Editor’s note: This feature originally appeared in the January issue of DS News, out now.
On August 28, 2019, the Eleventh Circuit Court of Appeals held that a post-discharge mortgage statement sent to a Chapter 13 debtor-mortgagor did not violate the discharge injunction and further found that sanctions were not appropriate. [In re Roth, 935 F.3d 1270 (11th Cir. 2019)]
Arlene Roth (hereinafter referred to as “Roth”) filed a voluntary petition for bankruptcy under Chapter 13 on December 22, 2010. Id. at 1273. Her chapter 13 plan provided for the subject property to be surrendered. On June 27, 2014, Roth received her discharge and Nationstar (the servicer on the subject property) was notified.
Approximately four months later, Nationstar started sending Roth monthly statements related to her mortgage. Although the statements disclosed they were not an attempt to collect a debt, Roth nonetheless had her attorney send a cease and desist letter. When the statements did not stop, Roth, through her attorney, filed a motion for sanctions in the bankruptcy court alleging violations of 11 U.S.C. §524, as well as a separate civil action claiming violations of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C §1692e et seq, and the Florida Consumer Collection Practices Act (FCCPA). On December 14, 2015, after receiving another “informational statement” from Nationstar, Roth filed a second motion for sanctions in the bankruptcy case. The bankruptcy court denied Roth’s motion for sanctions by finding that the “informational statement” was not an attempt to collect a debt and did not run afoul of §524.
The Language in the “Informational Statement”
The Eleventh Circuit carefully examined the language contained in the “informational statement,” which reads as follows:
“This statement is sent for informational purposes only and is not intended as an attempt to collect, access, or recover a discharged debt from you, or as a demand for payment from any individual protected by the United States Bankruptcy Code. If this account is active or has been discharged in a bankruptcy proceeding, be advised this communication is for informational purposes only and is not an attempt to collect a debt. Please note, however, Nationstar reserves the right to exercise its legal rights, including but not limited to foreclosure of its lien interest, only against the property securing the original obligation”.
Is the Objective Effect of the Creditor’s Action to Pressure a Debtor to Repay a Discharged Debt?
The Eleventh Circuit rejected Roth’s argument to apply the FDCPA’s “least sophisticated consumer standard” to determine whether the informational statement was a violation of the discharge injunction. Instead, the Eleventh Circuit focused on whether the objective effect of the creditor’s action is to pressure a debtor to repay a discharged debt. In re McLean, 794 F.3d 1131, 1322 (11th Cir. 2015).
In its analysis, the Eleventh Circuit looked at the fact that the first page of the statement contained bold letters declaring that it is “for informational purposes only and is not intended as an attempt to collect, access, or recover a discharged debt from you, or as a demand for payment from any individual protected by the United States Bankruptcy Code.” In re Roth, 935 F.3d at 1276. Moreover, this disclaimer is repeated throughout the statement. Lastly, the statement contained a payment coupon that is marked in large letters as “voluntary.”
Worth noting, the Eleventh Circuit mentioned that 11 U.S.C. §524 allows for a debtor to voluntarily pay back a discharged debt. Particularly, 11 U.S.C. §524(f) states “[n]othing contained in subsection (c) or (d) of this section prevents a debtor from voluntarily repaying any debt.”
This begs the question, how else would Roth (or any other consumer) know how much is owed on a debt in order to repay it? The Eleventh Circuit found that if the informational statement is unlawful debt collection under §524, there would be little daylight between (1) a legitimate attempt by Nationstar to inform Roth how she could regain the property and (2) an unlawful attempt at debt collection in violation of the discharge injunction. In re Roth, 935 F.3d at 1276. Thus, the Eleventh Circuit found that the informational statement did not violate the discharge injunction under §524.
Even If Nationstar Committed a §524 Violation, Sanctions Would Not Be Appropriate
What is fascinating about this decision is that the Eleventh Circuit found that even if a §524 violation was committed, sanctions would be inappropriate under the Supreme Court’s recent decision in Taggart v. Lorenzan, 139 S.Ct. at 1799. Under the Taggart standard, in order to find sanctions appropriate, there would need to be a finding that there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful. In other words, with more than a “fair ground of doubt” as to whether the discharge order barred Nationstar’s conduct, sanctions would be inappropriate. In re Roth, 935 F.3d at 1278.
How Should Mortgage Servicers Comply?
Although the Taggart standard is favorable to mortgage servicers, it is imperative that all statements sent during and after a bankruptcy, contain disclaimer language. For instance, the statements should contain large bold letters that read that it is for informational purposes only and not an attempt to collect a debt. Any payment coupon forms should be marked voluntary and the disclaimer language should be repeated on each page of the statement in a manner that grabs the reader’s attention. Simply put, the disclaimer language needs to be as conspicuous as possible (even if boarder-line obnoxious—as discussed more fully below). The goal is to show what the debt is as to the property, not as to the borrower.
Questions That Remain Unanswered
Some questions that remain unanswered are whether courts in other jurisdictions will apply the objective analysis when faced with §524 violation claims and if not, what standard will be applied? More concerning is whether or not other jurisdictions will apply the FDCPA’s “least sophisticated consumer standard” in these cases. That concern stems from the fact that at the motion to dismiss stage in Roth’s federal lawsuit (brought under the FDCPA), the district court determined that the FDCPA complaint “plausibly alleges that the Informational Statement was sent to induce payment on Plaintiff’s mortgage debt,” and was thus, “related to debt collection” under the FDCPA. Id. at 270. However, the district court did not make a finding on the merits since the case was resolved by agreement of the parties.
In addition, what is to stop consumers from bringing lawsuits in federal court based on FDCPA violations? For the reasons stated in this article, it is crucial that mortgage servicers take great care in ensuring that statements sent out during or after a bankruptcy, contain as much disclaimer language as possible as to withstand the “least sophisticated consumer” standard.