Filed: Mar. 03, 2015
Latest Update: Mar. 02, 2020
Summary: PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 14-1016 CHRISTOPHER M. COVERT; THOMAS E. HAWORTH; CAROL J. HAWORTH; KIFLE AYELE; DWAN L. BROWN, Plaintiffs – Appellants, v. LVNV FUNDING, LLC; RESURGENT CAPITAL SERVICES LIMITED PARTNERSHIP; SHERMAN ORIGINATOR LLC, Defendants – Appellees. Appeal from the United States District Court for the District of Maryland, at Greenbelt. Deborah K. Chasanow, Chief District Judge. (8:13-cv-00698-DKC) Argued: December 11, 2014 Decided: March
Summary: PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 14-1016 CHRISTOPHER M. COVERT; THOMAS E. HAWORTH; CAROL J. HAWORTH; KIFLE AYELE; DWAN L. BROWN, Plaintiffs – Appellants, v. LVNV FUNDING, LLC; RESURGENT CAPITAL SERVICES LIMITED PARTNERSHIP; SHERMAN ORIGINATOR LLC, Defendants – Appellees. Appeal from the United States District Court for the District of Maryland, at Greenbelt. Deborah K. Chasanow, Chief District Judge. (8:13-cv-00698-DKC) Argued: December 11, 2014 Decided: March 3..
More
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-1016
CHRISTOPHER M. COVERT; THOMAS E. HAWORTH; CAROL J. HAWORTH;
KIFLE AYELE; DWAN L. BROWN,
Plaintiffs – Appellants,
v.
LVNV FUNDING, LLC; RESURGENT CAPITAL SERVICES LIMITED
PARTNERSHIP; SHERMAN ORIGINATOR LLC,
Defendants – Appellees.
Appeal from the United States District Court for the District of
Maryland, at Greenbelt. Deborah K. Chasanow, Chief District
Judge. (8:13-cv-00698-DKC)
Argued: December 11, 2014 Decided: March 3, 2015
Before NIEMEYER, SHEDD, and KEENAN, Circuit Judges.
Affirmed by published opinion. Judge Shedd wrote the opinion,
in which Judge Niemeyer and Judge Keenan joined.
ARGUED: Laura J. Margulies, LAURA MARGULIES & ASSOCIATES, LLC,
Rockville, Maryland, for Appellants. Ronald S. Canter, LAW
OFFICES OF RONALD S. CANTER, LLC, Rockville, Maryland, for
Appellees. ON BRIEF: Lawrence P. Block, Janet M. Nesse,
STINSON LEONARD STREET LLP, Washington, D.C., for Appellants.
SHEDD, Circuit Judge:
Christopher M. Covert, Thomas E. Haworth, Carol J. Haworth,
Kifle Ayele, and Dwan L. Brown (collectively “Plaintiffs”) each
separately filed a petition for individual bankruptcy under
Chapter 13 in Maryland in 2008. LVNV Funding, LLC (“LVNV”) and
its affiliated companies (collectively “Defendants”) held an
unsecured claim against each Plaintiff and filed proofs of those
claims in each proceeding. 1 Each Chapter 13 plan was approved,
the Defendants’ claims were allowed, and each Plaintiff made
payments on these claims. In March 2013, the Plaintiffs filed
this putative class action lawsuit in the District of Maryland,
alleging that the Defendants had violated the federal Fair Debt
Collection Practices Act (FDCPA) and various Maryland laws by
filing these proofs of claim without a Maryland debt collection
license. The Defendants moved to dismiss and the court granted
the motion, finding that the state common law claims were barred
by res judicata and that the federal and state statutory claims
failed to state a claim because filing a proof of claim does not
constitute an act to collect a debt. For the reasons stated
below, we affirm the dismissal of all claims, but we do so on
res judicata grounds.
1
A proof of claim is a form filed by a creditor in a
bankruptcy proceeding that states the amount the debtor owes to
the creditor and the reason for the debt.
2
I.
In 2008, each Plaintiff filed a petition for individual
bankruptcy under Chapter 13 in the Bankruptcy Court for the
District of Maryland. LVNV had acquired a defaulted debt
against each Plaintiff from Sherman Originator, LLC, and LVNV
then filed a proof of unsecured claim based on these debts in
each bankruptcy proceeding through its servicer, Resurgent
Capital Services Limited Partnership. The bankruptcy court
confirmed a plan in each proceeding that provided for unsecured
claims to be paid in pro rata amounts. The Defendants’ claims
were allowed, and they received payments from the Chapter 13
Trustees on these claims. At all relevant times, none of the
Defendants was licensed to do business as a debt collection
agency in Maryland.
In March 2013, the Plaintiffs filed this lawsuit in the
District of Maryland, alleging that the Defendants had violated
the FDCPA by filing proofs of claim without a Maryland debt
collection license. The FDCPA defines a “debt collector” as
“any person ... who regularly collects or attempts to collect,
directly or indirectly, debts owed or due or asserted to be owed
or due another.” 15 U.S.C. § 1692a(6). Under the FDCPA, debt
collectors “may not use any false, deceptive, or misleading
representation or means in connection with the collection of any
debt,” including “[t]he threat to take any action that cannot
3
legally be taken,” 15 U.S.C. § 1692e(5). Under the Maryland
Code, it is a misdemeanor for a person to “knowingly and
willfully do business as a collection agency in the State unless
the person has a license.” Md. Code Ann., Bus. Reg. § 7-401.
The Plaintiffs allege that because the Defendants filed claims
in the bankruptcy proceedings without a license, the Defendants
were not legally entitled to collect those debts and thus took
an “action that cannot legally be taken” in violation of the
FDCPA. The Plaintiffs also asked for an injunction deeming the
Defendants’ proofs of claim invalid and instructing the
Defendants to return to the Plaintiffs all money paid pursuant
to those claims. 2
Plaintiff Covert filed several additional Maryland state
law claims. Specifically, Covert alleged unjust enrichment,
violations of the Maryland Consumer Debt Collection Act (MCDCA),
and violations of the Maryland Consumer Protection Act (MCPA).
The Defendants moved under Federal Rule of Civil Procedure
12(b)(6) to dismiss all claims for failure to state a claim upon
which relief could be granted. The district court granted the
2
The Plaintiffs also asserted a claim seeking attorneys’
fees and reasonable expenses incurred in litigating this suit.
Because a request for expenses and attorneys’ fees is not a
separate claim, but rather a request for a particular form of
relief, this request necessarily fails because the underlying
action is barred by res judicata. We therefore adopt the
reasoning of the district court dismissing this claim.
4
motion. Covert v. LVNV Funding, LLC, No. DKC 13-0698, 2013 WL
6490318 (D. Md. Dec. 9, 2013). It held that the Maryland unjust
enrichment claim was barred by res judicata, but that the FDCPA,
MCDCA, and MCPA claims could not be barred by res judicata
absent an adversary proceeding in each bankruptcy action, which
had not occurred. Nonetheless, the district court dismissed
these statutory claims on the merits because it found that
filing a proof of claim is not a “collection activity” within
the meaning of those statutes. The Plaintiffs timely appealed.
II.
We review de novo the district court’s dismissal of a
complaint for failure to state a claim under 12(b)(6). United
States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694, 700
(4th Cir. 2014). Federal law governs the res judicata effect of
earlier bankruptcy proceedings. See Grausz v. Englander,
321
F.3d 467, 472 (4th Cir. 2003) (“We look to res judicata
principles developed in our own case law to determine whether an
earlier federal judgment, including the judgment of a bankruptcy
court, bars a claim asserted in a later action.”).
“Under res judicata principles, a prior judgment between
the same parties can preclude subsequent litigation on those
matters actually and necessarily resolved in the first
adjudication.” In re Varat Enters., Inc., 81 F.3d 1310, 1314-15
5
(4th Cir. 1996). As we have applied it, the doctrine of res
judicata encompasses two concepts: claim preclusion, which bars
later litigation of all claims that were actually adjudicated or
that could have been adjudicated in an earlier action, and issue
preclusion, which bars later litigation of legal and factual
issues that were “actually and necessarily determined” in an
earlier action. Id. at 1315 (internal citation omitted).
Rather than attempting to draw a sharp distinction between these
two aspects here, we conduct our analysis under the general res
judicata framework, as has been our practice in bankruptcy
cases. We have held that a prior bankruptcy judgment has res
judicata effect on future litigation when the following three
conditions are met:
1) [T]he prior judgment was final and on the merits,
and rendered by a court of competent jurisdiction in
accordance with the requirements of due process; 2)
the parties are identical, or in privity, in the two
actions; and, 3) the claims in the second matter are
based upon the same cause of action involved in the
earlier proceeding.
Id. All three requirements are met here.
The first requirement is easily satisfied because
confirmation of a bankruptcy plan is a final judgment on the
merits. See, e.g., id. (“[T]he [bankruptcy plan] confirmation
order constitutes a final judgment on the merits with res
judicata effect.”); In re Linkous,
990 F.2d 160, 162 (4th Cir.
1993) (same). 11 U.S.C. § 1327(a) states the general rule that
6
“[t]he provisions of a confirmed plan bind the debtor and each
creditor, whether or not the claim of such creditor is provided
for by the plan, and whether or not such creditor has objected
to, has accepted, or has rejected the plan.” It is this
provision that gives plan confirmation the res judicata effect
of a final judgment. Linkous, 990 F.2d at 162; see also In re
Beard,
112 B.R. 951, 954 (Bankr. N.D. Ind. 1990) (“The
Bankruptcy Code gives confirmation a binding effect, through 11
U.S.C. § 1327.”).
The second res judicata requirement is also satisfied
because both the Plaintiffs and the Defendants in this action
were parties to the earlier Chapter 13 plan confirmation
proceedings. Self-evidently, each Plaintiff participated in the
confirmation proceedings for his own bankruptcy plan. See
Varat, 81 F.3d at 1316 n.6 (“A party for the purposes of former
adjudication includes one who participates in a ... plan
confirmation proceeding.”). Here, the Defendants were also
parties to these proceedings because of their financial interest
in the amount allotted to satisfy unsecured claims. See
Grausz,
321 F.3d at 473 (“In the bankruptcy context a party in interest
is one who has a pecuniary interest in the distribution of
assets to creditors.”). See also In re Snow,
270 B.R. 38, 40
(D. Md. 2001) (holding that both debtor and creditor were
7
parties to Chapter 13 plan confirmation for res judicata
purposes).
The third res judicata condition requires that Plaintiffs’
claims be “based upon the same cause of action involved in” the
plan confirmation proceedings. Varat, 81 F.3d at 1315.
Although we have said that “no simple test exists to determine
whether claims are based on the same cause of action for claim
preclusion purposes,”
Grausz, 321 F.3d at 473 (quoting Pittston
Co. v. United States,
199 F.3d 694, 704 (4th Cir. 1999)),
generally, “claims are part of the same cause of action when
they arise out of the same transaction or series of
transactions, or the same core of operative facts,”
id. at 473
(quoting
Varat, 81 F.3d at 1316).
Applying these principles, it is clear that the Plaintiffs’
current claims are based upon the same cause of action as the
Defendants’ claims in the confirmed bankruptcy plans. To prove
his unjust enrichment claim, Covert would have to show that the
Defendants had accepted and retained a benefit under inequitable
circumstances, see Hill v. Cross Country Settlements, LLC, 936
A.2d 343, 351 (Md. 2007), because the claim on which he had paid
the Defendants was procedurally invalid. Similarly, to
establish their claims for reimbursement and injunctive relief,
Covert and the other Plaintiffs would have to show that they
made payments on claims that are invalid because they were
8
illegally filed. Finally, to succeed on their statutory claims
for damages under the FDCPA, MCDCA, and MCPA, the Plaintiffs
would need to show that these statutes prohibited the Defendants
from filing the proofs of claim. A finding for the Plaintiffs
on any of these claims, therefore, would entail a holding that
the Defendants’ proofs of claim are invalid, which would
directly contradict the bankruptcy court’s plan confirmation
order approving those proofs of claim as legitimate.
We have held, in fact, that even claims that do not
directly contradict confirmed orders, but merely “assert rights
that are inconsistent with” those orders, are sufficient to
satisfy the third res judicata requirement. Varat, 81 F.3d at
1317. See also
Grausz, 321 F.3d at 475 (debtor’s malpractice
action was precluded by bankruptcy court’s prior order which had
allowed firm’s fees because a successful “malpractice action at
this stage could impair rights accorded the ... firm in the
final fee order”) (internal citation omitted). Our sister
circuits share this view that “once a bankruptcy plan is
confirmed, its terms are not subject to collateral attack”
through suits that raise claims inconsistent with the confirmed
plan. Adair v. Sherman,
230 F.3d 890, 894 (7th Cir. 2000)
(dismissing post-confirmation FDCPA action alleging that
creditor had inflated the amount of its claim). See also, e.g.,
In re Szostek,
886 F.2d 1405, 1413 (3d Cir. 1989) (creditor
9
could not challenge amount of claim in confirmed plan, even
though a hearing to consider a Truth in Lending Act challenge to
that claim amount had been scheduled before the plan was
confirmed). In sum, because all of the Plaintiffs’ claims
implicitly ask the district court to reconsider the provisions
of the confirmed plans, they are based on the same cause of
action as the plan confirmation orders. Accordingly, all three
requirements are satisfied and the Plaintiffs’ claims are barred
by res judicata.
III.
Res judicata bars not only those claims that were actually
raised during prior litigation, but also those claims that could
have been raised, and the Plaintiffs in this case did indeed
have the opportunity to raise their statutory claims for relief
under the FDCPA, the MCDCA, and the MCPA during the bankruptcy
proceedings. The Plaintiffs, as debtors in their own bankruptcy
proceedings, could have objected to LVNV’s proofs of claim at
the time they were filed on the basis that they violated these
consumer protection statutes. See 11 U.S.C. § 502(a)-(b)(1) (if
a party in interest objects to a proof of claim, the bankruptcy
court will hold a hearing and will determine whether the claim
is “unenforceable against the debtor ... under any ...
applicable law”); see also Sampson v. Chase Home Finance, 667 F.
10
Supp. 2d 692, 696-67 (S.D.W.V. 2009) (plaintiffs’ consumer
protection challenges to allowed claim were barred by res
judicata after plan was confirmed because the challenges could
have been raised during the bankruptcy proceedings). The
Plaintiffs could also have brought their affirmative claims for
damages during the bankruptcy process under Federal Rule of
Bankruptcy Procedure 7001(1), which provides that “a proceeding
to recover money or property” may be brought as an adversary
action. But the Plaintiffs were not free to raise statutory
objections after the court had entered its confirmation order
when those objections were known or should have been known to
them during the bankruptcy proceedings. See
Varat, 81 F.3d at
1317. See also U.S. Dept. of Air Force v. Carolina Parachute
Corp.,
907 F.2d 1469, 1473 (4th Cir. 1990) (government, as
creditor, could not bring post-confirmation statutory challenge
to plan’s assignment of government’s contract with debtor, even
though the government had already begun court proceedings to
terminate the contract);
Grausz, 321 F.3d at 474 (res judicata
barred debtor’s malpractice claim after fee order because “by
the time the bankruptcy court entered the final fee order,
[debtor] knew or should have known there was a real likelihood
that he had a malpractice claim against the firm.”).
Here, Plaintiffs do not assert that any information
necessary to make out their statutory claims was unavailable to
11
them at the time their plans were confirmed. Accordingly,
Plaintiffs should have raised these statutory claims during the
plan confirmation hearings, and their failure to do so means
that these claims are barred by res judicata. 3 See Varat, 81
F.3d at 1317 (“When all of the requirements for claim preclusion
are satisfied, the judgment in the first case acts as an
absolute bar to the subsequent action with regard to every claim
which was actually made ... and those which might have been
presented.”).
One of the core purposes of bankruptcy is to collect all of
“the debtor’s assets for equitable distribution amongst
creditors.” Kuehner v. Irving Trust Co., 299 U.S. 445, 452
3
We note that the Plaintiffs failed to raise a claim for
equitable relief under 11 U.S.C. § 502(j), which states that
“[a] claim that has been allowed ... may be reconsidered for
cause,” until oral argument in this case. We thus consider this
argument waived. See Equal Rights Center v. Niles Bolton
Assocs., 602 F.3d 597, 604 n.4 (4th Cir. 2010) (arguments not
raised in appellant’s opening brief are deemed waived). We also
note, however, that the burden of establishing cause for
reconsideration under 502(j) rests with the moving party, In re
Starlight Group, LLC,
515 B.R. 290, 293 (Bankr.E.D.Va. 2014),
and “the clearest cause for reconsideration is the discovery,
subsequent to allowance, of new relevant facts or evidence that
could not have been discovered at an earlier stage, or the
discovery of clear error in the order of allowance,” In re Gold
& Silversmiths, Inc.,
170 B.R. 538, 545 (Bankr. W.D.N.Y. 1994)
(quoting Collier on Bankruptcy 14th Ed., ¶ 57.23(3)). Here, the
Plaintiffs freely admit that no new relevant facts have come to
light since their plans were confirmed, and they allege no clear
error in the confirmation order. As a result, they would be
unable to meet their burden of establishing cause for
reconsideration under § 502(j).
12
(1937). Were we to hold that proofs of claim are subject to
post-confirmation challenge, we would risk undermining this
purpose by creating an incentive for debtors to enrich
themselves at the expense of their creditors. Debtors would be
motivated to refrain from pursuing claims for monetary damages
until after a plan has been confirmed in order to obtain
additional post-plan assets that would not be subject to
distribution in bankruptcy. The only recourse for creditors in
this situation would be to petition the court to revoke the
discharge order based on a showing of fraud under 11 U.S.C. §
727(d). In the majority of cases, however, it is unlikely that
a showing of fraud could be made, leaving the creditors without
a remedy and frustrating bankruptcy’s goal of collecting and
equitably distributing all of a debtor’s assets.
Moreover, allowing these kinds of post-confirmation
collateral attacks on a bankruptcy plan’s terms would “destroy
the finality that bankruptcy confirmation is intended to
provide.” Adair, 230 F.3d at 895. See also
Grausz, 321 F.3d at
475 (allowing debtor’s malpractice action after confirmation of
final attorneys’ fees order would “undermine a fundamental
purpose of the doctrine of res judicata: ... encouraging
reliance on adjudication”) (internal citation omitted). Thus,
allowing the kinds of post-confirmation actions that the
13
Plaintiffs bring in this case would frustrate two fundamental
aims of the bankruptcy process.
IV.
In deciding that these statutory claims were not barred by
res judicata, the district court relied on our opinion in Cen-
Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995). In Cen-Pen, we
held that a creditor may challenge a plan’s treatment of his
secured claim as unsecured even after the plan is confirmed,
because “Bankruptcy Rule 7001(2) expressly requires initiation
of an adversary proceeding to determine the validity, priority
or extent of a lien.”
Id. at 93 (emphasis in original). We
then held that “[i]f an issue must be raised through an
adversary proceeding it is not part of the confirmation process
and, unless it is actually litigated, confirmation will not have
a preclusive effect.”
Id.
Although there is no lien at issue in this case, the
district court nevertheless read Cen-Pen to create a blanket
rule that plan confirmation does not have preclusive effect as
to any issue that must have been decided through an adversary
process. Covert,
2013 WL 6490318 at *5. It then concluded that
the Plaintiffs' statutory claims for damages were claims to
“recover money or property,” and were thus not precluded because
14
Federal Rule of Bankruptcy Procedure 7001(1) requires such
claims to be raised in adversary proceedings. Id.
This reading of Cen-Pen is too broad. First, Cen-Pen dealt
with the status of secured claims following a bankruptcy
proceeding, noting “the general rule that liens pass through
bankruptcy unaffected.”
Id. at 92. We noted that this rule has
statutory support in 11 U.S.C. § 506(d)(2), which states that
liens are not voided “due only to the failure of any entity to
file a proof of such claim.”
Cen-Pen, 58 F.3d at 93. Here, by
contrast, Plaintiffs challenge the legality of the process used
to collect an unsecured claim. There is no analogous rule or
statute establishing that claims challenging the filing process
pass through bankruptcy unaffected, nor any rule that unsecured
claims pass through bankruptcy unaffected. Indeed, the opposite
is true. See 11 U.S.C. § 1327(c) (stating the general rule that
“[e]xcept as otherwise provided in the plan or in the order
confirming the plan, the property [that a confirmed plan
distributes] is free and clear of any claim or interest of any
creditor provided for by the plan.”).
Second, our reasoning in Cen-Pen was motivated by the need
to protect the rights of parties in interest who are not
directly involved in a bankruptcy proceeding. In Cen-Pen, the
party seeking post-confirmation reinstatement of its secured
lien apparently did not participate in the debtors’ bankruptcy
15
proceedings at all, and its liens were “nowhere mentioned or
otherwise acknowledged” in the debtors’ proposed plans. Cen-
Pen, 58 F.3d at 94. Under such circumstances, we found that a
creditor’s lien could not be avoided simply because a plan had
been confirmed because “[w]here [an adversary proceeding] is
required to resolve the disputed rights of third parties, the
potential defendant has the right to expect that the proper
procedures will be followed.”
Id. at 93 (internal citation
omitted). Any such concerns over the notice necessary before
altering the rights of third parties are inapplicable here,
where the Plaintiffs seeking relief from the confirmation orders
are the debtors themselves, and they clearly suffered from no
lack of notice of the claims against them.
The Cen-Pen exception simply does not apply in this case.
The Plaintiffs’ statutory claims are therefore subject to the
normal principles of res judicata, and are thus precluded by the
confirmation of the Chapter 13 plans.
V.
For the foregoing reasons, the judgment of the district
court is affirmed.
AFFIRMED
16
