bar code would reveal the borrower’s account number.  Because smart phones have apps to easily read “QR” (“quick response”) bar codes, the court reasoned that having the bar code visible by scanning made the account visible to the general public, which could make the consumer a victim of identity theft.

The debt collector argued that the bar code was a benign symbol, which would be exempt from FDCPA liability.  Further, it noted that anyone who scanned the consumer’s mail would be violating federal criminal statutes that prevent unauthorized access to items placed in the U.S. mail and that the FDCPA does not cover illegal actions by unrelated third parties.  In addition to federal criminal statutes, the debt collector noted that the Domestic Mail Manual specifically prohibits postal employees from reading or disclosing the contents of any items placed in the mail.

The court rejected these arguments, relying on prior cases that found that an envelope which had a printed account number on the outside of the envelope or an account number within the viewing area of clear plastic envelope windows violated the FDCPA.  (These cases are Douglass v. Convergent Outsourcing,765 F.3d 299 (3d Cir. 2014),  and Styer v. Prof’l Med. Mgmt., 2015 U.S. Dist. LEXIS 92349 (M.D. Pa. July 15, 2015).)

The Court reasoned that disclosing an account number raises privacy concerns for the consumer and is not benign because it could be used by a third party to harm the consumer.  Consequently, while leaving open the possibility that the barcode disclosure could ultimately be shown to be benign at a later stage in the case, the court found that the borrower’s complaint was sufficient to survive a motion for judgment on the pleadings.

In light of this decision, and as discussed in a prior post discussing the Douglass case, entities collecting consumer debt should avoid the use of QR codes on envelopes or within the viewing area of clear plastic envelope windows.  Revealing such information on envelopes or through clear plastic envelope windows may expose debt collectors to liability under the FDCPA.

Third Circuit Clarifies FDCPA Restrictions on Third-Party Communication

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By: Joshua A. Huber

In Evankavitch v. Green Tree Servicing, LLC, the Third Circuit considered, as a matter of first impression, which party bears the burden with respect to alleged improper third-party communications under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. (“FDCPA”). Evankavitch v. Green Tree Servicing, LLC, —F.3d—, 2015 WL 4174441, at *1 (3d Cir. Jul. 13, 2015). Put differently, the Court was asked to determine whether the debt collector must prove that allegedly improper third-party communications fall within § 1692b’s exception, or whether it is incumbent on the debtor to disprove the applicability of that exception as an element of his claim.   Id.

Under the FDCPA, a debt collector is liable to a consumer for contacting third parties in pursuit of that consumer’s debt unless the communication falls under a statutory exception. One such exception permits communication with a third party “for the purpose of acquiring location information about the consumer” but, even then, prohibits more than one such contact “unless the debt collector reasonably believes that the earlier response of such person is erroneous or incomplete and that such person now has correct or complete location information.” 15 U.S.C. § 1692b.

The Third Circuit ultimately determined that the burden falls on the debt collector. Evankavitch, 2015 WL 4174441, at *10. Noting the “‘longstanding convention’ that a party seeking shelter in an exception . . . has the burden to prove it,” the Court held that Green Tree was required to prove that any alleged third party communications were only for purposes of obtaining location information about Evankavitch and therefore within the narrow exception to the FDCPA’s general prohibition on communications with third parties. Id. at *5.

U.S. Supreme Court Holds Disparate Impact Claims Can Be Brought Under Fair Housing Act

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By: Louise Bowes Marencik

In Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., decided on June 25, 2015, the United States Supreme Court held that disparate impact claims are cognizable under the Fair Housing Act. No. 13-1371, ____ U.S. ____ (2015). The Inclusive Communities Project (“ICP”) alleged that the Texas Department of Housing and Community Affairs (“DOH”) disproportionately allocated low-income housing tax credits to developers of properties in areas highly populated by minorities, resulting in a disparate impact on the availability of low-income housing in minority areas versus nonminority areas in violation of the Fair Housing Act (“FHA”).

Previously, the District Court of Texas ruled in favor of ICP on its disparate impact claim and imposed a structural injunction on the DOH after it found that ICP had established a prima facie case of disparate impact, and the DOH failed to show that no less discriminatory alternatives for the allocation of tax credits were available. In 2013, the U.S. Department of Housing and Urban Development (“HUD”) issued a new regulation interpreting the FHA to include disparate impact liability, and implementing a new burden-shifting framework for adjudication of such claims. The United States Court of Appeals for the Fifth Circuit upheld the District Court’s decision, but reversed and remanded the case in light of HUD’s new regulation, because the District Court had improperly required the DOH to demonstrate that no less discriminatory alternatives were available.

In the Supreme Court’s 5-4 opinion, Justice Kennedy opined that although the language of the FHA does not expressly allow for disparate impact claims, such claims are consistent with the policy behind the FHA. But, the Court clarified that a disparate impact claim under the FHA cannot be proved based on statistical disparity alone. Plaintiffs must be able to point to a defendant’s policy or policies that cause the disparate impact in order to establish their prima facie case. Specifically, Justice Kennedy quoted Griggs v. Duke Power Co., 401 U.S. 424 (1971), which established the disparate impact cause of action under Title VII of the Civil Rights Act of 1964, noting that policies are not subject to disparate impact liability unless they are “artificial, arbitrary, and unnecessary barriers.” Justice Kennedy further noted that these limitations are in place to prevent potential defendants from making race-based decisions to avoid disparate impact litigation. Without such limitations on disparate impact claims, developers may be deterred from building low-income housing, which would undermine the purpose of the Act. Despite these limitations, with this decision the Supreme Court has resolved any controversy regarding whether disparate impact claims can be brought under the FHA.

 

U.S. Supreme Court Rules That Chapter 7 Debtors Cannot Void Wholly Unsecured Liens

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By: Diana M. Eng and Joshua B. Alper

In Bank of America v. Caulkett, No. 13-1421, 575 U.S. __ (2015) and Bank of America v. Toledo-Cardona, No. 14-163, 575 U.S. __ (2015), the Supreme Court of the United States recently held that a Chapter 7 debtor cannot void a junior mortgage, where the value of the collateral securing the debt is less than the outstanding indebtedness owed on the first mortgage.  In essence, even though a junior lien may be wholly unsecured, Section 506(d) of the Bankruptcy Code (the “Code”) does not permit the debtor to void the lien.  Moreover, these Supreme Court decisions resolved a conflict amongst many courts across the country, both at the Bankruptcy Court and Circuit Court levels.

Section 506(d) of the Code states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”  11 U.S.C. § 506(d) (2015).  By its terms, an allowed claim generally has been construed to mean (with certain exceptions not relevant here) a claim to which no objection has been made or a claim that is adjudicated as allowed despite a party objecting to the claim. See 11 U.S.C. § 502(a)–(b).

Significantly, Caulkett and Toledo-Cardona involved substantially similar facts. Both debtors had two mortgage liens on their homes and the mortgages held by Bank of America were both subordinate liens.  Furthermore, the total outstanding indebtedness the debtors owed to the senior lenders exceeded the fair market value of the property. In this posture, the liens held by Bank of America were characterized as “totally underwater.”

In 2013, both debtors filed petitions for relief under Chapter 7 of the Code. Likewise, they each moved to void or “strip off” the junior liens, relying on Section 506(d) of the Code.  In both cases, the Bankruptcy Court granted the debtors’ motions, which were subsequently affirmed by the District Courts and the Eleventh Circuit.  The Supreme Court of the United States granted certiorari to consider “whether a debtor in a Chapter 7 bankruptcy proceeding may void a junior mortgage under 11 U.S.C. § 506(d) when the debt owed on the senior mortgage exceeds the present value of the property.” Caulkett, No. 1341, slip op. at 1 (2015).

Notably, in Caulkett and Toledo-Cardona, there was no dispute regarding whether Bank of America’s claims were allowed.  Instead, the crux of the dispute, and the focus of the Supreme Court’s opinion, centered on the definition of a “secured claim” for purposes of Section 506(d).

As an initial matter, the Supreme Court noted that Section 506(a) of the Code appeared to provide support for the debtors’ position.  In this regard, Section 506(a) (1) states that “[a]n allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property . . . and . . . an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.”  11 U.S.C. § 506(a).  As a result, the Supreme Court acknowledged that a straightforward textual application of Section 506(a) appeared to support the conclusion that a claim cannot be classified as secured if the value of the creditor’s interest in the collateral is zero.  However, the Supreme Court emphasized that it had previously considered this textual application and had rejected it in Dewsnup v. Tim, 502 U.S. 410 (1992).

In Dewsnup, the Supreme Court held that a Chapter 7 debtor could not reduce or “strip” down a partially underwater lien to the value of the collateral securing the claim.  In reaching this conclusion, the Dewsnup Court found that pursuant to Section 506(d), a ”secured claim” is simply “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.” Caulkett, No. 1341, slip op. at 4.  Moreover, if a claim is “allowed” and otherwise “secured with recourse to the underlying collateral, it does not come within the scope of 11 U.S.C. §506(d).” Id. (citing Dewsnup, 502 U.S. at 415, 417-20).

Among other arguments, the debtors attempted to persuade the Court that Dewsnup should be limited to the facts of that case, mainly instances involving partially secured or under-secured liens. Caulkett, No. 1341, slip op. at 5.  Additionally, the debtors also posited that the definition of “secured claim” could be redefined to mean “any claim that is backed by collateral with some value,” but the Supreme Court ultimately rejected both arguments. Id.  The Supreme Court refused to limit Dewsnup’s general application and it also declined to adopt an alternative definition of “secured claim” than what was already decided by prior Supreme Court precedent.  In its final analysis, the Supreme Court held that the construction of “secured claim” under Dewsnup mandated the conclusion that a Chapter 7 debtor cannot void a wholly unsecured junior mortgage lien.

In light of this decision, lenders and the banking industry can be reassured that wholly underwater junior liens generally will not be stripped off in a Chapter 7 bankruptcy case. Previously, Chapter 7 debtors in various jurisdictions had success with voiding junior liens where the property was underwater.  Caulkett and Toledo-Cardona are particularly significant because as the value of real property fluctuates over time, the value of a junior lien can change when the property increases in value.  As a result, debtors will not be able to obtain a windfall by taking advantage of the value of their real property at the time of the filing of the Chapter 7 petition.

Lenders Beware: Private Student Loans May Soon Be Dischargeable in Bankruptcy

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By:  Joshua B. Alper, Esq.

The Consumer Financial Protection Bureau has its eye on the default rate of private student loans.  In an effort to address this issue, a bill was recently introduced in the United States Senate entitled “The Fairness for Struggling Students Act of 2015” (the “Act”).  Significantly, the Act aims to help students and graduates struggling with repaying private student loans the ability to discharge such debt in bankruptcy.  The Act will essentially treat private student loan debt similar to that of other forms of private unsecured debt like credit cards and medical bills.

When the reforms to the Bankruptcy Code were enacted in 2005, private and government-backed student loans were afforded similar protection when a borrower filed for bankruptcy.  Both were generally deemed nondischargeable (although private student loans could be discharged in rare and extreme circumstances).  With the introduction of the Act, the Senate seeks to alleviate the financial pressure experienced by students and graduates when they are obligated to begin repaying private student loans.  Significantly, the Act leaves intact the nondischargeability of student debt arising from federal student loans.  Federal loans are typically backed by revenue received from taxpayers.  As a result, it is no surprise that the Senate chose not to change the law in this area.  Federal loans usually have low interest rates and have flexibility with respect to available repayment options.  By contrast, private loans generally have higher interest rates and limited flexibility regarding repayment.  Therefore, the Act would ease the burden of repaying private student loans, especially when the total outstanding debt on private loans that are in default is reported to be extreme.

While critics of the Act may suggest the Act does not protect against bad faith bankruptcy filings, the Bankruptcy Code already contains provisions that were enacted in 2005 to guard against debtors abusing the bankruptcy system for their own personal gain.  For a variety of reasons, the enactment of legislation is oftentimes a difficult task because there are a multitude of interests to consider.  Consequently, it will be interesting to see how lawmakers and the financial industry react to the Act, especially during the current economic climate.

U.S. Supreme Court to Decide ECOA Circuit Split: Can Spouses be Required to Sign Personal Guaranties?

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By: Joe Patry

The Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. § 1691 et seq. was enacted in 1974 “to eradicate credit discrimination waged against women, especially married women whom creditors traditionally refused to consider for individual credit.” Mays v. Buckeye Rural Elec. Coop., 273 F.3d 837 (6th Cir. 2002), at 5 (all references to pagination is to the pagination in the .PDF copies of the cases to which this post links). Under ECOA, a creditor cannot discriminate deny an application for credit solely because of that person’s marital status. See 15 U.S.C. § 1691(a).

Based on recent decisions, the Courts of Appeal for the Eighth Circuit and Sixth Circuit are split on the question of whether a creditor may require a spouse to execute a personal guaranty for a loan. If a guarantor is considered an “applicant” under ECOA, then requiring a spouse to guarantee a loan violates ECOA and may allow the spouse to use the affirmative defense of recoupment to avoid enforcement of the personal guaranty.  Last month, the Supreme Court of the United States granted the writ of certiorari to resolve this circuit split.  The case has not yet been set for argument.

In Hawkins v. Community Bank of Raymore 761 F.3d 937 (8th Cir. 2014), the husbands of Plaintiffs Valerie J. Hawkins and Janice A. Patterson were the two members of PHC Development, LLC (“PHC”).  Id. at 2. Patterson and Hawkins themselves had no interest in PHC.  Id.  From 2005 to 2008, Community Bank of Raymore (“Community”) made four loans to PHC, totaling $2,000,000. Id.  Hawkins, Patterson and their husbands signed personal guaranties on the loans.  Id.  The loans went into default and Community demanded payment not only from PHC but also from Hawkins and Patterson as guarantors.  Id.

Hawkins and Patterson sued Community, asserting that Community violated ECOA when it forced them to execute the guaranties solely because they were married to their husbands – the members of PHC.  Id.  Further, Hawkins and Paterson claimed that because of the alleged ECOA violation, the personal guaranties were unenforceable against them.  Id.  The trial court found that Hawkins and Patterson were not “applicants” within the meaning of ECOA and thus there was no ECOA violation, and granted summary judgment for Community.  Id.

On appeal, the Eighth Circuit noted that ECOA makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.”  Id. at 3 (citing 15 U.S.C. § 1691(a)).  An applicant is any person who applies “directly” to a creditor for “an extension, renewal, or continuation of credit . . . .”  Id. (citing 15 U.S.C. § 1691a(b)).  Interpreting this definition, the Federal Reserve Bank promulgated 12 C.F.R. § 202.2(e), which provides that the definition of “applicant” under ECOA includes guarantors.  Id. 

Under the Chevron doctrine, federal courts typically defer to a federal agency’s interpretation of a statute if (1) the statute is ambiguous or unclear and (2) if the agency’s reading is reasonable in light of Congress’s intent.  Id.  at 4; Chevron U.S.A. v. Natural Resources Defense Counsel, 467 U.S. 837 (1984). If the statute is clear, then the analysis stops and the second step is irrelevant. Hawkins at 4. Applying the first step of the Chevron doctrine, the Eighth Circuit found that ECOA was clear that a guarantor is not an applicant because ECOA requires that, to be an applicant, a person must request credit directly from a creditor.  Id.   However, when making a guaranty, a person does not request credit.  Id.  Rather, a guaranty is collateral and security for an underlying loan; although a guarantor makes the guaranty so that credit will be extended to a borrower, providing a guarantee does not constitute a request for credit.  Id.

The Hawkins court noted that the Sixth Circuit recently reached a contrary conclusion in RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F.3d 380 (6th Cir. 2014), where BB&T required the borrower’s wife to execute a guaranty on a commercial loan.  Id. at 3.  In RL BB, the borrower’s wife claimed that this requirement violated ECOA, and she argued that the personal guaranty was thus unenforceable.  Id. at 4.  The trial court in RL BB ruled against the borrower’s wife and found that the guaranty was enforceable.  Id.

On appeal, the Sixth Circuit noted that the Federal Reserve has interpreted ECOA as prohibiting a creditor from requiring an applicant’s spouse from guaranteeing a security instrument.  Id. at 5.  While the Sixth Circuit noted that ECOA does not explicitly define an applicant to include a guarantor, the Sixth Circuit highlighted that the Federal Reserve’s regulations define an applicant as a guarantor (meaning that a guarantor would be able to sue for an ECOA violation).  Id. 

Applying the first prong of the Chevron doctrine, the Sixth Circuit found that an ambiguity existed in ECOA’s definition of “applicant” because a guarantor approaches a creditor in the sense that she offers her own personal liability if the borrower defaults.  Id.  Further, the Sixth Circuit explained that a guaranty is made in consideration of the borrower’s receiving credit.  Id.  The Sixth Circuit explained that an “applicant” requests credit, but credit is the right granted by a creditor to a debtor to defer payment of debt.  Id.  Thus, the Sixth Circuit found that an applicant requests credit but the debtor enjoys the benefit of the credit, and as a result, an applicant and the debtor could be different persons.  Id.  Looking at the larger purpose of ECOA to prevent discrimination “in any respect” of a credit transaction, the RL BB court reasoned that the broad remedial goal of the statute meant that the term applicant could be ambiguous.  Id. 

Because the Sixth Circuit found that the term “applicant” could be ambiguous, the court continued from where the Eighth Circuit stopped and moved on to the second prong of the Chevron analysis.  Id. With respect to the second prong, the Sixth Circuit found that because an “applicant” could include a guarantor (and that a creditor could not require a spouse to be a guarantor), the Federal Reserve’s interpretation in Regulation B was reasonable and thus entitled to deference.  Id.  Because the borrower’s wife impermissibly had been required to execute a personal guaranty, the personal guaranty was not enforceable and the Sixth Circuit reversed the lower court’s finding and allowed the borrower to use the affirmative defense of recoupment to prevent the enforcement of the guaranty.  Id. at 12.

Lenders that require a personal guaranty from a spouse should monitor the Supreme Court’s resolution of this circuit split. If the Supreme Court agrees with the Sixth Circuit, creditors should ensure that spouses are not required to execute personal guaranties on loans, as such guaranties may well be unenforceable.

NY AG Fails to Compel Enforcement of National Mortgage Settlement Against Wells Fargo

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By: Louise Bowes Marencik

Last Monday, the United States District Court for the District of Columbia ruled that evidence of Wells Fargo’s noncompliance with the National Mortgage Settlement presented by the New York Attorney General’s Office was insufficient to support its claims to compel enforcement of the settlement. United States v. Bank of Am. Corp., 2015 U.S. Dist. LEXIS 11617 (D.D.C. Feb. 2, 2015). In October 2013, the New York AG’s Office filed a motion to compel enforcement of the National Mortgage Settlement against Wells Fargo, alleging that the bank does not sufficiently adhere to the loan modification review timelines agreed to by the bank in the National Mortgage Settlement. Wells Fargo defended against the claims on the basis that the evidence set forth by the AG’s office related to less than 0.025 percent of its loans.

In February 2012, Wells Fargo and four other mortgage servicers entered into multiple consent judgments, collectively known as the National Mortgage Settlement, with the United States Department of Justice, 49 state attorneys general, and the Department of Housing and Urban Development. The Settlement, which was valued at $25 billion, required the servicers to comply with certain “Servicing Standards,” including the implementation of certain practices related to loan modification reviews. For example, under the National Mortgage Settlement, the servicer must acknowledge receipt of a borrower’s application for a loan modification within 3 business days, and notify the borrower of any missing information necessary to conduct the review within 5 business days.

In its Motion to Enforce the Consent Judgment, the NY AG claimed that Wells Fargo failed to comply with these and other similar requirements in connection with 97 out of the roughly 450,000 loans serviced by Wells Fargo in New York. The Consent Judgment provides that the Servicing Standards required to be implemented by the servicers are to be monitored by a Monitoring Committee, including representatives from the state attorneys general, financial regulators, the Department of Justice, and the Department of Housing and Urban Development. Designated Monitors are responsible for implementing certain “Metric” testing to determine whether the servicers are in compliance with the various requirements of the Consent Judgment. If a certain error rate is exceeded, the Monitor notifies the servicer of a “Potential Violation,” and a remedial procedure is triggered; however, not all of the Servicing Standards can be evaluated using the Metric process.

The issue in this case was whether the NY AG had the authority to bring the Motion to Enforce the Consent Judgment given that the Judgment specifically provides for enforcement by the Monitoring Committee. Wells Fargo argued that state attorneys general can only file such a motion related to uncured Potential Violations; however, the Court opined that Wells Fargo’s argument went “too far.” The Court found that “(1) only the Monitor can enforce Servicing Standards covered by a Metric unless there has been a failure to cure and (2) the parties and the Monitoring Committee can sue to enforce (a) uncured Potential Violations of Servicing Standards covered by a Metric and (b) Servicing Standards that are outside the Metric testing/Potential Violation process.” Id. at *31.

Although the Court found that the NY AG could seek enforcement of the Consent Judgment under these circumstances, because two of the Servicing Standards in question are not monitored by the Metric system, the Court ultimately found that the NY AG failed to allege a breach of the Consent Judgment in its motion because the AG relied on such a small sample of the loans serviced by Wells Fargo in New York to support its claims. The Court noted that the “Consent Judgment does not require absolute perfection in loan servicing” and “the Parties understood this.” Id. at *35.

Pennsylvania Federal Judge Strikes Class Allegations Pre-Certification and Discovery

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By: Laura E. Vendzules

Too many times a defendant is forced to foot the bill for costly discovery and motion practice before being able to successfully challenge class allegations. The recent decision in Bell v. Cheswick Generating Station, et al., Civ. A. No. 12-929 (W.D. Pa., January 28, 2015), however, provides some optimism that defendants faced with ill-defined class action allegations may be able to avoid the expense of class-wide discovery and briefing a class certification opposition by filing a motion to strike class allegations pre-discovery.

In Bell, Plaintiffs alleged a class comprised of individuals that live or own property within one mile of the Cheswick Generating Station “who have suffered similar damages to their property by the invasion of particulates, chemicals, and gases from Defendant’s facility which thereby caused damages to their real property.” Defendant filed a motion to strike Plaintiffs’ class allegations, relying on Federal Rules of Civil Procedure 23(c)(1)(A) and 12(b). In an opinion by Judge Cathy Bissoon, the United States District Court for the Western District of Pennsylvania acknowledged that authority to strike class allegations stems from Federal Rules of Civil Procedure 12(f), 23(c)(1)(A) and 12(d)(1)(D) – not Rule 12(b). The Court also noted that Third Circuit decisions support striking class allegations, where “no amount of discovery will demonstrate that the class can be maintained.”

In deciding Defendant’s motion to strike, the Bell Court rejected Plaintiffs’ argument that Defendant’s pre-discovery motion to strike was subject to the standard of review for a Rule 12(b) motion. Rather than accepting the class certification allegations as true, the Court was persuaded by the reasoning of the Seventh Circuit and a majority of District Courts considering the issue, and required Plaintiffs to make a “prima facie showing that the class action requirements of Fed.R.Civ.P. 23 are satisfied or that discovery is likely to produce substantiation of the class allegations.”

After examining the class definition, the Court determined that the class, as alleged, was a “fail-safe” class and was unascertainable in that the Court would be required to conduct mini-hearings to determine who belonged within the class. The Court also rejected Plaintiffs’ attempt to “amend[] the Complaint in their briefing,” but indicated that an amended complaint that defines the class by “clear, objective criteria” may not be futile. Accordingly, the Court granted the motion to strike without prejudice to Plaintiffs filing a motion to amend, but cautioned that no further amendments would be permitted.

While it is too early to tell, Bell could signal a shift in this District requiring greater scrutiny of class allegations at the early stages of litigation.