Fourth Circuit Ruling Sends Message to Beware of Loan Servicing Practices Involving Bankruptcies and Pay Attention to State Laws
The New Abusiveness Framework
In a recently published opinion by Fourth Circuit Judge Quattlebaum, Jr., the majority of the panel found there to be a genuine dispute of material fact in Plaintiff Mark Anthony Guthrie’s North Carolina Debt Collection Act (NCDCA) and Fair Credit Reporting Act (FCRA) claims, which were originally filed in the Eastern District of North Carolina. Guthrie v. PHH Mortg. Corp., No. 22-1248, 2023 U.S. App. (4th Cir. Aug. 18, 2023). The Court noted that this case was so complicated that it would make “an excellent hypothetical for a law school exam.”
The Plaintiff, Mr. Guthrie, purchased a house with his soon-to-be ex-wife before ultimately filing for Chapter 13 bankruptcy. Subsequently, he and his wife moved out of the house and the plaintiff faithfully complied with the restructuring plan, and his bankruptcy was discharged in 2016. Since the creditor of the mortgage, PHH, did not foreclose on the house, once the bankruptcy was discharged, Mr. Guthrie did not have an obligation to pay the mortgage – only his ex-wife did. The majority stated: “The discharge order left an unusual situation concerning the property and the debt on it… [b]ecause PHH did not foreclose on the property after Guthrie surrendered it in 2013, both Guthrie and his ex-wife’s names remained on the deed.” This is where the fact pattern turns very law school-esque: Guthrie — one joint owner — had received a bankruptcy discharge order on the debt. Tonia — the other joint owner — was still obligated on the debt and she never filed for bankruptcy. Nevertheless, even after repeated requests by Mr. Guthrie to stop pursing him, PHH continued to contact and request money owed on the mortgage.
After the lower court granted PHH summary judgment finding no genuine dispute of material fact, Guthrie appealed to the Fourth Circuit which reversed the decision in part. The majority partially revived Guthrie’s claim for failure to reasonably respond to credit report disputes submitted to TransUnion, as Guthrie introduced evidence that PHH’s response did not “rectify all major errors in his credit report.” This brought up the possibility of reckless disregard of the FCRA since Mr. Guthrie’s credit report continued to show a delinquency for more than two years after the bankruptcy discharge, which resulted in alleged emotional distress and harm. Additionally, the Court revived the NCDCA claims as it found factual disputes shown by phone transcripts that PHH was attempting to collect the full balance on the loan that Mr. Guthrie no longer owed. PHH continued these phone calls even after it was disclosed Mr. Guthrie was represented by legal counsel such that N.C. Gen. Stat. § 75-54 may have been violated by continued outreach.
Why it Matters
The two key takeaways that servicers, banks, and credit agencies should pay attention to from this convoluted case are actually quite simple: First, the Bankruptcy Code will not preempt more stringent state laws. Second, you may be required to adjudicate these issues on the merits and early escape from litigation could be difficult.