In Diamante v. Solomon Solomon, P.C., No. 99-1339, 2001 WL 1217226 (N.D.N.Y. Sept. 18, 2001), a bankruptcy court determined that the defendant had violated the injunction provision of 11 U.S.C. § 524 when it froze the plaintiff's bank account.Summary of this case from Dougherty v. Wells Fargo Home Loans, Inc.
September 18, 2001
OFFICE OF RICHARD DIMAGGIO, RICHARD DIMAGGIO, ESQ., Clifton Park, New York, Attorneys for Plaintiff.
SOLOMON SOLOMON, P.C., DOUGLAS FISHER, ESQ. Albany, New York, Attorneys for Defendant.
MEMORANDUM-DECISION AND ORDER
Plaintiff filed this action against Defendant on August 24, 1999. His complaint alleges two federal causes of action and three state law causes of action. In his federal claims, Plaintiff asserts that Defendant violated the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq., and that, as a result, he is entitled to attorneys' fees pursuant to 15 U.S.C. § 1692k(a)(3). Plaintiff's state law claims sound in conversion, abuse of process and intentional infliction of emotional distress.
Presently before the Court are Defendant's objections to Bankruptcy Judge Littlefield's Report-Recommendation; Defendant's motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure; and Plaintiff's motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The Court heard oral argument in support of, and in opposition to, these motions and objections on September 22, 2000 in Albany, New York. At that time, the Court reserved decision. Subsequently, the Court granted both parties leave to file limited supplemental case law regarding the issues under consideration. The following constitutes the Court's decision with respect to the pending motions.
Plaintiff filed a Chapter 13 petition on June 9, 1994. On July 12, 1994, Plaintiff's then-attorney Mark S. Ehrlich wrote to Valerie Solomon, principal of Defendant, advising her of the bankruptcy regarding another creditor, Niagara Mohawk Power Corporation. Plaintiff's case was converted to a Chapter 7 on December 6, 1995. Plaintiff contends that his then-attorney Mr. Ehrlich notified Valerie Solomon of the Chapter 7 bankruptcy again on April 23, 1996 as it applied to Niagara Mohawk Power Corporation.
Plaintiff eventually realized that he had forgotten to list another creditor, Monogram Bank ("Monogram"). Monogram had hired Defendant to collect Plaintiff's debt. Defendant had already obtained a default judgment against Plaintiff regarding this debt in state court on February 19, 1997.
On January 16, 1998, Plaintiff filed an amended schedule which included the Monogram debt ("the debt"). Upon receipt of this amendment, Defendant's attorney wrote a letter to Plaintiff's attorney, on February 2, 1998, advising him that he considered the debt still valid pursuant to 11 U.S.C. § 523. Plaintiff contends that Defendant never filed an adversarial proceeding or sought a determination from the bankruptcy court. Rather, he only wrote the letter stating that Defendant deemed the debt still valid.
Plaintiff received a discharge in his bankruptcy proceeding on November 16, 1998. Plaintiff contends that despite receiving notice of the amendment, notice of the proceeding, and notice of the discharge, Defendant froze Plaintiff's bank account in May 1999. Plaintiff's alleged injuries arose out of the freezing of the bank account.
After Plaintiff filed his complaint in this Court, Defendant filed a motion to dismiss. On October 13, 1999, this Court heard oral argument with respect to that motion and decided that the question of whether the debt had been discharged was fundamental to its determination of Plaintiff's motion. Therefore, with the parties' consent, the Court referred the matter to Bankruptcy Judge Littlefield, requesting a determination of whether the debt had been discharged. The Court also referred all questions pertaining to the application of the Bankruptcy Code to Judge Littlefield. In light of the referral, the Court denied Defendant's motion to dismiss without prejudice.
On July 21, 2000, Judge Littlefield issued a Report-Recommendation in which he found that the debt was discharged in November 1998, that Defendant violated the injunction provision of 11 U.S.C. § 524 when it restrained Plaintiff's bank account in May 1999, and that any damages Plaintiff suffered were negated because Defendant had adequately demonstrated the prerequisites for laches. Defendant urged adoption of the Report-Recommendation, which effectively would require this Court to dismiss the present action on the basis of laches. In the alternative, Defendant filed objections to the extent that this Court did not adopt the Report-Recommendation and dismiss this action.
With this procedural background in mind, the Court will address the issues raised seriatim.
A. The Bankruptcy Code's effect on Plaintiff's state law claims
The vast majority of courts that have addressed the issue have held that the Bankruptcy Code preempts state law claims that are based upon allegations that the defendant violated the Bankruptcy Code. See, e.g., MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910 (9th Cir. 1996) (Chapter 11; finding claim for malicious prosecution preempted); Bessette v. Avco Fin. Servs., Inc., 240 B.R. 147 (D.R.I. 1999) (Chapter 7; finding claim for unjust enrichment preempted), aff'd in part, vacated in part on other grounds, 230 F.3d 439 (1st Cir. 2000). Holloway v. Household Auto. Fin. Corp., 227 B.R. 501 (N.D.Ill. 1998) (Chapter 13; finding claim under Illinois Consumer Fraud and Deceptive Practices Act preempted); Cox v. Zale Del., Inc., No. 97 C 4464, 1998 WL 397841 (N.D.Ill. July 13, 1998) (Chapter 7; finding state law claim for unjust enrichment preempted); Pereira v. First N. Am. Nat'l Bank, 223 B.R. 28 (N.D. Ga. 1998) (Chapter 7; finding state law claims for an accounting and unjust enrichment preempted); In re Shape, Inc., 135 B.R. 707 (D.Me. 1992) (finding claim under Massachusetts Consumer Protection Act preempted). But see, Wagner v. Ocwen Fed. Bank, FSB, No. 99 C 5404, 2000 WL 1382222 (N.D.Ill. Aug. 28, 2000) (finding state law claims not preempted).
In holding that the Bankruptcy Code did not preempt the plaintiff's state law claims, the court in Wagner did not address those claims in any detail. The court merely held that those claims were not preempted for the same reasons that it found that the plaintiff's FDCPA claims were not preempted. See Wagner, 2000 WL 1382222, at *3.
All of the courts that have held that the Bankruptcy Code preempts state law claims based upon violations of the Bankruptcy Code have reasoned that "the complex, detailed, and comprehensive provisions of the lengthy Bankruptcy Code . . . demonstrate Congress' 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, Ltd., 74 F.3d at 914 (footnote omitted). Therefore, those courts have concluded that because the Bankruptcy Code provides a remedial scheme for addressing violations of the Bankruptcy Code it preempts state law claims based upon such violations. See, e.g., In re Shape, Inc., 135 B.R. at 708 ("Since the [Bankruptcy Code] is applicable here, and has its own enforcement scheme and separate adjudicative framework, it must supercede any state law remedies."). The Court finds the reasoning and the conclusions of those courts persuasive.
In the present case, the sole basis for Plaintiff's state law claims is his allegation that Defendant violated § 524 of the Bankruptcy Code by attempting to collect a discharged debt. By asserting these claims, Plaintiff is, in effect, attempting to circumvent the enforcement and remedial scheme of the Bankruptcy Code, which provides a remedy for any violation of § 524 in the form of possible contempt sanctions. To permit such claims would thwart Congress' intent in promulgating the Bankruptcy Code to create a singular federal system to adjust all of the rights and duties of both creditors and debtors. Accordingly, the Court grants Defendant's motion to dismiss Plaintiff's state law claims on the grounds that the Bankruptcy Code preempts them.
B. The Bankruptcy Code's effect on Plaintiff's FDCPA claim
The courts that have addressed the issue of whether the Bankruptcy Code precludes claims brought pursuant to the FDCPA, which are based upon a defendant's violation of the Bankruptcy Code, are divided. See, e.g., Walls v. Wells Fargo Bank, N.A., 255 B.R. 38 (E.D. Cal. 2000) (finding preclusion); Kibler v. WFS Fin., Inc., No. CV-00-5217, 2000 WL 1470655 (C.D.Cal. Sept. 13, 2000) (same); Gray-Mapp v. Sherman, 100 F. Supp.2d 810 (N.D.Ill. 1999) (same); Baldwin v. McCalla, Raymer, Padrick, Cobb, Nichols Clark, L.L.C., No. 98 C 4280, 1999 WL 284788 (N.D.Ill. Aug. 26, 1999) (same). But see Peeples v. Blatt, No. 00 C 7028, 2001 WL 921731 (N.D.Ill. Aug. 15, 2001) (finding no preclusion); Molloy v. Primus Auto. Fin. Servs., 247 B.R. 804 (C.D.Cal. 2000) (same); Wagner v. Ocwen Fed. Bank, FSB, No. 99 C 5404, 2000 WL 138222 (N.D.Ill. Aug. 28, 2000) (same).
In Walls, a Chapter 7 debtor commenced a proceeding to recover damages for the creditor-defendant's alleged violations of the Bankruptcy Code's automatic stay and discharge injunction provisions. See 11 U.S.C. § 362, 524. The plaintiff's FDCPA claim was based solely upon the defendant's alleged violations of these two provisions. The court began its analysis by noting that Congress had provided remedies for violations of those provisions in the Bankruptcy Code. See 11 U.S.C. § 105(1), 362(h), 524(a)(2). Moreover, the court explained that in order to adjudicate the plaintiff's FDCPA claim, which was based upon the defendant's alleged collection of a debt in violation of §§ 362 and 524, the court would first have to decide
(1) whether the payments received from [the] plaintiff were "voluntary" under section 524(f), [(2)] whether [the] defendant was required to enter into a reaffirmation agreement with [the] plaintiff pursuant to section 524(c), and [(3)] whether the "ride through" in In re Parker, 139 F.3d 668, precluded [the] defendant from engaging in the acts [the] plaintiff contends violated sections 362 and 524.
Walls, 255 B.R. at 47.
Since those issues were completely unrelated to the FDCPA, the court concluded that "allowing [the] plaintiff to proceed with her claims under the FDCPA would risk interfering with `the complex, detailed, and comprehensive provisions of the lengthy Bankruptcy Code.'" Id. (quotation omitted). Therefore, the court held that the Bankruptcy Code precluded the plaintiff's FDCPA claim because the "remedies for violations of the Bankruptcy Code lie within the Code itself." Id.
Similarly, in Kibler, the court held that the Bankruptcy Code precluded the plaintiffs' FDCPA claim. In that case, the plaintiffs asserted that "because collection of a discharged debt is not permitted by law under Section 524 of the Bankruptcy Code, such collection practices are `unfair and unconscionable acts' under the FDCPA." Kibler, 2000 WL 1470655, at *9 (citing Compl. ¶ 37). The court held that "[t]o permit [the] plaintiffs to premise FDCPA claims upon alleged violations of Section 524 would disrupt the remedial scheme of the Bankruptcy Code." Id. Moreover, the court found that if courts permitted debtors to assert FDCPA claims based upon violations of § 524, they "would `deliberately bypass' the contempt remedy created by the Bankruptcy Code in favor of a damages recovery under the FDCPA." Id. Finally, the court concluded that "[s]uch circumvention of the Bankruptcy Code could not have been Congress' intent in enacting section 1692(f) of the FDCPA." Id.
The court in Kibler also relied upon the Supreme Court's decision in Kokoszka v. Belford, 417 U.S. 642 (1974), to further support its view that the FDCPA was not applicable in these circumstances. In Kokoszka, the Supreme Court stated that "`the Consumer Credit Protection Act [of which the FDCPA is a part] sought to prevent consumers from entering bankruptcy in the first place. However, if despite its protection, bankruptcy did occur, the debtor's protection and remedy remained under the Bankruptcy Act [the predecessor of the Bankruptcy Code].'" Id. (quoting [Kokoszka,] 417 U.S. at 650). Based upon this language, the court in Kibler reasoned that "[i]f, . . ., Congress did not intend to interfere with the bankruptcy scheme through the Consumer Credit Protection Act, it follows that [the p]laintiff cannot assert a claim for damages under the FDCPA when the Bankruptcy Code does not provide for it." Id. According to the court, "[t]o hold otherwise would defeat Congress' intent of providing only a contempt remedy for violations of Section 524." Id. (citation omitted).
The Kibler court distinguished Molloy, in which the court held that the Bankruptcy Court did not preclude an FDCPA claim on the ground that in Molloy the court had found an implied right of action for damages under § 524. See Kibler, 2000 WL 1470655, at *10. Under these circumstances, the court stated that it was "consistent with such a finding for the Molloy court to conclude that the FDCPA does not disrupt the Bankruptcy Court's remedial scheme." Id.
The court reasoned that if a plaintiff were "permitted to seek a damages remedy under section 524, an FDCPA damages remedy [would not be] inconsistent with, and [would not] circumvent, the bankruptcy process." Id. However, since the court in Kibler did not find an implied right of action under § 524, the court would "not permit [the p]laintiffs to avoid the consequences of this ruling simply by asserting a claim under the FDCPA." Id.
It should be noted that a majority of courts that have addressed the issue have held that § 524 does not provide for an implied private right of action. See, e.g., Walls, 255 B.R. at 45; Kibler, 2000 WL 1470655, at *8.
In Gray-Mapp, the court also concluded that the Bankruptcy Code precluded the plaintiff's FDCPA claim. In that case, the plaintiff, a Chapter 13 debtor, brought a post-confirmation suit against counsel for a secured creditor who had allegedly filed an inflated claim, asserting a violation of the FDCPA. The court held that an FDCPA claim could not be based on allegedly fraudulent proofs of claim that were filed during bankruptcy proceedings. The court reasoned that neither the Bankruptcy Code nor the FDCPA suggested "that a debtor should be permitted to bypass the procedural safeguards in the Code in favor of asserting potentially more lucrative claims under the FDCPA." Gray-Mapp, 100 F. Supp.2d at 814. Furthermore, the court found that there was "nothing in the FDCPA [which] suggest[ed] that it [was] intended as an overlay to the protections already in place in the bankruptcy proceedings." Id.
Likewise, in Baldwin, the plaintiff, a Chapter 13 debtor, sought to secure redress under the FDCPA for the defendant's practice of filing claims in Chapter 13 proceedings that demanded payment of interest that was not authorized by law. The court began its analysis by noting that the case raised a potential conflict between two federal statutes because the plaintiff's
complaint [sought] to produce an external challenge to alleged wrongdoing that occurred during bankruptcy proceedings, which were governed by "the complex, detailed, and comprehensive provisions of the lengthy Bankruptcy Code," which "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."
Baldwin, 1999 WL 284788, at *2 (quotation omitted).
The court also relied upon the Supreme Court's decision in Kokoszka, which it concluded "impel[led] a finding that an FDCPA claim may not be premised on proofs of claim filed as part of a bankruptcy proceeding." Id. at *4. Finally, the court found that permitting debtors to premise FDCPA actions on proofs of claim filed in bankruptcy proceedings would give rise to two definite risks: (1) "that creditors [might] be deterred from filing claims, . . ." and
[(2)] the possibility of an FDCPA claim, with its provisions permitting statutory and actual damages and attorney's fees, could prompt debtors to ignore the procedural safeguards within the Bankruptcy Code, such as the right to object to proofs of claim and to seek sanctions against creditors who violate provisions within the Bankruptcy Code, in favor of the FDCPA.
Id. at *5.
In contrast to the above cited cases, the court in Peeples concluded that the Bankruptcy Code did not preclude the plaintiff from asserting an FDCPA claim. In that case, the plaintiff alleged that the defendant had violated § 524 of the Bankruptcy Code. The court distinguished the holdings in Walls and Kibler, in part, because those cases had relied upon Baldwin and Gray-Mapp, which the court found to be distinguishable from Peeples because in those cases the plaintiffs had sought to bring an FDCPA claim on the ground that the defendants had fraudulently inflated the proofs of claim they had filed during bankruptcy proceedings. To the contrary, the court found that because the plaintiff's claim in Peeples concerned a collection action that did not occur until after the bankruptcy proceedings had closed, the FDCPA claim would not contravene the Bankruptcy Code's central purpose — "`to adjudicate and conciliate all competing claims to a debtors [sic] property in one forum and one proceeding.'" Peeples, 2001 WL 921731, at *4 (quotation omitted).
Likewise, in Molloy, the court concluded that the Bankruptcy Code did not preclude the plaintiff's FDCPA claim. In that case, a former Chapter 7 debtor brought a lawsuit to recover for the defendant's alleged violations of the Bankruptcy Code's automatic stay and discharge injunction provisions. All of the plaintiff's claims stemmed from the defendant's alleged attempts to collect debts that the plaintiff ostensibly owed on an automobile lease after the plaintiff had filed for Chapter 7 bankruptcy. The court distinguished Baldwin on the ground that that case involved allegations of misconduct during the bankruptcy proceedings themselves. See Molloy, 247 B. R. at 820. In Molloy, however, the plaintiff's FDCPA claim was premised solely upon the defendant's "alleged debt collection activities outside of and in disregard of the bankruptcy proceeding." Id. (citation omitted). Moreover, the court found that since the plaintiff had been discharged from her bankruptcy, there was "no danger that allowing her to bring a claim under the FDCPA would interfere with the administration of her bankruptcy." Id. at 820-21. Moreover, the court concluded that "[i]nasmuch as the FDCPA's purpose is to prevent bankruptcy, a debtor who has been discharged is still in need of and entitled to [FDCPA] protection." Id.
Finally, in Wagner, the court also concluded that the Bankruptcy Code did not preclude the plaintiff's FDCPA claim. In that case, the plaintiff alleged that the defendant had inappropriately asked her to repay her mortgage loan that had been discharged in bankruptcy. The court determined that it would not preclude the plaintiff from seeking an FDCPA remedy because "repeal by implication" was not favored. See Wagner, 2000 WL 1382222, at *1. The court distinguished Gray-Mapp because, unlike that case, the claim in Wagner could be "determined without doing violence to the Bankruptcy Code's purpose of adjudicating all claims in a single proceeding." Id. at *2. Moreover, the court found that the plaintiff had "not attempted to bypass any remedies provided to her under the [Bankruptcy] Code while her bankruptcy petition was pending; indeed, she could not have raised these issues there, because all of [the defendant's] activities post-dated the conclusion of her bankruptcy case." Id.
After reviewing all of the above-cited cases, the Court concludes that the reasoning of those cases holding that the Bankruptcy Code precludes claims under the FDCPA when those claims are based upon violations of the Bankruptcy Code is more persuasive. Specifically, with respect to § 524, the injunction provision, which is at issue in the present case, the Bankruptcy Code provides for a specific remedy for violations of that provision — a civil contempt proceeding. To permit Plaintiff to circumvent that provision and its remedy by bringing a claim under the FDCPA, which provides for damages and attorneys' fees, would directly contravene the Bankruptcy Code's remedial scheme. Moreover, if the Court were to decide that Plaintiff could proceed with his FDCPA claim, the Court would have to determine whether the debt which Defendant attempted to collect had been discharged. That is a question that can only be answered by reference to the Bankruptcy Code, which was, in fact, the reason that this Court referred the matter to Judge Littlefield to make a recommendation as to the status of the debt. Finally, if the reasoning of the courts finding no preclusion were followed, it would render the Bankruptcy Code's remedy for violations of § 524 superfluous because in most, if not all, cases, the plaintiff would choose the potentially more lucrative remedies found in the FDCPA. For all these reasons, the Court concludes that the Bankruptcy Code precludes Plaintiff's FDCPA claim. Accordingly, the Court grants Defendant's motion to dismiss Plaintiff's FDCPA claim.
After carefully considering the file in this matter, the parties' submissions and oral arguments, and the applicable law, and for the reasons stated herein, it is hereby
ORDERED that Defendant's motion to dismiss Plaintiff's complaint in its entirety is GRANTED; and it is further
ORDERED that Plaintiff's motion for summary judgment is DENIED as moot; and it is further
ORDERED that Defendant's objections to Judge Littlefield's Report-Recommendation are DENIED as moot and that no further consideration of that Report-Recommendation is necessary in light of this Order; and it is further
ORDERED that the Clerk of the Court is to enter judgment in favor of Defendant and close this case.
IT IS SO ORDERED.