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.

Does the FDCPA Allow an Association to Communicate with a Tenant Under the Florida Condominium Act's Recent Amendments?

The Florida Condominium Act, Chapter 718, Florida Statutes, was recently amended to provide that if a unit is occupied by a tenant and the unit owner is delinquent on any monetary obligation to the association, the association may demand in writing that the tenant pay future rents and other monetary obligations of the tenant directly to the association until the association releases the tenant or the tenant vacates the premises, in order to satisfy the unit owner's obligations to the association. At first glance, it would appear that taking such an action on the part of the association would constitute a violation of the Federal Fair Debt Collection Practices Act (FDCPA), particularly 15 U.S.C.A. § 1692c's prohibition on communication with third parties regarding the debt. For several reasons, however, we believe the Condominium Act's amendments are not always inconsistent with the FDCPA.

In order to more fully understand the operation of the amendment, we must review its actual language, which can be found at Chapter 2010-174, Laws of Florida (beginning on page 47). It provides, in pertinent part:

"If the unit is occupied by a tenant and the unit owner is delinquent in paying any monetary obligation due to the association, the association may make a written demand that the tenant pay the future monetary obligations related to the cooperative share to the association and the tenant must make such payment. The demand is continuing in nature, and upon demand, the tenant must pay the monetary obligations to the association until the association releases the tenant or the tenant discontinues tenancy in the unit. The association must mail written notice to the unit owner of the association’s demand that the tenant make payments to the association. The association shall, upon request, provide the tenant with written receipts for payments made. A tenant who acts in good faith in response to a written demand from an association is immune from any claim from the unit owner."

It should first be noted that the provision states that the association "may" elect this remedy, not that it must. Therefore, it cannot be said that this provision is in direct conflict with the FDCPA, because the association can simply choose not to elect this remedy if it fears it will violate the FDCPA in doing so. There is no Morton's Fork involved, and therefore little likelihood that the state law is conflict preempted under the Supremacy Clause (U.S. Const. art. VI, cl 2.) (click here for more information on these doctrines, in the context of the Arizona immigration law).

That being said, one can understand why an association would want to exercise its rights under this provision. In order to determine if it's possible to do that without violating the FDCPA, let's look at the relevant Federal provision. 15 U.S.C.A. § 1692c(b) provides:

"Except as provided in section 1692b of this title [to ascertain the debtor's location information], without the prior consent of the consumer given directly to the debt collector, or the express permission of a court of competent jurisdiction, or as reasonably necessary to effectuate a postjudgment judicial remedy, a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector."

For this provision to apply, the communication must concern a debt, it must come from a debt collector, and the communication must not fall within an exception to the provision. Whether these criteria will be met will depend on the facts of each specific case.

Is the communication in connection with the collection of a "debt"?

The FDCPA defines debt as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." 15 U.S.C.A. § 1692a(5). Association dues and assessments are usually considered debts under the FDCPA, but fines assessed by the association for violation of association rules are not. Durso v. Summer Brook Preserve Homeowner's Ass'n, 641 F.Supp. 2d 1256 (M.D. Fla. 2008). The Florida law at issue provides that the tenant may be required to pay rent to the association if the owner is delinquent on "any monetary obligation due to the association." Presumably, this would include both dues and fines.

Is the party attempting to collect the amount owed to the association a "debt collector"?

The FDCPA defines "debt collector" as "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 who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. Notwithstanding the exclusion provided by clause (F) of the last sentence of this paragraph, the term includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. For the purpose of section 1692f(6) of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests."

Under this definition, the association itself would not be subject to the FDCPA (unless it uses another name in collecting the debt), since it is a creditor in this scenario, not a debt collector. See generally Madura v. Lakebridge Condominium Association, Inc., 2010 WL 2354140 (11th Cir. 2010). But a management company probably is (see Id.), and a collection agency and an attorney definitely are.

Does the Florida Condominium Act's amendment fall under any exception to § 1692c(b)?

Even if the communication concerns a debt and emanates from a debt collector, the communication will not violate the FDCPA if it falls under one of the exceptions to § 1692c(b). According to its terms, § 1692c(b) does not apply to communications (1) made with the prior consent given directly to the debt collector, (2) made with the express permission of a court of competent jurisdiction, or (3) as reasonably necessary to effectuate a postjudgment judicial remedy. It is likely that the first exception will not be met with respect to existing unit owners, although it should urge all associations to place a written consent into the documents prospective owners must sign in order to avoid liability in the future. It is also likely that the second exception is not met, unless the notice is being sent in litigation and upon the court's order. The third exception does not appear to have any application to the Florida Statute at all.

Additionally, the FTC staff commentary to the FDCPA provides that "an attorney may communicate with a potential witness in connection with a lawsuit he has filed (e.g., in order to establish the existence of a debt), because the section was not intended to prohibit communications by attorneys that are necessary to conduct lawsuits on behalf of their clients." It is not clear where this came from, or if a court would consider this a valid exception (FTC commentary is not binding on the judiciary). However, parallels can be drawn between the need to contact witnesses for the purposes of litigation and the need to contact tenants for the purposes of the Condominium Act amendment. Both involve remedies that need not be elected- just as the Act's amendments provide that the association "may" notify the tenant, in principal a creditor need not elect to file a lawsuit and seek judicial remedy. So if an exception is going to be made to allow the creditor to elect one legal remedy- a lawsuit, why not make an exception to allow the creditor to elect another legal remedy- charging past due amounts to the tenant?

Conclusion

The issue of whether electing remedy under the amendments to the Condominium Act will subject an association or its agent to FDCPA liability has not been litigated. It is likely that this issue will be addresses by a court of competent jurisdiction at some point however, given the state of the economy and of Florida real property in general. Associations should prepare for this battle by amending their association documents to provide for the unit owner's consent to elect the remedy provided in the Condominium Act's amendments, and by being prepared to establish the existence of an exception to § 1692c(b)'s application in the specific circumstances.

Florida Supreme Court Expands Remedies Available Against Judgment Debtors Owning an Interest in a Single Member Limited Liability Company

In a ruling with far-reaching implications for judgment creditors and debtors, on June 24, 2010 the Florida Supreme Court decided the case of Olmstead v. Federal Trade Commission (SC08-1009). The case came to the Supreme Court as a result of a question certified by the Federal Eleventh Circuit in F.T.C. v. Olmstead, 528 F.3d 1310 (11th Cir. 2008): "Whether, pursuant to Fla. Stat. § 608.433(4), a court may order a judgment-debtor to surrender all “right, title, and interest” in the debtor's single-member limited liability company to satisfy an outstanding judgment."

A majority of the Florida Supreme Court answered the question in the affirmative (after rephrasing it). As a result, when a creditor obtains a judgment against an individual debtor who is a member of a single member Limited Liability Company, the judgment creditor may obtain an order from the court requiring the LLC to surrender its assets to satisfy the judgment against the member.

Prior to this ruling, a judgment creditor who wished to levy upon a judgment debtor's interest in a Limited Liability Company had to seek a charging order pursuant to Fla. Stat. § 608.433(4), which provides:

"On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of such interest."

According to this statute, a court may order the LLC to apply distributions accruing to the judgment debtor toward satisfaction of the judgment. However, the court may not otherwise allow the judgment creditor to interfere with the operation of the LLC or take part in the decision to make distributions, because pursuant to Fla. Stat. § 608.432(1), a member's right to participate in the management of the LLC's affairs cannot be assigned unless the operating agreement provides for such an assignment and the other members of the LLC consent. This statute greatly limits the usefulness of the charging order as a creditor's remedy, because it leaves the decision to make distributions within the discretion of the members of the LLC, who have no duty to the judgment creditor and no interest in seeing the judgment get paid. A judgment creditor who wants to influence the decisions of the LLC can seek court appointment of a receiver (an extraordinary remedy that should rarely be granted), but otherwise the creditor has no control over the LLC.

After the Olmstead decision, however, the limitations created by § 608.432 no longer exist with respect to single member LLCs, as the charging order is not the only remedy available. When the judgment debtor is the sole member of an LLC, according to Olmstead, the judgment creditor may obtain an order under Chapter 56, Florida Statutes (the chapter generally covering Execution and Final Process), requiring the judgment debtor to surrender all title and interest in the LLC and to turn over the assets of the LLC to the judgment creditor. Thus, the affect of Olmstead is that a single member LLC provides no asset protection whatsoever for the member.

The Court's rationale for drawing a distinction between single member LLCs and multi-member LLCs is that the limitations placed on the assignability of the right to participate in the decisions of the LLC set forth in § 608.432 have no practical application to single member LLCs because there are no other members whose consent would be required in order to assign the right to participate. In other words, while a member's interest in a multi-member LLC is not freely transferable, a member's interest in a single member LLC is.

Obviously this holding should be of interest to judgment creditors and their attorneys. The dissenting opinion should also be of interest, because it discusses the remedies that may be available to judgment creditors in the context of both single member and multi-member LLCs- an order of insolvency of the judgment debtor, an order piercing the corporate veil of the LLC and attaching its property, and an order seeking judicial dissolution of the LLC. And the dissent does not necessarily disagree with the majority's holding that a single member LLC's property may be applied to a judgment against the member, it merely proscribes a procedure for reaching this property that does not require distinguishing between a single member and a multi-member LLC.

Remedies similar to those mentioned above are available to judgment creditors of partners in General Partnerships (Fla. Stat. § 620.8504) and Limited Partnerships (Fla. Stat. § 620.1703), although with respect to these entities, the charging order provides the exclusive remedy. And Chapter 56 sets forth the remedy available against a judgment debtor's shares of a corporation- levy and sale under execution pursuant to Fla. Stat. § 56.061. Jorge M. Abril, P.A.'s main practice areas include enforcing these and other creditor's remedies in state court and in Bankruptcy proceedings.

Upcoming Teleconference- Bankruptcy, Debt Collection, & Judgment Enforcement

Jorge Abril will speak at 12:00 Noon today at a Live Teleconference entitled Bankruptcy, Debt Collection, & Judgment Enforcement, presented by the Rossdale Group, LLC. A recording of the teleconference should be available for purchase from the Rossdale Group shortly thereafter. Jorge will speak on topics concerning the collection of assets, including locating assets, utilizing public records, debtor's examination, the ethical concerns of asset collection, the effect of Bankruptcy on recovering assets, "the Creditor's & Debtor's Perspective," pre-judgment remedies, and depositions in aid of execution.