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

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Mar 2002

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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.<a href="#1" name="1a">1</a>

One statute with the inherent potential for conflict with the Bankruptcy Code is
the <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Debt Collection Practices Act (FDCPA). 15 U.S.C. 1692</a>
et.seq. The FDCPA "was designed to protect against the abusive debt collection
practices likely to disrupt a debtor's life."<a href="#2" name="2a">2</a> 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?

<h3>FDCPA Liability for Proofs of Claims</h3>

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.,<a href="#3" name="3a">3</a> 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."<a href="#4" name="4a">4</a>

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."<a href="#5" name="5a">5</a> In doing so, the court was mindful of the
Supreme Court's "clear statement rule" in Cohen v. De La Cruz,<a href="#6" name="6a">6</a> directing that
courts should "not read the Bankruptcy Code to erode past bankruptcy practice absent
a clear indication that Congress intended such a departure."<a href="#7" name="7a">7</a>

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,<a href="#8" name="8a">8</a> 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."<a href="#9" name="9a">9</a> 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.,<a href="#10" name="10a">10</a> 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.<a href="#11" name="11a">11</a>

The court in Cooper relied on the case of Gray-Mapp v. Sherman, et al.,<a href="#12" name="12a">12</a>
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."<a href="#13" name="13a">13</a>

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.<a href="#14" name="14a">14</a>

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."<a href="#15" name="15a">15</a> Finally, the result is consistent with other cases
addressing the applicability of the FDCPA in bankruptcy.<a href="#16" name="16a">16</a> Those cases, although
not factually identical to Baldwin, raise similar issues in terms of applying the
FDCPA to bankruptcy cases.

<h3>FDCPA Liability for Violations of the Automatic Stay</h3>

In Hubbard v. National Bond and Collection Associates Inc.,<a href="#17" name="17a">17</a> 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.<a href="#18" name="18a">18</a> 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."<a href="#19" name="19a">19</a>

<h3>FDCPA Liability for Non-compliance During Bankruptcy Proceedings</h3>

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. Phillips<a href="#20" name="20a">20</a> 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."<a href="#21" name="21a">21</a>

In May 2001, the Seventh Circuit Court of Appeals issued its ruling in the
case of Buckley vs. Bass & Associates P.C., et al.<a href="#22" name="22a">22</a> 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.<a href="#23" name="23a">23</a> 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."<a href="#24" name="24a">24</a>

<h3>FDCPA Liability for Post-discharge Collection Attempts</h3>

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,<a href="#25" name="25a">25</a> the debtor sued the debt collector for allegedly
coercing the debtor to pay discharged debts.<a href="#26" name="26a">26</a> 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.<a href="#27" name="27a">27</a> 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.<a href="#28" name="28a">28</a>

Conversely, on similar facts, the court in Wagner vs. Ocwen<a href="#29" name="29a">29</a> 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.<a href="#30" name="30a">30</a>

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.<a href="#31" name="31a">31</a> "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."<a href="#32" name="32a">32</a> 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.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. McCalla, Raymer, Padrick, Cobb Nichols & Clark. L.L.C., 1999 WL 284788</a> (N.D. Ill.), citing
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… States v. Palumbo Bros. Inc.,</a><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 145 F.3d 850, 852 (7th Cir. 1998)</a>. <a href="#1a">Return to article</a>

<a name="2">2</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Van Ru Credit Corp., 109 F.3d 338</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… WL 284788</a> (N.D. Ill.). <a href="#3a">Return to article</a>

<a name="4">4</a> Id. at 4 (citations omitted). <a href="#4a">Return to article</a>

<a name="5">5</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#5a">Return to article</a>

<a name="6">6</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S. 213, 118 S.Ct. 1212, 140 L.Ed. 341 (1988)</a>. <a href="#6a">Return to article</a>

<a name="7">7</a> Id. at 1218. <a href="#7a">Return to article</a>

<a name="8">8</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S. 642, 94 S.Ct. 2431 (1974)</a>. <a href="#8a">Return to article</a>

<a name="9">9</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 651</a>. <a href="#9a">Return to article</a>

<a name="10">10</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 286 (Bankr. N.D. Fla. 2000)</a>. <a href="#10a">Return to article</a>

<a name="11">11</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 291</a> (citations omitted). The FDCPA claim was also dismissed for failure to allege willfulness as required by the
statute. <a href="#11a">Return to article</a>

<a name="12">12</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.Supp.2d 810 (N.D. Ill. 1999)</a>. <a href="#12a">Return to article</a>

<a name="13">13</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 813</a>. <a href="#13a">Return to article</a>

<a name="14">14</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 814</a>. <a href="#14a">Return to article</a>

<a name="15">15</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, supra at 9</a>. <a href="#15a">Return to article</a>

<a name="16">16</a> 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. <a href="#16a">Return to article</a>

<a name="17">17</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 422 (D. Del. 1991)</a>. <a href="#17a">Return to article</a>

<a name="18">18</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.1692e</a>. <a href="#18a">Return to article</a>

<a name="19">19</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, supra at 428-9</a>. <a href="#19a">Return to article</a>

<a name="20">20</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 721 (M.D. Ga. 1996)</a>. <a href="#20a">Return to article</a>

<a name="21">21</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 723</a>. <a href="#21a">Return to article</a>

<a name="22">22</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3rd 678 (7th Cir. 2001)</a>. <a href="#22a">Return to article</a>

<a name="23">23</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… WL 1006568 (N.D. Ill. 2000)</a>. <a href="#23a">Return to article</a>

<a name="24">24</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 836</a>. <a href="#24a">Return to article</a>

<a name="25">25</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… WL 921731</a> (N.D. Ill.). <a href="#25a">Return to article</a>

<a name="26">26</a> Count II of the complaint sought damages under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… USC §524</a>. 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. <a href="#26a">Return to article</a>

<a name="27">27</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… vs. Wells Fargo Bank N.A., 255 B.R. 38 (E.D. Cal. 2000) affd., 276 F.3d 502 (9th Cir.
2002)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… vs. WFS Financial Inc., 2000 WL 1470655 (C.D. Cal. 2000)</a>; and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… vs. Ocwen Federal Bank,

FSB, 2000 WL 1382222 (N.D. Ill. 2001)</a>. <a href="#27a">Return to article</a>

<a name="28">28</a> 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). <a href="#28a">Return to article</a>

<a name="29">29</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#29a">Return to article</a>

<a name="30">30</a> See, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… vs. Primus Auto. Fin. Servs., 247 B.R. 804 (C.D. Cal. 2000)</a>, 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. <a href="#30a">Return to article</a>

<a name="31">31</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… vs. Wells Fargo Bank N.A., 276 F.3d 502 (9th Cir. 2002)</a>. <a href="#31a">Return to article</a>

<a name="32">32</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 510</a>, 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, supra.</a> <a href="#32a">Return to article</a>

Journal Authors

Alane A. Becket

Journal Date

Friday, March 1, 2002 - 12:00

Bankruptcy Rule

2002