Who's Got to Watch the Clock?

When a debt collector files a claim in a consumer bankruptcy case that is time-barred under state statute of limitations law, whose problem is it? Does the burden of raising the statute of limitations defense fall on the trustee in the consumer debtor's bankruptcy case who must affirmatively object to the claim as not "allowable" because of the time bar?  Or, should the burden fall on the debt collector creditor because the act of filing a time barred claim in a bankruptcy case violates the Fair Debt Collection Practices Act's (FDCPA) prohibition on false or deceptive debt collection practices?

The issue was before the Supreme Court yesterday in Midland Funding v. Johnson.  A transcript of the oral argument is here.  The Eleventh Circuit in 2014 held that when a debt collector files a time -barred claim in a bankruptcy case it violates the FDCPA.  Every other circuit court that has considered this question has held the opposite.

The case presents a clash between two federal statues, the Bankruptcy Code and the FDCPA.   The Code  defines "claim" broadly and deliberately to bring within the jurisdiction of the bankruptcy court all of the debtor's liabilities, even unmatured, contingent, unliquidated or disputed liabilities, so that all such claims can be addressed and potentially forgiven in his bankruptcy case.  In a bankruptcy case, a debt that may be subject to one or more defenses is still a "claim."  It is common for the debtor to identify a creditor, give that creditor notice of his bankruptcy case, and invite the creditor to file a claim even if the debtor intends to object to it.  The debtor's goal is to obtain court-ordered discharge (forgiveness) of as much liability (or potential liability) as possible. And, no "claim" can be discharged in a bankruptcy case if the creditor holding it did not receive notice and an opportunity to be heard (due process).  The Eleventh Circuit and all courts considering this issue have held that a creditor on a debt subject to a statute of limitations defense holds a "claim" under the Code.

The Eleventh Circuit held that although a time-barred debt is a "claim" under the Bankruptcy Code, the debt is "unenforceable" under the FDCPA so that when a debt collector asserts such a claim in a bankruptcy case, it violates the FDCPA, which prohibits "false, deceptive, or misleading representation" or "unfair or unconscionable means" to collect a debt.

At the oral argument yesterday, several of the justices asked the debt collector's attorney why debt collectors file time barred claims in the first place.  The Eleventh Circuit noted in its opinion:  "A deluge has swept through U.S. Bankruptcy courts of late.  Consumer debt buyers-- armed with hundreds of delinquent accounts purchased from creditors-- are filing proofs of claim on debts deemed unenforceable under state statutes of limitations."  Creditors have always filed claims in consumer bankruptcy cases that are or might be subject to defenses.  But, large scale debt collectors like Midland Funding can locate debtors and assert claims more efficiently than ever before.

The Fourth Circuit, in Dubois v. Atlas Acquisitions held in favor of the debt collector-- filing a time barred claim in a consumer's bankruptcy case does not violate the FDCPA.  It noted that a contrary ruling would create an incentive for debt collectors to refrain from filing claims in consumer bankruptcy cases to avoid the risk of violating the FDCPA (which provides consumers with a statutory penalty and a right to recover attorneys fees).  The Fourth Circuit noted that this effect runs contrary to the purpose of the claims process in a bankruptcy case.

Observers at the oral argument yesterday generally noted that based on the questions of the justices, it appeared that five were concerned about the implications of a consumer friendly decision.  The Court will decide the case by the end of June.

Compensation at Wells Fargo Now

Wells Fargo Bank is putting the pieces together after the sales team compensation scandal in September 2016.  Post scandal, the OCC announced that it would review sales incentive practices at all the large and midsize banks it supervises.  Bankers have been watching what Wells Fargo would do to appease the OCC and other critics of its performance-based pay strategies.  Wells Fargo's new plan doesn't eliminate incentive pay entirely. But, the new plan draws Wells Fargo in line with compensation plans that are common throughout the retail banking industry. 

Sales quotas based on account opening data are gone. Compensation is based primarily on salary. Bank tellers' compensation is 95% salary.  Entry level bankers' get incentive pay based on the performance of their team, not individual sales results. 

What will the reputational damage and tilt in compensation toward base pay and team results mean for Wells Fargo's ability to recruit and retain the best bankers?  American Banker reports that pay cuts for current employees are in the offing and morale is low.

GM Ignition Switch Plaintiffs Litigation: Not So Free and Clear

In an opinion issued yesterday, the Second Circuit provides a scintillating account of the astonishing events leading up to GM’s flop into bankruptcy in 2009 and its “surgical” sec. 363 sale of assets to New GM  “free and clear” of liabilities of Old GM.   The 2d Cir. decides whether plaintiffs who learned of failed GM ignition switches in 2014 could sue New GM under a successor liability theory, or were stuck with just Old GM as a defendant because of the 2009 section 363 sale.  I won't give away the exciting conclusion.  The opinion is here. 

Erin Andrews's Stalker Gets No Forgiveness in Bankruptcy

Erin Andrews’s claim against the stalker guy who videotaped her through a hotel door peephole got a $55 million judgment jointly against the stalker (Barrett) and the hotel.  Barrett filed for bankruptcy to discharge his debt to her (51% of the $55 million, the hotel was liable for the balance). Erin objected to discharge of her claim on grounds that under section 523(a)(6) it was for “willful and malicious injury.”  (Section 526(a) is  my personal favorite exception to discharge, however  sec. 523(a)(4) “fraud or defalcation while acting in a fiduciary capacity” is a close second).  Anyhoo—the bankruptcy court agreed with Ms. Andrews.  Creeper Barrett gets no forgiveness in bankruptcy.

How Are Americans Really Doing Financially?

FINRA Investor Education Foundation released the results of a study on the financial status of people living in the United States. View the report titled "Financial Capability in the United States 2016" to see findings nationally and by state.  The percentage of survey responders who report no difficulty covering their monthly bills increased from 36% in 2009 to 48% in 2015.  Those who report having emergency funds on hand increased from 35% in 2009 to 46%.  The percentage of responders who fall into the "high" financial literacy category (could answer 4 of 5 basic financial questions correctly) dropped from 42% in 2009 to 37% in 2015.   (Test your financial literacy skills by trying to answer these three questions correctly (no peeking at the answers).

Education makes a difference in financial resilience.  Almost half  of the responders with a high school education or less say they could not raise $2,000 in 30 days in case of an emergency.  Among responders with a college degree, the percentage was 18%.

Harrisburg's Parking Bonds Drop to Junk

In more bad news for Harrisburg, the  bonds issued by the Pennsylvania Economic Development Financing Authority (PEDFA) to fund parking operations in Harrisburg dropped to the top rank  of speculative grade,  BB+ , per S&P.  The parking system failed to make the revenue the bonds required for the past two years and is likely to fall short this year.  The parking bonds were part of a fiscal recovery plan for Harrisburg following a near insolvency crisis from its failed incinerator project.  Under a court approved plan, PEDFA took over Harrisburg's parking system under a long term lease.  In 2013, it issued about $285 million in bonds backed by parking revenue and used the cash to help pay off creditors.

Twinkies and Ho Ho's Find a New Owner

The current owner of Hostess Brands will announce later today an agreement to sell control of the company to an affiliate of the Gores Group for about $725 million.  Four years ago Hostess's former parent filed for bankruptcy, but Twinkies and Ho Ho's survived. The snack cake business got snapped up by corporate turnaround firms, who did just that by arranging a sale to Gores Group.

These iconic treats have an unlimited shelf life, both in the market and in kids' lunch bags.