A new opinion from the Third Circuit Court of Appeals could lead to more claims under the Fair Debt Collection Practices Act being filed in Bankruptcy Court. Allen v. LaSalle Bank, N.A., No. 09-1466 (3rd Cir. 1/12/11) held that correspondence from a debt collector to a consumer’s attorney could be actionable under the FDCPA. You can find the opinion here. Although Allen did not arise in a bankruptcy case, it involves a fact pattern likely to be seen in bankruptcies.
The case began when Dorothy Rhue Allen failed to make the final payment on her 30 year mortgage. LaSalle Bank retained Fein, Such, Kahn & Shephard, P.C. (“FSKS”) to file a foreclosure action. At the request of Allen’s attorney, FSKS provided a payoff letter. Less than three weeks later, Allen filed a class action counterclaim and third party complaint asserting that FSKS’s response violated the FDCPA. LaSalle promptly released the mortgage and dismissed the foreclosure action.
Not content with this result, Allen filed a class action against FSKS, LaSalle and the servicer for the loan in the U.S. District Court for the District of New Jersey. Although she initially made other arguments, she later conceded that her complaint was based solely on a violation of 15 U.S.C. §1692f(1), which prohibits “the collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” She alleged that the amounts charged to her exceeded the actual charges or the amounts allowed by court rule. For example, she alleged that FSKS demanded $910 in attorney’s fees when a court rule permitted only $15.43, $335 for searches when court rule permits only $75, $160 for recording fees when the actual fee was only $60 and $475 for service of process when statute and court rule limited reimbursement to $175.
The defendants moved to dismiss. The District Court, relying on precedent from the Seventh Circuit, held that a communication from a debt collector to a consumer’s attorney should be analyzed under the standard of a competent attorney. Because a competent attorney would have recognized the charges as being excessive and objected to them, the District Court held that the complaint failed to state a cause of action.
The Third Circuit’s Opinion
The Court of Appeals reversed. It found that §1692f(1) was a strict liability statute which did not depend upon the nature of the recipient (which would be the least sophisticated consumer or competent attorney under other FDCPA provisions). Attorneys who regularly collect debts through litigation are considered to be debt collectors. The FDCPA defines “communication” as “the conveying of information regarding a debt directly or indirectly to any person through any medium.” Thus, the attorneys were debt collectors and the letter to the consumer’s attorney constituted an indirect communication with the consumer herself.
The Court wrote:
The FDCPA is a strict liability statute to the extent it imposes liability without proof of an intentional violation. If an otherwise improper communication would escape FDCPA liability simply because that communication was directed to a consumer’s attorney, it would undermine the deterrent effect of strict liability.
In this case, the District Court sub silentio concluded that a communication from a debt collector to a consumer’s attorney was generally covered by the FDCPA but that it is to be analyzed from the perspective of a competent attorney. The District Court, however, did not have the benefit of Allen’s concession that her claims were predicated only upon § 1692f(1), which defines the collection of an unauthorized debt as a per se “unfair or unconscionable” debt collection method. The only inquiry under § 1692f(1) is whether the amount collected was expressly authorized by the agreement creating the debt or permitted by law, an issue we leave for the District Court.
Opinion, pp. 8-9.
The Third Circuit’s ruling places it in agreement with the Fourth Circuit, Sayyed v. Wolfpoff & Abramson, 485 F.3d 226, 232-33 (4th Cir. 2007) and in conflict with the Second and Ninth Circuits, Guerrero v. RJM Acquisitions LLC, 499 F.3d 926, 934-39 (9th Cir. 2007); Kropelnicki v. Siegel, 290 F.3d 118, 129-31 (2d Cir. 2002).
The Third Circuit also rejected a claim that New Jersey’s litigation privilege claim would bar the claim.
Nonetheless, the FDCPA does not contain an exemption from liability for common law privileges. “[C]ommon law immunities cannot trump the [FDCPA]‟s clear application to the litigating activities of attorneys,” (citation omitted), and, like the Fourth Circuit, we will not “disregard the statutory text in order to imply some sort of common law privilege.”
Opinion, p. 9.
Other courts have split over whether there is a litigation privilege defense to FDCPA claims. Newburger & Barron, Fair Debt Collection Practices, ¶1.07[k] (A.S. Pratt & Sons 2009).
The Third Circuit’s holding has tremendous implications for bankruptcy cases. Debt collectors regularly communicate information regarding consumer debts in bankruptcy cases. Proofs of claims, motions for relief from the automatic stay and objections to plans all involve as “the conveying of information regarding a debt directly or indirectly to any person through any medium.” It is not unknown for these documents to include charges prohibited for law, such as post-petition interest or attorney’s fees on an unsecured or under secured debt. Under the Allen decision, it is possible that courts could impose strict liability on creditor communications and filings in bankruptcy court.
It is important to note that the Second Circuit recently held that “the filing of a proof of claim in bankruptcy court cannot form the basis for an FDCPA claim.” Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2nd Cir. 2010). This is just one facet of the ongoing debate over the relationship between bankruptcy law and the Fair Debt Collection Practices Act. While Allen does not directly address this controversy, it seems likely that it will add fuel to the fire.