DEBTOR CANNOT PURSUE STATE AND FEDERAL CLAIMS AGAINST CREDITOR FOR FILING IMPROPER PROOFS OF CLAIM IN BANKRUPTCY CASE
The United States Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) held that a bankruptcy court erred when it did not dismiss a debtor’s state and federal claims against a creditor for filing improper proofs of claim in the debtor’s bankruptcy case. In re Chaussee, 399 B.R. 225 (B.A.P. 9th Cir. 2008).
The debtor had filed a chapter 13 petition and repayment plan to which the creditor filed two unsecured proofs of claim. In response, the debtor filed an adversary complaint against the creditor alleging that it violated both the Washington Consumer Protection Act (“CPA”) and the federal Fair Debt Collection Practices Act (“FDCPA”) because the debtor did not owe the debts underlying the claims, or alternatively, the debts were barred by the statute of limitations. The debtor also objected to the claims pursuant to Section 502 of the Bankruptcy Code. Because the creditor did not respond to the objection, the bankruptcy court sustained the objection and dismissed the creditor’s claims.
The creditor filed a motion to dismiss the debtor’s complaint, arguing that (i) the neither the CPA nor the FDCPA apply to proofs of claim in a bankruptcy case, (ii) the CPA was preempted by the Code’s claim process and (iii) the debtor’s exclusive remedy for disputing the proofs of claim was to object to them in the bankruptcy case. The bankruptcy court held that the Code neither preempted the debtor’s CPA claim, nor precluded the debtor’s FDCPA claim, and thus denied the creditor’s motion.
The BAP, however, disagreed with the bankruptcy court and held that the debtor’s state law CPA claim was in fact preempted by the Code, and thus should have been dismissed. According to the BAP, the Code and the Federal Rules of Bankruptcy Procedure provide the exclusive remedies for a debtor against a creditor who has engaged in wrongful conduct in a bankruptcy case. In addition, allowing debtors to recover under such circumstances could (i) skew the incentive structure of the Code and its remedial scheme and discourage creditors from filing claims and (ii) encourage debtors to dispense with the claim objection process in favor of an adversary proceeding that could result in costly litigation. Furthermore, allowing debtors to pursue state law claims could divest bankruptcy courts of the control that is needed over the remedies for improper filings and undercut the Code’s uniform application.
The BAP also held that the debtor’s FDCPA claim was precluded by the Code, and thus also should have been dismissed. According to the BAP, the Code represents a whole system designed to comprehensively define all rights and remedies of debtors and creditors and to permit a simultaneous claim under the FDCPA would circumvent this remedial scheme.