Can The RFDCPA Apply To Proof Of Claims?

21 Sep Can The RFDCPA Apply To Proof Of Claims?

This week our firm had oral arguments in an appeal of first impression in the Ninth Circuit Bankruptcy Appellate Panel.  The appeal concerns whether other federal laws may be used in the bankruptcy claims process, or whether the Bankruptcy Code offers the sole remedy.  In a few months, a decision should be out.


In the appeal of In re McCarther-Morgan, a creditor(Asset Acceptance) filed a proof of claim for the wrong debtor.  An objection to the claim was filed and Asset withdrew the claim.  An adversary proceeding was then commenced against Asset for violating the Fair Debt Collection Practices Act (FDCPA) and the case was dismissed by the Bankruptcy Court, relying upon the two 9th circuit cases of Walls v Wells Fargo, 276 F.3d 502, and MSR Exploration,74 F.3d at 914, of which held Bankruptcy is the only applicable law.  However, Walls v Wells Fargo dealt with discharge violations, not proof of claims.  Likewise, MSR Exploration did not deal with two federal laws, but rather state law versus federal law.  As such, there is no Ninth Circuit binding authority on the matter at this time.


One of the most interesting facts of this present appeal is that the Ninth Circuits flawed analysis in Walls v Wells Fargo is at the heart of the appeal and now exposed.  To make a long story short, MSR was a case that dealt with preemption(Federal Laws are Supreme over State laws in certain instances). MSR holds that in the proof of claims process, Bankruptcy Law preempts state law.  A malicious prosecution action can not arise from the filing of a proof of claim, since “Bankruptcy occupies the field.”  



The Ninth Circuit flaw arises when Walls seized upon this identical language and held that the FDCPA action can not stand since Bankruptcy occupies the field.  Specifically, the Court stated:


 “[A] mere browse through the complex, detailed, and comprehensive provisions of the lengthy Bankruptcy Code … demonstrates Congress’s intent to 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.” MSR Exploration, 74 F.3d at 914 (state law malicious prosecution claim based on bankruptcy filings preempted). Nothing in either Act persuades us that Congress intended to allow debtors to bypass the Code’s remedial scheme when it enacted the FDCPA. While the FDCPA’s purpose is to avoid bankruptcy, if bankruptcy nevertheless occurs, the debtor’s protection and remedy remain under the Bankruptcy Code. See Kokoszka v Belford, 417 U.S. 642.  Because Walls’s remedy for violation of 524 no matter how cast lies in the Bankruptcy Code, her simultaneous FDCPA claim is precluded. 



The flaw with this argument, however, is that the Walls Court focused on preclusion and analyzed the two statutes under preemption, which is an impossibility since one federal statute can not preempt another federal statute.  Instead, the inquiry is whether one federal statute “repeals” the other. Repeal can be explicit or implicit.  PRECLUSION/PREEMPTION and REPEAL are two entirely separate legal animals.  While they are easily confused, they are in fact two separate legal principals.  


The 7th circuit case of Randolph v. IMBS, Inc., 368 F.3d 726 recocgnized this and got it right by holding that the FDCPA is not repealed by Bankruptcy Law.  That court held that the two statutes can coexist as follows:


One federal statute does not preempt another.   See Baker v. IBP, Inc. 357 F.3d 685, 688 (7th Cir. 2004). When two federal statutes address the same subject in different ways, the right question is whether one implicitly repeals the other — and repeal by implication is a rare bird indeed.  It takes either irreconcilable conflict between the statutes or a clearly expressed legislative decision that one replace the other. Preemption is more readily inferred, so decisions such as Cox v. Zale — which held that bankruptcy principles come from federal rather than state law — are not informative about which federal laws apply to what transactions. The district court did not find any clearly expressed decision that the Bankruptcy Code displaces the FDCPA, and the debt collectors do not contend that Congress made such a decision. The argument, rather, is one based on the operational differences between the statutes. These do not, however, add up to irreconcilable conflict; instead the two statutes overlap, and if the plaintiff shows a more serious transgression — the willful violation to which 362(h) refers — then more substantial sanctions (such as punitive damages) are available. 


The Bankruptcy Code of 1986 does not work an implied repeal of the FDCPA, any more than the latter Act implicitly repeals itself……..To say that only the Code applies is to eliminate all control of negligent falsehoods. Permitting remedies for negligent falsehoods would not contradict any portion of the Bankruptcy Code, which therefore cannot be deemed to have repealed or curtailed 1692e(2)(A) by implication. To the extent that Walls holds otherwise, we do not follow it; instead we reaffirm the approach of Turner and Hyman.



Accordingly, since the Ninth Circuit improperly used the legal analysis of “preemption” instead of “repeal,” the decision at its roots is based upon bad law.  Thus this may be the first step in finally getting the Walls v Wells Fargo case reviewed, at least in the Bankruptcy Claims process.  Who knows, depending where this case goes, Walls v Wells Fargo might some day be overturned by the Supreme Court since the 7th Circuit Randolph Case holds completely the opposite the 9th Circuit Walls Case.


Written by Michael G. Doan

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