Case Law Newsletter

Noonan and Lieberman keeps you current on litigation news with its regular Case Law Update focusing on important and emerging trends in federal and state case law. Case Law Update is edited by attorney James V. Noonan.

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July 2008

Debtor’s attempt to extinguish secured claim by treating it as invalid fails.

The Third Circuit in In Re: Mansaray-Ruffin, 05-4790 (3rd Cir., June 24, 2008) affirmed a Bankruptcy court’s rejection of a debtor’s attempt to invalidate a secured mortgage lien by characterizing the lien as invalid in her confirmed plan. The debtor argued that the claim was successfully invalidated because she treated it as unsecured in her plan, the creditor failed to object and the Bankruptcy Code makes all confirmed plans final. The court ruled that the debtor’s attempt at “lien stripping” could only be made by filing an adversary proceeding which was not filed. The creditor’s failure to object to the plan did not relieve the debtor from the duty to resolve the validity of the lien by means of an adversary action. This is true, the court found, even though the confirmed plan treated the lien as invalid because due process require that the creditor be notified of the challenge to the lien by the means provided by the Rules,. i.e. an adversary proceeding. “A confirmed plan has no preclusive effect on issues that must be raised in an adversary proceeding, if no such proceeding has been brought.”

Responding to QWR or Sending Loan Statement Under Section 2605 of RESPA does not constitute an action prohibited by the automatic stay provisions of the Bankruptcy Code.

In response to a servicer’s proof of claim representing pre-petition arrearages the debtor in Saylor v. Select Portfolio Servicing, Inc., 3:07-cv-00229 (M.D.Ala., June 9 2008) filed a Qualified Written Request under § 2605 of RESPA to review the charges the servicer assessed under the mortgage. Some of the charges predated the confirmation of the plan so the debtor commenced an adversary action charging the servicer with violating the automatic stay. The court determined that for there to be a valid claim under § 362 there must be action specifically prohibited by § 362 on the creditors part. The charges to the creditor’s account were merely bookkeeping entries and by responding to the QWR the creditor was not trying to collect them. “The court refuse[d] to find that merely sending a transaction history report and payoff letter in response to a request from the debtor violates the automatic stay when there is no allegation that the mortgage company attempted to collect the debt.”

A similar result was reached in Pultz v. Novastar Mortgage, Inc., 2008 WL 2471892 (Bkrtcy.D.Md. June 16, 2008) where the Bankruptcy court concluded that a servicer’s statutorily mandated duty under RESPA to send notice of the transfer of servicing rights does not violate the automatic stay.

Despite a technical violation in the Notice of Right to Cancel it was sufficient to “clearly and conspicuously” disclose the right to rescind under TILA.

The question presented in McMillian v. AMC Mortgage Services, Inc. 07-0773-WS-M (S.D.Ala., June 10, 2008) was whether a disclosure of the three day right to cancel that left blank the final date to cancel violated TILA. The court concluded it did not because the notice form used clearly stated that the consumer had three business days after the latest of the date of closing, the date of the TILA disclosures, or the date of the notice of the right to cancel. The court concluded that “no reasonably attentive consumer” reading the notice could have failed to appreciate the existence and running of the three day right to cancel. The court said it was compelled to follow Eleventh Circuit precedent holding that a TILA violation will not be found for a technical violation as long as the disclosure forms furnish “clear and conspicuous notice of rescission rights”

“Plausible Deniability” charge fails. Debt collector not required to independently determine if debtor filed bankruptcy case before commencing collection actions.

Relying on Seventh Circuit precedent a Bankruptcy court in Ohio held that a debt collector did not violate the FDCPA in knowingly attempting to collect a discharged debt. In Gunter v. Kevin O’Brien and Associates, 2:05-ap-02257 (Bkrtcy. S.D.Ohio, June 17, 2008) the debt collectors claimed that it was unaware of the discharge when it commenced collection. In response, the debtor argued that the debt collector failed to check PACER or any other source t determine whether a Bankruptcy was filed so it should be charged with the knowledge that such a search would have revealed. The court determined that a debt collection firm, however, generally does not have a duty to determine whether an individual from whom it is attempting to collect has commenced a bankruptcy case. It would be unreasonable to expect collection firms to do so in every instance. The court noted that “It is not difficult to imagine that, of the thousands of individuals to whom the typical debt collector sends letters, many of them-even though not in bankruptcy themselves-will have the same name as one or more persons who have commenced a bankruptcy case.” No violation found.