United States Bankruptcy Court Reclassifies Secured Claim as Unsecured Based Upon the Date the Creditor Filed the Judgment Lien Certificate Under Florida Law

A recent ruling by the United States Bankruptcy Court for the Southern District of Florida highlights the need for creditors and their counsel to perfect judgment lien interests under Florida law at the earliest possible opportunity. The case, In re Broward Kitchens & Baths, Inc., ___ B.R. ____ (Bankr. S. D. Fla. 2010) (decided May 21, 2009), is available on Westlaw at 2010 WL 2016533. It stands for the proposition that a judgment entered by a Florida court entitles the judgment creditor to a secured claim in a Bankruptcy proceeding only to the extent that the Judgment Lien Certificate has been filed in accordance with Fla. Stat. § 55.203.

The facts of the case are fairly straightforward, and in our experience commonplace. The creditor obtained a judgment in excess of $45,000 against the debtor in Florida state court on February 6, 2006. On May 19, 2006, the judgment creditor filed the Judgment Lien Certificate. Subsequently, in September 2006, the debtor filed its voluntary petition for Bankruptcy under Chapter 7. The judgment creditor then filed its claim with the Bankruptcy Court in December 2006. At some point during the Bankruptcy case, the Trustee brought an adversary proceeding under §§ 548 and 550 of the Bankruptcy Code, alleging that in December 2005 the debtor transferred a substantial portion of its assets to third parties, in exchange for payment in the amount of $215,000, in anticipation of and in order to avoid the impending judgment. These claims were eventually settled for a reduced amount. However, given that the property that would have secured the creditor's claim resided not in the hands of the debtor or of the estate, but in the hands of third parties (as a result of the fraudulent transfer), the Trustee objected to the nature of the creditor's claim. The Trustee's argument, which was adopted by the court, was that the judgment lien never attached to the fraudulently transferred property because the Judgment Lien Certificate was filed after the transfer.

The court reasoned that despite the well settled Florida law that legal title to property cannot pass to a fraudulent transferee of that property, a fraudulent transfer is not per se void, but merely voidable by the Trustee. In this case, the Trustee settled the adversary proceeding before there was an official determination that the transfer was in fact fraudulent, which means that the transfer was never actually voided. As such, the fraudulently transferred assets could not be considered part of the Bankruptcy estate. In fact, the only property comprising the Bankruptcy estate at the time the Judgment Lien Certificate was filed, which is when under Fla. Stat. § 55.202(2) the creditor became a secured creditor, was the remainder of the $215,000 paid in exchange for the fraudulent transfer; and since Fla. Stat. § 55.202(2) provides that a judgment lien does not attach to money, the creditor's claim must therefore be treated as an unsecured claim.

As a result, instead of being paid directly from the sale of collateral, the creditor's claim will be payable only to the extent funds remain available after the payment of all claims with a higher priority under § 507 of the Bankruptcy Code. Obviously this is not good for the creditor- there may in fact be no funds remaining to pay this claim. And while that outcome may have been unavoidable for this creditor, the lesson to be learned by creditors and attorneys from this case is that timely action must be taken after the entry of judgment in order to protect the creditor's interests.

Violation of the Florida Consumer Collection Practices Act May Constitute a Violation of the Federal Fair Debt Collection Practices Act

The United States Court of Appeals for the Eleventh Circuit recently decided a case dealing with the interplay between the Federal Fair Debt Collection Practices Act (FDCPA) and its Florida counterpart, the Florida Consumer Collection Practices Act (FCCPA), Fla. Stat. § 559.55 et. seq. The decision, LeBlanc v. Unifund CCR Partners, G.P., --- F.3d ----, 2010 WL 1200691 (11th Cir. 2010), can be found here. According to the Court, even where the FCCPA does not create a private right of action for a violation of its terms, the FDCPA can provide a remedy.

The FDCPA has received an increasing amount of attention in recent years, with the struggling economy and the resultant proliferation of a new legal practice area- consumer debt collection defense. Lawsuits seeking damages for alleged violations of this law are becoming more and more popular. Of significantly lesser renown is the FCCPA, similar legislation enacted by the Florida legislature. In the spirit of the FDCPA, and as a supplement thereto (see Fla. Stat. § 559.552), the FCCPA makes it a violation of state law to engage in certain practices in the collection of consumer debt, including impersonating a law enforcement agency, using or threatening violence or force, disclosing the status of the debt to third parties, failing to disclose that the debt has been disputed, harassing the debtor, etc. The exhaustive list, which can be found at Fla. Stat. § 559.72, should look familiar to FDCPA attorneys.

The FCCPA also provides administrative remedies (Fla. Stat. § 559.730) and civil remedies (Fla. Stat. § 559.77) for violations of § 559.72, each of which is inspired by Federal law (15 U.S.C. §§ 1692(k) and 1692(l)).

In addition to these sections mirroring the FDCPA, the FCCPA requires consumer collection agencies located within the state and consumer collection agencies located outside the state conducting business here to register with the Office of Financial Regulation. Fla. Stat. § 559.553. But while it authorizes administrative actions against a consumer collection agency who fails to register, the FCCPA does not create a private right of action under Florida law for failing to register.

This brings us to the central question addressed by the Eleventh Circuit in Leblanc- whether relief can be provided under the Federal FDCPA for failing to register as a consumer collection agency as required by the Florida FCCPA. The issue came to the court because the Defendant collection agency allegedly sent a letter to a Florida debtor, prior to registering under the FCCPA, which threatened to sue him. The District Court ruled summarily that this violated the FDCPA because the letter contained a threat to take an action that could not legally be taken (i.e. sue the debtor in Florida without registering under § 559.553), and the collection agency appealed. The Eleventh Circuit reversed, holding that not all FCCPA violations amount to an FDCPA violation, and that in this case, based upon the specific language of the letter, a reasonable juror could find that the least sophisticated consumer would view the letter as something other than a threat to sue.

This decision is consistent with prior District Court rulings, and it makes sense. If the letter is a threat to take action that cannot legally be taken, it should be a violation of the FDCPA, § 1692e(5). The source of the law that makes the threatened action illegal, be it Federal consumer protection law, state criminal law, Federal Bankruptcy law, etc., is immaterial. Conversely, if the letter is not a threat to take an action that cannot legally be taken, then no section of the FDCPA can be invoked, and so the fact that a violation of the FCCPA has occurred is of no consequence. As a result, while the ruling should be noted, especially for its in-depth discussion of the least sophisticated consumer standard: "the least sophisticated consumer can be presumed to possess a rudimentary amount of information about the world and a willingness to read a collection notice with some care...however, the test has an objective component in that while protecting naive consumers, the standard also prevents liability for bizarre or idiosyncratic interpretations of collection notices by preserving a quotient of reasonableness,” it should not have a significant effect on the collection agency's policies and procedures.

United States Supreme Court Rules Debt Collectors Are Not Entitled to Bona Fide Error Defense for Mistakes of Law

The United States Supreme Court handed down its decision in the case of Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA today, holding, as expected, that the Fair Debt Collection Practices Act's bona fide error defense, discussed previously on this blog here, does not apply to mistakes of law. Justice Sotomayor delivered the opinion of the Court, in which Chief Justice Roberts and Justices Stevens, Thomas, Ginsberg, and Breyer joined (with Justice Breyer also writing a separate concurring opinion). Justice Scalia wrote an opinion concurring in part and concurring in the judgment, and Justice Kennedy dissented, with Justice Alito joining in his opinion.

The majority cites several sources of authority in support of its decision, some compelling and some not so compelling. In the coming weeks, we will explain each argument advanced by the majority and the corresponding arguments made by the concurrences and the dissent. In the meantime, it is important to note the practical effect of the ruling: a debt collector or collection attorney's mistaken belief in the legality of an action under the FDCPA will not excuse him or her from liability. As a result, the only way to completely shield yourself from liability for a mistake of law is under an advisory opinion provided by the Federal Trade Commission.

It should also be noted, however, that according to the majority this decision does not affect the ability of the trial court hearing an FDCPA lawsuit to award actual damages in a de minimis amount (even zero) under § 1692k(a)(1), or as the majority puts it, "to adjust [additional] damages where a violation is based on a good-faith error," under § 1692k(b), which provides:

(b) Factors considered by court

In determining the amount of liability in any action under subsection (a) of this section, the court shall consider, among other relevant factors—

(1) in any individual action under subsection (a)(2)(A) of this section, the frequency and persistence of noncompliance by the debt collector, the nature of such noncompliance, and the extent to which such noncompliance was intentional; or

(2) in any class action under subsection (a)(2)(B) of this section, the frequency and persistence of noncompliance by the debt collector, the nature of such noncompliance, the resources of the debt collector, the number of persons adversely affected, and the extent to which the debt collector’s noncompliance was intentional.

 

With this in mind, debt collectors and collection attorneys should remain dedicated to keeping abreast of developments in Fair Debt Collection Practices Act law, not only to keep themselves in compliance with the law and thereby avoid liability altogether, but to minimize their exposure to damages in the event they are sued by demonstrating their good faith.

Upcoming Seminar- "Commercial Collections: Legal Strategies from A to Z"

Jorge M. Abril, Esq. is scheduled to speak at the National Business Institute's upcoming seminar entitled Commercial Collections: Legal Strategies from A to Z. The seminar takes place June 21, 2010 at the Hyatt Regency Miami. The program description reads:

Know the Legal Remedies and Procedures for Collecting Commercial Debts- Do you have a firm grasp of the legal procedures for commercial debt collection? Attend this step-by-step, practical seminar to not only gain a better understanding of collection law fundamentals, but also learn the exact procedures for filing your claim and collecting on judgment. Get what's owed to your clients as smoothly and efficiently as possible with these proven collection techniques. Register today!

• Get business debtors' attention with an effective demand strategy and process.
  
• Avoid costly litigation with successful techniques to achieve debt settlement without filing a lawsuit.
  
• Confidently proceed with your client's lawsuit – knowing specific procedures for where, how and what to file.
  
• Exhaust every avenue for collection with proven strategies for locating debtors and their assets.
  
• Discover the best methods to collect post-judgment.
  
• Smoothly handle your next commercial collection claim with sample letters, forms, complaints, checklists and other must-have documentation.
  
• Recognize and steer clear of unethical collection practices that could result in disciplinary action or disbarment.
  

Jorge will present sections on the Fair Debt Collection Practices Act (FDCPA), on Prefiling Strategies, and on Ethical Pitfalls in Collections. As an aside, Jorge and I are both perplexed as to why there is a section discussing the Fair Debt Collection Practices Act, given that the seminar addresses commercial collections and that the FDCPA applies only to consumer debt- a testament to the extent to which the FDCPA is misunderstood. Nevertheless, this seminar should be of interest to commercial litigators, collection agencies, and creditors. More information, including registration instructions and tuition costs, can be found here.

HITECH Act's Changes to HIPAA Privacy Rule Soon Taking Effect

Covered entities and business associates subject to the HIPAA Privacy Rule, including health care providers and revenue cycle vendors, should take note that the amendments to the Rule brought about by the Health Information Technology for Economic and Clinical Health Act, §§13400-13424 of the American Recovery and Reinvestment Act of 2009 (the "HITECH Act"), take effect February 17, 2010.

Previously, business associates' only liability for mishandling Protected Health Information (PHI) arose under the business associate's contract with the health care provider, and the only party responsible for ensuring the existence of a proper Business Associate Agreement was the provider itself. Under the amended regulations, a business associate can now be held directly responsible for improper use of PHI and for the failure to maintain proper policies for its protection.  §13404(a).

The HITECH Act makes the following provisions, previously directed at covered entities only, applicable to business associates:

• Administrative safeguards (45 C.F.R. § 164.308)
• Physical safeguards (45 C.F.R. § 164.310)
• Technical safeguards (45 C.F.R. § 164.312)
• Policies and documentation (45 C.F.R. § 164.316)

Additionally, while HIPAA previously required action on breaches only by covered entities, the HITECH Act requires business associates to take action on known breaches of their agreements by the covered entities they serve, including curing the breach themselves, terminating the agreement, and/or notifying the department of the covered entity's breach. §13404(b).

The breach notification requirements affecting covered entities and business associates have also changed. The HITECH Act requires notification by a covered entity to the individual whose PHI has been breached, within a reasonable time, not longer than 60 days. Business associates must notify covered entities of any breach within the same time period. The notice must be sent in writing via first class mail, and in the case where the breach concerns 10 or more individuals and the individuals cannot be located, notice must be posted on the breaching party's website and through public media. Notice regarding the breach must also be provided to the Secretary, immediately in the case of a breach concerning 500 or more individuals, and via an annual log in the case of a breach of fewer than 500 individuals. §13402.

The penalties for failing to comply with these provisions include criminal charges, §13409, and civil sanctions, §13410. 

From a practical standpoint, this means that agencies should implement their own documented policies for protecting PHI and should immediately ensure that a Business Associate Agreement is executed with the covered entities with which they do business. Covered entities should review the policies of each and every business associate. If an agreement already exists (which it should), it may need to be amended. It must limit the exchange and use of PHI to the minimum amount necessary for the business associate to carry out its function. HHS has a website discussing the recommended contract language, here. Our sample contract is found below. Note: the agreement requires customization based upon the use of PHI contemplated by the parties' business relationship.

Sample Business Associate Agreement

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