A three-judge panel for the U.S. Court of Appeals for the Fourth Circuit recently held that state law claims for a creditor’s alleged improper collection efforts on a debt that has been discharged in bankruptcy are not preempted by the federal Bankruptcy Code.
The borrower alleged that a mortgage company improperly attempted to collect on his mortgage loan years after the debt was discharged in bankruptcy and improperly reported the debt as delinquent to credit agencies. The borrower brought state law claims, including one under North Carolina’s Debt Collection Act and two emotional distress claims, as well as federal claims under the Fair Credit Reporting Act (FCRA) and the Telephone Consumer Protection Act (TCPA).
The district court granted summary judgment for the mortgage company, holding that the federal Bankruptcy Code preempts the borrower’s state law claims, which require proof that the mortgage company violated the discharge injunction and thus depend on the Bankruptcy Code, meaning that the borrower must pursue a remedy under the Bankruptcy Code in bankruptcy court. The district court further held that, regardless of the preemption issue, the mortgage company’s attempts to contact the borrower to reach his ex-wife did not amount to attempts to collect a debt from the plaintiff himself because the plaintiff and his ex-wife, who had not filed for bankruptcy, were both named on the deed of the mortgaged property.
On appeal, the Fourth Circuit panel overturned the district court’s grant of summary judgment as to all but the TCPA claim. First, the panel found that the borrower’s state law claims were not preempted by the Bankruptcy Code, reasoning that the state law is consistent with Congress’s objectives in passing the Bankruptcy Code. The panel also found that there is a genuine dispute of material fact as to the borrower’s state law and FCRA claims. For the borrower’s state law claims, the panel pointed to transcripts of phone calls suggesting the mortgage company tried to collect the full amount of the debt from the borrower. And for the FCRA claim, the panel noted that the mortgage company allegedly failed to correct errors in the borrower’s credit report, such as reporting the status of his debt as “delinquent” for more than two years after his bankruptcy case was closed.
One judge on the panel dissented on the issue of preemption, arguing that Congress intended for the Bankruptcy Code to preempt state law claims premised on a violation of an automatic stay or discharge injunction issued by a bankruptcy court. The dissent noted that the Bankruptcy Code already contains a remedy for an improper attempt to collect a discharged debt like that alleged by the borrower in this case – a contempt proceeding before the bankruptcy court that discharged the debt.