Circuit Court Rejects FDCPA Claim Based on Alleged Invalid Proof of Claim

Ronald Canter

A recent trend has evolved in Fair Debt Collection Practices Act (“FDCPA”) litigation where courts have allowed bankrupt debtors to file FDCPA claims based on the alleged invalidity of a proof of claim filed by a third party collector and/or debt buyer. But a precedential Circuit Court ruling Tuesday appears to limit the timing of some of those suits.

In Covert v. LVNV Funding, LLC, 2015 WL 877133 (4th Cir. March 3, 2015), the United States Court of Appeals for the Fourth Circuit ruled that the doctrine of res judicata, which bars a second lawsuit where an earlier ruling decided issues between the same parties, precludes a bankrupt debtor’s FDCPA suit challenging the validity of a proof of claim. The Court grounded its ruling on the fact that a debtor’s confirmed Chapter 13 payment plan allowing for payment of filed proofs of claim prevents further consumer litigation based on the purported invalidly of a filed proof of claim.

In Covert, five bankrupt debtors filed a class action lawsuit in the United States District Court for the District of Maryland asserting that a passive debt buyer, who outsourced all collection action, was prohibited from filing a bankruptcy proof of claim without obtaining a Maryland Collection Agency license.

The lower court dismissed the lawsuit, holding that the state law claims for unjust were barred by the doctrine of res judicata. However, the lower court refused to apply the res judicata doctrine to the statutory FDCPA and state consumer protection claims. Instead the lower court held that the filing of a proof of claim was not a “collection action” under the FDCPA or under the Maryland consumer protection laws.

On appeal, the Fourth Circuit explained that the five plaintiffs “were not free to raise statutory objections after the Court had entered its confirmation order where those objections (to the proofs of claim) were known or should have been known to them during the bankruptcy proceedings.”  Slip Op. at 11.  The Court went on to apply the res judicata doctrine to all claims, explaining that that the Plaintiffs’ lawsuit “implicitly (asked) the District Court to reconsider the provisions of the confirmed (plans) as based on the same cause of action as to plan confirmation orders.” Slip Op. at 11

(Listen to oral arguments before the 4th Circuit panel here)

This ruling sidestepped the question of whether the filing of a proof of claim is deemed a collection activity under the FDCPA, an issue which has been a subject of a swarm of recent litigation by bankrupt debtors who have sued debt collectors asserting that the filing of invalid proofs of claim, including suits alleging that the filing of a time barred proof of claim, violates the FDCPA.

Nonetheless, this decision will put the brakes on the increasing number of FDCPA lawsuits based on purported invalid proofs of claim in circumstance where the FDCPA suit is brought after a debtor’s Chapter 13 plan was confirmed by the Bankruptcy Court.

Ronald S. Canter of The Law Offices of Ronald S. Canter, LLC represented LVNV Funding, LLC in this litigation.