Supreme Court Resolves Circuit Split, Finds Time-Barred Claims Do Not Violate FDCPA

On May 15, the U.S. Supreme Court (SCOTUS) determined that filing a proof of claim for a time-barred debt does not violate the Fair Debt Collection Practices Act (FDCPA). Although the focus of the FDCPA is on consumer debts, trade creditors who hold claims against individual personal guarantors or sole proprietors may take comfort in this decision.

In the 5–3 decision in Aleida Johnson v. Midland Funding LLC, SCOTUS reversed the 11th Circuit Court of Appeals and said that FDCPA considerations “have significantly diminished force in the context of a Chapter 13 bankruptcy.” The Court referenced the fact that in a Chapter 13 proceeding there is a knowledgeable trustee available and that the bankruptcy rules “more directly guide the evaluation of claims.” It relied on the Bankruptcy Code definition of “claim” and that even an “unenforceable claim” is nonetheless a “right to payment,” hence a “claim.”

Further, SCOTUS noticed a clear distinction between the FDCPA and the Bankruptcy Code. It said: “The act seeks to help consumers … by preventing consumer bankruptcies in the first place. The Bankruptcy Code, by way of contrast, creates and maintains what we have called the ‘delicate balance of a debtor’s protections and obligations.’ To find the Fair Debt Collection Practices Act applicable here would upset that ‘delicate balance.’”

Outside of the Bankruptcy Court, if a creditor attempts to pursue payment of a claim after the statute of limitations has run out, the debtor may assert the lapsed statute of limitations as an affirmative defense. Generally, a debtor filing for bankruptcy protection will list all creditors despite the age of the debts. Creditors receive notice of the bankruptcy and an invitation to file a proof of claim. In a Chapter 13 case, it is likely creditors will be paid some percentage of their claims. Proofs of claims filed beyond the statute of limitations’ period have come to be called “time-barred” claims. The question before the Supreme Court was whether, under the FDCPA, filing of a time-barred proof of claim against a debtor in bankruptcy is “unfair,” “unconscionable,” “deceptive” and “misleading.” Other circuit courts, including the 4th, 7th and 8th courts, had ruled that filing time-barred claims did not violate the FDCPA.

In March 2014, Aleida Johnson filed a Chapter 13 petition in Alabama. The $1,879.71 debt to Midland Funding LLC was 10 years old, four years beyond the state’s statute of limitations. Midland filed a truthful proof of claim stating the age of the debt. When Johnson objected to the claim, Midland did not respond and the claim was disallowed. Johnson sued Midland seeking actual damages, statutory damages, attorneys’ fees and costs, claiming that the filing of the proof of claim on the time-barred debt was a violation of the FDCPA. The U.S. District Court dismissed the action saying that the FDCPA did not apply in the context of a bankruptcy proceeding and Johnson appealed that decision to the 11th Circuit.


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Know Your Project Before Filing Notices, Liens on Condos

Colorado is close to adopting a bill that would update its construction defects law, paving the way for what many hope will spur condominium construction in the state as homeowners would have a more difficult time suing builders.

The state legislature recently sent House Bill 1279 to the governor, who is expected to pass the legislation. Lawmakers have been working for years in Colorado to pass a construction-defects reform law; multiple cities and one county have already passed their own ordinances to address the issue in the face of broader legislative inertia. Defects lawsuits have made insurance and financing for larger condo projects more expensive or difficult to obtain, press reports state. In Denver, for instance, the city’s share of the condo housing market has fallen from 20% in 2005—the year the original law designed to protect homeowners from shoddy construction work passed—to 2% today, The Gazette of Colorado Springs reported.

Getting tied up in a multimillion-dollar class-action lawsuit can delay payments to suppliers for months if not years, said Connie Baker, CBA, director of operations for NACM’s Secured Transaction Services.

Under the proposed law, before a homeowner’s association board could bring suit against a developer or builder on behalf of unit owners, it would need to: notify all unit owners and the developer or builder; call a meeting with the developer or builder, who will have a chance to present relevant facts and arguments; and obtain the approval of a majority of the unit owners after giving them detailed disclosures about the lawsuit and its potential costs and benefits.

Suppliers to condo builders in Colorado—or those working on condo projects in other states—need to understand several factors to properly secure their rights to payment, Baker said.

In some states, such as Texas, New York and New Jersey, it’s crucial to know whether the job is commercial or residential, as the deadlines to file notices and mechanic’s liens differ; filing too late for either could mean a supplier will lose lien rights on a job. In some cases, both residential and commercial projects can occur at the same location—again, not knowing which type of job you’re supplying can mean you’ll miss important notice and lien filing deadlines.

Suppliers have to know if the work is being done on common elements within the condo association, Baker said. Common elements are those parts of a condo complex that can be used by all owners, such as corridors, roofs, lobbies, etc. Sometimes notifying a property owner or homeowners’ association and general contractor for work on, say, a roof may be sufficient, she said. In New York, common elements in condos are not lienable. In other situations, suppliers have to send a mechanic’s lien or preliminary notice to all of the individual unit owners when work is being done within the condo units, which can wind up costing hundreds of dollars.


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Same Day ACH Sees Growing Adoption

Building upon the Automated Clearing House (ACH) electronic payments network for next-day settlement, Same Day ACH provides credit professionals the option of same-day processing and settlement of ACH transactions. A new survey by NACHA–The Electronic Payments Association, as well as anecdotal information from a recent meeting of the Association for Financial Professionals (AFP), gives insight into the adoption of the system since its launch last September.

Same Day ACH is available for almost any ACH transaction, excluding international transactions and single transactions over $25,000. Use cases include faster settlement of business-to-business invoice payments and faster account-to-account transfers. In the first quarter of 2017, Same Day ACH accounted for about 13 million transactions totaling nearly $18 billion, with volume growing nearly 14% since the fourth quarter of 2016, according to NACHA. Nearly one-third of the volume came from B2B transactions that totaled about half of the dollar amount value.

“NACHA is seeing many businesses opting to make faster payments via Same Day ACH,” said Bill Sullivan, senior director and group manager, government and industry relations for NACHA, when he spoke with NACM.

A meeting of AFP’s Treasury Advisory Group, attended by Sullivan, included an informal poll of the 20 people attending that indicated little adoption of Same Day ACH by treasurers of large corporations, as reported in an article on AFP’s website. Reasons raised include lack of activity on the part of banks, concerns about differences in time zones to fit into the processing window and the $25,000 limit keeping some customers away.

“The $25,000 limit was set as a built-in risk management provision while also enabling the industry to fully understand the impact of the new Same Day ACH capability,” Sullivan said. He added that the processing windows were set so that they end by the time the Federal Reserve settlement service closes, which is on Eastern time. “If the industry wants the dollar limit increased or clearing windows added, we would welcome hearing from them.”

NACHA, which will offer a Payments Help Desk at NACM’s 121st annual Credit Congress & Expo this June, conducted a Same Day ACH survey of 23 financial institutions this past December and January. “The survey showed that this faster payment solution is being implemented by businesses of all sizes,” Sullivan said. Of those surveyed, 84% reported that they originated Same Day ACH transactions for middle market-size companies and 58% for large companies. Nearly all institutions in the survey said they are using Same Day ACH for emergency payments such as payroll, and more than half are using it for one-time payments and to make regularly scheduled payments such as for hourly employees.

“Same Day ACH can be an opportunity to reduce cost per payment received, as well as improve other key metrics, such as days sales outstanding, average days delinquent, collection effectiveness index and cash flow management/cash application cycle time,” Sullivan said.

NACHA offers a Same Day ACH Resource Center with more information for credit professionals. “Same Day ACH is being implemented in three phases, with the first phase completed last September for credits,” Sullivan said. The second phase, for debit payments, will begin this September.



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U.S. Leveraged Loan Default Rate Increases

With the specter of more energy sector defaults looming and problems continuing in retail, Fitch Ratings has increased its default rate forecast for U.S. institutional leveraged loans. The 12-month trailing (TTM) rate went from 2% to 2.5%, with a particular rise in retail expected by year end.

With $3.8 billion in defaults in energy this year so far, mostly from the Chapter 15 filing of Ocean Rig UDW in March, the expected defaults of Seadrill Ltd. and Pacific Drilling SA this summer could add $3.6 billion of volume to the default environment. Current distress in the industry is focused on drilling service providers, having moved away from exploration and production companies. While fewer defaults in energy are expected this year than in 2016, Fitch projects $8 billion in energy defaults in 2017 compared to $6.4 billion in 2016. The energy default rate will finish the year at 18%, the ratings agency said.

Payless Inc.’s bankruptcy increased the April TTM retail default rate to 1%, and this past Monday’s bankruptcy filing by teen apparel chain Rue21 has lifted it to 1.7%. An impending bankruptcy from Gymboree Corp. could take the retail TTM to 2.7%, Fitch said. The ratings agency forecasts a 9% retail sector loan default rate, on about $6 billion of defaults, by year end. Factors for the gloomy outlook include increased discount and online shopping, as well as shifts in consumer spending toward services and experiences. The retail environment has become extremely competitive. Recently, investors wiped out $4.6 billion of market value in the U.S. department store sector in the largest two-day sell-off in dollars since 2008, according to the Financial Times’ reporting of the S&P department stores index.

“It was not so long ago that analysts dismissed the rise of online sales and pointed out all the reasons consumers would reject the option,” said NACM Economist Chris Kuehl, Ph.D. “It turns out that people will buy anything online. This has steadily chewed into the traditional store’s sales. Shopping has become far more utilitarian. People are just not as willing to spend time and effort in a store.”

The largest name on Fitch’s Loans of Concern list, iHeartCommunications Inc., may add to the U.S. TTM institutional leveraged loan default rate if a likely bankruptcy is filed. Also in the telecommunications sphere, Avaya Inc.’s early 2017 filing, delayed from December of last year, represents the largest nonenergy or metals/mining loan default since the beginning of 2015, Fitch said.



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“Buy American, Hire American” Impact Still Unknown

President Donald Trump has signed three dozen executive orders, but none may be more controversial than the one he signed a month ago. One of the main reasons for the presidential executive order on buy American and hire American is to review the H-1B visa program and make sure it is functioning properly.

“The latest executive order has called for a significant review of the H-1B visa program that has allowed many high-tech companies to get access to foreign talent,” said NACM Economist Chris Kuehl, Ph.D. “The industry has complained for years that it does not see enough in the way of domestic talent and therefore needs to go outside the U.S. However, those working in the sector assert that the companies are using that foreign labor force to hold down compensation and that likely explains the shortage of qualified workers.”

“It shall be the policy of the executive branch to buy American and hire American,” said the executive order. But what does that mean, and how is it defined? “The executive order is as broad as it is vague, so, at this stage, it is somewhat difficult to predict how it will shape federal construction projects in the future,” said Amandeep Kahlon, Esq., of national law firm Bradley in its BuildSmart construction blog.

“Increased H-1B enforcement should not significantly impact the construction industry, which does not appear, at present, to rely heavily on immigrant workers who meet the H-1B qualifications, but the move is in line with other steps by the administration to tighten immigration controls that may worsen the ongoing labor shortage in the industry,” explained Kahlon.

Kahlon believes the executive order will increase the price of materials and heighten the risk of material shortages on federal projects. “Higher costs and potential shortages may tempt more fraud and abuse on federal procurement and construction projects,” he said. This means contractors have to be aware of falsely advertised and certified “buy American” materials.

The executive order is structured to enforce laws that have previously been established in the Immigration and Nationality Act, among other places. The president has called for heads of agencies to meet and ensure the laws are implemented and enforced. President Trump set timetables ranging from 60 to 150 days for department secretaries and other leaders to write reports spelled out in the order.

The buy American report “shall be submitted within 220 days of the date of this order [April 18, 2017] and shall include specific recommendations to strengthen implementation of buy American laws, including domestic procurement preference policies and programs,” according to the executive order. The order also sets subsequent dates for future reports.

As of now, the executive order is still in its infancy, but “you can likely expect additional actions once that report is received and evaluated,” said Kahlon.


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