The Third Circuit holds that communications with debtors during bankruptcy proceedings can expose debt collectors to liability under the FDCPA

By Stephen J. Shapiro

The Third Circuit, addressing an issue of first impression in the circuit, recently held that debtors who receive communications from debt collectors in the course of bankruptcy proceedings are not barred from pursuing claims alleging that those communications violate the Fair Debt Collections Practices Act (FDCPA).  In Simon v. FIA Card Services, N.A., the plaintiffs filed for bankruptcy and FIA, one of their unsecured creditors, hired a law firm to represent its interests in the bankruptcy proceeding.  The law firm sent a letter to the Simons’ bankruptcy counsel in which it offered to refrain from initiating a proceeding to declare the debt nondischargeable if the Simons either stipulated that the debt was nondischargeable or agreed to settle the debt by paying a discounted amount.  The letter also enclosed a notice of the law firm’s intent to question the plaintiffs pursuant to Bankruptcy Rule 2004.

The Simons sued FIA and the law firm, arguing that the letter and notice violated the FDCPA.  The district court dismissed the suit because, it held, the Bankruptcy Code precluded the Simons’ FDCPA claims and because the Simons’ allegations were not sufficient to state a claim under the FDCPA.

The Third Circuit reversed.  First, the Court rejected the law firm’s argument that the FDCPA did not apply because the firm’s communication did not demand payment of a debt.  The Court held that the “FDCPA applies to litigation-related activities that do not include an explicit demand for payment when the general purpose is to collect payment,” and that “[t]he letter and notice were an attempt to collect the Simons’ debt through the alternatives of settlement . . . or gathering information to challenge dischargeability” through a Rule 2004 examination.

Next, the Court held that some of the Simons’ allegations stated viable claims for violations of the FDCPA.  Specifically, the FDCPA prohibits debt collectors from “threat[ening] to take any action that cannot legally be taken or that is not intended to be taken” and “false[ly] represent[ing] or impl[ying] that documents are legal process.”  The Court held that the Simons adequately pled that the law firm violated these prohibitions in the FDCPA by failing to comply with provisions of the Bankruptcy Rules and Federal Rules that required the firm to: (a) personally serve the Rule 2004 notice on the Simons, and (b) include in the Rule 2004 notice text explaining the duties of and remedies available to the recipient of such a notice.  The Simons also alleged that the law firm failed to include in its letter the “mini-Miranda” warning required by the FDCPA (that “the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose”).

The Court then addressed an issue of first impression in the Third Circuit: “[W]hether, or to what extent, an FDCPA claim can arise from a debt collector’s communications to a debtor in a pending bankruptcy proceeding.”  The Court first noted that the circuits are split on this issue.  The Ninth Circuit, Ninth Circuit Bankruptcy Appellate Panel and the Second Circuit have held that communications with a debtor in the context of a bankruptcy proceeding cannot violate the FDCPA, while the Seventh Circuit has concluded that they can.  The Court agreed with the Seventh Circuit’s analysis, and held that “[w]hen FDCPA claims arise from communications a debt collector sends a bankruptcy debtor in a pending bankruptcy proceeding . . . there is no categorical preclusion of the FDCPA claims.”  Rather, the courts must consider “whether the FDCPA claim raises a direct conflict between the [Bankruptcy] Code or [Federal] Rules and the FDCPA, or whether both can be enforced.”

Applying that inquiry to the claims before it, the Court held that the Simons’ FDCPA claims based on the law firm’s failure to personally serve the Rule 2004 notice and failure to include in the notice text describing the rights and responsibilities of the recipient did not conflict with the Bankruptcy Code or the Federal Rules and, therefore, reversed the dismissal of those claims.  However, the Court affirmed the dismissal of the FDCPA claim based on the law firm’s failure to include in its letter a warning that it was attempting to collect a debt because such a warning would have violated the Bankruptcy Code’s automatic stay provision, which forbids “any act to collect, assess, or recover a claim against the debtor . . . .”

The lesson for debt collectors in the Simon case is clear.  When communicating with a debtor in a bankruptcy proceeding, debt collectors must take the same care to comply with the FDCPA as they would when communicating with debtors outside of bankruptcy proceedings.

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