Fifth Circuit Report: June 2015

This month's Fifth Circuit report doesn't have a lot of bankruptcy sizzle:  an interesting case on abstention and remand,  two unpublished cases about how not to reserve a claim under a plan and a case about suing a trustee.   However, there are some fascinating cases about lenders, liens, fraudulent transfers, the Texas Debt Collection Act and the Fair Debt Collection Practices Act.    The big news here is that the Fifth Circuit vacated its Golf Channel decision and instead certified the question to the Texas Supreme Court.   Here are June's decisions.   (Click on the style of the case to go to the actual opinions).

  

Third Circuit Holds That Attorney Letter Can Form Basis for FDCPA Claim

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 (3^rd 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 Facts

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[11][k] (A.S. Pratt & Sons 2009).

Bankruptcy Implications

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 (2^nd 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.

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 (2^nd 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.3^rd 726 (7^th 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.

Court Clears the Way for Simultantaneous Causes of Action Based on Discharge Violation

Nature abhors a vacuum. When Congress restricted access to bankruptcy in 2005, many debtor’s lawyers became plaintiff’s lawyers, filing suit over automatic stay and discharge violations which might have been allowed to pass in an earlier time. Not only are debtor’s lawyers suing more often, they are also asserting more causes of action as illustrated by a recent opinion from the Western District of Texas. Eastman v. Baker Recovery Services, Adv. No. 08-5055 (Bankr. W.D. Tex. 4/17/09).

Eastman shows a common fact pattern. A debtor filed a no asset case and failed to schedule a creditor. The unscheduled creditor later filed suit. The debtor did not answer the suit, but did inform the creditor of the discharge. The creditor took a default judgment. Several years later, after the debtor moved to reopen her bankruptcy case, the creditor finally had the judgment vacated. The debtor then filed an adversary proceeding for violation of the discharge after the judgment had been vacated. However, the debtor not only filed suit for violation of the discharge, but for violation of the Fair Debt Collection Practices Act, the Texas Debt Collection Practices Act, the Texas Deceptive Trade Practices Act and “tortiously engaged in practices that rise to the intentional infliction of emotional distress” (whatever that means).

This case shows a pattern of escalating failures which is not that unusual. The debtor blundered by not listing the creditor. However, because the case was a no-asset case, the debt was still subject to discharge. The creditor’s initial action to file suit in violation of the discharge was innocent because the creditor did not have notice of the bankruptcy case. The debtor blundered a second time when it did not answer the state court lawsuit. The creditor blundered when it took a judgment after being informed of the discharge. The debtor showed a curious indifference to her own rights when she waited for over a year to remedy the discharge violation. The creditor showed a cavalier disregard for its own liability when it waited until after the debtor had moved to reopen the bankruptcy case before it got around to vacating the judgment.

This case raises two issues 1) Can the same violation of the discharge give rise to multiple causes of action? and 2) Does the Bankruptcy Court have jurisdiction to hear all of them? Judge Clark answered yes to both questions.

There is currently a split between courts as to whether a discharge violation is also actionable under the FDCPA and other statutes. The Ninth Circuit holds that the bankruptcy discharge preempts other laws so that a plaintiff may not assert both causes of action. Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir. 2002). On the other hand, the Seventh Circuit holds that one federal statute cannot preempt another and that implied repeal of another federal statute should not be done on less than imperative grounds. Randolph v. IMBS, Inc., 368. F.3d 726 (7th Cir. 2004). Judge Clark sided with the Seventh Circuit, finding that both federal causes of action could be asserted simultaneously. However, he went one step further and found that the state causes of action were not preempted either.

However, what is really interesting about this opinion is that Judge Clark also ruled that he had jurisdiction to consider all of the claims in one action. In doing so, he disagreed with Judge Clark. In Mahoney v. Washington Mutual , Judge Clark dismissed state law claims which arose from the same facts as an alleged discharge violation because they did not have any conceivable effect on the bankruptcy estate. In so ruling, Judge Clark followed the test for “related to” jurisdiction which has long been followed in the Fifth Circuit.

So, why did Judge Clark disagree with Judge Clark? The difference was an intervening Fifth Circuit decision. In Matter of Morrison, 555 F.3d 473 (5th Cir. 2009), the Fifth Circuit upheld a decision by a bankruptcy court which held a debt to be nondischargeable and entered a money judgment on the claim. The Fifth Circuit found that judicial efficiency should not require a creditor obtaining a finding of nondischargeability to file a separate action to obtain a judgment on the claim. Judge Clark found that the same logic applied in this situation as well. He said:

A similar rationale warrants a similar exercise of jurisdiction here. The action for violation of the discharge injunction is a core proceeding, one that arises under a provision of title 11. (citation omitted). The selfsame facts make out a case for violation of the FDCPA. There would be no judicial efficiency in requiring the beneficiary of a judgment finding the defendant liable for violating the discharge injunction to pursue a separate lawsuit in state or federal court in order to secure a money judgment against the defendant. (citation omitted). Thus, the court concludes, under the reasoning of Morrison, that it has the requisite subject matter jurisdiction to entertain the FDCPA cause of action.

Eastman, at 8.

If Judge Clark is correct, “related to” jurisdiction has substantially expanded in the Fifth Circuit. If a Bankruptcy Court has jurisdiction over a claim, then it also has jurisdiction over other claims arising from the same facts in the name of judicial efficiency. This conclusion is somewhat of a two-edged sword. On the one hand, it expands the Bankruptcy Court’s jurisdiction to include what would be known as supplemental jurisdiction for an Article III Court. However, it also undermines the ability of a plaintiff to pursue separate bankruptcy and state court claims arising from the same facts on the ground that the bankruptcy court lacked jurisdiction to hear the non-bankruptcy claims.