Lawsuits filed against debt collectors have been dismissed in two federal district courts with the decisions holding that filing proofs of claim in bankruptcy cases on time-barred debt is not actionable under the Fair Debt Collection Practices Act.
In both cases, Donaldson v. LVNV Funding LLC and Torres v. Asset Acceptance LLC, the collection agencies filed proofs of claims in the plaintiffs Chapter 13 cases. The plaintiffs then sued citing alleged FDCPA violations, including the use of false or deceptive representations to attempt to collect debts and threatening to take action that is illegal.
In granting the respective motions to dismiss by LVNV Funding and Asset Acceptance, both courts declined to follow the Eleventh Circuits 2014 decision in Crawford v. LVNV Funding.
The Southern District of Indiana, in Donaldson v. LVNV Funding, rejected the plaintiffs argument that filling proofs of claim misrepresented the legal status of debts. Indiana law states that a debt that has become uncollectible because of the statute of limitations is still owed and that the FDCPA only regulates the remedies available to the collector.
The Indiana court applied the so-called "competent lawyer" standard to determine whether filing the proofs of claim violated the FDCPA. In the earlier Eleventh Circuit case, the court applied the "least sophisticated consumer" standard. The Indiana court noted that with both a trustee and a lawyer "looking out for the consumer in the bankruptcy context, the unsophisticated consumer standard has no real application."
The Indiana court further held that filing a proof of claim doesnt violate the provision of the FDCPA prohibiting threats to take action that cannot legally be taken since there is no threat in a proof of claim that accurately reflects information about an unsecured debt. The court held that the Bankruptcy Code states such debts are allowed, unless objected to by any party in interest.
In the second case, Torres v. Asset Acceptance, the Eastern District of Pennsylvania rejected the ruling in Crawford v LVNV Funding and concluded filing proofs of claim didnt violate the FDCPA. The court discussed splits in circuit decisions considering whether filing proofs on time-barred debt violates the FDCPA. The court determined that debtors already are adequately protected by Bankruptcy Code provisions.
"While the risk of being duped into settling a stale debt is especially high for debtors who are not represented by counsel and who have little experience with the court system, this risk is attenuated for debtors in bankruptcy, who are already under the protection of the bankruptcy court," the court ruled. Therefore, "the Crawford court's apprehensions are not justified in the bankruptcy context.
The court also found that the Bankruptcy Code already provides adequate remedies to address potential creditor misconduct and that the plaintiff "does not explain why these remedies were insufficient, or what justifies the bypassing of these remedies."
Another related LVNV Funding case was settled by U.S. Court of Appeals for the Fourth Circuit in March.
In Covert v. LVNV Funding, the plaintiffs filed a class action alleging violations of the FDCPA and Maryland state laws, stating that LVNV filed proofs of claim in Chapter 13 cases without a Maryland 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 Funding 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."