The Second Circuit handed down a debtor-friendly opinion on Jan. 4 accentuating an existing split of circuits and laying the foundation for the Supreme Court to decide whether the Bankruptcy Code precludes claims to any extent under the federal Fair Debt Collection Practices Act, or FDCPA.
A woman confirmed a five-year chapter 13 plan with monthly payments on her home mortgage, including payments to cure arrears. After completing her plan payments, she got a discharge in 2013 and soon thereafter defaulted on the mortgage.
The loan servicer dunned her for pre-discharge arrears and post-discharge payments she missed. The woman responded by suing for violations of the FDCPA, contending the lender was attempting to collect personal obligations on the mortgage that had been discharged.
A district judge in Rochester, N.Y., dismissed the suit, holding that the Bankruptcy Code provided the debtor’s exclusive remedy for attempting to collect a discharged debt. The district judge believed the proper procedure would have been a motion for contempt of the discharge injunction under Section 105(a).
Circuit Judge Jon O. Newman reversed and reinstated the suit in an opinion largely focusing on the concept of implied repeal.
One federal statute does not supersede another. Instead, when there is an “irreconcilable conflict” between two federal statutes, Judge Newman said the question is whether all or part of the earlier law was repealed “by implication,” a concept that is “disfavored.”
Judge Newman’s opinion was constrained by the circuit’s 2010 Simmons v. Roundup Funding decision, which barred FDCPA claims during the pendency of a bankruptcy. He interpreted Simmons to mean that the FDCPA was inapplicable to claims made during a bankruptcy case. That opinion, he said, did not mean that the FDCPA was impliedly repealed.
Judge Newman was able to reach a different result and reinstated the FDCPA suit by distinguishing the facts in Simmons, where the claim arose before discharge. The new case, argued in October, was based on actions taking place after discharge, when the debtor no longer had protection from the bankruptcy court, the circuit opinion said.
There is an extant conflict among the circuits, according to Judge Newman. In 2002, he said, the Ninth Circuit precluded FDCPA claims brought during bankruptcy. In 2004, the Seventh Circuit ruled that the statutes only “overlap” and lack any “irreconcilable conflict,” enabling debt collectors to comply with both simultaneously.
The Third Circuit similarly found no implied repeal.
Distinguishing Simmons, the Jan. 4 decision holds that the Bankruptcy Code does not “broadly repeal” the FDCPA for claims based on alleged violations of the discharge injunction.
Distinguishing the facts in Simmons rests tenuously on the notion that a debtor has no protection from the bankruptcy court after discharge. In reality, the debtor could reopen his or her case to enforce the discharge injunction and seek damages for contempt. In that respect, Judge Newman’s opinion and Simmons lay the groundwork for rehearing en banc, in which all active circuit judges could consider whether the Bankruptcy Code ever precludes claims under the FDCPA, since the Second and Seventh Circuits are not on the same page.
When debt collectors allegedly violate either the automatic stay or the discharge injunction, debtors prefer using the FDCPA because it carries more favorable remedies, including the automatic recovery of the plaintiff’s attorneys’ fees if the claim is upheld.