Crawford v. LVNV Funding, LLC: The Interplay Between the Bankruptcy Code and the FDCPA
Bankruptcy is not practiced in a vacuum. Attorneys can practice a wide variety of law — intellectual property,1 transportation,2 even criminal3; while appearing before a bankruptcy court. But there is no more overlap as between bankruptcy and collections law. Meanwhile, there is generally a separation between the applicability of the Bankruptcy Code and debt collection laws, such as the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §1692, et seq. That changed with Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), petition for cert. filed (U.S. Jan. 15, 2015) (No. 14-858).
Crawford is fairly banal when considering its application outside the bankruptcy forum. A debt-purchaser filed a proof of claim on a debt that expired by statute of limitation several years prior to the petition date.4 As acknowledged by Crawford,5 under the FDCPA, collection on a time-barred debt typically constitutes a violation unless there is a “bona fide error.”6 What was disconcerting with Crawford was that the court found the mere filing of a proof of claim constituted “collection activity” despite the automatic stay.7 The court held:
The automatic stay prohibits debt-collection activity outside the bankruptcy proceeding, such as lawsuits in state court. It does not prohibit the filing of a proof of claim to collect a debt within the bankruptcy process. Filing a proof of claim is the first step in collecting a debt in bankruptcy and is, at the very least, an “indirect” means of collecting a debt.8
The debt-purchaser9 then violated the FDCPA by filing a proof of claim on a stale debt.
In a footnote, the court declined to opine on whether the FDCPA is preempted by the Bankruptcy Code, noting the defendant did not make the argument.10 The court referenced a split in authority regarding preemption.11 This analysis is key because it accentuates the reason why the decision should have been resolved differently.
Further, there is a slippery slope of policy questions: If there is no preemption, do any actions taken in a bankruptcy forum constitute collection activity? Will the policy apply to all creditors, not merely debt collectors? If so, will it be applicable only to those represented by counsel? Will the procedure involve adversary proceedings or contested matters? Does filing a time-barred proof of claim also constitute a violation of the automatic stay, since such constitutes “collection activity”? Is the bankruptcy estate considered a “consumer” under the FDCPA? Must proofs of claim now include FDCPA-compliant language?
Preemption emphasizes the relationship between the Bankruptcy Code and nonbankruptcy issues. The Bankruptcy Code was created by Congress “to create a whole system under federal control which is designed to bring together and adjust all of the rights and duties of creditors and embarrassed debtors alike.”12 Aggrieved parties cannot use bankruptcy courts to achieve “through the back door what [they] cannot accomplish through the front door….”13 Preemption exists so that parties cannot “circumvent the remedial scheme of the [c]ode under which Congress struck a balance between the interests of debtors and creditors….”14
The argument for preemption is particularly strong. “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.”15
Because Crawford did not address preemption, the issue will likely reappear in future litigation.16 Crawford identified four cases17 supporting each position of preemption: Two “pro” preemption — Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2d Cir. 2010), and Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir. 2002); and two “non” preemption — Simon v. FIA Card Ser., N.A., 732 F.3d 259 (3d Cir. 2013), and Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004).
Walls reviewed a putative class action premised on discharge and FDCPA violations.18 The debtor paid a secured creditor19 during her Ch. 7 case, and continued to do so post-discharge without reaffirming the debt.20 The debtor fell behind in her payments, and the secured creditor initiated foreclosure.21 In response, the debtor filed a class action in the federal district court.22 The Ninth Circuit reviewed whether the district court erred in dismissing her claims.23
In holding any remedy for the debtor’s damages lay squarely with the Bankruptcy Code, her FDCPA claims were precluded.24
Nothing in [the Bankruptcy Code or FDCPA] persuades us that Congress intended to allow debtors to bypass the [c]ode’s remedial scheme when it enacted the FDCPA. While the FDCPA’s purpose is to avoid bankruptcy, if bankruptcy nevertheless occurs, the debtor’s protection and remedy remain under the Bankruptcy Code.25
Because the debtor had an available remedy under §§524 and 105, she could not bypass that by selecting an alternate method of recovery.26
Simmons also entailed a putative class action premised on FDCPA violations stemming from an improper proof of claim.27 The creditor filed a proof of claim that was approximately $860 more than what was ultimately held to be owed.28 The debtors sued in the district court, and the Second Circuit affirmed the lower court’s dismissal of their claims.29
The court outlined in great detail the express purpose of the FDCPA — the elimination of abusive debt collection practices by debt collectors.30 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.”31 The rationale being that:
Debtors in bankruptcy proceedings do not need protection from abusive collection methods that are covered under the FDCPA because the claims process is highly regulated and court controlled. While the FDCPA’s purpose is to protect unsophisticated consumers from unscrupulous debt collectors, that purpose is not implicated when a debtor is instead protected by the court system and its officers.32
Bankruptcy courts are the sole forum for wrongfully filed proofs of claim. “It is beyond cavil that past bankruptcy practice, as well as explicit Bankruptcy Code provisions, have left the remedy for fraudulent and otherwise defective proofs of claim to the Bankruptcy Code.”33
The alternate view does not find preemption. In Randolph, the Seventh Circuit reversed three district court decisions that found preemption when a debtor sought relief under the FDCPA for negligent, but not willful, violations of the automatic stay.34 The court found dunning letters, sent inadvertently by a debt purchaser, were violations of the FDCPA.35 F or debt collection communication, there is a scienter requirement under §362(h), but strict liability under §1692(2)(A).36 The two acts complemented each other, “each with coverage that the other lacks.”37 Overlapping statutes do not repeal one another by implication; as long as people can comply with both, then courts can enforce both.”38
The Bankruptcy Code and the FDCPA provide “different rules, with different requirements of proof and different remedies.”39 Crawford allowed the FDCPA to usurp the procedures and protections provided by the Bankruptcy Code. There the debtor already had specific rules to follow: contested matter with specific proof, prima facie validity until an objection is filed, and specific remedies — disallowance of the claim as time-barred. Instead, the debtor was able to “bypass the procedural safeguards in the [c]ode in favor of asserting potentially more lucrative claims under the FDCPA.”40 A s stated in B-Real, LLC v. Rogers, 405 B.R. 428 (M.D. La. 2009):
The Bankruptcy Code itself contemplates a creditor filing a proof of claim on a time-barred debt and the Bankruptcy Court disallowing such claim after objection from the debtor. It is difficult for this [c]ourt to understand how a procedure outlined by the Bankruptcy Code could possibly form the basis of a violation under the FDCPA.41
While Randolph appears to contradict preemption, the Seventh Circuit instead found harmony — “as long as people can comply with both, then courts can enforce both.”42
The same can be said of Simon. The Third Circuit reversed the district court’s dismissal of an FDCPA case based upon activities by a law firm regarding the collection of a debt.43 The court reviewed the relationship between the Bankruptcy Code and the FDCPA with respect to “a debt collector’s communications to a debtor in a pending bankruptcy proceeding.”44 The court analyzed Walls, Simmons, and Randolph. Also reviewed was B-Real, LLC v. Chausse (In re Chausse), 399 B.R. 225 (9th Cir. BAP 2008). In Chausse, the Ninth Circuit BAP held that time-barred proofs of claim could not substantiate the basis for an FDCPA claim.45 [W]here the [c]ode and [r]ules provide a remedy for acts taken in violation of their terms, debtors may not resort to other state and federal remedies to redress their claims lest the congressional scheme behind the bankruptcy laws and their enforcement be frustrated.”46 Furthermore:
Attempting to reconcile the debt validation procedure contemplated by FDCPA with the claims objection process under the [c]ode results in the sort of confusion and conflicts that persuades us that Congress intended that FDCPA be precluded in the context of bankruptcy cases. We fail to understand how [a debt collector] could comply with FDCPA §1692g and its various notice and informational requirements because those provisions conflict with the [c]ode and [r]ules.47
This conflict alone was enough to preclude an FDCPA case for a time-barred proof of claim, as it presented a quagmire between compliance with the FDCPA and the automatic stay.
The Simon court then reached its holding through extremely limited facts — when FDCPA claims “arise from communications a debt collector sends a…debtor in a pending bankruptcy proceeding, and the communications are alleged to violate the Bankruptcy Code or [r]ules, there is no categorical preclusion of the FDCPA claims.”48 The proper inquiry…is whether the FDCPA claim raises a direct conflict between the Code or [r]ules and the FDCPA, or whether both can be enforced.”49
Whether taking a broad approach as viewed by Walls and Simmons, or a more restrictive view as promulgated by Randolph and Simon, the result in Crawford should have been different. With broad preemption, the Bankruptcy Code provides the sole procedure and remedy for issues regarding proofs of claim — for practical reasons ( i.e., judicial expediency) and substantive ones ( i.e., preventing the choice of a more lucrative cause of action). When comparing the claims objection process against the FDCPA, a court cannot enforce both provisions simultaneously. In order to allow a debtor to move forward with an FDCPA claim, a court must eschew the procedure of the claims objection process. The result, by either account, is simply incorrect.
While we await certiorari review, it is important to proceed carefully as to proofs of claim. If the statute of limitation has passed, it is best not to file the claim.50 Since Crawford did not decide preemption, practitioners are filing adversary proceedings for proof of claim resolution. Given the long-standing practice in the Middle District, however, do not expect the judiciary to abide by Crawford. The Supreme Court will either resolve the issue, or general practice will erode Crawford over time.
1 See In re Matusalem, 158 B.R. 514 (Bankr. S.D. Fla. 1993).
2 See In re Olympia Holding Corp., 192 B.R. 1021 (Bankr. M.D. Fla. 1996).
3 See In re Purity, Inc., 189 B.R. 541 (Bankr. S.D. Fla. 1995).
4 Crawford, 758 F.3d at 1257.
5 Id. at 1259-60 (citations omitted).
6 See, e.g., Gaisser v. Portfolio Recovery Associates, LLC, 593 F. Supp. 2d 1297, 1303 (S.D. Fla. 2009); Heintz v. Jenkins, 514 U.S. 291, 295-96 (1995).
7 See Crawford, 758 F.3d at 1261-62 (citations omitted).
8 Id. (internal citations and parenthetical omitted). But see Hanson v. HSBC, Adv. No. 3:14-ap-317-PMG, 2015 WL 639265 (Bankr. M.D. Fla. Jan. 27, 2015) (holding filing and mailing proof of claim does not constitute communication under FDCPA).
9 The FDCPA only applies to debt collectors, not creditors. See 15 U.S.C. §1692(e).
10 Crawford, 758 F.3d at 1262, n.7.
11 Id.
12 MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910, 914 (9th Cir. 1996).
13 Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 510 (9th Cir. 2002).
14 Id.
15 Simmons v. Roundup Funding, LLC, 622 F.3d 93, 96 (2d Cir. 2010).
16 There are currently 10 adversary proceedings pending in the Middle District of Florida, Orlando Division regarding this issue.
17 Crawford emanated from the Middle District of Alabama. The Northern, Middle, and Southern Districts of Florida have each reviewed this issue. See, e.g., Rios v. Bakalar & Assocs., P.A., 795 F. Supp. 2d 1368, 1369-70 (S.D. Fla. 2011) (debt collection letter seeking collection of discharged debt was permitted to base FDCPA claim); Bacelli v. MFP, Inc., 729 F. Supp. 2d 1328, 1336-37 (M.D. Fla. 2010) (when Bankruptcy Code and FDCPA can be read together, without conflict, a claim for violation under FDCPA can stand); Williams v. Asset Acceptance, LLC (In re Williams), 392 B.R. 882, 885-87 (Bankr. M.D. Fla. 2008) (“[A]pplying the FDCPA to issues involving the automatic stay or dischargeability is different than the issues surrounding the creditor’s right to file a claim in a bankruptcy case.”); Pariseau v. Asset Acceptance, LLC (In re Pariseau), 395 B.R. 492, 493-96 (Bankr. M.D. Fla. 2008) (“[G]iven the thousands of cases filed annually, coupled with the high volume of claims filed in each case, it is essential that practitioners appearing before this [c]ourt respect the claims process so that significant judicial resources are not squandered on matters that can be so very easily resolved.”); Cooper v. Litton Loan Servicing (In re Cooper), 253 B.R. 286, 291 (Bankr. N.D. Fla. 2000) (“[T]he filing of a proof of claim in a bankruptcy proceeding does not trigger the FDCPA, and fails to state a cause of action under the [a]ct.”).
18 Walls, 276 F.3d at 504.
19 Neither Simmons nor Walls discussed the inapplicability of the FDCPA to the creditors in these cases. The creditors were not debt collectors and, therefore, did not fall under the purview of the FDCPA.
20 Walls, 276 F.3d at 505.
21 Id.
22 Id.
23 Id.
24 Id. at 511.
25 Id. at 510 (citation omitted).
26 See also Gray-Mapp v. Sherman, 100 F. Supp. 2d 810, 814 (N.D. Ill. 1999).
27 Simmons, 622 F.3d at 94-95.
28 Id. at 95.
29 Id.
30 Id.
31 Id. at 95-95 (citing, inter alia, Gray-Mapp, 100 F. Supp. 2d 810; and B-Real, LLC v. Rogers, 405 B.R. 428 (M.D. La. 2009)).
32 Id. at 96 (quoting B-Real, 405 B.R. at 432).
33 Id. (quotation omitted).
34 Randolph, 368 F.3d at 728.
35 Id.
36 Id. at 730-31.
37 Id. at 731.
38 Id.
39 Id. at 732.
40 Gray-Mapp, 100 F. Supp. 2d at 814.
41 B-Real, 405 B.R. at 431-32.
42 Randolph, 368 F.3d at 731.
43 Simon, 732 F.3d at 262-63.
44 Id. at 271.
45 Chausse, 399 B.R. at 225.
46 Id. at 236-37.
47 Id. at 239.
48 Simon, 732 F.3d at 274.
49 Id.
50 See, e.g., In re Sekema, Case No. 14-40145 (Bankr. N.D. Ind. Jan. 15, 2015) (awarding sanctions for violating Rule 9011 for filing time-barred proof of claim).
Adina L. Pollan is a partner at Gillis Way Duncan & Campbell LLP. Her practice includes the representation of creditors in Ch. 7, 11, 12, and 13 cases, as well as collection practice litigation in state and federal courts.
This column is submitted on behalf of the Business Law Section, Alan Howard, chair, and Stephanie C. Lieb, editor.
