by Three cases out of the Northern District of Illinois address the issue of whether filing a proof of claim in chapter 13 bankruptcy for a stale debt can be the basis for a FDCPA claim. In Murff v. LVNV Funding (In re Murff), No. 13-44431, Adv. Proc. 14-790 (Bankr. N.D. Ill. June 15, 2015) and LaGrone v. LVNV Funding (In re LaGrone), 525 B.R. 419 (Bankr. N.D. Ill. Jan. 21, 2015), the courts essentially found the element of deception for a FDCPA violation is not present in the context of a bankruptcy case. In Avalos v. LVNV Funding (In re Avalos), No. 13-40865, Adv. Proc. 15-91(Bankr. N.D. Ill. June 12, 2015), Judge Schmetterer found that the determination of whether debt-collector conduct is deceptive is an issue of fact to be addressed on a case-by-case basis.
All three courts began with the jurisdictional finding that the FDCPA claim did not “arise under” Title 11 or in a case under Title 11, but fell under the rubric of “related to” for jurisdictional purposes. As such they lacked jurisdiction to enter final judgment. However, all three courts found that the motions to dismiss did not require final judgment as even granting the motion would leave open the possibility of amendment [though in both Murff and LaGrone the ability to amend was purely theoretical and the opinions left no room for a successful FDCPA claim].
[In Murff, the court rejected LVNV’s argument that the FDCPA claim was moot because LVNV had withdrawn its proof of claim prior to the adversary proceeding finding that the pursuit of damages for the violation kept the issue alive despite LVNV’s voluntary cessation of the offending conduct.]
In LaGrone, Judge Wedoff granted LVNV’s motion to dismiss the debtor’s adversary complaint on the grounds that filing a POC for a time-barred claim in a bankruptcy case does not violate the FDCPA. Noting that courts have uniformly found that filing a lawsuit to collect a stale claim violates the FDCPA, Judge Wedoff enumerated four factors that distinguish a bankruptcy proof of claim from a lawsuit:
- Unlike consumers against whom time-barred claims are brought in state court, the fiduciary presence of the bankruptcy trustee, whose duties include objecting to improper proofs of claim, protects the unsophisticated consumer from the coercive effect of the stale claim,
- A bankruptcy debtor has less at stake because the harm from allowing a proof of claim for a time-barred claim adheres to other unsecured creditors rather than the debtor. (In a concession to reality, the court footnoted the fact that if the bankruptcy case were dismissed before completion of the plan, the payments on the stale claim would result in the debtor owing more to legitimate creditors. Unfortunately, Judge Wedoff cavalierly conlcuded that the effect on the debtor would still be less than a civil lawsuit),
- A bankruptcy debtor is likely to have counsel already engaged to handle the bankruptcy while a debtor outside bankruptcy would have to engage counsel solely to address the time-barred claim,
- And, in appallingly obtuse reasoning, Judge Wedoff found that even if the debtor were not adequately protected by the trustee and did not have a lawyer to see to his interests, there is less at stake and less embarrassment associated with defending a proof of claim in bankruptcy than in participating in a state court debt collection case. [He failed to explain how the lack of embarrassment affects his first two findings based on the trustee fiduciary duty and the involvement of counsel].
Although both the Murff and the LaGrone courts dismissed the complaints with the invitation to amend, Murff at least acknowledged that it left little to no room for an amendment that would state an FDCPA claim.
LaGrone Bankr. N.D. Ill. opinion Murff Bankr. N.D. Ill opinion
In fact, the debtor in LaGrone filed an amended complaint adding the allegations that chapter 13 trustees in general, and the particular trustee in that case, do not typically object to proofs of claims of general unsecured creditors. The amended complaint also included the observations that FDCPA claims are analyzed using an objective standard and that improper claims cause harm in bankruptcy.
The court granted the LVNV’s motion to dismiss the amended complaint for all the reasons cited in the first opinion. LaGrone v. LVNV Funding, No. 13-21423 Adv. Proc. 14-578 (Bankr. N.D. Ill. May 14, 2015), transmitted to district court on proposed findings of fact and conclusions of law, No. 15 cv 5178 (June 12, 2015). The court, apparently unfamiliar with pro se debtors and disinterested trustees, maintained its position that bankruptcy debtors have counsel and a trustee to protect them against improper proofs of claim. Incredibly, the court found that in the event of a proof of claim that is improperly included in the bankruptcy estate, the debtor’s remedy is not against the creditor but is against his counsel, in the form of a disciplinary action, or the trustee in the office of the Chapter 13 United States Trustee.
LaGrone Bankr. N.D. Ill opinion Amended complaint
Judge Schmetterer, in Avalos, rejected the reasoning applied in LaGrone and Murff.
Instead of approaching the issue by explaining why it is acceptable for a debt collector to attempt to deceive a bankruptcy debtor into paying an uncollectible debt, the Avalos court began with the language of the FDCPA. That statute prohibits misrepresentation of the legal status of a debt, threats to take action that cannot legally be taken, or use of deceptive means to collect or attempt to collect a debt. It prohibits any false, deceptive, misleading, unfair or unconscionable attempt to collect a debt. The court noted that the seventh circuit has found that filing a time-barred claim in state court falls under these prohibitions. Phillips v. Asset Acceptance, LLC, 736 F.3d 1076 (2013).
Judge Schmetterer found that the same reasoning that would prohibit a debt collector from seeking to collect on a stale debt in a civil lawsuit prohibits that conduct in the context of bankruptcy. The court quickly dispensed with LVNV’s initial arguments relating to the nature of a proof of claim as something other than an attempt to collect on a debt. It began with LVNV’s attempt to divorce the debt from the debtor by arguing that a proof of claim is merely an attempt to participate in asset distribution rather than an attempt to collect from the borrower. In rejecting this argument, the court distinguished between chapter 7 in which the assets to be distributed are fixed at the time of the bankruptcy filing, and chapter 13 in which the debtor repays the debts with future income. The court was likewise unconvinced by LVNV’s argument that a stale debt may still constitute a “claim” in bankruptcy, finding instead that an uncollectable debt is at most a moral obligation, but no longer a legal obligation creating a “right to payment” that can form the basis of a “claim.” Finally, the court made quick work of the creditor’s contention that if filing a POC was an attempt to collect a debt, it would be prohibited by the automatic stay, finding that the automatic stay simply does not prohibit actions taken within the bankruptcy proceeding itself.
Turning to the issue of whether there is the requisite deception or unfair conduct to support an FDCPA claim—the issue the debtor lost on in Murff and LaGrone—the Avalos court began with the Eleventh Circuit case of Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), which found that a POC for a time-barred claim violates the FDCPA. The Avalos court agreed that filing a POC for a stale debt is an attempt to circumvent the statute of limitations by taking advantage of inattention or mistake on the part of the debtor or trustee in order to obtain repayment of that debt. As such, it smacks of deception and trickery.
The Avalos court found that the prohibition of the FDCPA was broader than that found by Judge Wedoff in LaGrone. It addressed the arguments found persuasive in Murff and LaGrone and found them wanting.
Beginning with the issue of whether filing a proof of claim on a stale debt is likely to deceive, the court turned to the person the FDCPA was intended to protect: the unsophisticated consumer. The question, therefore, was properly whether a hypothetical borrower would be tricked by the filing of a proof of claim rather than whether a particular debtor was in fact tricked. The presence of the trustee or counsel does not affect the deceptive nature of the conduct for purposes of stating an FDCPA claim. The court concluded that, “Whether a communication is deceptive is a matter of fact, not law.” Moreover, deterring debt collectors from filing time-barred claims against borrowers unlikely to be aware of either the FDCPA or the statute of limitations is one purpose of the prohibition.
As a practical matter, the court noted that if there was no hope of deception, debt collectors would have little incentive to file proofs of claims for time-barred debts. The mere fact that they do so suggests that their deceptive practices are successful enough to make them worthwhile. The court threw out a challenge. Rather than rely on intuition to support a finding that the bankruptcy context precludes deception, as was the foundation of Judge Wedoff’s decision, the court suggested a survey of LVNV’s proofs of claim to determine whether and how many time-barred claims slip through the cracks and are paid through chapter 13 plans.
The court added that there is another prohibition against filing stale proofs of claim: Bankruptcy Rule 9011.
Avalos Bankr. N.D. Ill opinion
Though the cases did not ultimately turn on the issue of preclusion between overlapping federal statutes, the LaGrone court specifically found that while the two statutes intersect they do not conflict and are therefore not preclusive of each other. (This issue is the subject of a NACBA amicus brief filed on June 13, 2015, in Garfield v. Ocwen Loan Servicing, No. 15-527 (2d Cir.)).
[…] One of Three Illinois Cases Gets it Right in FDCPA Case […]