Knowing When to Walk Away
A couple of weeks ago, Bankruptcy Judge Wise wrote an opinion holding that the Fair Debt Collection Practices Act was inapplicable to representations made in bankruptcy proofs of claim. In Mallard v. Wynn-Singer, the claimant filed a proof of claim and included a host of unredacted medical billing documents containing highly-sensitive information about the debtor's health.
The debtor filed an adversary proceeding against the claimant asserting seven causes of action: (1) a proof of claim objection; (2); contempt of court for violation of court policies; (3) contempt of court for violation of FRBP 9037; (4) a state law tort claim for violation of privacy; (5) violation of the FDCPA; (6) violation of the KY Consumer Protection Act; and (7) disclosure of a specific medical diagnosis in violation of a Kentucky statute.
Judge Wise partially granted summary judgment, but allowed Counts 6-7 to go to trial. The claimant withdrew its proof of claim, and Judge Wise granted summary judgment on the contempt claims, holding that no private right of action for violating the redaction rules existed. Judge Wise also granted summary judgment on the violation of privacy claim, holding that there was insufficient evidence of "publicity," as required by Kentucky law.
For Kentucky bankruptcy lawyers, the most important takeaway is Judge Wise's grant of summary judgment on the FDCPA claim. In reaching that conclusion, Judge Wise held that, as a matter of law, the FDCPA does not apply to representations made in a proof of claim. This is the majority rule, but it had not been addressed by the Sixth Circuit, and was somewhat in doubt after the Sixth Circuit's ruling in Glazer v. Chase Home Finance. In Glazer, the Sixth Circuit held that the FDCPA did apply to representations made by a creditor in judicial foreclosure pleadings. According to Judge Wise, this "implicitly rejected arguments that either the mere supervision of a court or the availability of non-FDCPA remedies in the litigation context obviate the need for protections of the FDCPA."
Judge Wise refused to extend that logic to the proof of claim context. She noted:
The Sixth Circuit's broad interpretation of the FDCPA's applicability should not extend to the mere filing of a proof of claim. In the Sixth Circuit, 'for a communication to be in connection with the collection of a debt, an animating purpose of the communication must be to induce payment by the debtor.' [citation omitted] Filing a proof of claim is not a demand for payment from a debtor. At most, it is a request to participate in the claims allowance process of the debtor's estate.
Claimants should obviously strive to avoid disclosures in proofs of claim that would violate court policies or FRCP 9037, and indeed, at least two of the claims asserted by the debtors in Mallard survived summary judgment. However, it is nice to have some clarity from the Kentucky courts on the proof of claim/FDCPA issue in light of Glazer.