Christopher Covert v. LVNV Funding, LLC

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 14-1016

CHRISTOPHER M. COVERT; THOMAS E. HAWORTH; CAROL J. HAWORTH;

KIFLE AYELE; DWAN L. BROWN,

Plaintiffs – Appellants,

v.

LVNV FUNDING, LLC; RESURGENT CAPITAL SERVICES LIMITED

PARTNERSHIP; SHERMAN ORIGINATOR LLC,

Defendants – Appellees.

Appeal from the United States District Court for the District of

Maryland, at Greenbelt. Deborah K. Chasanow, Chief District

Judge. (8:13-cv-00698-DKC)

Argued: December 11, 2014 Decided: March 3, 2015

Before NIEMEYER, SHEDD, and KEENAN, Circuit Judges.

Affirmed by published opinion. Judge Shedd wrote the opinion,

in which Judge Niemeyer and Judge Keenan joined.

ARGUED: Laura J. Margulies, LAURA MARGULIES & ASSOCIATES, LLC,

Rockville, Maryland, for Appellants. Ronald S. Canter, LAW

OFFICES OF RONALD S. CANTER, LLC, Rockville, Maryland, for

Appellees. ON BRIEF: Lawrence P. Block, Janet M. Nesse,

STINSON LEONARD STREET LLP, Washington, D.C., for Appellants.

SHEDD, Circuit Judge:

Christopher M. Covert, Thomas E. Haworth, Carol J. Haworth,

Kifle Ayele, and Dwan L. Brown (collectively “Plaintiffs”) each

separately filed a petition for individual bankruptcy under

Chapter 13 in Maryland in 2008. LVNV Funding, LLC (“LVNV”) and

its affiliated companies (collectively “Defendants”) held an

unsecured claim against each Plaintiff and filed proofs of those

claims in each proceeding. 1 Each Chapter 13 plan was approved,

the Defendants’ claims were allowed, and each Plaintiff made

payments on these claims. In March 2013, the Plaintiffs filed

this putative class action lawsuit in the District of Maryland,

alleging that the Defendants had violated the federal Fair Debt

Collection Practices Act (FDCPA) and various Maryland laws by

filing these proofs of claim without a Maryland debt collection

license. The Defendants moved to dismiss and the court granted

the motion, finding that the state common law claims were barred

by res judicata and that the federal and state statutory claims

failed to state a claim because filing a proof of claim does not

constitute an act to collect a debt. For the reasons stated

below, we affirm the dismissal of all claims, but we do so on

res judicata grounds.

1

A proof of claim is a form filed by a creditor in a

bankruptcy proceeding that states the amount the debtor owes to

the creditor and the reason for the debt.

2

I.

In 2008, each Plaintiff filed a petition for individual

bankruptcy under Chapter 13 in the Bankruptcy Court for the

District of Maryland. LVNV had acquired a defaulted debt

against each Plaintiff from Sherman Originator, LLC, and LVNV

then filed a proof of unsecured claim based on these debts in

each bankruptcy proceeding through its servicer, Resurgent

Capital Services Limited Partnership. The bankruptcy court

confirmed a plan in each proceeding that provided for unsecured

claims to be paid in pro rata amounts. The Defendants’ claims

were allowed, and they received payments from the Chapter 13

Trustees on these claims. At all relevant times, none of the

Defendants was licensed to do business as a debt collection

agency in Maryland.

In March 2013, the Plaintiffs filed this lawsuit in the

District of Maryland, alleging that the Defendants had violated

the FDCPA by filing proofs of claim without a Maryland debt

collection license. The FDCPA defines a “debt collector” as

“any person ... who regularly collects or attempts to collect,

directly or indirectly, debts owed or due or asserted to be owed

or due another.” 15 U.S.C. § 1692a(6). Under the FDCPA, debt

collectors “may not use any false, deceptive, or misleading

representation or means in connection with the collection of any

debt,” including “[t]he threat to take any action that cannot

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legally be taken,” 15 U.S.C. § 1692e(5). Under the Maryland

Code, it is a misdemeanor for a person to “knowingly and

willfully do business as a collection agency in the State unless

the person has a license.” Md. Code Ann., Bus. Reg. § 7-401.

The Plaintiffs allege that because the Defendants filed claims

in the bankruptcy proceedings without a license, the Defendants

were not legally entitled to collect those debts and thus took

an “action that cannot legally be taken” in violation of the

FDCPA. The Plaintiffs also asked for an injunction deeming the

Defendants’ proofs of claim invalid and instructing the

Defendants to return to the Plaintiffs all money paid pursuant

to those claims. 2

Plaintiff Covert filed several additional Maryland state

law claims. Specifically, Covert alleged unjust enrichment,

violations of the Maryland Consumer Debt Collection Act (MCDCA),

and violations of the Maryland Consumer Protection Act (MCPA).

The Defendants moved under Federal Rule of Civil Procedure

12(b)(6) to dismiss all claims for failure to state a claim upon

which relief could be granted. The district court granted the

2

The Plaintiffs also asserted a claim seeking attorneys’

fees and reasonable expenses incurred in litigating this suit.

Because a request for expenses and attorneys’ fees is not a

separate claim, but rather a request for a particular form of

relief, this request necessarily fails because the underlying

action is barred by res judicata. We therefore adopt the

reasoning of the district court dismissing this claim.

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motion. Covert v. LVNV Funding, LLC, No. DKC 13-0698, 2013 WL

6490318 (D. Md. Dec. 9, 2013). It held that the Maryland unjust

enrichment claim was barred by res judicata, but that the FDCPA,

MCDCA, and MCPA claims could not be barred by res judicata

absent an adversary proceeding in each bankruptcy action, which

had not occurred. Nonetheless, the district court dismissed

these statutory claims on the merits because it found that

filing a proof of claim is not a “collection activity” within

the meaning of those statutes. The Plaintiffs timely appealed.

II.

We review de novo the district court’s dismissal of a

complaint for failure to state a claim under 12(b)(6). United

States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694, 700

(4th Cir. 2014). Federal law governs the res judicata effect of

earlier bankruptcy proceedings. See Grausz v. Englander, 321

F.3d 467, 472 (4th Cir. 2003) (“We look to res judicata

principles developed in our own case law to determine whether an

earlier federal judgment, including the judgment of a bankruptcy

court, bars a claim asserted in a later action.”).

“Under res judicata principles, a prior judgment between

the same parties can preclude subsequent litigation on those

matters actually and necessarily resolved in the first

adjudication.” In re Varat Enters., Inc., 81 F.3d 1310, 1314-15

5

(4th Cir. 1996). As we have applied it, the doctrine of res

judicata encompasses two concepts: claim preclusion, which bars

later litigation of all claims that were actually adjudicated or

that could have been adjudicated in an earlier action, and issue

preclusion, which bars later litigation of legal and factual

issues that were “actually and necessarily determined” in an

earlier action. Id. at 1315 (internal citation omitted).

Rather than attempting to draw a sharp distinction between these

two aspects here, we conduct our analysis under the general res

judicata framework, as has been our practice in bankruptcy

cases. We have held that a prior bankruptcy judgment has res

judicata effect on future litigation when the following three

conditions are met:

1) [T]he prior judgment was final and on the merits,

and rendered by a court of competent jurisdiction in

accordance with the requirements of due process; 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.

Id. All three requirements are met here.

The first requirement is easily satisfied because

confirmation of a bankruptcy plan is a final judgment on the

merits. See, e.g., id. (“[T]he [bankruptcy plan] confirmation

order constitutes a final judgment on the merits with res

judicata effect.”); In re Linkous, 990 F.2d 160, 162 (4th Cir.

1993) (same). 11 U.S.C. § 1327(a) states the general rule that

6

“[t]he provisions of a confirmed plan bind the debtor and each

creditor, whether or not the claim of such creditor is provided

for by the plan, and whether or not such creditor has objected

to, has accepted, or has rejected the plan.” It is this

provision that gives plan confirmation the res judicata effect

of a final judgment. Linkous, 990 F.2d at 162; see also In re

Beard, 112 B.R. 951, 954 (Bankr. N.D. Ind. 1990) (“The

Bankruptcy Code gives confirmation a binding effect, through 11

U.S.C. § 1327.”).

The second res judicata requirement is also satisfied

because both the Plaintiffs and the Defendants in this action

were parties to the earlier Chapter 13 plan confirmation

proceedings. Self-evidently, each Plaintiff participated in the

confirmation proceedings for his own bankruptcy plan. See

Varat, 81 F.3d at 1316 n.6 (“A party for the purposes of former

adjudication includes one who participates in a ... plan

confirmation proceeding.”). Here, the Defendants were also

parties to these proceedings because of their financial interest

in the amount allotted to satisfy unsecured claims. See Grausz,

321 F.3d at 473 (“In the bankruptcy context a party in interest

is one who has a pecuniary interest in the distribution of

assets to creditors.”). See also In re Snow, 270 B.R. 38, 40

(D. Md. 2001) (holding that both debtor and creditor were

7

parties to Chapter 13 plan confirmation for res judicata

purposes).

The third res judicata condition requires that Plaintiffs’

claims be “based upon the same cause of action involved in” the

plan confirmation proceedings. Varat, 81 F.3d at 1315.

Although we have said that “no simple test exists to determine

whether claims are based on the same cause of action for claim

preclusion purposes,” Grausz, 321 F.3d at 473 (quoting Pittston

Co. v. United States, 199 F.3d 694, 704 (4th Cir. 1999)),

generally, “claims are part of the same cause of action when

they arise out of the same transaction or series of

transactions, or the same core of operative facts,” id. at 473

(quoting Varat, 81 F.3d at 1316).

Applying these principles, it is clear that the Plaintiffs’

current claims are based upon the same cause of action as the

Defendants’ claims in the confirmed bankruptcy plans. To prove

his unjust enrichment claim, Covert would have to show that the

Defendants had accepted and retained a benefit under inequitable

circumstances, see Hill v. Cross Country Settlements, LLC, 936

A.2d 343, 351 (Md. 2007), because the claim on which he had paid

the Defendants was procedurally invalid. Similarly, to

establish their claims for reimbursement and injunctive relief,

Covert and the other Plaintiffs would have to show that they

made payments on claims that are invalid because they were

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illegally filed. Finally, to succeed on their statutory claims

for damages under the FDCPA, MCDCA, and MCPA, the Plaintiffs

would need to show that these statutes prohibited the Defendants

from filing the proofs of claim. A finding for the Plaintiffs

on any of these claims, therefore, would entail a holding that

the Defendants’ proofs of claim are invalid, which would

directly contradict the bankruptcy court’s plan confirmation

order approving those proofs of claim as legitimate.

We have held, in fact, that even claims that do not

directly contradict confirmed orders, but merely “assert rights

that are inconsistent with” those orders, are sufficient to

satisfy the third res judicata requirement. Varat, 81 F.3d at

1317. See also Grausz, 321 F.3d at 475 (debtor’s malpractice

action was precluded by bankruptcy court’s prior order which had

allowed firm’s fees because a successful “malpractice action at

this stage could impair rights accorded the ... firm in the

final fee order”) (internal citation omitted). Our sister

circuits share this view that “once a bankruptcy plan is

confirmed, its terms are not subject to collateral attack”

through suits that raise claims inconsistent with the confirmed

plan. Adair v. Sherman, 230 F.3d 890, 894 (7th Cir. 2000)

(dismissing post-confirmation FDCPA action alleging that

creditor had inflated the amount of its claim). See also, e.g.,

In re Szostek, 886 F.2d 1405, 1413 (3d Cir. 1989) (creditor

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could not challenge amount of claim in confirmed plan, even

though a hearing to consider a Truth in Lending Act challenge to

that claim amount had been scheduled before the plan was

confirmed). In sum, because all of the 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 the Plaintiffs’ claims are barred

by res judicata.

III.

Res judicata bars not only those claims that were actually

raised during prior litigation, but also those claims that could

have been raised, and the Plaintiffs in this case did indeed

have the opportunity to raise their statutory claims for relief

under the FDCPA, the MCDCA, and the MCPA during the bankruptcy

proceedings. The Plaintiffs, as debtors in their own bankruptcy

proceedings, could have objected to LVNV’s proofs of claim at

the time they were filed on the basis that they violated these

consumer protection statutes. See 11 U.S.C. § 502(a)-(b)(1) (if

a party in interest objects to a proof of claim, the bankruptcy

court will hold a hearing and will determine whether the claim

is “unenforceable against the debtor ... under any ...

applicable law”); see also Sampson v. Chase Home Finance, 667 F.

10

Supp. 2d 692, 696-67 (S.D.W.V. 2009) (plaintiffs’ consumer

protection challenges to allowed claim were barred by res

judicata after plan was confirmed because the challenges could

have been raised during the bankruptcy proceedings). The

Plaintiffs could also have brought their affirmative claims for

damages during the bankruptcy process under Federal Rule of

Bankruptcy Procedure 7001(1), which provides that “a proceeding

to recover money or property” may be brought as an adversary

action. But the Plaintiffs were not free to raise statutory

objections after the court had entered its confirmation order

when those objections were known or should have been known to

them during the bankruptcy proceedings. See Varat, 81 F.3d at

1317. See also U.S. Dept. of Air Force v. Carolina Parachute

Corp., 907 F.2d 1469, 1473 (4th Cir. 1990) (government, as

creditor, could not bring post-confirmation statutory challenge

to plan’s assignment of government’s contract with debtor, even

though the government had already begun court proceedings to

terminate the contract); Grausz, 321 F.3d at 474 (res judicata

barred debtor’s malpractice claim after fee order because “by

the time the bankruptcy court entered the final fee order,

[debtor] knew or should have known there was a real likelihood

that he had a malpractice claim against the firm.”).

Here, Plaintiffs do not assert that any information

necessary to make out their statutory claims was unavailable to

11

them at the time their plans were confirmed. Accordingly,

Plaintiffs should have raised these statutory claims during the

plan confirmation hearings, and their failure to do so means

that these claims are barred by res judicata. 3 See Varat, 81

F.3d at 1317 (“When all of the requirements for claim preclusion

are satisfied, the judgment in the first case acts as an

absolute bar to the subsequent action with regard to every claim

which was actually made ... and those which might have been

presented.”).

One of the core purposes of bankruptcy is to collect all of

“the debtor’s assets for equitable distribution amongst

creditors.” Kuehner v. Irving Trust Co., 299 U.S. 445, 452

3

We note that the Plaintiffs failed to raise a claim for

equitable relief under 11 U.S.C. § 502(j), which states that

“[a] claim that has been allowed ... may be reconsidered for

cause,” until oral argument in this case. We thus consider this

argument waived. See Equal Rights Center v. Niles Bolton

Assocs., 602 F.3d 597, 604 n.4 (4th Cir. 2010) (arguments not

raised in appellant’s opening brief are deemed waived). We also

note, however, that the burden of establishing cause for

reconsideration under 502(j) rests with the moving party, In re

Starlight Group, LLC, 515 B.R. 290, 293 (Bankr.E.D.Va. 2014),

and “the clearest cause for reconsideration is the discovery,

subsequent to allowance, of new relevant facts or evidence that

could not have been discovered at an earlier stage, or the

discovery of clear error in the order of allowance,” In re Gold

& Silversmiths, Inc., 170 B.R. 538, 545 (Bankr. W.D.N.Y. 1994)

(quoting Collier on Bankruptcy 14th Ed., ¶ 57.23(3)). Here, the

Plaintiffs freely admit that no new relevant facts have come to

light since their plans were confirmed, and they allege no clear

error in the confirmation order. As a result, they would be

unable to meet their burden of establishing cause for

reconsideration under § 502(j).

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(1937). Were we to hold that proofs of claim are subject to

post-confirmation challenge, we would risk undermining this

purpose by creating an incentive for debtors to enrich

themselves at the expense of their creditors. Debtors would be

motivated to refrain from pursuing claims for monetary damages

until after a plan has been confirmed in order to obtain

additional post-plan assets that would not be subject to

distribution in bankruptcy. The only recourse for creditors in

this situation would be to petition the court to revoke the

discharge order based on a showing of fraud under 11 U.S.C. §

727(d). In the majority of cases, however, it is unlikely that

a showing of fraud could be made, leaving the creditors without

a remedy and frustrating bankruptcy’s goal of collecting and

equitably distributing all of a debtor’s assets.

Moreover, 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.” Adair, 230 F.3d at 895. See also Grausz, 321 F.3d at

475 (allowing debtor’s malpractice action after confirmation of

final attorneys’ fees order would “undermine a fundamental

purpose of the doctrine of res judicata: ... encouraging

reliance on adjudication”) (internal citation omitted). Thus,

allowing the kinds of post-confirmation actions that the

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Plaintiffs bring in this case would frustrate two fundamental

aims of the bankruptcy process.

IV.

In deciding that these 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 (4th Cir. 1995). In Cen-Pen, we

held that a creditor may challenge a plan’s treatment of his

secured claim as unsecured even after the plan is confirmed,

because “Bankruptcy Rule 7001(2) expressly requires initiation

of an adversary proceeding to determine the validity, priority

or extent of a lien.” Id. at 93 (emphasis in original). We

then held that “[i]f an issue must be raised through an

adversary proceeding it is not part of the confirmation process

and, unless it is actually litigated, confirmation will not have

a preclusive effect.” Id.

Although there is no lien at issue in this case, the

district court nevertheless read Cen-Pen to create a blanket

rule that plan confirmation does not have preclusive effect as

to any issue that must have been decided through an adversary

process. Covert, 2013 WL 6490318 at *5. It then concluded that

the Plaintiffs' statutory claims for damages were claims to

“recover money or property,” and were thus not precluded because

14

Federal Rule of Bankruptcy Procedure 7001(1) requires such

claims to be raised in adversary proceedings. Id.

This reading of Cen-Pen is too broad. First, Cen-Pen dealt

with the status of secured claims following a bankruptcy

proceeding, noting “the general rule that liens pass through

bankruptcy unaffected.” Id. at 92. We noted that this rule has

statutory support in 11 U.S.C. § 506(d)(2), which states that

liens are not voided “due only to the failure of any entity to

file a proof of such claim.” Cen-Pen, 58 F.3d at 93. Here, by

contrast, Plaintiffs challenge the legality of the process used

to collect an unsecured claim. There is no analogous rule or

statute establishing that claims challenging the filing process

pass through bankruptcy unaffected, nor any rule that unsecured

claims pass through bankruptcy unaffected. Indeed, the opposite

is true. See 11 U.S.C. § 1327(c) (stating the general rule that

“[e]xcept as otherwise provided in the plan or in the order

confirming the plan, the property [that a confirmed plan

distributes] is free and clear of any claim or interest of any

creditor provided for by the plan.”).

Second, 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. In Cen-Pen, the

party seeking post-confirmation reinstatement of its secured

lien apparently did not participate in the debtors’ bankruptcy

15

proceedings at all, and its liens were “nowhere mentioned or

otherwise acknowledged” in the debtors’ proposed plans. Cen-

Pen, 58 F.3d at 94. Under such circumstances, we found that a

creditor’s lien could not be avoided simply because a plan had

been confirmed because “[w]here [an adversary proceeding] is

required to resolve the disputed rights of third parties, the

potential defendant has the right to expect that the proper

procedures will be followed.” Id. at 93 (internal citation

omitted). Any such concerns over the notice necessary before

altering the rights of third parties are inapplicable here,

where the Plaintiffs seeking relief from the confirmation orders

are the debtors themselves, and they clearly suffered from no

lack of notice of the claims against them.

The Cen-Pen exception simply does not apply in this case.

The Plaintiffs’ statutory claims are therefore subject to the

normal principles of res judicata, and are thus precluded by the

confirmation of the Chapter 13 plans.

V.

For the foregoing reasons, the judgment of the district

court is affirmed.

AFFIRMED

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