Bankruptcy Court Holds Filing a Bankruptcy Proof of Claim is “Debt Collection”
A 2020 bankruptcy court decision has created cause for concern among lenders and debt collectors pursuing debtors in bankruptcy court and represents a departure from existing jurisprudence. A Southern District of Texas bankruptcy court held that filing a proof of claim constitutes an effort to collect a debt that can potentially violate the Fair Debt Collection Practices Act (“FDCPA”). See In Re: Trevino, 615 B.R. 108 (Bankr. S.D. Texas 2020); see also 15 U.S.C. §§ 1692e, 1692f and 1692k. While most courts have held that the FDCPA does not apply to proofs of claim, the Trevino ruling potentially opens the door for expensive FDCPA litigation across the country.
In Trevino, HSBC Mortgage Services, Inc. held the debtors’ mortgage; Caliber Home Loans serviced the debt. In their confirmed plan, the debtors failed to account for their ad valorem tax debt. In 2011, the trustee noticed the court that she intended to pay certain claims, which included the ad valorem taxes, despite the plan’s lack of a provision for the tax debt. HSBC also paid the 2010 tax debt, but the taxing authorities refunded HSBC’s payment. HSBC again paid the debtors’ ad valorem taxes in 2012, but that payment was refunded as well. Despite the refunds, HSBC claimed the full amount of these payments under the plan in 2013 in its Notice of Post-Petition Mortgage Fee, Expenses, and Charges (“3002.1 Notice”). Upon reviewing HSBC’s 3002.1 Notice, the trustee filed a motion to dismiss the chapter 13 case because, in omitting the ad valorem debt, the debtors had failed to propose a feasible plan. The debtors amended their plan and filed an adversary proceeding against HSBC and Caliber claiming, in part, that the 3002.1 Notice violated the FDCPA.
Ultimately, the bankruptcy court held that the 3002.1 Notice contained false statements related to the ad valorem taxes and that it also constituted an effort to collect a debt under the FDCPA. In so holding, the Trevino court explicitly rejected the holdings and reasoning of at least six other courts, including:
- The debtor and the bankruptcy estate are separate, so proofs of claim are “requests to participate in the distribution of the bankruptcy estate”—not an effort to collect from the debtor;
- If filing proofs of claim is deemed debt collection, then the FDCPA and the Bankruptcy Code are in conflict since proof of claim filings would violate the automatic stay; and/or
- Permitting FDCPA claims premised on a proof of claim could discourage and disincentivize the filing of proofs of claim.
The Trevino court noted the difference between the debtor and the bankruptcy estate but gave no effect to that difference. On the automatic stay issue, the Trevino court asserted that deeming the filing of a proof of claim as “debt collection” and giving effect to the automatic stay may “harmoniously coexist” because “it is well established that the automatic stay does not prohibit actions taken in the bankruptcy case itself.” The court noted that the automatic stay applies to actions taken before the filing of the bankruptcy, not actions taken post-filing. The Trevino court did not address the public policy concerns that lenders and debt collectors would be disincentivized to file proofs of claim if FDCPA litigation were allowed based on those filings.
As a practical matter, bankruptcy courts have other legal mechanisms to punish filers of proofs of claims that contain false information, including claims for abuse of process, which the Trevino court used to sanction HSCB and Caliber. While the Trevino decision could be an anomaly, it could also signal a shift in the law that has the potential to generate significant FDCPA litigation in bankruptcy proceedings and put mortgage lenders and other creditors at risk. In any case, lenders, creditors and debt collectors must exercise a high degree of caution to ensure accuracy when filing proofs of claim.