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States Where Debt Is Increasing the Most During COVID-19

Though debt in collection increased slightly, the percentage of people with debt in collection actually declined — edging down from 29.68% to 29.1%, a drop of 0.58 percentage points. That belt-tightening helped Americans bolster their credit score. The median credit score increased by 11 points, from 693 to 704. According to the nonprofit think tank Urban Institute, most Americans shored up their bank accounts and kept their spending in check. The median amount of debt in collection nationwide rose a scant $16 between February and October 2020, inching up from $1,833 to $1,849. 

Going state by state, median debt in collection climbed in 29 states, but median credit scores rose in all states. Median debt in collection declined the most in North Dakota, falling by $244 to $1,914. In the state where median debt in collection increased the most, it rose by $120 to $2,242. The amount of median debt in collection in October 2020 ranged from $1,315 to $2,509.

Nationwide, mortgage delinquency rate also fell, from 3.02% to 1.57%, a significant decline of 1.45 percentage points. The only state with a rise in mortgage delinquencies was Hawaii. Interestingly, Hawaii residents are the least likely to own their own homes in the nation — these are the states with highest homeownership.

To identify the states where debt in collection increased the most during COVID-19, 24/7 Wall St. ranked each state by the change in median debt in collection from February 2020 to October 2020 using data from Urban Institute’s “Credit Health During the COVID-19 Pandemic” report. To read more, click here.

Law Requires Significant Changes for Collection Actions Brought in New York

New York Governor Kathy Hochul signed the Consumer Credit Fairness Act (the Act) into law. The Act will likely have substantial impact on debt collection lawsuits filed by creditors or debt collectors in New York. 

First, the Act significantly shrinks the statute of limitations for most debt collection law suits arising out of consumer credit transactions, from six years to three years. Further, consumer payments towards the debt, or a consumers written or oral affirmation of ownership of the debt will no longer reinstate or extend the limitations period. Previously, a consumer’s affirmation of a debt or payments toward the debt could reinstate or extend the six-year limitations period. The new, three-year statute of limitations will go into effect on April 6, 2022.

Second, the Act incorporates several new requirements regarding the filing and prosecution of a debt collection action. Creditors or debt collectors filing a debt collection action must include the contract or written instrument the action is based upon, or, for a revolving credit account, the charge-off statement. Complaints filed will be required to include additional information about the debt. For certain types of debts, additional information like collection costs and fees imposed by the original creditor must also be included with the complaint.

Third, the Act imposes new notice requirements on creditors or debt collectors filing an action to pursue to the collection of a consumer debt. The additional notice must include the names of the creditor or debt collector, the consumer, the original creditor, the case index number, and the consumer’s rights and responsibilities regarding the judgment, among other requirements.

Finally, the Act also enacts additional affidavit requirements when a third-party debt collector seeks a default judgment collecting upon a consumer debt. The Act requires the application for default judgment to attach an affidavit from the original creditor. Any subsequent assignors or sellers of the debt must also file an affidavit of sale. In addition, the plaintiff creditor must include an affidavit of a witness who can verify the chain of title of the debt. All parties requesting the default judgment must also attach an affidavit stating the statute of limitations on collecting the debt has not expired. The new filing requirements are effective May 6, 2022. To read more, click here.

Collector Shut Down, Banned in Buffalo, Fined $1.2 Million

NY AG Letitia James announced she is shutting down an illegal debt collection scheme operating in western New York and recovering $1.2 million in penalties and restitution for victims. An agreement with Buffalo-based debt collector Andrew Fanelli and his companies — Northwood Asset Management Group LLC, Pinnacle Asset Recovery Group LLC, and Koalaty Pay LLC — permanently bans them from any future consumer debt collection. Collectors working for Fanelli’s companies routinely used illegal tactics to collect consumer debt, including false threats of criminal action, wage garnishment, driver’s license suspension, and lawsuits. 

Fanelli began his debt collection career collecting debts for Douglas MacKinnon, an illegal debt collection kingpin shut down by Attorney General James in 2019. His company operated as Fanelli and Associates, later changing its name to Northwood Asset Management Group. Fanelli also used another one of his companies, Pinnacle Asset Recovery, to purchase consumer debt. Call recordings obtained by the Office of the Attorney General (OAG) revealed that collectors working for Fanelli routinely used deceptive and illegal threats to collect on consumer debts.

Fanelli also operated as a debt broker, selling debts to and placing debts for collection with other collectors that engaged in egregious violations of the law. For example, Fanelli placed debts with Kenneth Thomas’s company, Midway Resolution Services LLC, which defrauded and harassed consumers by using call spoofing and impersonating government officials to collect debts. Thomas and his company were sued by the OAG in September 2020 and have since been shut down and have been banned from the debt collection industry. Fanelli also operated Koalaty Pay LLC, a business that helped other illegal debt collectors obtain payment processing services.

This agreement permanently bans Fanelli and his companies from engaging in consumer debt collection, consumer debt brokering, consumer lending, debt settlement, credit repair services, and payment processing. Within six months, Fanelli is required to dissolve all of his companies.

The agreement also requires Fanelli and his companies to pay $1.2 million to the OAG in restitution and penalties.

Hunstein en banc Rehearing Court Requests Briefs on Standing

Last week, the U.S. Court of Appeals for the Eleventh Circuit ordered rehearing en banc in Hunstein v. Preferred Collection and Management Services, Inc.  Yesterday, the Eleventh Circuit issued a memorandum indicating that for purposes of the en banc rehearing, the Court wants counsel to focus their briefs on the question: “Does Mr. Hunstein have Article III standing to bring this lawsuit?”

The Court also directed Preferred Collection and Mr. Hunstein to serve and file their briefs by, respectively, December 23, 2021 and January 18, 2022.  An en banc reply brief must be filed by February 1, 2022 and oral argument will be conducted during the week of February 21, 2022.

Although the Court has asked the parties to focus their briefs on Mr. Hunstein’s Article III standing, the Court could still reach the question of whether Mr. Hunstein has stated a FDCPA claim and conclude that he has not.  In the rehearing, the Court must decide whether to affirm or reverse the district court’s dismissal of the complaint for failing to state a claim.  The district court concluded that Mr. Hunstein had not sufficiently alleged that the debt collector’s transmittal of information to the vendor violated Section 1692c(b) of the FDCPA because the transmittal did not qualify as a “communication in connection with the collection of any debt.”  To read more click here.

Hunstein: The Eleventh Circuit Cavalry Arrives

It’s been a long, strange trip through the 11th U.S. Circuit Court of Appeals for Hunstein v. Preferred Collection & Management Services Inc, a Fair Debt Collection Practices Act case that exemplifies the challenge for appellate courts in applying the U.S. Supreme Court’s test for constitutional standing.

On Wednesday, the 11th Circuit said that it had voted to review the case en banc. The court's order came just a few weeks after an Oct. 28 panel decision that allowed the plaintiff, Richard Hunstein, to proceed with claims that the debt collector violated the FDCPA by sharing sensitive personal information about him with the outside vendor that mails out Preferred’s dunning letters. The en banc 11th Circuit didn't even wait for Preferred's lawyers at Kaufman Dolowich & Voluck to ask for a rehearing.

That Oct. 28 opinion – which was vacated in Wednesday’s en banc order -- has its own unusual history. Judges Adelberto Jordan, Kevin Newsom and Gerald Tjoflat first heard the Hunstein case last March. They issued a unanimous decision only a month later, holding that under the Supreme Court’s 2016 ruling in Spokeo, Inc v. Robins, Hunstein had Article III standing to sue because his allegation was akin to a common-law action for invasion of privacy (more on that later).

The panel’s April 21 ruling was a jolt not just for debt collectors but for the entire financial services industry, which relies on outside contractors to communicate with consumers. Amicus briefs piled into the 11th Circuit in support of Preferred’s petition for rehearing.

Instead of rehearing the case, the original three-judge panel issued the Oct. 28 opinion, addressing sua sponte the arguments in Preferred’s petition and the amicus briefs – as well as the Supreme Court’s tightened rules for standing from the justices’ June 25 ruling in TransUnion LLC v. Ramirez.

In the revised opinion, Newsom and Jordan insisted that TransUnion did not alter their original conclusion that Hunstein had Article III standing. But Tjoflat sharply dissented, arguing that the majority had focused on secondary considerations in TransUnion instead of the Supreme Court's concentration on "history and the judgment of Congress.”

Presumably, it was Tjoflat's dissent that prompted the 11th Circuit to decide to hear the case en banc. The debt collector’s lead counsel, Richard Perr of Kaufman Dolowich, said he expects the appeals court to issue a subsequent order specifying the issues it wants the parties to brief for en banc consideration. Hunstein counsel Thomas Bonan of Seraph Legal didn’t respond to my query.

It seems likely that the key question in the en banc case will be whether Hunstein’s allegations of a violation of the federal law barring abusive debt collection practices align closely with the common-law tort of invasion of privacy. (There’s not much doubt that Hunstein failed to raise adequate allegations of a concrete injury or imminent risk of one.)

Plaintiffs' lawyers claimed that Preferred ran afoul of the debt collection law when it provided information to the mail vendor CompuMail about debt Hunstein owed to Johns Hopkins All Children’s Hospital for his son’s medical treatment. The transmission of sensitive information about his son’s medical care, Hunstein alleged, was an improper public disclosure of private facts.

The Supreme Court’s TransUnion case, which also arose from an alleged privacy violation, actually addressed the issue of whether a business that shares information with an outside vendor has “published” that information, albeit in a footnote. Citing an unpublished 11th Circuit ruling, the justices cast doubt on the theory that disclosure to a vendor amounts to an actionable publication under tort law.

The majority in the now-vacated Oct. 28 acknowledged that the TransUnion footnote was at odds with Hunstein’s claims. But Jordan and Newsom said it’s not clear from the record in the Hunstein case whether employees at CompuMail read about his son’s medical issues after Preferred sent the data to the mail vendor.

Newsom and Jordan said that under TransUnion and 11th Circuit precedent, “a plaintiff need only show that his alleged injury is similar in kind to the harm addressed by a common-law cause of action, not that it is similar in degree.” So even if Preferred’s disclosure of Hunstein’s sensitive personal information was limited just to CompuMail employees, the majority said, the disclosure was similar in kind, if not degree, to publication that triggers the tort of privacy invasion.

 Tjoflat’s dissent said that reasoning was flat wrong: “Communication of a fact to a small group of persons is not publicity,” he wrote. And without showing that Preferred "published" his information, Tjoflat said, Hunstein can’t claim an invasion of his privacy.

The majority’s focus on "kind, not degree," he said, was mere “lip service” to an “ancillary” point in the Supreme Court decision.

Preferred counsel Perr, who came into the case after the debt collector’s initial loss at the 11th Circuit, said in the company’s petition to rehear that first ruling that CompuMail generates dunning letters electronically, without any actual person reading the information in the mailings. Perr also pointed out – as did Tjoflat in his dissent in the Oct. 28 decision – that in the 1977 statute, Congress expressly allowed debt collectors to disclose information to telegraph operators -- an old-school version of mail vendors that send out collection notices. To read more of the Reuters article click here.

Attorneys at Alston & Bird provided this insightful analysis of the case detailing what happened, what does it mean and what happens next:

Today, like Yogi Berra, we have a sense of déjà vu all over again. Yesterday, (lighting a cigarette) we published a client update bemoaning the fact the Eleventh Circuit panel in Hunstein v. Preferred Collection and Management Services Inc. had, after a five-month silence on a rehearing petition, reaffirmed in Hunstein II its holding that a debt collector’s thoroughly unremarkable (and industry standard) practice of sending data to a third-party vendor to have debt collection letters printed and mailed violated Section 1692c(b) of the Fair Debt Collection Practices Act (FDCPA). We noted that Preferred planned to file a new en banc petition but warned that relief could be months or even years away and that defendants might have to live with Hunstein II for a while. 

But hard on the heels of our advisory, the Eleventh Circuit bus arrived in the form of a sua sponte grant of en banc review, coupled with an order vacating the Hunstein II decision. En banc review may be conducted under Federal Rule of Appellate Procedure 35(a) on a vote of the majority of the circuit judges who are in active service, without the filing by a party of a petition for rehearing en banc. Review under FRAP 35(a) is limited to circumstances where “en banc consideration is necessary to secure or maintain uniformity of the court’s decisions,” or “the proceeding involves a question of exceptional importance.” A majority of the active circuit judges has determined that the Hunstein II decision falls into one or both of these categories. 

What happened? Petitions for panel rehearing and rehearing en banc are considered in “behind closed doors” mode in the appellate courts, but we can speculate a bit, based on published internal operating procedures, about what may have happened. When, in May, Preferred filed a petition for panel hearing or for rehearing en banc, the petition and the 17 amicus briefs filed in support of it would have been distributed to all the judges of the Eleventh Circuit. However, under the Eleventh Circuit’s Internal Operating Procedures, the filing of a petition for rehearing en banc along with a petition for panel rehearing “does not take the appeal out of plenary control of the panel deciding the appeal.” Here, the original panel granted panel rehearing, which caused the panel to retain control of the proceeding until it issued its opinion in Hunstein II on October 28. Once the revised opinion was issued, the Internal Operating Procedures permitted any active circuit judge to request that the court be polled on whether rehearing en banc should be granted. A poll was clearly requested, and likely informed by the original petition and the amicus briefs filed with the court, a majority of the 11 active circuit judges voted to grant en banc review. 

What does it mean? The court’s order explicitly vacates the Hunstein II decision, which is customary on a grant of en banc review. The hundreds of cases that have been filed on the premise that Hunstein I’s or Hunstein II’s interpretation of Section 1692c(b) of the FDCPA is controlling have now lost their footing. Plaintiffs can attempt to keep their actions alive by urging courts to follow the logic laid out in the Hunstein appellate decisions, but those decisions are no longer precedential. District courts – even district courts within the Eleventh Circuit – are free to disagree with that logic. Defendants in such cases should be well equipped to defeat those arguments in trial courts – the 17 amicus briefs filed on the original Hunstein en banc petition contain a broad range of arguments about why a debt collector’s transfer of letter data to a mailing house does not violate Section 1692c(b) of the FDCPA. Defendants have a lot of breathing room, at least until the en banc panel issues a decision that interprets Section 1692c(b). 

What’s next? The chief judge of the Eleventh Circuit will appoint appeal managers who will prepare and circulate to the other members of the en banc court a proposed notice to the parties specifying the issues to be briefed, brief lengths, and whether oral argument should be heard. When the notice has been approved by the court, the clerk will transmit it to the parties. The contents of that notice will be telling: will the full court request briefing on only the standing issue, on only the FDCPA issue, or on both? If the full court does not request briefing on Section 1692c(b), its en banc decision will not ultimately address that section. If, on the other hand, the full court requests such a briefing, there remains a possibility that an appellate court could, in time, re-adopt the Hunstein panel’s surprising and disruptive interpretation of Section 1692c(b). 

If you are interested in more information about Hunstein and its impact on debt collection practices, Alston & Bird LLP can provide guidance.