The New York City Department of Consumer Affairs was recently asked to address an inquiry as to whether “debt buyers” that do not themselves engage in collection activities must be licensed by the Department. The Department responded that a purchaser or assignee of defaulted debt whose principal purpose is the collection of that debt, whether for itself or others, is a “debt collection agency” under New York City Administrative Code § 20-489 (a). Debt buyers that engage in debt collection activities must therefore be licensed by the Department in order to collect debts in New York City. New York City Administrative Code § 20-490.

A debt buyer that merely purchases or acquires defaulted debt but does not engage in collection activities itself does not require a license from the Department. Administrative Code § 20-489 defines a debt collection agency as “a person engaged in business the principal purpose of which is to regularly collect or attempt to collect debts owed or due or asserted to be owed or due to another.”

The Department of Consumer Affairs also reiterated the statement that attorneys and law firms are not exempt from licensing requirements but but that a “debt collection agency” does not include “any attorney-at-law collecting a debt as an attorney on behalf of and in the name of a client.” New York City Administrative Code § 20-489 (a) (5) (emphasis added). Thus, the Code’s exemption applies to those attorneys whose practice is limited to legal activities such as the filing and prosecution of lawsuits to reduce debts to judgments. The narrow exception does not, however, cover attorneys or law firms that regularly engage in activities traditionally associated with debt collection such as sending demand letters (dunning notices) or making collection telephone calls to consumers. Such attorneys and law firms are “debt collection agencies” under the New York City Administrative Code and must be licensed by the Department.

What does this mean to you, the consumer bankruptcy lawyer? In protecting your clients by sending out letters of representation to debt collectors (a practice that every consumer bankruptcy lawyer should follow) you should always remember that debt buyers may be considered debt collectors. So, too, are law firms that collect consumer debts. If a law firm send collection letters to your New York City client then that firm must be licensed by New York City as a debt collector; a failure to obtain a license may be yet another cause of action under the Fair Debt Collection Practices Act or state law.

If you would like a copy of the letters of representation that I send out to debt collectors, please e-mail me. And if you’d like to discuss how I can help you maximize the protection your clients get under the Bankruptcy Code or a variety of other federal and state laws, just let me know.

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The case of In re Hildreth — B.R. —-, 2007 WL 458066 (Bkrtcy.M.D.Ala. 2007) makes clear that a depository institution was properly served by first class mail addressed to an attorney, though the attorney in question had never entered formal appearance in bankruptcy case on bank’s behalf, where attorney appeared numerous times on bank’s behalf and had filed motion and submitted a proposed order as bank’s legal representative.

Federal Rule of Bankruptcy Procedure 7004(h) requires that service on an insured depository institution (as defined in section 3 of the Federal Deposit Insurance Act) in a contested matter or adversary proceeding shall be made by certified mail addressed to an officer of the institution unless the institution has appeared by its attorney, in which case the attorney shall be served by first class mail; the court orders otherwise after service upon the institution by certified mail of notice of an application to permit service on the institution by first class mail sent to an officer of the institution designated by the institution; or the institution has waived in writing its entitlement to service by certified mail by designating an officer to receive service.

So the question in Hildreth was really what constitutes “unless the institution has appeared by its attorney.” The court, using the cases of Rubin v. Pringle (In re Focus Media, Inc.), 387 F.3d 1077, 1084 (9th Cir.2004) and Ms. Interpret v. Rawe (In re Ms. Interpret), 222 B.R. 409, 416 (Bankr.S.D.N.Y.1998) held that an attorney does not have to enter a formal appearance in a case in order to be the party’s attorney for purposes of service of process. The attorney for the bank in this case had appeared numerous times in this bankruptcy case, filing a motion and submitting a proposed order on behalf of the bank.

In response, the attorney claimed that she received thousands of emails and that she cannot possibly “monitor each pleading filed in each and every case in which [she] has filed a motion for a creditor.” Citing McMillian v. District of Columbia, 233 F.R.D. 179, 181 (D.D.C.2005) as well as In re Mayhew, 223 B.R. 849, 856 (D.R.I.1998), the court tossed aside this argument and held that it is the duty of the creditor’s attorney to monitor the court’s docket to keep himself apprised of the developments in the case.

So the lesson here is that unbundling is not permitted by either party If a creditor has retained counsel for one aspect of a bankruptcy case, that attorney cannot come to the court with an argument that is has merely “unbundled” it’s services. Most debtor attorneys face the same challenge, with many courts holding that a lawyer in the base case is automatically the lawyer in any adversary proceeding commenced against the debtor during the court of the case.

What’s good for the goose is good for the gander.

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In the recent case of In re Rice, 2007 WL 781893 (Bkrtcy. E.D.Pa. 2007) the Chapter 7 debtor claimed her 2000 Mitsubishi Galant, secured by a loan from National Auto Finance Company, as exempt pursuant to 11 U.S.C. § 522(d)(2) and (5). The Debtor filed a Statement of Intention asserting that the car was exempt, and then later amended her intentions to reflect that she intended to redeem the car. The lender objected to the motion to redeem based on valuation.

In an Amended Motion to Redeem and Determine Rights in Property and her accompanying Memorandum of Law, the Debtor argued that the lender had no right to repossess the car because she was making regular post-petition payments. In other words, the Debtor argued that, because her post-petition payments were accepted by the lender, she had chosen the ride-through option sanctioned by the Third Circuit.

The court, however, disagreed and held that BAPCPA eliminated the ride-through option previously in place in the Third Circuit. In noting his disappointment, debtor counsel Henry Sommer pointed out that the loss of the ride-through option does not necessarily forestall a debtor’s rights under state law; the Rice court simply found that there was no federal right to keep and pay but did not address the state law claim that the creditor waived the default by accepting post-petition payments.

Sommer went on to state the he continues, “to be amazed at the extent the American auto makers seem to want to alienate their few remaining loyal customers, unlike the Japanese, who treat their customers much better in this situation.” In fact, consumer bankruptcy attorneys have found that foreign car companies have proven to be more amenable to accepting the ride-through option. Apparently American car companies are not content with making money from a continued revenue stream and prefer to “eat steel.”

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In most bankruptcy cases, an automatic stay is entered as soon as you file your case. The effect of this automatic stay is to prevent creditors from continuing to collect on debts. That means no phone calls, no collection letters, no legal action, no repossession, no foreclosure, not even a birthday card. No collection activity of any sort is permitted.

So what happens if a creditor continues to contact you after the case is filed? They are violating the bankruptcy laws. If they step over the line, you may be able to collect monetary damages from your creditors. Those monetary damages include legal fees, which means that you should never pay a fee to a lawyer for bringing a case on your behalf.

Let’s say you fall behind on your car loan. If you’re not in bankruptcy, the creditor can repossess your car. But from the moment your case is filed with the U.S. Bankruptcy Court, the lender cannot repossess the car without seeking permission to do so.

Some of the most common violations of the automatic stay include:

• Repossessing your car;
• Sending you a letter or calling you after your case is filed;
• Filing a state court action against you;
• Refusing to release an income execution; or
• Refusing to release a bank account restraint.

Not many bankruptcy lawyers take on cases against creditors. Why? Because the cases skill set that other lawyers have not taken the time to develop. It doesn’t mean that other bankruptcy lawyers aren’t good, though; to the contrary, other bankruptcy lawyers may have spent years honing their craft. It’s just like being a doctor – one physician may be an excellent heart surgeon, and another a great brain surgeon.

The majority of my law practice involves suing creditors to enforce your rights under the U.S Bankruptcy Code. I’ve spent the time to cultivate this unique set of skills necessary to maximize the success of the cases I bring on behalf of my clients. In fact, many of my cases are referred to me by other consumer bankruptcy lawyers. By letting me help their clients they are free to concentrate on what they do best.

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In the case of In re Pinti, 2007 WL 744031 (Bkrtcy.S.D.N.Y.,2007), the Debtor filed a voluntary petition for Chapter 13 bankruptcy. Schedule B of Debtor’s petition listed a 2004 Ford F250 valued at $10,400. The Vehicle was purchased by the Debtor pursuant to a retail installment contract on July 26, 2004. In Schedule D, the Debtor listed Ford Motor Credit Company with a claim of $28,000 secured by the Vehicle.

The debtor fell behind on the car payments, and Ford moved to lift the stay. The debtor did not object to the motion but, after the stay was lifted, the debtor filed a motion to expunge Ford’s claim as fully satisfied by sale of the Vehicle; the Debtor characterized the post-petition seizure of the Vehicle as a “surrender” by the Debtor that was in full satisfaction of the amount owed on the Vehicle. Ford opposed the Motion to Expunge, noting that the Debtor’s original Chapter 13 plan did not provide for surrender of the Vehicle to fully satisfy the debt, and that such a provision would have been objectionable in any event. Ford also requested that after liquidation of the Vehicle, any shortfall be allowed as an unsecured claim.

Judge Cecelia Morris interpreted the “Hanging Paragraph” of 11 U.S.C. § 1325(a)(5) to apply where the debtor’s Chapter 13 plan opts to surrender the collateral, preventing the creditor from asserting an unsecured claim for any deficiency. Put another way, the Court interpreted the Hanging Paragraph as permitting a debtor to surrender collateral in full satisfaction of the claim as part of a Chapter 13 plan.

The impact of this ruling on New York bankruptcy cases is enormous, as debtors who surrender their automobiles no longer need to be concerned with a deficiency increasing their required Plan payments in Chapter 13.

Congratulations to my fellow NACBA member Andrea Malin of Genova & Malin, Wappingers Falls, NY for her excellent representation of this debtor’s interests.

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