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Sixth Circuit Court of Appeals Finds No Breach of Contract or FCRA Violation in Connection with Late Payments Under a Reaffirmation Agreement

In bankruptcy, a debtor must relinquish assets to satisfy debts. But there are exceptions to this general rule. Certain assets may be exempted from a debtor’s bankruptcy under federal and state law. Other assets, which are subject to a contractual loan agreement and the security interest of a lender, may be “reaffirmed” by a debtor pursuant to a reaffirmation agreement. The debtor may keep the asset, such as a house or a car, as long as the debtor enters into a new agreement with the lender that reaffirms the debt according to defined contractual terms, which may or may not track the original loan terms.

The U.S. Court of Appeals for the Sixth Circuit issued an opinion in a case involving a reaffirmation agreement that was entered into during a Chapter 7 bankruptcy case.[1] The debtor initiated the underlying lawsuit following her bankruptcy, arguing that her lender breached a reaffirmation agreement and violated the Fair Credit Reporting Act (FCRA). The case was dismissed in the trial court and the debtor/plaintiff appealed to the Sixth Circuit, which upheld the lower court’s decision.

Case Background

The case involved a husband and wife who took out a bank loan in the amount of approximately $10,000, to be paid in 48 monthly payments, secured by their mobile home. The debtor/plaintiff (wife) made 13 timely payments on the loan before missing a payment. Shortly thereafter, the debtor/plaintiff and her husband filed for Chapter 7 bankruptcy.

After filing for bankruptcy, the parties entered into a reaffirmation agreement on substantially the same terms as the original loan. Before the reaffirmation agreement became effective, but after the bankruptcy case was filed, the debtors made a loan payment which the bank applied to the payment missed during the prepetition period. The debtors mistakenly assumed the payment would be applied to the post-petition period and would, thus, be timely.

This created what the trial court called a “domino effect,” where all subsequent payments made during the pendency of the loan were deemed late because they were applied to a prior period and not the current one. Essentially, because the debtors never caught up from the missed prepetition payment, each payment made pursuant to the reaffirmation agreement was late. As a result, each month the lender charged late fees and reported the debtors to the consumer reporting agencies.

Several years after the bankruptcy, but prior to the loan being paid in full, the debtors sent letters to both the consumer rating agencies disputing their late payment history and the lender challenging the accuracy of the payment history appearing on their credit reports. In response, the lender verified the debtors’ payment history as accurate.

The debtor/plaintiff filed suit alleging state-law breach of contract and violations of the FCRA. The trial court dismissed the claims, finding that the lender properly applied the debtors’ first post-petition payment to the prepetition past-due bill. Therefore, the lender did not breach the reaffirmation agreement nor report inaccurate information to the consumer reporting agencies in violation of the FCRA. The debtor/plaintiff appealed the decision to the 6th Circuit Court of Appeals.

The Opinion

The court of appeals began by considering the debtor/plaintiff’s breach of contract claim. It found that the reaffirmation agreement, which must be in writing, signed by the parties, and goes into effect once filed with the bankruptcy court, was entered into properly and became effective on September 11.

The debtor/plaintiff’s first breach of contract argument was that the lender violated the automatic stay by applying the first post-petition payment to the past-due prepetition bill. The court noted that this argument was first made on appeal, and therefore was forfeited. However, the court addressed the substance of the argument and found that a lender is entitled to accept voluntary payments post-petition—there was no evidence of improper solicitation of the payment—without violating the automatic stay.

The debtor/plaintiff’s second breach of contract argument, which focused on the interpretation of the reaffirmation agreement also failed. First, because the reaffirmation agreement did not go into effect until September 11, the agreement was not in place when the debtors made the voluntary post-petition loan payment approximately a month earlier. Accordingly, the lender was under no obligation to apply the payment to the payments owed under the reaffirmation agreement as the debtor/plaintiff alleged. Second, because the terms of the reaffirmation agreement matched those of the original loan agreement in terms of payment amounts and payment timeline, the lender properly applied subsequent payments to prior periods (therefore rendering each payment late) despite any misunderstanding by the debtor/plaintiff.

Finally, the court considered the debtor/plaintiff’s argument that the lender violated the FCRA. Under the FCRA, furnishers of credit are obligated to provide accurate information about their customers to the consumer reporting agencies. If a dispute arises, and a consumer reporting agency notifies a furnisher of such dispute, a furnisher must take steps to investigate, report results of its findings, and remedy inaccuracies as appropriate. The FCRA provides borrowers a private right of action against furnishers of credit for negligently or willfully failing to comply with relevant requirements of the FCRA.

The court found that, because the reaffirmation agreement was effective and the lender properly applied the first post-petition payment, the lender did not submit inaccurate or incomplete information to the consumer reporting agencies in violation of the FCRA.

If you have any questions about this case, or a lender’s obligation under a reaffirmation agreement or the FCRA, please contact Patricia Scott at 517.371.8132 or at pscott@fosterswift.com.

[1] Chandler v. Peoples Bank & Trust Company of Hazard, Case No. 18-5361 (6th Circuit, April 24, 2019).

Categories: 6th Circuit Court of Appeals, Billing/Payment, Chapter 7, Collections

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