Southern California Bankruptcy Law Blog

Fair Debt Collection Practices Act And Bankruptcy

Posted in Chapter 11, Chapter 13, Chapter 7

Cartoon of man with billA very recent Eleventh Circuit decision, Crawford v. LVNV Funding, LLC, No. 13-12389 (11th Cir., July 10, 2014), highlights an interesting split among the circuits, which makes things ripe for an appeal to the Supremes.

First let’s get a little background.

BACKGROUND

I.                The Automatic Stay And The Discharge Injunction

When a person files for bankruptcy protection, the automatic stay is triggered.  The stay prevents creditors from taking action against the debtor, the debtor’s possessions, and the bankruptcy estate that is created upon filing.  I have written about the automatic stay in many previous posts, so I won’t spend a lot of time exploring it here.

[T]he stay . . . continues until the earliest of —

(A) the time the case is closed;

(B) the time the case is dismissed; or

(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied.

11 U.S.C. § 362(c) (2).

If the debtor receives a discharge, then once the stay terminates it is replaced by the permanent discharge injunction of 11 U.S.C.  § 524(a), that forever prohibits creditors from attempting to collect discharged debts.

 

II.              The Fair Debt Collection Practices Act

The Bankruptcy Code is federal law, made pursuant to Congress’s enumerated power “to establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”  U.S. Const. art. I, § 8, cl. 4.  It affords debtors marvelous protections — including the automatic stay and the discharge injunction — against the depredations of their creditors.

Another federal law that protects debtors, in this case from debt collectors, is the Fair Debt Collection Practices Act (“FDCPA”) found in 15 U.S. Code § 1692, et seq.  The FDCPA contains significant limitations on what a debt collector can do.  By the way, the limitations here are not on the creditor, just on the collector.

 

III.            The Doctrine Of Federal Preemption

The U.S. Constitution contains the following provision:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof . . . shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

U.S. Const., art. VI, para. 2.

This means that federal laws are binding on everyone.  Thus, if there is a conflict between a federal statute and a state statute, the federal statute always wins.  This is sometimes referred to as the doctrine of federal preemption.

But notice what the Constitution does not say.  It does not say anything about the relationship between two federal statutes.  Therefore, if there were an inconsistency between two federal statutes, there is no formula for determining which statute controls.  And if there were no conflict between two federal statutes, there is no indication that one should be preferred above the other.

 

IV.            The Ninth Circuit’s Walls Decision

In 2002 the U.S. Court of Appeals for the Ninth Circuit issued a decision in Walls v. Wells Fargo Bank, N.A., 276 F. 3d 502 (9th Cir. 2002), that has created a problem for Ninth Circuit practitioners.

In Walls, the Court was faced with a class action brought against Wells Fargo Bank under both the Bankruptcy Code — specifically, the discharge injunction of § 524(a) coupled with the Court’s contempt power found in § 105  — and the FDCPA.  The focus of the FDCPA portion of the action was on Wells Fargo’s attempts to collect discharged debts rather than on any communications with represented persons (see, e.g., 15 U.S.C. § 1692(c)).  The Court held:  “Because Walls’s remedy for violation of § 524 lies in the Bankruptcy Code, her simultaneous FDCPA claim is precluded.”  Walls v. Wells Fargo Bank, N.A., 276 F. 3d at 511.  Thus, if there is a bankruptcy form of relief, Walls says that that’s all the debtor is entitled to.  In essence then, the Walls Court held that the Bankruptcy Code, a federal statute, preempted the FDCPA, also a federal statute.

 

V.              The Problems With Walls

My view is that Walls was wrongly decided for at least two reasons:

First, the FDCPA affords a debtor relief that is unavailable under the Bankruptcy Code.  For example, the Bankruptcy Code does not address the problems of communications with a represented party, a creditor’s mischaracterization of the nature of a debt, or a creditor’s failure to verify the validity of a debt before resuming collection activities, whereas the FDCPA does.  Thus, the relief available under 15 U.S.C. § 1692c (a) (2), 15 U.S.C. § 1692e (2) (A), and 15 U.S.C. § 1692g (b) has no Bankruptcy Code analogue.  In sum, the Walls Court summarily denied the plaintiffs their rights under the FDCPA; rights they did not have under the Bankruptcy Code.

Second, two years after the Walls decision, the Seventh Circuit handed down the very well-reasoned opinion, Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004), in which it explicitly rejected the Walls decision.  In Randolph the Seventh Circuit held that the Bankruptcy Code does not preempt an FDCPA action.  Indeed, the Court held that in the absence of a statutory inconsistency no federal statute preempts another.  Randolph v. IMBS, Inc., 368 F.3d at 730 (citing Baker v. IBP, Inc., 357 F.3d 685, 688 (7th Cir. 2004)).  The Court reasoned that because:  (a) there is no irreconcilable conflict between the Bankruptcy Code and the FDCPA, and (b) there is no expressed legislative decision that one replaces the other, neither preempts the other.

 

THE CRAWFORD CASE

In Crawford v. LVNV Funding, LLC, No. 13-12389 (11th Cir. July 10, 2014), the debtor, one Stanley Crawford, filed Chapter 13 papers.  LVNV Funding, a member of the dark side of the force, filed a proof of claim in the case to participate in the Chapter 13 payment scheme.  However, the debt in question was stale:  the statute of limitations on any collection action had passed.  Crawford’s challenge to the claim under the FDCPA was denied by both the Bankruptcy Court, and the Federal District Court.  Crawford appealed to the Eleventh Circuit Court of Appeals.

The Court began its decision by quoting from Crawford’s brief, and then stated its holding:

A deluge has swept through U.S. bankruptcy courts of late. Consumer debt buyers — armed with hundreds of delinquent accounts purchased from creditors — are filing proofs of claim on debts deemed unenforceable under state statutes of limitations.  This appeal considers whether a proof of claim to collect a stale debt in Chapter 13 bankruptcy violates the Fair Debt Collection Practices Act (“FDCPA” or “Act”).  15 U.S.C. §§ 1692-1692p (2006).

We answer this question affirmatively. The FDCPA’s broad language, our precedent, and the record compel the conclusion that defendants’ conduct violated a number of the Act’s protective provisions.  See id. §§ 1692(e), 1692d-1692f. We hence reverse the orders of the bankruptcy and district courts.

Crawford v. LVNV Funding, LLC, No. 13-12389 (11th Cir. July 10, 2014).  (Sorry; the case is so new that it has not yet been paginated, so I can’t give you page numbers.)

This means that in the Eleventh Circuit a debtor in bankruptcy has an FDCPA cause of action against a creditor that files a proof of claim for a stale debt.

The holding in Crawford is a nice, debtor-friendly decision, but may be difficult to apply in the Ninth Circuit due to Walls.  Of course, the two cases may be distinguishable because in Walls the debtor sought simultaneously to obtain relief under:  (a) § 524(a) coupled with § 105, and (b) the FDCPA, whereas the Crawford debtor was only seeking relief under the FDCPA.  However, if a Ninth Circuit debtor were to apply the FDCPA a lá Crawford, the Walls decision might lead to defeat because the Ninth Circuit appears to view the Bankruptcy Code as the sole source of relief for a debtor in bankruptcy.  Thus, the Ninth Circuit might hold that since the debtor can object to the proof of claim under 11 U.S.C. § 502(a), any FDCPA action is precluded.

Since that position is at variance with both Randolph and Crawford, it might be time to find a good case to take to the Supremes to resolve the circuit split.

In the meantime, it will be interesting to see whether the Crawford holding will have any application in the Ninth Circuit.

If you are a debtor facing overwhelming debt and need bankruptcy protection, contact an extremely knowledgeable and highly skilled bankruptcy attorney to guide you through the process.