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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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October, 2010

SIXTH CIRCUIT RESOLVED SPLIT IN LOWER COURTS WHEN IT HELD THAT A CHAPTER 13 DEBTOR WHO PROPOSES TO CURE A DEFAULT HAS TO PAY EVERYTHING DUE EVEN WHERE THE DEBT IS UNDERSECURED

The Sixth Circuit resolved a split in the Southern District of Ohio as to whether the proper arrearage amount in a Chapter 13 plan includes fees and costs permitted by the contract terms and applicable non-bankruptcy law even where the debt is undersecured. In Deutsche Bank National Ass’n v. Tucker, 09-5867 (6th Cir., Sept. 15, 2010) the mortgagee was undersecured on a mortgage loan to a debtor who was in default. The debtor wanted to retain the home and proposed a Chapter 13 plan to cure the arrearage, but included in the plan only the amount of the arrearage that was secured. In In re Evans, 336 B.R. 749 (Bankr. S.D. Ohio 2006), the bankruptcy court held that a Chapter 13 debtor only needs to cure the amount of the default that is defined as secured under 11 U.S.C. §506(b). In contrast, In re Thompson, 372 B.R. 860 (Bankr. S.D. Ohio 2007), the same court ruled that a Chapter 13 debtor who proposes to cure a default has to pay everything due under the underlying agreement and non-bankruptcy law, regardless of the extent of security. The Sixth Circuit started with the language used by Congress in 11 U.S.C. §1322(e) which it found was “unambiguous.” “Notwithstanding * * * Section[] 506(b) * * * , if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable non-bankruptcy law.” Based on this unambiguous language the Six Circuit held that a Chapter 13 debtor who proposes to cure a default must pay everything required by the underlying agreement and non-bankruptcy law, regardless of the extent of security. The Sixth Circuit noted that the obvious reading of the statute is “not surprisingly the one virtually all of the courts to consider [this question] have applied.” Finally, the Six Circuit also examined the typical use of the term “notwithstanding,” as applied throughout the Bankruptcy Code, and concluded that its application consistently functioned “in a normal supplanting way” and that “because the statutory language is unambiguous, ‘the judicial inquiry is at an end * * * ‘ without reference to the legislative history.”

A CALIFORNIA DISTRICT COURT REJECTED A HELOC LENDER’S DEMAND THAT MORTGAGORS MUST OBTAIN FLOOD INSURANCE FOR THE FULL AMOUNT OF THEIR LINE OF CREDIT EVEN THOUGH THE LENDER HAD SUSPENDED FUTURE DRAWS DUE TO A DECLINE IN THE PROPERTY’S VALUE

In Hofstetter v. Chase Home Finance, LLC, C 10-01313 (N.D. Cal., Aug. 16, 2010) the mortgagors had a home equity line of credit that had no opening balance. The lender suspended future draws because the mortgagors’ properties had declined in value. After the credit was suspended the lender advised the mortgagors by federal law they must purchase flood insurance for the property in the amount of $175,000.00. The lender further advised the mortgagors that if they don’t purchase the flood insurance, the lender would force place it and charge them the premium, which is what ultimately happened. The plaintiff, a mortgagor, brought a class action against the lender under California’s UDAP statutes and TILA. The lender answered that it was required under the National Flood Insurance Act of 1968 (NFIA) to purchase the flood insurance. According to the plaintiff, the statutory language of 42 U.S.C. §4012a(b)(1) unambiguously set the minimum required amount of flood insurance coverage for plaintiff’s home equity line of credit at zero dollars, since the “outstanding principal balance of [her] loan” was zero dollars. As such, plaintiff asserts that the lender was not required-and had no authority-under the NFIA to purchase flood insurance for her property. The lender, in rebuttal, pointed to decades’ worth of regulatory materials showing that the total amount of credit at origination is the proper measuring stick for the “minimum” required flood insurance under the NFIA. The court said neither party was right. The agencies implementing NFIA recognized that “it would be onerous to require banks to continually monitor the ebb and flow of funds actually being drawn on a home-equity line of credit for purposes of compliance with the mandatory flood insurance provisions of the NFIA.” As such, the agencies allowed lenders to simply require the purchase of flood insurance equal to the maximum amount of funds the borrower could theoretically draw on the line. The court further found that the lender’s proposed construction also missed the mark. According to the lender, the minimum amount of flood insurance required for a home equity line of credit under the NFIA is the total amount of the line at origination, regardless of whether circumstances surrounding the line have changed. However, the OCC made clear that “a request made for an increase in an approved line of credit may require a new determination” of minimum flood insurance requirements. This demonstrates that the minimum amount of flood insurance required for home-equity lines of credit is tied not to the total amount of the line at origination but to the total amount of credit actually being extended at the time. Thus, to be consistent with the purposes of the NFIA and in accord with the regulations and agency materials governing these requirements, the minimum requirements for flood insurance for a home-equity line of credit requires the lender to take into account: (1) the maximum amount of funds the borrower may draw on the line at the time a flood determination is made, and (2) the outstanding principal balance of the loan, whichever is greater.

DEBT COLLECTOR DOES NOT VIOLATE §1692C(C) OF THE FDCPA BY CONTACTING DEBTORS ATTORNEY TO COLLECT THE DEBT

The issue at bar in Medeiros v. Client Services, Inc., 09 CV 6170 (N.D. Ill. Aug. 17, 2010) was whether a debt collectors efforts to collect the debt by contacting the debtor’s attorney violated the FDCPA. After the debtor received a dunning letter it sought legal assistance from a legal clinic. A clinic attorney faxed a letter to the debt collector stating that the debtor was represented by counsel and instructing it to cease all further collection activities and contact with the debtor. After receipt of this letter the debt collector contacted the clinic to demand the debtor settle his account. The debtor sued under the FDCPA contending that the debt collector violated §1692c© when it continued to demand payment of the debt. The District Court for the Northern District of Illinois granted the debt collector summary judgment. At issue was whether communication with a consumer’s attorney is actionable under the section. The debtor cited another decision from the district with nearly identical facts, Startare v. Credit Bureau of N. Am., LLC, No. 09 C 6464, slip op. (N.D. Ill. June 3, 2010), which held that based on the Seventh Circuit’s ruling in Evory v. RJM Acquisitions Funding, LLC, 505 F.3d 769 (7th Cir.2007) the defendant’s communication with the plaintiff’s attorney violated § 1692c©. In Evory, the court held that communications with a consumer’s attorney are subject to § 1692d through § 1692f of the FDCPA, which prohibit harassing, deceptive, and unfair practices in debt collection. The Startare court decided that the Seventh Circuit’s rationale in Evory for applying the FDCPA to communications sent to a consumer’s attorney under these sections would be equally applicable to 15 U.S.C. § 1692c. The debt collector argued that the Startare case was incorrectly decided and that the decision in Tinsley v. Integrity Fin. Partners, Inc., No. 09 C 7925, slip op. (N.D.Ill. Mar. 29, 2010), which is currently before the Seventh Circuit, is correct. In Tinsley, the district court ruled that § 1692c© did not apply to communication with a consumer’s attorney after the consumer refused to pay his outstanding debt. It determined that Congress did not intend for the term “consumer” in § 1692c© to be interchangeable with the consumer’s attorney and distinguished the Evory holding as not based on § 1692c© nor the definition of “consumer” in § 1692c(d). The court in Medeiros found the Tinsley decision was more persuasive because the debtor’s attorney is omitted from the list of persons defined as consumers which indicates that § 1692c© is not intended to prohibit communication to a consumer’s attorney. Furthermore, the debtor waived his claim by asking his attorney to “direct all future communications to the LASPD office”. Thus, the debt collector ceased all communication with debtor after it received his written refusal to pay the debt, and it did not violate this section when it contacted his attorney as directed.