Third Circuit Holds FDPCA Can Apply in Bankruptcy Proceedings


The United States Circuit Court for the Third Circuit upheld a lower court’s decision that the Bankruptcy Code precluded a borrowers’ claims under the Fair Debt Collection Practices Act.   After filing for bankruptcy, defendants, attorneys for a debt collector, sent a letter to the borrowers’ attorney advising that the debt collector was considering challenging the dischargeability of the credit card debt. Among other things, the letter stated that the debt collector preferred to negotiate a stipulation of non-dischargeability or settle the debt for a reduced amount. In return, plaintiffs filed a complaint alleging defendants violated the FDCPA by, among other things, failing to include the “mini-Miranda warning” informing plaintiffs that the letter was “attempting to collect a debt and that any information obtained will be used for that purpose.” Defendant filed a motion to dismiss arguing that plaintiff’s allegations from which the FDCPA claims arose were governed exclusively by the Bankruptcy Code. The lower court agreed and dismissed plaintiffs’ complaint holding that the FDCPA claims were precluded by the Bankruptcy Code. Plaintiffs’ appealed.

At the outset, the Third Circuit rejected the argument that because there was no express demand for payment, defendants were not “debt collectors,” that their activity was not “debt collection,” and that the letter was not a “communication” under the FDCPA. The Third Circuit held that the FDCPA was not construed “so narrowly,” and that the absence of an explicit payment demand does not take the communication outside of the FDCPA. In addressing whether the Bankruptcy Code precludes relief under the FDCPA related to communications concerning a bankruptcy proceeding, the Third Circuit noted a split among circuits and district courts on the issue. Courts finding preclusion of FDCPA claims cite the Bankruptcy Code’s broad and comprehensive scope as evidence that Congress did not intend for alternate statutory remedies to be available concerning bankruptcy-related communications. The Third Circuit adopted the approach of the Seventh Circuit in Randolph v. IMBS, Inc., 368 F.3d 726, and rejected preclusion. The Third Circuit ruled that preclusion is not warranted when “[i]t is easy to enforce both statutes, and any debt collector can comply with both simultaneously.” Considering whether the alleged failure to include the “mini-Miranda warning” informing plaintiffs that the letter was attempting to collect a debt, the Third Circuit concluded that this claim was precluded by the Bankruptcy Code, because such a communication would have violated the Bankruptcy code’s automatic stay provision.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Topics:  Consumer Bankruptcy, Dischargeable Debts, FDCPA

Published In: Bankruptcy Updates, General Business Updates, Consumer Protection Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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