Imagine a creditor filing a claim in a chapter 13 bankruptcy case where neither the debtor nor the bankruptcy trustee objects to the claim. Imagine the chapter 13 plan is confirmed, including the claimed debt, though the creditor receives little to nothing in return for its claim. Can the debtor later bring a separate action under the Fair Debt Collection Practices Act or does res judicata bar the FDCPA claim? Evidently, res judicata does not prohibit an FDCPA claim, at least according to a Georgia District Court which held an FDCPA claim is an independent claim and does not arise out of the same cause of action. Willis v. Cavalry Investments, LLC, 1:14-cv-00227-JRH-BKE (ECF # 44) (July 13, 2016).
After the bankruptcy court entered an order confirming the debtors Chapter 13 bankruptcy plan, the debtor brought a class action suit against the creditor alleging the creditor routinely files time barred proof of claims in bankruptcy proceedings to collect stale debts. After removing the case to Federal Court, the creditor filed a motion to dismiss arguing the FDCPA was precluded by res judicata because the bankruptcy court's confirmation order was a final judgment with respect to the debt. Judge Randall Hall, writing for the District Court, delayed his ruling until after the 11th Circuit decided Johnson v. Midland Funding, LLC in May, which found no irreconcilable conflict between the FDCPA and the later adopted Bankruptcy Code. Although the Johnson decision creates a circuit split and becomes a strong candidate for Supreme Court review, Judge Hall seized upon it claiming the creditors argument had been “completely foreclosed” by the holding in Johnson.
The creditor argued that the FDCPA action was an attempt by the debtor to relitigate the validity or amount of the debt and, consequently, the causes of action are barred by res judicata because they arise out of the same nucleus of operative facts. But the Court disagreed. It concluded that an FDCPA claim “concerns Defendants' methods of collecting the debt” rather than the validity or amount of the debt and “whether the Defendants violated the FDCPA when they filed the proof of claim.”
With the Court having held that an FDCPA claim is an independent claim which does not arise out of the same set of operative facts as the prior bankruptcy proceeding and with the support of the Johnson decision the creditors' motion to dismiss was denied and the debtors' class action lawsuit permitted to continue. For now and until the Supreme Court settles the circuit split, the 11th Circuit will continue to subject creditors to costly FDCPA actions should they file time barred claims in bankruptcy proceedings.