Covert v. LVNV Funding, LLC

• Decision Date: 03 March 2015
• Docket Number: No. 14–1016.,14–1016.
• Citation: 779 F.3d 242
• Parties: 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.
• Court: U.S. Court of Appeals — Fourth Circuit

779 F.3d 242

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.

No. 14–1016.

United States Court of Appeals,Fourth Circuit.

Argued: Dec. 11, 2014.

Decided: March 3, 2015.

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.

Before NIEMEYER, SHEDD, and KEENAN, Circuit Judges.

Affirmed by published opinion. Judge SHEDD wrote the opinion, in which Judge NIEMEYER and Judge KEENAN joined.

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.

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 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 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 (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 “[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 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, 402 Md. 281, 936 A.2d 343, 351 (2007), because the claim on which he had paid the Defendants was procedurally invalid. Similarly, to establish their claims for reimbursement and injunctive...