The facts in the cases are similar: a medical patient incurs several medical bills, such as a hospital bill, doctors' bills, etc. The bills are submitted to insurance, which pays most but not all of the bills. The unpaid balances of the bills are relatively small. The medical providers are not paid by the patient, and the accounts are turned over to a collection agency. The collection agency is not successful in collecting the bills, and a law firm files a lawsuit to collect the bills.

Typically, the smaller bills are assigned to the creditor with the largest unpaid bill, usually the hospital, and suit is filed only in the name of the hospital. Information about the smaller accounts is included in the collection lawsuit, but the only creditor filing the lawsuit is the hospital. 

The plaintiffs in the class action lawsuits that have been filed claim that this method of filing collection lawsuits for unpaid medical bills violates the Fair Debt Collection Practices Act ("FDCPA") and similar Michigan laws. The FDCPA is a federal law designed to protect consumers from abusive debt collectors and unfair collection practices.

Plaintiffs in the class action lawsuits claim that the FDCPA is violated because the assignments from the smaller creditors to the hospital are not real or are done only for the purpose of allowing the collection agency to file one collection lawsuit against the patient, rather than filing a separate lawsuit for each of the medical providers. The plaintiffs claim that this practice is misleading, deceptive, and unfair. 

The lawsuits also claim that the collection agencies committed the unauthorized practice of law, by doing things that only lawyers should do, such as deciding how the collection lawsuit is handled and telling the attorney and medical providers what to do.

The lawsuits are class action lawsuits, and the plaintiffs have asked the courts to bring into the cases all other persons who were sued in collection cases with similar account assignments.  The plaintiffs are asking for treble damages and attorney fees. 

The cases are relatively new so the courts have not decided whether the plaintiffs' claims have validity. However, regardless of how the cases are decided or whether or not they are settled, it is likely that the filing of these class action lawsuits will have a significant impact on the collection industry, including attorneys, collection agencies, and large medical providers such as hospitals which use collection agencies.  Since damages in class action FDCPA cases are potentially very large, medical providers, collection agencies, and attorneys are likely to change how they file suits to collect medical bills, rather than be forced to defend similar class action lawsuits in the future.

Still, the decision is somewhat surprising as a 1998 Sixth Circuit Court of Appeals case has held that unscheduled debts in Chapter 7 no-asset bankruptcy cases are discharged even though the creditor was not given notice of the bankruptcy.

Keeping it ordinary

The first issue is timing. If a debtor's payments being arriving earlier or later than normal, iti s possible that a bankruptcy court may determine that these payments were made outside of the ordinary course of business. Therefore, if your debtor's payment schedule starts to change, it would be wise to find out why and address related issues early.

The second issue is the method of payment. A change in the debtor's method of paying may also signal to the bankruptcy court that payments fall outside the ordinary course. For example, if the debtor usually pays by check but suddenly begins paying by cash, or vice versa, that may provide grounds for denying the ordinary course defense.

The third issue is the amount of the payments. In essence, a court may consider whether the debtor is paying invoices in whole or in part when determining ordinary course status. Beware when a debtor who usually pays invoices in full beings paying only part of the balance. These payments may be deemed outside the ordinary course and thus subject to recovery by the trustee.

The fourth issue is terms of payment. A change in payment terms may indicate to a court that payments are outside the ordinary course. If the debtor requests a change in the terms of repayment, determine why it is requesting the change. If the debtor is seeking the change because of financial difficulty, then this may be grounds for the court to deny the ordinary course defense.

The fifth and final issue is regarding collection practices. In deciding whether paymets are in ordinary course, the bankruptcy court will also look to the collections methods used. Changes in collection practice could put payments outside the ordinary course. Although it may sound counterintuitive, you should thus avoid using extreme or "unusual" debt collection practices when dealing with a troubled company. Doing so could put whatever payments you do receive outside the ordinary course, thus subjective them to recovery as preference.

As more companies file for bankruptcy due to the depressed economy, actions to recover preferential payments will rise accordingly. There are no quick or easy fixes that would restore the economy to the prosperity of the late 1990s and early 2000s, but following the above guidelines when dealing with troubled companies will help your business preserve a defense against potential preference actions.

The idea is to make sure that someone else doesn't get to leave the playground with your toy.

But every adult knows that things in our world are a bit more complicated.

Anyone who has paid taxes knows that, like it or not, other people sometimes get to take what you have earned.

Another, perhaps less well-known example of this phenomenon occurs every day in the bankruptcy courts, through "preference" actions. During the recent economic downturn, it has become more important than ever for businesses to know how to protect themselves against preference liability.

Preferences and the ordinary course defense

If one of your debtor companies made payments to you during the 90 days before it filed for bankruptcy, then the trustee in charge of running the bankruptcy estate may be able to recover those payments as "preferences."

The Bankruptcy Code allows the trustee to recover these funds in order to level the playing field among creditors, thus preventing a bankrupt debtor from favoring - or "preferring" - one creditor over others on the eve of a bankruptcy filing.

However, the Bankruptcy Code also provides defenses for creditors who received these "preferential" payments.

The "ordinary course of business" defense is a key defense against a trustee attempting to take back a preferential payment. In order to encourage creditors to continue dealing with troubled companies, thus ideally sparing those companies a trip to the Bankruptcy Court, the Code says that a trustee cannot recover payments made by the debtor in the ordinary course of business.

There are two ways this can work.

Under the "objective test," you can show that the payment was made in the ordinary course of business in that particular industry. Or, under the "subjective test," you can show that the payment was made in the ordinary course of business between you and that particular debtor.

In either case, showing that the payment was made in the ordinary course of business will prevent the trustee from being able to reclaim it as a preference.

When considering the "subjective" version of the defense, there are a number of items business should be aware of when receiving payments from financially troubled companies. Being aware of these issues and addressing problems early will help to ensure that the payments you receive are not later taken back as preference.

The collection agency left a voice message for the consumer at her father's residence. The consumer claimed she didn't live with her father, and that the message violated the FDCPA because the message constituted a third party disclosure. The court dismissed the claim, because the message included a disclaimer telling individuals other than the consumer to discontinue listening. The court reasoned that the message gave third parties ample opportunity to delete or ignore the message, and that the message was specifically directed to the consumer )Collier v Professional Bureau of Collections, Case No. GLR-12-860, 2012 WL 3745720 (D. Md. Aug 28, 2012)).

Leaving messages for consumer debtors is risky, but this is a nice win for agencies who choose to leave messages similar to ACA's suggested voice message.

In Leggio v Michael E. Huffer, an unpublished opinion issued by the Court of Appeals on July 3, the Court held that under the plain language of MCL 600.3241a, only the mortgagee may take advantage of the statutory procedure for shortening the redemption period from six months to 30 days if the property has been abandoned by the mortgagor.  The Court reasoned that since the abandonment statute repeatedly refers to the "mortgagee", the statute should not be defined to include third parties who purchase properties at foreclosure sales.

However, the Court agreed  that a landlord may be able to obtain a lien if there is a provision in the lease giving the landlord a lien on the tenant's personal property.  For the lien to be effective, the landlord must file a financing statement under Article 9 of the Uniform Commercial Code.

Accordingly, landlords who want to take a lien on their tenant's personal property to secure payment of rent should include language in the lease granting the landlord a lien on the tenant's personal property, and should follow up by recording a financing statement.

On June 19, the Court issued an opinion in Clyde Sallie v. Fifth Third Bank and Foreclosure Management Company, allowing the Bank to foreclose a mortgage by advertisement even though the bank couldn't locate the underlying note at the time it started the foreclosure. At issue was a mortgage made in August 2000 between the plaintiff and Old Kent Bank, which merged with defendant Fifth Third Bank in 2001.

Although the bank was not in possession of the original note, the bank was able to show the mortgagor's payment history, default, and the amount outstanding on the debt, and the mortgagor even admitted that he stopped making payments on the debt.

The court pointed out that the bank had complied with the Michigan statutory requirements for foreclosing a mortgage by advertisement, and that Michigan law does not require a mortgagee to produce the underlying note in order to foreclose a mortgage by advertisement.

The court's decision may have been different if the mortgagor had raised questions about the terms or execution of the mortgage, but the plaintiff focused only on the bank's inability to produce the mortgage. The court may also have reached a different result if the bank was trying to enforce the note, instead of foreclosing the mortgage.