The Bankruptcy Code is federal law. It affords debtors protections - including the automatic stay and debt discharge injunction - that hold creditors at bay.
The Fair Debt Collection Practices Act (“FDCPA”) is also federal law. It contains limitations on what a debt collector can do when attempting to collect a debt.
Because debts - and more particularly attempts to collect those debts - drive people into bankruptcy, bankruptcy courts are sometimes forced to grapple with questions of how the Bankruptcy Code and FDCPA interact and impact each other.
In a recent opinion, the United States Bankruptcy Court for the Western District of Michigan considered these issues in an adversary proceeding brought by an individual debtor against a debt collection agency. Specifically, the court considered whether the defendant violated the FDCPA by filing a “stale” proof of claim in the debtor’s underlying Chapter 13 bankruptcy case.
In the year 2000, the debtor incurred a debt stemming from a breach of contract with an entity called Bankfirst. The six year statute of limitation on the breach of contract expired, but the debt continued to be transferred to and from third parties until it was transferred to LVNV Funding, LLC (“LVNV”). Resurgent Capital Services was retained to administer and service the debt (“Resurgent” together with LVNV, the “Defendants”).
In 2014, the plaintiff in this case filed for bankruptcy under Chapter 13 of the Bankruptcy Code. Plaintiff listed LVNV as holding an undisputed, liquidated and non-contingent claim against the plaintiff in the amount of $1,212.02 on her schedules. Thereafter, Resurgent, on behalf of LVNV, timely filed a proof of claim seeking approximately half of the amount identified by the plaintiff on her schedules.
The plaintiff subsequently filed a complaint against Defendants seeking damages for alleged violations of the FDCPA that resulted from the filing of the proof of claim. Defendants then filed a motion to dismiss the complaint, arguing that (i) the filing of a proof of claim is not a collection activity under the FDCPA, (ii) the Bankruptcy Code, not the FDCPA, provides relief to debtors, and (iii) a proof of claim is not the equivalent of a complaint for purposes of determining violations under the FDCPA.
The bankruptcy court ruled in the Defendants’ favor and dismissed the complaint. In its analysis, the court examined whether the FDCPA and the Bankruptcy Code co-exist, or whether the FDCPA has been impliedly repealed by the Bankruptcy Code. There is a conflict among the circuit courts of appeal that have considered this issue.
The court noted that, while the Sixth Circuit has yet to consider this specific issue, it has established a general framework for the doctrine of implied repeal, which is permitted in the following limited circumstances: (i) where provisions in the two acts are in irreconcilable conflict, the later act to the extent of the conflict constitutes an implied repeal of the earlier one; and (ii) if the later act covers the whole subject of the earlier one and is clearly intended as a substitute, it will operate similarly as a repeal of the earlier act. But in either case, the intention of the legislature to repeal must be clear and manifest.
Applying this framework, the court held that the Bankruptcy Code and FDCPA are capable of co-existence. The court reasoned that while the statutes conflict to some extent, there is no irreconcilable conflict. In addition, the Bankruptcy Code does not cover the entire subject matter of the FDCPA.
Having determined that the two statutes are capable of co-existence, the court turned to the particulars of the case at hand. Accordingly, the court considered the plaintiff’s argument that the contents of the Defendants’ proof of claim support claims for relief under the FDCPA (the plaintiff did not argue that Defendants were per se prohibited by the FDCPA from filing a “stale” proof of claim in the plaintiff’s bankruptcy case).
The court held that the complaint did not support the plaintiff’s claims. The court noted that, to determine whether a debt collector’s conduct is a violation of the FDCPA, the Sixth Circuit has instructed courts to use the “least sophisticated consumer” standard. The test is an objective one that, according to the Sixth Circuit, “asks whether there is a reasonable likelihood that an unsophisticated consumer who is willing to consider carefully the contents of a communication might yet be misled by them.”
The court considered the Defendants’ argument that the filing of a proof of claim is not an attempt to collect a debt, thereby preventing relief under the FDCPA. The Defendants argued that, if filing a claim was collection activity, then it would conflict with the Bankruptcy Code’s automatic stay provisions. The court found this argument to be unpersuasive. Adopting the reasoning from another bankruptcy court in a recent opinion, the court reasoned that while the filing of a proof of claim is an action to collect a debt, the automatic stay does not prohibit actions to collect a debt within the bankruptcy case itself. In addition, even though a bankruptcy estate is not the same as a bankrupt debtor, filing a claim against a debtor’s estate could still give rise to a violation of the FDCPA.
However, despite the fact that the filing of a proof of claim could give rise to a violation of the FDCPA, the court ruled that the Defendants’ actions in this case did not constitute a violation and it dismissed plaintiff’s complaint.
First, the court ruled that Defendants did not violate section 1692e of the FDCPA, which provides that a debt collector “may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." In so holding, the court emphasized the fact that the debtor herself identified LVNV as having a claim, and did not identify the claim as disputed, contingent or unliquidated. In addition, the proof of claim identified the debt owed as being less than what the plaintiff scheduled. The fact that the statute of limitations had already lapsed was also not indicative of a false or deceptive collection tactic.
Second, the court ruled that Defendants did not violate section 1692d of the FDCPA, which prohibits a debt collector from “engaging in conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt,” examples of which include “use or threat of violence” or “use of obscene or profane language.” The court ruled that the act of simply filing a proof of claim does not, in this case, “come close to the oppression, harassment and abuse contemplated by section 1692d.”
Third, the court ruled that Defendants did not violate section 1692f of the FDCPA, which prohibits attempting to collect amounts by using unfair and deceptive methods, including means proscribed by law, examples of which include taking or threatening to take action with respect to property or communicating via postcard. The court, again, ruled that the filing of a proof of claim did not constitute a violation of this section of the FDCPA.
Finally, the court ruled that the Defendants did not violate section 1692f of the FDCPA, which prohibits an attempt to collect a debt before first obtaining verification of the debt, including its validity. The court found plaintiff’s argument in this regard to be, if not waived, “untenable.”
The big takeaway from this case is that issues related to the interplay between the Bankruptcy Code and FDCPA remain unsettled. Can an action as seemingly straightforward as filing a proof of claim in a debtor’s bankruptcy violate the FDCPA? This case leaves the door open to a violation, but under this set of facts the answer is no.