An Uneasy Harmony The Intersection of the Bankruptcy Code and the Fair Debt CollectionPractices Act

An Uneasy Harmony The Intersection of the Bankruptcy Code and the Fair Debt CollectionPractices Act

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The Bankruptcy Code does not exist in a vacuum. Inevitably, there will be overlap between the Code and other federal and state statutes. Federal pre-emption resolves many conflicts arising with state laws. However, where the Bankruptcy Code collides with another federal statute, no clear guidelines exist to determine which prevails. Under these circumstances, courts must look to statutory construction and interpretation principles, as well as the underlying statutory policies and congressional intentions because, fundamentally, each federal statute has equal effect under the law.1

One statute with the inherent potential for conflict with the Bankruptcy Code is the Fair Debt Collection Practices Act (FDCPA). 15 U.S.C. 1692 et.seq. The FDCPA "was designed to protect against the abusive debt collection practices likely to disrupt a debtor's life."2 To that end, the FDCPA provides a framework for debt collection that includes mandatory notices to debtors, prohibitions of certain practices designed to harass, confuse and coerce debtors, and strict liability damages for violations.

However, when a debtor files for bankruptcy protection, at least two troublesome conflicts arise. First, can a debt collector be held liable for damages pursuant to the FDCPA for actions taken during and after the bankruptcy case? Second, should a debt collector comply with the terms of the FDCPA if doing so would violate the automatic stay?

FDCPA Liability for Proofs of Claims

Under the first scenario, debtors have sued creditors under the FDCPA for filing proofs of claims that the debtors believed to be invalid for various reasons. The first reported decision on this issue was from the District Court for the Northern District of Illinois. In Baldwin vs. McCalla, et al.,3 the debtor alleged that the law firm representing the creditor filed a proof of claim that included unauthorized finance charges. The debtor would have been forced to either object to the claim or pay the unauthorized charges, both of which were additional expenses to the debtor. After the debtor's bankruptcy case was dismissed, the debtor filed a class action suit against the law firm.

The defendant law firm argued that the debtor's FDCPA claim was precluded by remedies provided for by the Bankruptcy Code. In beginning its analysis, the court noted the potential conflict between the Code and the FDCPA, because the complaint sought to look outside the confines of the Code to redress alleged wrongdoing during bankruptcy proceedings, which are "governed by the complex, detailed and comprehensive provisions of the lengthy Bankruptcy Code which create a whole system under federal control which is designed to bring together and adjust all of the rights and duties of creditors and embarrassed debtors alike."4

The court then proceeded to conduct what it called a "harmonization analysis," beginning with a review of both statutes "to see if they are indeed incompatible or if they can be harmonized, and if they are indeed incompatible, to decide which one Congress meant to take precedence."5 In doing so, the court was mindful of the Supreme Court's "clear statement rule" in Cohen v. De La Cruz,6 directing that courts should "not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure."7

Noting that the Bankruptcy Code was designed to "place the property of the bankrupt, whereever [sic] found, under the control of the court, for equal distribution among the creditors" and to give " a single court the authority to determine all aspects of a bankruptcy case and its proceedings," the court in Baldwin addressed whether an FDCPA claim action could be based on the filing of a claim in bankruptcy. In ruling that it could not, the court analogized the situation to the Supreme Court case of Kokoszka v. Belford,8 in which it held that the wage-garnishment provisions of the Consumer Credit Protection Act, of which the FDCPA was a part, did not apply in bankruptcy proceedings. "[T]he Consumer Credit Protection Act sought to prevent consumers from entering bankruptcy in the first place. However, if despite its protection bankruptcy did occur, the debtor's protection and remedy remained under the Bankruptcy Act."9 Finding the holding and analysis in Kokoszka applicable to an FDCPA case premised upon actions taken in the bankruptcy proceeding, the court in Baldwin dismissed the debtor's FDCPA complaint.

Similarly, in Cooper v. Litton Loan Servicing, et al.,10 the debtors sued the collectors for violating the FDCPA, Florida Consumer Credit Practices Act and §362 of the Bankruptcy Code in connection with the filing of a claim in the debtor's bankruptcy. Dismissing the FDCPA count as failing to state a claim, the court held, "The debtor can only attack a proof of claim in the bankruptcy court, and only by using the remedies provided in the Bankruptcy Code.11

The court in Cooper relied on the case of Gray-Mapp v. Sherman, et al.,12 in which the court framed the issue as to whether it should "[F]orce Gray-Mapp to attack defendants' proof of claim in the bankruptcy court ...because the Bankruptcy Code provides the exclusive remedy for attacking false or inflated proofs of claim."13 Answering affirmatively, the court ruled that the Code's statutory framework provides a means for debtors to obtain relief from invalid proofs of claim and that nothing in the FDCPA suggests that Congress intended it to supplement the remedial provisions of the Code.14

In addition to case law supporting these decisions, the court in Baldwin cited several other reasons to disallow the debtor's FDCPA action. First, in accordance with the Supreme Court's clear statement rule, the Baldwin court recognized that past bankruptcy practices, as well as explicit Code provisions, have left the remedy for defective proofs of claim to the Code. Second, the Bankruptcy Code's purpose is to reconcile and adjudicate all creditor claims. The court was concerned that the threat of prosecution outside of the bankruptcy court may deter creditors from filing claims. Third, allowing FDCPA actions in the bankruptcy enables debtors to ignore remedial provisions in the Code in favor of potentially more lucrative damages and attorney fees under the FDCPA. "The practice of debtors deliberately bypassing the Bankruptcy Code's objection process in favor of alternative litigation would undermine the entire bankruptcy system."15 Finally, the result is consistent with other cases addressing the applicability of the FDCPA in bankruptcy.16 Those cases, although not factually identical to Baldwin, raise similar issues in terms of applying the FDCPA to bankruptcy cases.

FDCPA Liability for Violations of the Automatic Stay

In Hubbard v. National Bond and Collection Associates Inc.,17 the debt collector, unaware that the debtor had filed for bankruptcy protection, sent a collection letter to the debtor during the debtor's chapter 13 case. The debtor sued the collector under several provisions of the FDCPA, including those prohibiting using any false, deceptive or misleading means in collecting debt.18 This section was violated, according to the debtor, because the automatic stay prohibits attempts to collect debts, while the collection letter was just that. The court, granting summary judgment for the collector, held, "The FDCPA was not enacted to enforce the Bankruptcy Code's automatic stay provisions... Automatic stays are adequately enforced by the contempt power of bankruptcy courts and specific provisions of the Bankruptcy Code... The willfulness standard of §362(h) would be undermined if the court now recognized a private right of action under the FDCPA in which a defendant could be held liable for a single unknowing violation of an automatic stay."19

FDCPA Liability for Non-compliance During Bankruptcy Proceedings

Courts addressing this issue find the debt collector to be faced with a Hobson's choice. While the FDCPA requires the collector to conspicuously disclose that it is attempting to collect a debt, such a notice would conflict with the automatic stay, which prohibits all such efforts. Faced with such an alternative, the creditor in Maloy v. Phillips20 did not give the required FDCPA notice and was sued by the debtor for its non-compliance with the FDCPA. Finding that sending the debtor an FDCPA notice would have been another step in the collection process, the court found that the collector had correctly chosen not to send the FDCPA notice not only because of the automatic stay, but because if he had sent the notice, he would have arguably confused the debtor and violated the spirit of the FDCPA. "[The] defendant's situation was a catch-22. One statute told him to go left, the other right. Erring on the side of caution, [the] defendant chose to terminate all communications with the debtor. In the court's best judgment, [the] defendant made the right choice by honoring the automatic stay."21

In May 2001, the Seventh Circuit Court of Appeals issued its ruling in the case of Buckley vs. Bass & Associates P.C., et al.22 That decision affirmed a lower court's opinion, holding that a letter from a debt collector to a debtor asking for bankruptcy information was not an "attempt to collect a debt" subject to the FDCPA.23 Accordingly, the collector's failure to give FDCPA notices was not actionable. The court found that the letter, seeking only information and containing no demand for payment, was not a "communication" subject to the provisions of the FDCPA. More importantly, however, the lower court's opinion acknowledged the inherent conflict between the requirements of the FDCPA and the automatic stay. On this issue, the court found the requirements of the automatic stay to be paramount. "Allowing [the] plaintiff to assert a private right of action under the FDCPA for doing no more than requesting bankruptcy information places Bass in a catch-22 by forcing them to choose between violating the Bankruptcy Code and violating the FDCPA."24

FDCPA Liability for Post-discharge Collection Attempts

Not all FDCPA claims related to bankruptcy cases fail. In a rash of recent cases where debtors have sued collectors under the FDCPA for violating the discharge injunction by attempting to collect debts that were discharged, plaintiffs have had some success. In Peeples vs. Blatt,25 the debtor sued the debt collector for allegedly coercing the debtor to pay discharged debts.26 The debt collectors argued that the debtor's claim was based on a violation of the discharge injunction and that, therefore, the Bankruptcy Code's remedial provisions provided the appropriate remedy. The debtor, on the other hand, argued that the FDCPA and the Code should be construed, wherever possible, to give effect to both and urged the court to allow the FDCPA case to proceed, especially since the bankruptcy case was closed.

In reaching its ruling, the court cited three cases on this point.27 All involved collection attempts taken after the conclusion of the bankruptcy case, and resulted in two views. In the cases where the FDCPA claims were stricken, the courts based their decisions on Baldwin and Gray-Mapp, and held that the Code's framework of remedies and relief must be used when the acts complained of are matters related to the bankruptcy case, such as here, where the discharge injunction is alleged to have been violated.28

Conversely, on similar facts, the court in Wagner vs. Ocwen29 allowed the debtor's FDCPA suit to proceed. This court found Baldwin and Gray-Mapp distinguishable because the acts complained of in those cases concerned the filing of proofs of claims. Here, however, the alleged violations occurred after the debtor received her discharge. The court noted that the debtor had not attempted to bypass the remedies available in the Code, a concern cited by other courts. Indeed, she did not have an FDCPA claim during her bankruptcy case, as the collection activities occurred subsequently. After a review of these cases, the court in Peeples found the reasoning in Wagner to be sound and refused to dismiss the debtor's FDCPA claim.30

Most recently, however, the Ninth Circuit Court of Appeals ruled that a debtor's suit, brought under the FDCPA for violations of the discharge injunction, necessarily involved "bankruptcy-laden determinations" and therefore was required to be brought as a civil contempt action in the bankruptcy court.31 "The 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."32 Currently, this would appear to be the majority view.

As these cases show, FDCPA plaintiffs have had some limited success in asserting their claims when the conduct complained of is related to bankruptcy proceedings. The fact that debtors continue to look for nuances that distinguish their situations from those already decided shows that the damages available pursuant to the FDCPA would appear to be more desirable than the relief provided by the contempt powers of the courts. If I were a judge, I might take issue with that. However, until then, courts continue to sing a decidedly unharmonious song.


1 Baldwin v. McCalla, Raymer, Padrick, Cobb Nichols & Clark. L.L.C., 1999 WL 284788 (N.D. Ill.), citing United States v. Palumbo Bros. Inc., 145 F.3d 850, 852 (7th Cir. 1998). Return to article

2 Id., citing Mace v. Van Ru Credit Corp., 109 F.3d 338. Return to article

3 1999 WL 284788 (N.D. Ill.). Return to article

4 Id. at 4 (citations omitted). Return to article

5 Id. Return to article

6 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed. 341 (1988). Return to article

7 Id. at 1218. Return to article

8 417 U.S. 642, 94 S.Ct. 2431 (1974). Return to article

9 Id. at 651. Return to article

10 253 B.R. 286 (Bankr. N.D. Fla. 2000). Return to article

11 Id. at 291 (citations omitted). The FDCPA claim was also dismissed for failure to allege willfulness as required by the statute. Return to article

12 100 F.Supp.2d 810 (N.D. Ill. 1999). Return to article

13 Id. at 813. Return to article

14 Id. at 814. Return to article

15 Baldwin, supra at 9. Return to article

16 The Baldwin court also discussed the law firm's defense of collateral estoppel at length and ruled that "[I]t would be inappropriate under the rules of res judicata to permit [the] plaintiff to file a new [FDCPA] claim in a new court challenging the defendant's proof of claim where [the] plaintiff failed to object to the proof of claim filed prior to the involuntary dismissal of [the plaintiff's bankruptcy]." At 11. Return to article

17 126 B.R. 422 (D. Del. 1991). Return to article

18 15 U.S.C.1692e. Return to article

19 Hubbard, supra at 428-9. Return to article

20 197 B.R. 721 (M.D. Ga. 1996). Return to article

21 Id. at 723. Return to article

22 249 F.3rd 678 (7th Cir. 2001). Return to article

23 2000 WL 1006568 (N.D. Ill. 2000). Return to article

24 Id. at 836. Return to article

25 2001 WL 921731 (N.D. Ill.). Return to article

26 Count II of the complaint sought damages under 11 USC §524. That claim was dismissed by the court based on precedent in the Seventh Circuit that requires such claims to be brought in the bankruptcy court that issued the discharge injunction. The court made no comment on the availability of such a private remedy once brought in the bankruptcy court. Return to article

27 Walls vs. Wells Fargo Bank N.A., 255 B.R. 38 (E.D. Cal. 2000) affd., 276 F.3d 502 (9th Cir. 2002); Kibler vs. WFS Financial Inc., 2000 WL 1470655 (C.D. Cal. 2000); and Wagner vs. Ocwen Federal Bank, FSB, 2000 WL 1382222 (N.D. Ill. 2001). Return to article

28 See, also, Diamante vs. Solomon & Solomon P.C., Slip Op. (N.D.N.Y. 2001); Degrosiellier vs. Solomon & Solomon P.C., Slip. Op. (N.D.N.Y. 2001); and Bolen vs. Bass & Associates Inc., Slip Op. (N.D. Ill. 2001). Return to article

29 Supra. Return to article

30 See, also, Molloy vs. Primus Auto. Fin. Servs., 247 B.R. 804 (C.D. Cal. 2000), holding that a debtor discharged in bankruptcy is still in need of and entitled to protection under the FDCPA when acts complained of occurred after the discharge. Return to article

31 Walls vs. Wells Fargo Bank N.A., 276 F.3d 502 (9th Cir. 2002). Return to article

32 Id. at 510, a case that did find that §524 provided a debtor with a private right of action allowed the debtor's FDCPA claim under that provision. See Molloy, supra. Return to article

Journal Date: 
Friday, March 1, 2002