Sunday, October 17, 2010

Second Circuit Holds That FDCPA Does Not Apply to Proof of Claim in Bankruptcy

The Second Circuit has held that an allegedly inflated proof of claim cannot form the basis for a claim under the Fair Debt Collection Practices Act. Simmons v. Roundup Funding, No. 09-4984 (2nd Cir. 10/5/10). The opinion can be found here.

In Simmons, Roundup Funding filed a proof of claim for $2,039.21. After a hearing on claims objection, the court reduced the claim to $1,100.00, the amount that the debtors acknowledged to be owed.

Having achieved victory on the claims objection, the Debtors then sought to bring a class action under the FDCPA. The District Court was not impressed and not only dismissed the action, but awarded attorney's fees against the Debtors. The Second Circuit affirmed the dismissal, but reversed the award of attorney's fees.

The Court wrote:

Federal courts have consistently ruled that filing a proof of claim in bankruptcy court (even one that is somehow invalid) cannot constitute the sort of abusive debt collection practice proscribed by the FDCPA, and that such a filing therefore cannot serve as the basis for an FDCPA action (citations omitted).

We join these courts. The FDCPA is designed to protect defenseless debtors and to give them remedies against abuse by creditors. There is no need to protect debtors who are already under the protection of the bankruptcy court, and there is no need to supplement the remedies afforded by bankruptcy itself.

Slip Opinion, at 5-6.

It is interesting that the Court did not cite any provision of the FDCPA in affirming the dismissal. While the Fair Debt Collection Practices Act is designed to protect "defenseless debtors" from voracious collectors, this is typically not a requirement under the statute. The omission of a word or two can be the basis for an action regardless of whether the debtor was defenseless or not.

While the opinion achieves a common sense result, other courts have held that violations of the Bankruptcy Code may result in a claim under the FDCPA. Randolph vs. IMBS, Inc., 368 F.3rd 726 (7th Cir. 2004). The Randolph case allowed a debtor to bring an FDCPA claim based upon a violation of the discharge, holding that the Bankruptcy Code could not preempt the FDCPA. The distinction here may be between acts which take place outside of bankruptcy (such as violations of the discharge) and acts which take place within the bankruptcy court (such as filing a proof of claim). Unfortunately, the rationale is not stated as clearly as it could have been.


Evan Parker said...

what if the creditor/debt collector files a proof of claim that shows figures larger than what the debtor actually owes?as far as my knowledge goes, under FDCPA no debt collector can claim any amount greater than what the debtor if a creditor/debt collector claims anything greater than the actual debt figure in a bankruptcy case that should be considered a violation of the FDCPA.that’s what I feel.after all, filing an incorrect proof of claim is no better than claiming greater amounts during collection procedures.also the term “defenseless” sounds a little obscure.every debtor who’s being harassed by creditors/debt collectors is a “defenseless” debtor.and the FDCPA is the shield that’s meant to protect these debtors

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