Cases of Interest to Creditors in the October Term of the United States Supreme Court

There are two cases for argument in the United States Supreme Court's October Term that may be of interest to creditors- Ransom v. MBNA America Bank and Chase Bank USA v. McCoy.

The former deals with the construction of 11 U.S.C.A. §707(b)(2)(A)(ii), which sets forth the available deductions from income for purposes of determining if the presumption of abuse arises under Chapter 7 and of calculating disposable income under Chapter 13. The issue is whether, under that section, as incorporated into Chapter 13 by 11 U.S.C.A. § 1325(b)(3), the Bankruptcy court can allow a Chapter 13 debtor with an above-median income to claim an ownership deduction for a vehicle, when the debtor doesn't make payments on the vehicle. The specific statutory language at issues provides, in pertinent part, that "[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards," promulgated by the IRS. The debtor claims that he should be able to deduct the standard cost for vehicle ownership even though his vehicle is paid in full. MBNA, an unsecured creditor, disagrees. The United States has filed an Amicus brief in support of MBNA, arguing that where the debtor does not actually make payments on the vehicle, there are no "applicable monthly expense amounts" to deduct. The National Association of Consumer Bankruptcy Attorneys has filed an Amicus brief in support of the debtor, arguing that with the amendments to the Bankruptcy Code enacted in the Bankruptcy Abuse Prevention and Consumer Protections Act of 2005, Congress intended that the focus be shifted away from actual expenses to standardized amounts, and that requiring individual inquiry into the debtor's actual monthly expenses with respect to the debtor's vehicle(s) frustrates that purpose. Both raise compelling policy arguments in their briefs, which can be found here and here, respectively. The lower court's decision, ruling against the debtor, is available at In re Ransom, 577 F.3d 1026 (9th Cir. 2009).

The latter concerns the pre-2009 Regulation Z, 12 C.F.R. § 226.9(c), issued pursuant to the Truth in Lending Act (TILA), 15 U.S.C.A. § 1601 et. seq. The issue in the case is whether the regulation required a creditor to provide a credit card holder with a change-in-terms notice in advance when the creditor increases the credit card rate due to the card holder's default, when the contract provided for the right to increase the rate upon default. I frame the issue in the past tense, because under the current version, the answer would clearly be "yes," since the phrase at issue- "[t]he 15-day timing requirement does not apply...if a periodic rate or other finance charge is increased because of the consumer's delinquency or default,"- has been removed. The case presents an interesting question concerning the deference that should be given to the rulemaking authority's interpretation of a regulation's meaning, as published in the Federal Register in connection with proposed changes to the rule. The United States and the American Bankers Association have filed Amicus briefs in support of the bank, arguing, in part, that the Federal Reserve Board's interpretation should be given deference, and that the lower court, in coming to its conclusion (which can be found at McCoy v. Chase Manhattan Bank USA, 559 F.3d 963 (9th Cir. 2009)), failed to do so.

Expect to read more on these cases on this blog as they progress. A list of all cases scheduled for the October Term 2010 can be found on SCOTUSblog.

Upcoming Seminar- Protecting the Creditor's Rights During Bankruptcy

Jorge M. Abril, Esq. is scheduled to speak at the National Business Institute's upcoming seminar entitled Protecting the Creditor's Rights During Bankruptcy, which takes place December 6, 2010 at the Hyatt Regency Miami. The program description reads:

Strategic Guide to Bankruptcy From the Creditor's Viewpoint
The debtor who's been dodging repayment for months has just filed for bankruptcy. Are you stuck with an unpaid account or are there ways to continue trying to collect? Join us for an engaging analysis of creditors' rights in bankruptcy and learn how to achieve the best possible result in the proceeding. Register today!

• Gain real-life strategies for lifting automatic stay in various scenarios.
• Clarify the priority of claims and determine the creditor's chances of retrieval.
• Explore creditors' options in every type of bankruptcy.
• Wisely advise the creditors in Chapter 11 cases on participation in creditors' committees.
• Gain a clear picture of the debtor's financial situation with skillful use of Rule 2004 exams.
• Find out what special rights landlords, suppliers, and equipment lessors have in bankruptcy.
• Find out what 10 questions to ask before getting started on the case.
• Maintain your impeccable reputation with tips for avoiding misrepresentation and harassment.
• Learn how to prevent execution/sale and secure post-petition interest.

Jorge will speak on issues relating to the ethical representation of creditors during Bankruptcy.

New Blog Discussing Hospital and Health Care Reimbursement News: Healthcare Provider Payment

The authors of the Florida Collection Law Blog are pleased to announce the creation of Healthcare Provider Payment, a blog discussing news, legislation, and recent case law of interest to health plan administrators, healthcare practitioners, and other medical professionals, including hospital business offices, physician practice groups, and individual providers. Like this blog, Healthcare Provider Payment is authored by the attorneys at Jorge M. Abril, P.A.

Articles relating to healthcare reimbursement that are also relevant to Florida creditors and collection professionals in general will be cross-posted here in the future (and vice versa), but the new blog will have more of a national scope and will deal with broader issues relating to Managed Care, provider payment, and other health law, policy, and regulations, which are not always appropriate for this blog.  We will continue to post content relevant to Florida creditors and collection professionals here. We begin there by reposting all articles from this blog posted under the Healthcare category, dealing with issues relevant to those in the medical profession.

Florida Bankruptcy Court- Funds Held by Chapter 13 Trustee Are Subject to Garnishment When the Case is Dismissed

A colleague has posted an interesting article on the Bankruptcy Law Network regarding a case decided last month in the United States Bankruptcy Court for the Middle District of Florida. According to the holding, when a Chapter 13 case is dismissed, a creditor may subject the Trustee to a writ of garnishment under Florida law and require the Trustee to turn over to the creditor all postpetition payments made by the Debtor pursuant to a proposed repayment plan. The case, In re Fischer, No. 6:09-bk-07498-KSJ, 2010 WL 2947165 (Bkrtcy. M.D. Fla. July 16, 2010), is available here. The blog article can be accessed here. Comments aren't available on that blog, and the holding should be of interest to Bankruptcy practitioners and creditors in Florida, so I'll discuss it here.

The relevant background is not particularly complicated: the Debtor filed a Chapter 13 Bankruptcy case, and at some point, the case was dismissed because the Debtor could no longer make the plan payments. The court entered an order dismissing the case and requiring the Trustee to return to the debtor the money that the debtor previously paid to the Trustee, as required by 11 U.S.C.A. §1326(a)(2), which provides:

"A payment made under paragraph (1)(A) shall be retained by the trustee until confirmation or denial of confirmation. If a plan is confirmed, the trustee shall distribute any such payment in accordance with the plan as soon as is practicable. If a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b)."

After the case was dismissed, but before the Trustee got around to finalizing the administration of the estate and returning the money to the Debtor, a Florida judgment creditor ran to state court and obtained a writ of garnishment, requiring the Trustee to turn over the money in its possession belonging to the Debtor to the creditor.

While the Bankruptcy case is pending, obviously that wouldn't work, because any money in the possession of the Trustee at that time would be in custodia legis, and because the automatic stay under §362 of the Bankruptcy Code would prevent the creditor from obtaining the writ of garnishment in the first place. According to the Fischer court, however, the stay is lifted when the dismissal order is entered, and as a result, the Trustee essentially becomes a general debtor of the Debtor at that point, which means it may be subject to garnishment under state law. The court didn't feel compelled to discuss the issue at length, but it did cite a number of cases, some allowing the garnishment and some refusing to allow it.

The courts refusing to allow the garnishment generally looked no further than the plain language of §1326(a)(2) - "the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b)." This language, 'shall return,' appears absolute and qualified only by the requirement to deduct administrative expenses. Some of these courts also ruled on policy grounds, finding that dismissal of the Chapter 13 case is supposed to leave the creditors on equal footing as they were before the Bankruptcy was filed, and promoting a race to the Trustee would not further the policies of encouraging debtors to file Chapter 13 or ensuring orderly and efficient disposition of the Bankruptcy case. Additionally, resort was made to presuming that Congress likely foresaw that creditors would attempt to make claims on funds held by the Trustee under the circumstances at hand, and that through the language requiring the Trustee simply to return the funds to the Debtor, Congress intended to foreclose this possibility. Some courts also held that returning the money to the Debtor does not conflict with state law, because any lien on the funds could follow the funds to the Debtor and be adjudicated in state court subsequent to the Trustee's disbursement. Most of these arguments are compelling, save, in my opinion, for the last. We all know that as soon as the money is returned to the Debtor, it will if at all possible be gone before the creditor can get back to state court, especially where the Debtor knows the creditor will attempt to make a claim. Here are the cases available on Google Scholar: In re Sexton, 397 B.R. 375 (Bkrtcy. M.D. Tenn. 2008); In re Inyamah, 378 B.R. 183 (Bkrtcy. S.D. Ohio 2007); In re Bailey, 330 B.R. 775 (Bkrtcy. D. Ore. 2005); In re Oliver, 222 B.R. 272 (Bkrtcy. E.D. Va. 1998); In re Walter, 199 B.R. 390 (Bkrtcy. C.D. Ill. 1996); In re Clifford, 182 B.R. 229 (Bkrtcy. N.D. Ill. 1995).

The courts allowing the garnishment generally relied on the interplay between §1326(a)(2) on one hand, and the automatic stay, which is lifted immediately upon entry of the dismissal order, and the definition of the estate, which is terminated upon dismissal, on the other. Interestingly, many of these cases dealt with Federal Tax liens, for which the analysis should be different, since there is no question of Supremacy and since the Federal Tax law is very clear: "Notwithstanding any other law of the United States, no property or rights shall be exempt from levy other than the property specifically made exempt by subsection (a). 26 U.S.C.A. §6334(c). The cited cases that are available on Google Scholar can be read at the following links: In re Mischler, 223 B.R. 17 (Bkrtcy. M.D. Fla. 1998); In re Schlapper, 195 B.R. 805 (Bkrtcy. M.D. Fla. 1996); In re Steenstra, 307 B.R. 732 (B.A.P. 1st Cir. 2004); In re Beam, 192 F.3d 941 (9th Cir. 1999); In re Brown, 280 B.R. 231 (Bkrtcy. E.D. Wis. 2001); In re Doherty, 229 B.R. 461 (Bkrtcy. E.D. Wa. 1999).

Whether you agree with the former group of cases or the latter, one thing is clear, especially given that all the Florida cases cited above have allowed the garnishment- the Florida creditor should diligently monitor the progress of the debtor's Bankruptcy case and should seek the advice of counsel with respect to the protection and enforcement of its rights and remedies in and out of Bankruptcy Court to the fullest extent allowable by law.

Pintos v. Pacific Creditors Revisited: Fair Credit Reporting Act Permissible Purposes

Readers of this blog may recall my criticism of the Ninth Circuit's decision in Pintos v. Pacific Creditors Association, No. 04-17485 (April 30, 2009), in which the court held that debt collection does not necessarily constitute a permissible purpose under the Fair Credit Reporting Act (FCRA) to obtain a consumer's credit report from one of the major credit bureaus. The decision came up for en banc review earlier this summer.

Not surprisingly, the court denied the petition for review, but the opinion denying review, as well as the dissents thereto, are particularly noteworthy. The majority added a lengthy footnote to its earlier opinion, clarifying that its analysis is limited to permissible purposes under 15 U.S.C. § 1681b(a)(3)(A), which allows a credit report to be obtained by a person who "intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer." The footnote continues, "we need not determine whether PCA had a permissible purpose under any other §1681b subsection. On remand, Defendants may argue that PCA was authorized to obtain Pintos’s report under a different subsection." This seems to be more than a subtle suggestion that there is another permissible purpose that is applicable to the case at bar, although the majority does not clue us in to any specific provision.

Next to note, the Chief Judge dissented from the majority's denial of en banc review, on several grounds. First, he hearkened back to the dissent to the original opinion, which took issue with the majority's distinction between obtaining a credit report in the process of collecting a judgment (permissible, in the eyes of the majority) and obtaining a credit report in the collection of an account before there was a judgment (not permissible according to the majority). As I previously wrote, the court's prior decisions did not support this distinction, nor did the FTC's commentary (nor common sense, for that matter). Next, the Chief Judge directed the majority's attention to §1681a(m) and §1681b(c). Both of these sections make reference to accessing a credit report in connection with a "credit or insurance transaction that is not initiated by the consumer," and §1681a(m) provides that that phrase does not include a report obtained for the purposes of collecting an account. In other words, debt collection always involves a transaction initiated by the consumer, according to the language of the FCRA. In missing this point, according to the Chief Judge, the majority has "flunk[ed] Statutory Interpretation 101."

Another judge wrote a second dissenting opinion, essentially stating that it's in everyone's best interests- including the consumer's- to allow debt collectors to obtain credit reports in the collection process, because it helps keep costs to collect down, and if the costs are increased, that increase will eventually be passed on to consumers. As a creditor's attorney, I like that argument, but I don't think it sticks. A similar argument can be made against the FDCPA's prohibition on harassing debtors- if collectors were allowed to threaten debtors, collectors would probably have an easier time collecting accounts (at least some), and this would decrease the costs to collect, causing a savings that would sooner or later reach consumers. Actually, similar arguments can be fashioned with respect to most consumer protection statutes reductio ad absurdum- they have some negative effect because they make reaching the consumer more difficult. Of course, this line of reasoning is never employed in construing these statutes; nor should it be.

Musings on statutory interpretation and logical constructs aside, it seems likely that we have not seen the last of this case. According to this post, Ninth Circuit en banc reviews that are denied with a dissenting opinion in which certiorari is granted are overturned by the Supreme Court an astonishing 90% of the time- and this one has two dissents. We'll see.