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FDCPA Lawsuit Tossed for Failure to Disclose Claim in Bankruptcy Petition

Bankruptcy documentsThe U.S. District Court for the District of New Jersey recently dismissed a debtor’s claims for violations of the federal Fair Debt Collection Practices Act (FDCPA) and the New Jersey Truth in Consumer Contract Warranty and Notice Act (TCCWNA), holding the debtor’s failure to schedule his lawsuit as an asset of his bankruptcy estate deprived him of standing to later assert the claims.

A copy of the opinion in Lewis v. Portfolio Recovery Associates, LLC is available at: Link to Opinion.

In March 2015, the debtor filed a lawsuit alleging the defendant sent him a letter in an attempt to collect a debt that contained a “mini-Miranda” warning in a box entitled “Account Details.” According to the debtor, by mislabeling his legal rights as “Account Details,” the defendant’s correspondence was misleading and designed to confuse the debtor as to the nature of the debt and his rights.

Prior to filing his complaint, however, the debtor filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code. The Chapter 7 trustee appointed to his bankruptcy proceedings issued a report of no distribution. Shortly thereafter, he received a discharge. As a result, the defendant argued that the debtor lacked standing to sue because he failed to schedule the lawsuit as a personal asset.

Debtor Must Disclose Potential Causes of Action as Asset of Bankruptcy Estate

As the Court noted, Section 541(a)(1) of title 11 of the U.S. Code provides that a bankruptcy estate comprises “all legal or equitable interests of the debtor in property as of the commencement of the case.” In re Allen, 768 F.3d 274, 281 (3d Cir. 2014). The scope of Section 541(a)(1) is broad, and includes possible legal causes action. Id. It imposes upon a debtor an ongoing affirmative obligation to disclose all assets and liabilities to the bankruptcy court before discharge, including pending and contingent claims. A failure to list an asset as property of the bankruptcy estate does not prevent it from becoming property of the estate.

As the Court reasoned, once an asset becomes part of the bankruptcy estate, all rights held by the debtor in the asset are extinguished unless the asset is expressly and unequivocally abandoned back to the debtor. As here, when a bankruptcy trustee is appointed in a Chapter 7 case, the trustee becomes the representative of the estate and succeeds to the debtor’s rights to pursue causes of action that are the property of the estate. Thus, once an estate is created, the trustee has sole and exclusive authority to pursue claims on behalf of the estate.

Debtor Lacks Standing for Pre-Petition Claims Not Disclosed in Bankruptcy Proceeding

If a pre-petition claim is properly scheduled and a trustee does not pursue the claim prior to discharge of the bankruptcy petition, that claim is abandoned to the debtor upon discharge. However, in cases where a debtor has not scheduled a pre-petition claim, a discharge order does not cause unscheduled claims to revert back to the debtor. Therefore, a debtor lacks standing to pursue unscheduled claims because they remain property of the bankruptcy estate. Schafer v. Decision One Mortg. Corp., 2009 U.S. Dist. LEXIS 56639, *12 (E.D. Pa. July 1, 2009). In order for a debtor to obtain standing, the trustee must abandon the unscheduled claim, whether voluntarily or pursuant to a court order. 11 U.S.C. § 554(a)-(b).

Here, there was no dispute that the debtor’s claims arose prior to filing for bankruptcy. Accordingly, his claims constituted pre-petition causes of action that had to be listed as assets on the “schedule of assets and liabilities” of his bankruptcy petition.

The debtor argued that his FDCPA and TCCWNA claims were in fact listed in his petition because his bankruptcy petition listed “lawsuits” as a joint marital asset worth $5,000. The Court disagreed, holding that a generic designation of “lawsuits” fails to notify the trustee as to whom the trustee should pursue and what causes of action should be brought.

Accordingly, the Court held that the debtor had not properly listed his FDCPA and TCCWNA claims against the defendant as an asset on his bankruptcy schedules, nor demonstrated that the trustee voluntarily abandoned the claims. Therefore, the FDCPA and TCCWNA claims remained part of the bankruptcy estate and, as a result, he lacked standing to pursue them in his subsequent lawsuit.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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