Even if the Supreme Court rules against debt collectors in deciding Midland Funding LLC v. Johnson, the Fourth Circuit held that disclaimers give the industry safe harbor from violating the federal Fair Debt Collection Practices Act, or FDCPA.
The Supreme Court will hear oral argument on Jan. 17 in Midland Funding to resolve circuit splits and decide whether (1) the later-adopted Bankruptcy Code impliedly repealed the FDCPA in part, and (2) filing a proof of claim based on a time-barred debt violates the FDCPA.
In a non-precedential decision on Dec. 20, the Fourth Circuit conspicuously avoided the implied repeal question pending in the Supreme Court but nevertheless absolved the debt collector of liability by concluding that disclaimers confer protection from some FDCPA claims.
The Facts
The case involved an individual still living in a million dollar home despite having defaulted on the mortgage in 2009. He got a chapter 7 discharge in 2011.
More than a year after discharge, the servicer sent several communications about the mortgage, for which the owner’s personal liability had been discharged in chapter 7. As Circuit Judge Dennis W. Shedd said in his opinion, the lender’s in rem right to foreclose survived bankruptcy.
The communications included monthly account statements for the mortgage debt, payment coupons, and an explanation of alternatives to foreclosure. At least one letter forthrightly said it was from a debt collector attempting to collect a debt.
The communications all contained similar disclaimers saying that the letters were not an attempt to collect a debt if it had been discharged in bankruptcy.
The homeowner sued two years later, alleging that the communications violated the FDCPA because they were attempts to collect discharged debt. The district court dismissed the suit on summary judgment and was upheld in the Fourth Circuit.
The Circuit’s Ratio Decidendi
Citing Fourth and Seventh Circuit authority, Judge Shedd employed a “commonsense inquiry” to determine whether the letters were an attempt to collect a debt, rather than the “least sophisticated consumer” test. He said the letters were “for informational purposes only, were non-threatening in nature, and contained clear and unequivocal disclaimers to establish that they were not in connection with the collection of a debt.”
Again citing Fourth Circuit authority, Judge Shedd said that someone with “‘a basic level of understanding and willingness to read with care’ . . . should have known” that the communications were “not attempting to collect a debt.”
Because the letters were not an attempt at debt collection, there was no FDCPA violation, thus justifying summary judgment for the debtor collector-defendant.
In a footnote, Judge Shedd said the result would have been the same using the “least sophisticated consumer” test, for reasons explained in the district court’s opinion.
Having decided that the letters were not attempts at debt collection, Judge Shedd did not reach an the issue in Midland Funding: Did the Bankruptcy Code preclude a claim under the FDCPA?
In future cases, former Bankruptcy Judge Eugene R. Wedoff said, “Some careful line-drawing may be required” depending on whether the debtor is wealthy and sophisticated or poor and unrepresented.
Judge Wedoff said he is “inclined to think that the owner of a high-value home represented by sophisticated bankruptcy counsel would very likely understand the extent and limitations of a chapter 7 discharge, and so not be confused by a monthly statement from the mortgage holder, but the owner of a low-value home represented by a high-volume consumer bankruptcy lawyer would more likely be misled.”
To read an ABI discussion of Midland Funding and the circuit splits, click here.