Joe Esposito

NCHER Legal Affairs Committee
Winter Meeting
January 24, 2014
2. CFPB Constitutionality
3. Tuition Clawback in Bankruptcy Cases
Joe Esposito
Hunton & Williams LLP
Washington, DC
1. Fair Debt Collection Practices Act (FDCPA), 15
U.S.C. § 1692
• Easterling v. Collecto, 692 F.3d 229 (2d Cir.
▫ Second Circuit held that debt collector violated
FDCPA’s prohibition against false, deceptive and
misleading representations, when inaccurately
represented to borrower that her student loan
could not be discharged in bankruptcy
▫ Plaintiff had student loan guaranteed by
Department of Education, which contracted with
Collecto to collect overdue student loans
▫ Plaintiff filed for bankruptcy under Chapter 7, but
did not institute an undue hardship adversary
proceeding to discharge her student loan
▫ Collecto mailed a letter to plaintiff, stating her loan
debt was not eligible for bankruptcy discharge
▫ Plaintiff sued Collecto for violating FDCPA
proscription against false, misleading, or deceptive
debt collection practices
▫ District Court granted summary judgment to
▫ On appeal, Second Circuit reversed
 HELD: Collecto misled borrower by representing
that debt was not dischargeable in bankruptcy
 Although debtor would face “significant hurdles” in
attempting to discharge the loan, “the least
sophisticated consumer would interpret Collecto’s
letter as representing, incorrectly, that bankruptcy
discharge . . . was wholly unavailable.” 692 F.3d at
Another case applying the “least sophisticated
consumer” standard to debt collector statements
• Vu v. Diversified Collection Servs., Inc., 293
F.R.D. 343 (E.D.N.Y. 2013)
▫ Student loan borrower filed class action against
debt collector alleging that collector’s notice letter
violated FDCPA because letter directed borrower to
contact debt collector by phone, not by mail, and
because it said account would be held for ten days
▫ The Court in Vu applied the “least sophisticated
consumer” standard to judge whether statements in
the letter were contradictory and/or false,
deceptive or misleading
▫ The standard is objective, and requires the court to
view the statement through the eyes of a consumer
who has “a rudimentary amount of information
about the world and a willingness to read a
collection notice with some care.”
▫ Court found the language in the collection notice
violated FDCPA as a matter of law in two respects:
 (1) the request for telephonic communication
conflicted with the required validation language on
the reverse side of the notice, with correctly stated
consumer must dispute debt in writing; and
 (2) ten-day deadline overshadowed validation
language, which allows 30 days to dispute a debt.
▫ Court in Vu granted summary judgment in favor of
plaintiff, and also certified a class based on the
notices sent out by debt collector
• Donohue v. Regional Adjustment Bureau, Inc.,
2013 WL 1285469 (E.D. Pa. Mar. 28, 2013)
▫ Student loan borrower alleged that ERS, a debt
collector, violated FDCPA because its
actions/omissions were deceptive in three respects
Plaintiff’s Allegations:
ERS dictated repayment terms that plaintiff alleged
were unaffordable, so ERS falsely represented that
student debt was not subject to requirement that
repayment terms be affordable.
2. ERS failed to engage in rehabilitation with the plaintiff,
failed to consider her financial circumstances, and did
not discuss rehabilitation until borrower threatened an
3. ERS told borrower if she did not make a down payment
and agree to monthly payments directly from her
account, ERS would garnish her wages.
• HELD: Motion to dismiss denied as to FDCPA
claims based on ERS’s deceptive conduct.
▫ Communication is deceptive if can be reasonably
read to have two or more different meanings, one
of which is inaccurate, viewed from perspective of
least sophisticated consumer.
• Deceptive communication includes threat to take
an action that cannot legally be taken, such as
threatening garnishment before meeting certain
• ERS’s offers of settlement and threats of
garnishment may have led plaintiff to incorrectly
believe these were only options available to her.
• Sufficient facts for claim that ERS did not follow
requirement that debt collector take borrower’s
entire financial circumstances into consideration
in context of rehabilitation plan.
Brown v. Enterprise Recovery Sys., Inc., 2013
WL 4506582 (Tex.App.-Fort Worth, Aug. 22,
• Student loan borrower alleged that ERS employee
threatened to place a tax lien on the borrower,
despite fact that ERS could not take such action
itself, thereby violating Section 1692e(5) of the
• Undisputed that (i) ERS’s client, USAF, had
authority to ask IRS to offset tax refund; and
(ii) ERS did not have that authority.
• Plaintiffs alleged ERS did not threaten USAF
would take the refund offset, and argued USAF’s
authority irrelevant because FDCPA is strict
liability, and it was ERS which threatened offset.
• At trial, court granted ERS motion for directed
• Texas Court of Appeals affirmed directed verdict
for ERS on grounds that ERS only threatened to
take action that its principal legally could take
2. CFPB Held Constitutional
• CFPB v. Morgan Drexen, Inc., No. 8:13-CV01267-JLS (C.D. Cal. 1/10/14)
▫ Federal district court rejected challenge to CFPB’s
▫ May be first decision to rule on merits of
constitutional challenge to CFPB
• Morgan Drexen argued that various aspects of
CFPB violated separation of powers, including
▫ A. President may remove Director only for cause
 Rejecting this argument, court concluded this was
governed by Humphrey’s Executor v. U.S., 295 U.S.
602 (1935),
• B. CFPB is led by single director, not multimember Commission
▫ Court rejected this, too, stating that judiciary does
not have authority to second guess Congress’ policy
determination that single director is best choice to
head agency.
▫ “Congress has not granted to the CFPB or its
Director authority to manufacture charges without
authorization from a statute or precedent.”
• C. CFPB funded from Federal Reserve earnings,
not congressional appropriation
▫ Rejected again – court relied on case law to the
effect that the Appropriations Clause of the
Constitution does not prevent or limit Congress
from creating self-financing program, without first
appropriating funds as in typical appropriations.
• D. CFPB’s interpretations of federal consumer
financial laws to be afforded deference as if CFPB
were only agency charged with interpreting those
▫ Strike 4 – court noted that Dodd-Frank provides
that where authority of CFPB and another agency
to prescribe rules under federal consumer financial
laws overlap, CFPB has exclusive authority to
prescribe rules. 12 U.S.C. § 5512(b)(4)(A)
▫ And Dodd-Frank says CFPB interpretation will be
as if it is only agency authorized to apply, enforce,
or interpret such law
▫ Court rejected challenge because there is no
interagency responsibility (unlike in Rapaport v.
U.S. Dept. of Treasury, 59 F.3d 212 (D.C. Cir.
1995), because of CFPB’s rulemaking authority is
▫ Congress clearly intended to grant CFPB exclusive
authority to interpret federal consumer financial
laws, so under Chevron, CFPB is entitled to
3. Tuition Clawback in Bankruptcy Cases
▫ Using fraudulent transfer provisions of Bankruptcy
Code, bankruptcy trustees around the country are
going after colleges and even private elementary
and secondary schools for tuition payments made
by parents who subsequently file for bankruptcy
▫ Can this happen to the student loan industry?
• Leading case on issue of pre-petition educational
payments being recovered as fraudulent transfers
– Gold v. Marquette Univ (In re Leonard), 454
B.R. 444 (Bankr. E.D. Mich 2011)
▫ Court held that more than $20,000 in college
tuition payments that parents made on behalf of
their 18-year-old son would (if proven made with
property of debtors) constitute avoidable
fraudulent transfers because parents themselves
received no economic value in exchange for the
• Marquette argued that debtors received
reasonably equivalent value for tuition by
receiving (i) peace of mind knowing son was
obtaining good education, and (ii) expectation
that their son would become financially
independent because of such education
[the Anti-Boomerang Defense]
▫ Court noted that debtors had no legal obligation to
provide adult child with college education
▫ Determined debtors did not receive any value in
exchange for tuition payments because benefit to
debtors was not concrete and quantifiable
▫ Similarly, in Banner v. Lindsay (In re Lindsay),
No. 06-36352 (GCM), Adv. No. 08-9091, 2010 WL
1780065 (Bankr. S.D.N.Y. May 4, 2010), court held
tuition payments were avoidable under New York
Debtor and Creditor Law §273-a, because debtor
did not receive fair consideration.
▫ Interestingly, New York law imposes obligation on
parent, if financially able, to provide education
through age 21, N.Y. Fam. Ct. Act §413; N.Y. Dom.
Rel. Law §240 1-b.
• But two cases from Western District of
Pennsylvania have gone the other way
▫ Sikirica v. Cohen (In re Cohen), No. 05-38135JAD, 2012 WL 5360956 (Bankr. W.D. Pa. Oct. 31,
2012), rev’d on other grounds, 487 B.R. 615 (W.D.
▫ Rejected Chapter 7 trustee’s attempt to recover
payments made by debtors for tuition for children’s
undergraduate education
• In re Cohen
▫ Acknowledged that Pennsylvania law did not
require parent to pay for child’s post-secondary
▫ Nonetheless, held such tuition payments are
“reasonable and necessary” for maintenance of
debtor’s family “for purposes of the fraudulent
transfer of statute only.” Cohen, 2012 WL 5360956,
at *10.
▫ Similarly, Shearer v. Oberdick (In re Oberdick),
490 B.R. 687 (Bankr. W.D. Pa. 2013) held that
debtor’s payment for undergraduate tuition for
children were not avoidable under Pennsylvania
Uniform Fraudulent Transfer Act
 Court found tuition constituted expenditure for
• Can tuition clawback affect student lenders?
• Are these cases too small to litigate?
• What can be done if tuition clawback hits the
student loan industry?

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