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Tensions Continue to Mount Between the Bankruptcy Code and the FDCPA

February 9, 2016 | by Caren D. Enloe

The issue of whether the Bankruptcy Code precludes claims under the FDCPA took another twist in a recent opinion issued by the Second Circuit. In a pro-consumer opinion, the Second Circuit changed direction by reversing the Southern District of New York’s dismissal of FDCPA claims which arose in part as a result of violations of the discharge injunction.  See Garfield v. Ocwen Loan Servicing, LLC, 2016 U.S. App. LEXIS 3 (2ND Cir. Jan. 4, 2016). In Garfield, the consumer brought suit in the district court seeking damages for violations of the FDCPA, contending the loan servicer was attempting to collect on a discharged obligation. The district court dismissed the claims holding that the Bankruptcy Code precluded all claims under the FDCPA for conduct that violates the discharge injunction. The Second Circuit reversed, holding that none of the debtor’s FDCPA claims conflicted with the discharge injunction provisions of the Bankruptcy Code, and, therefore, the claims were not precluded and should proceed forward.

The Court’s decision further complicates a split in authority among the circuits. Prior to the Second Circuit’s decision in Garfield, four circuits (including the Second Circuit) had addressed to some degree the issue of whether the Bankruptcy Code to any extent precludes claims under the FDCPA. In 2002, the Ninth Circuit held that the Bankruptcy Code precluded the debtor’s FDCPA claims. Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 511 (9th Cir. 2002). In that case, as in Garfield, the debtor sought to enforce a violation of the discharge injunction through the FDCPA. There, the Court noted that:

[t]he 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. This would circumvent the remedial scheme of the Code under which Congress struck a balance between the interests of debtors and creditors by permitting (and limiting) debtors’ remedies for violating the discharge injunction to contempt.

In 2010, the Second Circuit seemingly agreed with the Ninth Circuit, holding that the FDCPA does not authorize suit during the pendency of bankruptcy proceedings.  Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2nd Cir. 2010). The court’s rationale for so holding was that “[t]he FDCPA is designed to protect defenseless debtors” and “there is no need to protect debtors who are already under the protection of the bankruptcy court.” Id. at 96.

Two circuits have reached the opposite conclusion. Both the Seventh and Third Circuits have concluded that the operational differences between the provisions of the FDCPA and Bankruptcy Code do not create irreconcilable differences and that a debt collector can comply with the provisions of both simultaneously. See Randolph v., IMBS, Inc., 368 F.3d 726 (7th Cir. 2004); Simons v. FIA Card Services, N.A., 732 F.3d 259 (3rd Cir. 2013). Notably, in each of those cases, the alleged FDCPA violations occurred during the pendency of the bankruptcy.

In seeking to distinguish its holding from its prior precedent, the Garfield court focused on the fact that this case involved a post discharge violation while the violation in Simmons involved a predischarge violation. The court rationalized its decision on the premise that a debtor has no protection from the bankruptcy court after discharge. In doing so, the court ignored the fact that the debtor is provided an express remedy under section 524 of the Bankruptcy Code and, as was so aptly noted by the Wall Court, allowing the debtor to premise FDCPA claims upon a violation of the discharge injunction essentially creates an end run around the express remedy provided by the Bankruptcy Code.  The Garfield court’s decision will likely invite copycat actions as FDCPA claims to provide more favorable remedies than those found under the Bankruptcy Code, particularly where there are violations of the automatic stay and discharge injunctions.

Caren Enloe leads Smith Debnam’ s consumer financial services litigation and compliance group. In her practice, she defends consumer financial service providers and members of the collection industry in state and federal court, as well as in regulatory matters involving a variety of consumer protection laws.  Caren also advises fintech companies, law firms, and collection agencies regarding an array of consumer finance issues. An active writer and speaker, Caren currently serves as chair of the Debt Collection Practices and Bankruptcy subcommittee for the American Bar Association’s Consumer Financial Services Committee. She is also a member of the Defense Bar for the National Creditors Bar Association, the North Carolina State Chair for ACA International’s Member Attorney Program and a member of the Bank Counsel Committee of the North Carolina Bankers Association. Most recently, she was elected to the Governing Committee for the Conference on Consumer Finance Law. In 2018, Caren was named one of the “20 Most Powerful Women in Collections” by Collection Advisor, a national trade publication. Caren oversees a blog titled: Consumer Financial Services Litigation and Compliance dedicated to consumer financial services and has been published in a number of publications including the Journal of Taxation and Regulation of Financial Institutions, California State Bar Business Law News, Banking and Financial Services Policy Report and Carolina Banker.  ...LEARN MORE

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