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Spring 2005 Case Developments in Consumer Law

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Issue 27, Spring 2005


Case Developments

by Lorray S.C. Brown, MPLP Consumer Law Attorney


Social Security Benefits Are Protected From Garnishment
Even When Deposited in a Bank Account

In a recent published opinion, the Michigan Court of Appeals held that pursuant to 42 USC § 407(a) social security benefits are not subject to garnishment even after the recipient receives and deposits the money in a bank account. Whitwood, Inc v South Boulevard Property Management Company, No. 251391, 2005 WL 845122 (April 12, 2005). In this case, the debtors deposited their social security retirement benefits and teacher's pension benefits in a bank account. The debtors argued that both the proceeds from the social security benefits and the public teacher's pension benefits continued to be exempt from garnishment after the funds were deposited in the bank account under 42 USC § 407(a) and MCL 38.1683 respectively. The Court of Appeals held that the social security benefits continued to be exempt but not the teacher's pension benefits. The Court of Appeals held that "[u]nlike 42 USC § 407(a), the plain language of MCL 38.1683 does not expressly protect money paid as retirement benefits once those funds are received by the beneficiary." This decision validates the position legal services advocates have taken when challenging garnishments of social security benefits in bank accounts. Additionally, as the facts in this case involved the commingling of exempt funds and nonexempt funds in a bank account, this decision affirms legal services advocates' position that exempt funds retained their exempt status even when commingled with nonexempt funds in a bank account.

Inconsistent HUD-1 Settlement Statements Is Not A Truth In Lending Act (TILA) Violation; Notice of Right to Cancel Not Defective

In Silcox v Countrywide Home Loans, Inc, No. 5:04-CV-37 (W.D. Mich. April 6, 2005) husband and wife homeowners sought rescission of mortgages they entered into with Countrywide Home Loans. They asserted several Truth in Lending Act (TILA) violations. One of their claims is that Countrywide violated TILA by providing them with Housing & Urban Development Settlement Statements (HUD-1 Settlement Statements) containing inconsistent figures. The homeowners received two HUD-1 Settlement Statements detailing the settlement costs of the home equity loan. "One HUD-1 Settlement Statement stated that [the homeowners] received $10,415 cash from the transaction, the other provided that they received $3,415." The district court judge granted Countrywide's motion for summary judgment as to that claim holding that there was no TILA violation as the HUD-1 Settlement Statements are governed by the Real Estate Settlement Procedures Act (RESPA) not TILA. The court stated: "The HUD-1 Settlement Statement was created and is governed by the provisions of RESPA and Regulation X, not the TILA. Although inconsistencies in the HUD-1 Settlement Statement may arguably be a violation of Regulation X, there is no private right of action upon which [the homeowners] can seek relief."

The homeowners also asserted that the Notice of Right to Cancel was defective because it did not clearly state that the husband homeowner had a right to rescind. In making this argument, the homeowners relied on two sections of the Right to Cancel form. In the upper left corner of the form under the borrower heading the form contained the wife's name only. Additionally, in the middle of the form, there was a box providing directions for how to cancel the loan and a single signature line below the phrase "I WISH TO CANCEL." According to the homeowners, this form appeared to provide only the wife with the right to cancel. TILA and Regulation Z provide that "each consumer whose ownership interest is subject to a security interest shall have the right to rescind the transaction." See 15 USC § 1635(a); 12 CFR § 226.23(b)(1). However, the district court judge granted Countrywide's summary judgment motion on this claim as well. In doing so, the court noted that at the bottom of the form there were signature lines for up to four Borrower/Owners. Also directly above the signature block Countrywide inserted the following two sentences: "Each borrower/owner in this transaction has the right to cancel. The exercise of this right by one borrower/owner shall be effective to all borrowers/owners." The court concluded that Countrywide's insertion of the above sentences "clearly and unequivocally clarifies that the right to cancel belongs to both the borrower [the wife] as well as any other owner of the encumbered property, in this case, [the husband]." The court further held that Countrywide's modifications to the form served to "clearly and conspicuously" disclose that both the husband and the wife had the right to cancel as required by 15 USC § 1632(a).

Fair Debt Collection Practices Act: Whether Service of a Summons and Complaint Is An Initial Communication Regarding a Debt

There is a split among the federal circuits as to whether the summons and complaint by a law firm collecting a debt for another is an initial communication within the meaning of the Fair Debt Collection Practices Act (FDCPA). At issue is whether service of the summons and complaint triggers an obligation to provide the required validation notice to the debtor under 15 USC § 1692g. Under section 1692g, the debt collector is obligated to notify the debtor of his right to validate the debt. The validation notices must be included in either the initial communication from the debt collector or within five days of the initial communication. The Eleventh Circuit in Vega v McKay, 351 F.3d 1334 (11th Cir 2003) held that service by a creditor's attorney on consumer debtors of a complaint package including a civil complaint and summons did not qualify as an initial communication under the FDCPA, of the kind triggering the FDCPA notice requirements. In reaching its decision, the court stated that "it seems far more consistent with the purpose of the Act that the term ' communication' as used does not include a ' legal action or pleading.'" By contrast, on December 20, 2004, the Seventh Circuit held that the law firm's service of a summons and complaint was an initial communication. Thomas v Law Firm of Simpson & Cybak, et al, 392 F.3d 914 (7th Cir 2004). The Seventh Circuit concluded that "the FDCPA's broad definition of a ' communication' encompasses the service of a summons and complaint." The FDCPA defines a "communication" as "the conveying of information regarding a debt directly or indirectly to any person through any medium." 15 USC § 1692a(2). The summons and complaint conveyed information regarding a debt. Until the United States Supreme Court resolves this split (or the Sixth Circuit agrees with the Eleventh Circuit) or Congress amends the FDCPA to exclude formal pleadings from the definition of a communication, the Seventh Circuit gives us a potential validation notice claim in cases where the summons and complaint are the initial communication to the debtor.

Fair Debt Collection Practices Act: Ineffective Validation Notice

A debt collector sent a debtor a letter notifying her that he was attempting to collect a debt she owed. In the letter, the debt collector stated:





Smith v Hecker, No. Civ.A. 04-5820, 2005 WL 894812 (E.D. Pa. April 18, 2005).

The debtor asserted that this letter was an ineffective validation notice thereby violating section 1692g of the FDCPA (debt validation notice) because of the use of the phrase "will be assessed valid" instead of the statutory phrase "will be assumed to be valid" and the statutory phrase "by the debt collector" was omitted. The debtor argued that the phrase "will be assessed valid" made the letter an ineffective validation notice because it could confuse the least sophisticated debtor and lead the debtor to believe that the debt will be determined valid by some entity of authority such as a court. The debtor also argued that the omission of the phrase "by the debt collector" made the letter an ineffective validation notice because it similarly could confuse the least sophisticated debtor as to who or what entity will assess the debt. The district court judge, agreeing with the debtor, held "the phrase 'will be assessed valid' and the subsequent omission of any reference to the entity that will be 'assessing' the debt is likely to confuse or mislead the least sophisticated debtor into believing that her debt would be determined to be valid by an entity of authority. The debt collection letter does not comply with section 1692g, is deceptive, and, therefore, does not convey an effective validation notice."