June 19, 2009

Court Finds No Violation of Fair Debt Collection Practices Act

A Louisiana District court finds that the filing of an allegedly time barred proof of claim by a creditor does not amount to a violation of the Fair Debt Collection Practices Act. B-Real, LLC v. Rogers et al., 2009 WL 1405844 (M.D.La. May 19, 2009) (Ruling on Appeal)

A Louisiana District Court ruling provides that a creditor did not violate the provisions of the Fair Debt Collection Practices Act (FDCPA) by filing what were alleged to be three time-barred proofs of claim based upon underlying debt allowed under Louisiana law.

The Debtors/Plaintiffs filed an adversary proceeding against the creditor rather than objecting to the claims. The creditor filed a motion to dismiss arguing that the FDCPA does not apply to the filing of a proof of claim. The bankruptcy court denied the motion on the grounds that debtors may allege FDCPA violations for actions related to a bankruptcy. The creditor filed a subsequent motion for summary judgment for reconsideration of the bankruptcy court’s prior ruling and alleging that it could not be deemed a “debt collector” under the FDCPA. That motion was also denied by the bankruptcy court. The creditor appealed the bankruptcy court’s decision.

The two issues considered by the district court on appeal are whether the Bankruptcy Code and Rules preclude the application of the FDCPA to a claim arising from the filing of a proof of claim in a bankruptcy proceeding, and, if not precluded, whether the filing of a proof of claim in a bankruptcy proceeding on a prescribed debt may constitute a violation of the FDCPA. The creditor cited a number of cases in which a cause of action under the FDCPA based on filing a proof of claim on a prescribed debt was deemed precluded by the Bankruptcy Code.

The district court found that the Debtors’ sole remedy for the filing of allegedly time-barred claim by the creditor was under bankruptcy law, and any FDCPA remedy was precluded. The court reasoned that the Bankruptcy Code provides a remedial scheme for objecting to a claim filed for a prescribed debt. It noted that case law shows that many bankruptcy courts have disallowed such claims as “unenforceable against the debtor” and, therefore, 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. The court went on to say that it could not see how a procedure outlined by the Bankruptcy Code could possibly form the basis of a violation under the FDCPA.

While the Bankruptcy Code and the FDCPA overlap, they can typically “coexist”. However, the district court ultimately found that with the facts in the case at hand the alleged misconduct by the creditor was “intimately tied” to the Bankruptcy proceedings and because of the intimate connection, there was clearly a risk of undermining the Bankruptcy Code's provisions.

This E-alert was prepared by Laura M. Zaremski. Please contact any member of the Bricker & Eckler Creditor Rights & Bankruptcy group for more information.