A recent Third Circuit reversal paves the way for Fair Debt Collection Practices Act (FDCPA) lawsuits based on minor procedural mishaps in bankruptcy court. This contradicts the law in the Second and Ninth Circuits and in many district and bankruptcy courts that previously have found that participation in bankruptcy proceedings is not an attempt to collect a debt and thus not grounds for an FDCPA claim.   

On October 7, 2013, the Third Circuit reversed the lower court’s dismissal of this FDCPA case finding that the debtors stated an FDCPA claim by alleging that a deposition notice in a bankruptcy proceeding did not comply with the Bankruptcy Code’s procedural requirements.The ruling examines the intersection of the FDCPA and the Bankruptcy Code and holds that failure to comply with procedural rules under the Bankruptcy Code is a sufficient basis to state a claim for an FDCPA violation despite the Bankruptcy Code providing for enforcement of its own rules.

A husband and wife filed for Chapter 7 bankruptcy and included in their petitions an unsecured, nonpriority credit-card debt.A law firm representing the creditor sent a letter to the debtors’ bankruptcy attorney offering to abstain from an adversary proceeding challenging the dischargeability of the debt if the debtors either agreed that the debt was non-dischargeable or if they agreed to settle the debt for a reduced amount.The letter included FDCPA-required disclosures and attached to it was a Bankruptcy Rule 2004 Notice of Examination. 

The debtors successfully moved to quash the examination for failure to comply with Bankruptcy Rule 9016 and the subpoena requirements of Federal Rule of Civil Procedure 45.  Then the debtors filed an FDCPA lawsuit against the law firm and creditor alleging that the letter and notice violated the FDCPA as false, deceptive, and misleading under § 1692e(5), (11), and (13).The District Court dismissed the lawsuit with prejudice under Rule 12(b)(6) because the FDCPA claims were “precluded by the Bankruptcy Code.”

The Third Circuit reversed that ruling in part finding that FDCPA claims are not automatically precluded by the Bankruptcy Code: “A creditor may comply with the obligations of Bankruptcy Rule 9016 and Civil Rule 45 on the one hand and the FDCPA on the other.”The Third Circuit held that the law firm’s failure to serve the subpoenas directly on the individuals subpoenaed, as required by Federal Rule 45(b)(1), and failure to include the required text of Federal Rule 45(c)-(d) in the subpoenas, as required by Federal Rule 45(a)(1)(A)(iv), violated Federal Rule 45 and Bankruptcy Rule 9016 and—additionally--were sufficient to state a claim under 1692e(5) and (13) of the FDCPA.

The Third Circuit rejected the approaches taken by the Second and Ninth Circuits and numerous bankruptcy courts that have held that communications that arise within the context of a bankruptcy proceeding cannot form the basis for FDCPA claims.Instead, the Third Circuit cited an old Seventh Circuit opinion that discussed the issue of the repeal of conflicting statutes and stated "[w]hen two federal statutes address the same subject in different ways, the right question is whether one implicitly repeals the other." The Third Circuit explained that, in its opinion, “The fact that the bankruptcy court has other means to enforce compliance with the subpoena rules does not conflict with finding liability or awarding damages under the FDCPA for violations based on a debt collector’s failure to comply with the subpoena rules.” 

This contradicts the long-established rulings that action by a creditor in a bankruptcy proceeding does not constitute an effort to collect a debt under the FDCPA because collection activity must be asserted against a consumer. Bankruptcy proceedings, however, are not directed against the consumer. Rather, they areinstigated by the consumer who enjoys the protections of the automatic stay. Moreover, the consumer’s assets are part of the bankruptcy estate that is distributed by the trustee under the bankruptcy court’s control.Thus, a creditor’s participation in a bankruptcy proceeding is an attempt to take part in the distribution of the bankruptcy estate under court control—not an attempt to collect a debt.

The Third Circuit’s ruling opens the door to debtors using technical procedural mistakes in a bankruptcy proceeding to assert FDCPA claims for which they could receive statutory damages, actual damages, and attorney’s fees and costs. 

Simon v. FIA Card Svcs., 732 F.3d 259 (3d Cir. 2013)