Post-Confirmation FDCPA Claims Barred

Chapter 13 debtors who made payments under their approved plans to a lender who filed proofs of claims but who did not have a Maryland debt collection license cannot sue the lender for violating Maryland state laws and the federal Fair Debt Collection Practices Act; the 4^th Circuit affirms dismissal of debtors’ claims on res judicata grounds.

We have held that a prior bankruptcy judgment has res judicata effect on future litigation when three conditions are met: 1) the prior judgment was final and on the merits, and rendered by a court of competent jurisdiction; 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. All three requirements are met here.

Confirmation of the bankruptcy plan is a final judgment on the merits. The second requirement is also satisfied because both plaintiffs and defendants in this action were parties to the earlier Chapter 13 plan confirmation proceedings. Defendants were also parties to these proceedings because of their financial interest in the amount allotted to satisfy unsecured claims. The third condition requires that plaintiffs’ claims be based upon the same cause of action involved in the plan confirmation proceedings.

It is clear that plaintiffs’ current claims are based upon the same cause of action as defendants’ claims in the confirmed bankruptcy plans. To prove his unjust enrichment claim, plaintiff would have to show that defendants had accepted and retained a benefit under the inequitable circumstances, because the claim on which he had paid defendants was procedurally invalid. Similarly, to establish their claims for reimbursement and injunctive relief, the plaintiffs would have to show that they made payments on claims that are invalid because they were illegally filed. Finally, to succeed on their statutory claims for damages, plaintiffs would need to show that these statutes prohibited defendants from filing the proofs of claim. A finding for plaintiffs on any of these claims, therefore, would entail a holding that defendants’ proofs of claim are invalid, which would directly contradict the bankruptcy court’s plan confirmation order approving those proofs of claim as legitimate.

Here, because all of 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 plaintiffs’ claims are barred by res judicata.

Res judicata bars not only those claims that were actually raised during prior litigation, but also those claims that could have been raised, and plaintiffs in this case did indeed have the opportunity to raise their statutory claims for relief under the pertinent statutes during the bankruptcy proceedings.

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.

In deciding plaintiffs’ 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 (4^th Cir. 1995).  The court’s reading of Cen-Pen is too broad. 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. The Cen-Pen exception simply does not apply in this case. Plaintiffs’ statutory claims are subject to the normal principles of res judicata, and are thus precluded by the confirmation of the Chapter 13 plans.

Judgment affirmed.

Covert v. LVNV Funding LLC (Shedd) No. 14-1016, March 3, 2015; USDC at Greenbelt, Md. (Chasanow) Laura J. Margulies for appellants; Ronald S. Canter for appellees. VLW 015-2-029, 16 pp.