Archive for May, 2017

FCRA defendants hit back: sanctions motions in FCRA discharge cases

May 5, 2017 Leave a comment

In recent months, bankruptcy lawyers have begun to bring strikingly similar FCRA lawsuits on behalf of former clients who went through Chapter 13 bankruptcy.  This post will discuss these cases and how defendants are responding to them by winning on the merits, then moving for sanctions.  The first few paragraphs will set the stage by explaining a few aspects of bankruptcy, and then we’ll get to the gusto.

When a debtor goes through Chapter 13 bankruptcy, he or she follows a court-approved “plan” by paying money to a bankruptcy trustee each month for about 3-5 years.  The trustee uses that money to pay off a portion of the debtor’s debts, plus the various fees and costs of the bankruptcy case itself.  If the debtor follows the plan from beginning to end, he or she is rewarded by a court order which discharges all debts that were paid through the plan.

Debtors who have home mortgages and who want to keep their homes post-bankruptcy can go through Chapter 13, but with a twist:  the plan will list the home mortgage as a debt, but it will clarify that the borrower will pay it outside the plan.  Specifically, the debtor will pay the trustee one monthly payment, and then the mortgage company a second monthly payment.  If the debtor completes the plan, any non-mortgage debts will be discharged, but the home mortgage won’t be.

Bankruptcy lawyers can and do file hundreds of Chapter 13 cases each year, which means that they have hundreds and even thousands of former clients.  Recently, some bankruptcy lawyers have begun to file numerous FCRA lawsuits on behalf of these former clients – collectively, they have been filing dozens of them every month.  The lawsuits allege that because the former client completed a Chapter 13 plan and received a discharge order:  a) the mortgage should be reported as discharged, with a $0 balance; and/or b) any late payments that the borrower made on the mortgage before or during the plan should not be reported at all.

The legal theory behind these cases isn’t completely clear to me, but it appears to be that if a mortgage was listed on a Chapter 13 plan – even if it wasn’t paid by the trustee as part of the plan – then it should be reported as though it was discharged at the end of the plan (even though it wasn’t).

These lawsuits present FCRA defendants with a true dilemma.  The defendants know that the lawsuits are meritless:  case law states that if a mortgage isn’t paid by the trustee during a Chapter 13 plan, then it isn’t discharged and remains an open debt.  Moreover, and as we discussed last year, a borrower’s late payments before and during bankruptcy can be reported, because bankruptcy doesn’t erase a debt – it just removes the debtor’s obligation to pay it.

However – and here’s the dilemma for defendants – hiring a lawyer to argue these points and get the case dismissed can be expensive – especially if you’re facing dozens of these each month.  So many defendants settle them – although that’s expensive, too, and it’s annoying to pay to settle a case that you don’t think had merit in the first place.

So, if you are a defendant faced with one or more lawsuits, all of which allege that you should have reported a mortgage as having a $0 balance and as having never been late, simply because the debtor went through Chapter 13 bankruptcy, what do you do?

A few of the larger defendants – the nationwide consumer reporting agencies – have responded by winning a few cases in court, and then filing sanctions motions against the lawyers who brought them.  Here’s the status of three of those cases:

  1.  In Pappas, Case No. 1:15-cv-08115  (N.D. Illinois), Experian prevailed on a motion for summary judgment and recently filed a motion for sanctions.  That motion is pending; Experian’s reply brief will be due in a couple weeks;
  2. In Jackson, Case No. 1:15-cv-11140  (N.D. Illinois), Experian likewise prevailed on a motion for summary judgment and then filed a motion for sanctions.  That motion has been fully briefed and is pending; and
  3. In LeTren, Case No. 8:15-cv-03361 (D. Maryland), Trans Union filed a motion for sanctions, and the court will hear oral argument on May 16, 2017.

There are other ways to approach these cases from the defense perspective, and smaller defendants – including smaller reporting agencies and mortgage servicers – have been considering them.  As a lawyer in some of these cases (but not the three just mentioned!), I am very curious to see what the courts will do.




Categories: Bankruptcy