Tensions Continue to Mount Between the FDCPA and the Bankruptcy Code

The issue of whether the Bankruptcy Code precludes claims under the FDCPA took another twist in an opinion issued by the Second Circuit last week. In a pro consumer opinion, the Second Circuit seemingly changed direction by reversing the Southern District of New York’s dismissal of FDCPA claims which arose in part as a result of violations of the discharge injunction. See Garfield v. Ocwen Loan Servicing, LLC, 2016 U.S. App. LEXIS 3 (2^ND Cir. Jan. 4, 2016). In Garfield, the consumer brought suit in the district court seeking damages for violations of the FDCPA, contending the loan servicer was attempting to collect on a discharged obligation. The district court dismissed the claims holding that the Bankruptcy Code precluded all claims under the FDCPA for conduct that violates the discharge injunction. The Second Circuit reversed, holding that none of the debtor’s FDCPA claims conflicted with the discharge injunction provisions of the Bankruptcy Code and therefore the claims were not precluded and should proceed forward.

The Court’s decision further complicates a split in authority among the circuits. Prior to the Second Circuit’s decision in Garfield, four circuits (including the Second Circuit) had addressed to some degree the issue of whether the Bankruptcy Code to any extent precludes claims under the FDCPA. In 2002, the Ninth Circuit held that the Bankruptcy Code precluded the debtor’s FDCPA claims. Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 511 (9^th Cir. 2002). In that case, as in Garfield, the debtor sought to enforce a violation of the discharge injunction through the FDCPA. There, the court noted that

[t]he Bankruptcy Code provides its own remedy for violating § 524, civil contempt under § 105. To permit a simultaneous claim under the FDCPA would allow through the back door what Walls cannot accomplish through the front door -- a private right of action. This would circumvent the remedial scheme of the Code under which Congress struck a balance between the interests of debtors and creditors by permitting (and limiting) debtors' remedies for violating the discharge injunction to contempt.

Id.  at 510. 

In 2010, the Second Circuit seemingly agreed with the Ninth Circuit, holding that the FDCPA does not authorize suit during the pendency of bankruptcy proceedings. Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2^nd Cir. 2010). The court’s rationale for so holding was that "[t]he FDCPA is designed to protect defenseless debtors" and "there is no need to protect debtors who are already under the protection of the bankruptcy court." Id. at 96.

Two circuits have reached the opposite conclusion. Both the Seventh and Third Circuits have concluded that the operational differences between the provisions of the FDCPA and Bankruptcy Code do not create irreconcilable differences and that a debt collector can comply with the provisions of both simultaneously. See Randolph v., IMBS, Inc., 368 F.3d 726 (7^th Cir. 2004); Simons v. FIA Card Services, N.A., 732 F.3d 259 (3^rd Cir. 2013). Notably, in each of those cases, the alleged FDCPA violations occurred during the pendency of the bankruptcy.

In seeking to distinguish its holding from its prior precedent, the Garfield court focused on the fact that this case involved a post discharge violation while the violation in Simmons involved a predischarge violation. The court rationalized its decision on the premise that a debtor has no protection from the bankruptcy court after discharge. In doing so, the court ignored the fact that the debtor is provided an express remedy under section 524 of the Bankruptcy Code and, as was so aptly noted by the Wall Court, allowing the debtor to premise FDCPA claims upon a violation of the discharge injunction essentially creates an end run around the express remedy provided by the Bankruptcy Code. The Garfield court’s decision will likely invite copycat actions as FDCPA claims provide more favorable remedies than those found under the Bankruptcy Code, particularly where there are violations of the automatic stay and discharge injunctions.