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Third Circuit Holds that Debt Collectors Must Generally Comply with the Bankruptcy Code and the Fair Debt Collection Practices Act

 In Simon v. FIA Card Services, N.A., the U.S. Court of Appeals for the Third Circuit recently ruled that a debtor in a bankruptcy proceeding is not unconditionally precluded from bringing claims under the Fair Debt Collection Practices Act (the “FDCPA”) [an enhanced version of this opinion is available to subscribers]. The FDCPA, enacted to eliminate abusive debt collection practices by debt collectors, establishes guidelines for debt collecting, clarifies creditor rights when dealing with debt collectors, and establishes penalties for debt collectors that fail to comply with the provisions of the FDCPA. When claims under the FDCPA are asserted by a debtor in a bankruptcy proceeding, they are often challenged by the debt collector on the basis that the Bankruptcy Code governs such matters and precludes application of the FDCPA. Although some courts have accepted this argument, the Third Circuit in Simon sided with courts that have found otherwise. In particular, the Third Circuit adopted the Seventh Circuit standard, which provides that courts should examine whether the FDCPA claim raises a direct conflict with the Bankruptcy Code, or whether it is possible to enforce both the Bankruptcy Code and the FDCPA at the same time. Applying this standard, the Third Circuit found that one of the debtors’ FDCPA claims gave rise to a direct conflict, while another did not.

Factual Background

On December 30, 2010, Robert and Stacey Simon filed a voluntary petition under chapter 7 of the Bankruptcy Code. Shortly thereafter, on January 28, 2011, a law firm representing FIA Card Services sent a letter to the Simons’ bankruptcy attorneys, stating that FIA was considering filing an adversary proceeding to challenge the Simons’ proposed discharge of credit card debt owed to FIA. The letter also stated that FIA would forgo the adversary proceeding if the Simons either stipulated that the credit card debt was not dischargeable, or agreed to pay FIA a reduced amount to settle the debt.[5]  Finally, the letter stated that FIA was scheduling a Bankruptcy Rule 2004 examination to collect information for filing the adversary proceeding. A Rule 2004 subpoena was attached to the letter.

The Simons filed motions in the bankruptcy court to quash the Rule 2004 subpoena for failure to comply with the subpoena requirements of Bankruptcy Rule 9016 and Federal Rule of Civil Procedure 45. The Simons also filed an adversary proceeding against FIA and its law firm, asserting FDCPA claims. The bankruptcy court quashed the Rule 2004 subpoena, but ruled that it did not have subject matter jurisdiction over the FDCPA claims and dismissed those claims without prejudice.

The Simons then sued FIA and its law firm in the U.S. District Court for the District of New Jersey, alleging that the January 2011 letter and the Rule 2004 subpoena violated the FDCPA’s prohibition on false, deceptive and misleading debt collection practices. FIA and its law firm moved to dismiss the complaint on the grounds that, among other things, the allegations on which the FDCPA claims were based are governed exclusively by the Bankruptcy Code. The district court agreed and dismissed the claims with prejudice, reasoning that the Simons’ FDCPA claims were precluded by the Bankruptcy Code. The Simons timely appealed the district court’s decision.

The Third Circuit’s Decision

On the issue of whether the Bankruptcy Code precludes application of the FDCPA, the Third Circuit reviewed the “varying, and sometimes inconsistent conclusions” among appellate and trial courts that have considered the issue. After a lengthy analysis, the Third Circuit adopted the Seventh Circuit’s approach, which examines whether the FDCPA claim raises a direct conflict with the Bankruptcy Code, or whether both the Bankruptcy Code and the FDCPA can be enforced against the debt collector. The Third Circuit found this approach to be consistent with the Supreme Court’s pronouncement that co-existing federal statutes should be regarded as effective unless there is a clear Congressional intention to the contrary.

The Third Circuit then applied this standard to the Simons’ FDCPA claims. The first claim alleged that the defendants violated sections 1692e(5) and (13) of the FDCPA by failing to serve the Rule 2004 subpoena directly on the Simons and by failing to include the text of Civil Rule 45. FIA argued, in opposition, that because the bankruptcy court had previously quashed the subpoena on the separate grounds of not complying with the subpoena requirements of Bankruptcy Rule 9016 and Civil Rule 45, the Simons were precluded from exercising additional remedies under the FDCPA. The Third Circuit disagreed, finding that there was no conflict between the FDCPA prohibitions and the Bankruptcy Code subpoena requirements. Because both rules could be satisfied, the Third Circuit found that the Bankruptcy Code did not preempt the FDCPA with regard to this claim, and reversed the district court’s dismissal of the claim.

The Simons’ second claim alleged that the defendants failed to include in the January 2011 letter the “mini-Miranda” disclosure required by section 1692e(11) of the FDCPA, which requires a debt collector to disclose in the initial communication with the consumer that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose. The Third Circuit found that the inclusion of such a statement would violate the automatic stay provisions of the Bankruptcy Code, which, among other things, prohibit any act to collect a claim against a debtor. Due to the conflict between the FDCPA requirements and the automatic stay of the Bankruptcy Code, the Third Circuit affirmed the district court’s dismissal of the section 1692e(11) claim.


This decision clarifies that in the Third Circuit the Bankruptcy Code only preempts the FDCPA when there is a direct conflict between the statutes. Where no direct conflict exists, debtors in bankruptcy cases will be able to utilize the protections of both the Bankruptcy Code and the FDCPA when dealing with debt collectors. Accordingly, debt collectors are on notice that they must carefully navigate two legal regimes when attempting to negotiate with or collect against bankrupt debtors. [footnotes omitted-access the original article here]

This memorandum has been prepared by Cadwalader, Wickersham & Taft LLP (Cadwalader) for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact a member of the Firm or legal counsel licensed in their jurisdiction. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Cadwalader without first communicating directly with a member of the Firm about establishing an attorney-client relationship. ©2013 Cadwalader, Wickersham & Taft LLP. All rights reserved.

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