Assume that a creditor files a claim in a chapter 13 case, and neither the trustee nor the debtor objects. Can the debtor later mount a lawsuit against the creditor for filing a stale claim under the federal Fair Debt Collection Practices Act, or does res judicata preclude the FDCPA claim?
District Judge J. Randall Hall of Augusta, Ga., ruled on July 13 that res judicata does not apply.
A debtor had not made a payment on a debt since 1996 when she filed a chapter 13 petition in 2014. The creditor filed a proof of claim, even though collection would be barred by the statute of limitations. Neither the debtor nor the chapter 13 trustee objected to the claim.
After the bankruptcy court confirmed the plan, the debtor initiated a class suit in state court, alleging the creditor’s routine filing of time-barred claims violates the FDCPA.
The creditor filed a motion to dismiss, which Judge Hall held in abeyance until the Eleventh Circuit decided Johnson v. Midland Funding LLC in May, creating a split of circuits by holding that the later-adopted Bankruptcy Code did not impliedly repeal the FDCPA with respect to debt collectors who file claims barred by statutes of limitations.
Naturally, Judge Hall ruled that Johnson “completely foreclosed” the lender’s contention that the Bankruptcy Code supersedes the FDCPA because the Code permits filing stale claims. He still had to deal with the creditor’s argument that the bankruptcy court’s confirmation of the plan was a final judgment on the validity of the claim, thus barring the FDCPA suit on the grounds of res judicata.
Citing another court on the same issue, Judge Hall said that an “‘FDCPA claim is an independent claim that has nothing to do with whether the underlying debt is valid.’” Where plan confirmation dealt with the validity or amount of the debt, he said the suit before him “is about whether defendants violated the FDCPA when they filed the proof of claim.”
He also said that the FDCPA claim does not arise from the same facts and “does not involve the same cause of action.”
The creditor wanted the suit referred to the bankruptcy court if its motion to dismiss were denied. Employing the concept of permissive withdrawal of the reference, Judge Hall kept the class suit, saying that litigation in district court would conserve the parties’ and judicial resources. He also said that the district court was better situated to handle the litigation because it was a class action where the plaintiff demanded a jury trial.
To read ABI’s discussion of Johnson, click here.