The U.S. Court of Appeals for the Fourth Circuit has affirmed a district courts dismissal of claims against debt buyer LVNV Funding for filing proofs of claim in a state where it was not licensed as a debt collector.
The plaintiffs in Covert v. LVNV Funding filed a class action alleging violations of the Fair Debt Collection Practices Act and Maryland state laws. The case alleged LVNV filed proofs of claim in Chapter 13 cases without a Maryland debt collection license. The plaintiffs argued that by doing so, the defendant was not legally entitled to collect the debts. Five years before the district court action, each debtor had filed a Chapter 13 in which LVNV filed an unsecured proof of claim through its servicer. Each bankruptcy proceeded through confirmation and each of the debt buyers claims was allowed and paid on a pro rata basis with other unsecured claims. The district court granted LVNVs Motion to Dismiss, holding that the unjust enrichment claim was barred by the doctrine of res judicata, which bars a second lawsuit where an earlier ruling decided issues between the same parties.
The Fourth Circuit reviewed the case de novo and affirmed the dismissal as to all claims under that doctrine. 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 plaintiffs 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 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 plans terms would destroy the finality that bankruptcy confirmation is intended to provide."