Wednesday, March 4, 2015

Fourth Circuit Affirms Dismissal of Claims against Debt Buyer Based on Proofs of Claim

                The Fourth Circuit has affirmed a district court’s dismissal of claims against a debt buyer for filing proofs of claim in a state where it was not licensed as a debt collector.  In Covert v. LVNV Funding, C.A. No. 14-1016 (4th Cir. Mar. 3, 2015), the plaintiffs filed a putative class action alleging that defendants violated the FDCPA and various Maryland state laws by filing proofs of claim in the plaintiffs’ Chapter 13s because they were not licensed in Maryland as debt collectors.  Five years prior to the filing of the district court action, each debtor filed a Chapter 13 in which the debt buyer filed an unsecured proof of claim through its servicer.  Each bankruptcy proceeded through confirmation and each of the debt buyer’s claims was allowed and paid on a pro rata basis with other unsecured claims.

                In their lawsuit, brought five years later, plaintiffs argued that defendants had violated the FDCPA by filing proofs of claim without a Maryland debt collection license and asserting that by doing so, the defendant were not legally entitled to collect those debts and took action that cannot legally be taken in violation of the FDCPA.  The plaintiffs further asserted state law claims, including unjust enrichment and violation of Maryland’s consumer protection act.  The district court granted LVNV’s Motion to Dismiss, holding that the unjust enrichment claim was barred by the doctrine of res judicata and that the federal and state consumer protection claims failed to state claims because filing a proof of claim was not debt collection activity within the meaning of those statutes.

                The Fourth Circuit reviewed the case de novo and affirmed the dismissal as to all claims under the doctrine of res judicata. In doing so, the court reviewed the claims under a three part test: (a) whether the prior judgment was final and on the merits and rendered by a court of competent jurisdiction in accordance with the requirements of due process; (b) whether the parties are identical or in privity in the two actions; and (c) whether the claims in the second matter are based upon the same cause of action involved in the earlier proceeding. The court held that all three parts of the test were met, noting:

  • Confirmation of a bankruptcy plan is a final judgment on the merits;
  • Both the plaintiffs and the defendants were parties to the earlier Chapter 13 confirmation proceedings, specifically noting that the defendants were parties in those proceedings because of their financial interest in the amount allotted to satisfy their proofs of claim; and
  • Once a bankruptcy plan is confirmed, it is not subject to a collateral attack.  Because all of plaintiff’s claims “implicitly asked the district court to reconsider the provisions of the confirmed plans, they are based on the same cause of action as the plan confirmation orders.”

The court further held that res judicata also barred plaintiffs’ state and federal debt collection claims because those claims could have been raised in the bankruptcy proceedings either as adversary proceedings or through claim objections.  

While the court did not address the current sticky wicket of whether filing a proof of claim was debt collection activity within the meaning of the debt collection statutes, it did take to task the litigation strategy of the plaintiffs, making the following comments:

  • “Were we to hold that proofs of claim are subject to post-confirmation challenge, we would risk undermining this purpose by creating an incentive for debtors to enrich themselves at the expense of their creditors.  Debtors would be motivated to refrain from pursuing claims for monetary damages until after a plan has been confirmed in order to obtain additional post-plan assets that would not be subject to distribution in bankruptcy.”
  • “[A]llowing these kinds of post-confirmation collateral attacks on a bankruptcy plan’s terms would “destroy the finality that bankruptcy confirmation is intended to provide.”



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