Business Law

Manikan v. Peters & Freedman (9th Cir.)

The following is a case update written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), analyzing a recent decision of interest:

SUMMARY

In a recent ruling regarding the interplay between two federal statutes, the Bankruptcy Code (Code) and the Fair Debt Collection Practices Act (FDCPA), the United States Court of Appeals for the Ninth Circuit determined that its prior precedent establishing contempt as the exclusive remedy for discharge injunction violations did not preclude a discharged debtor from seeking a remedy under the FDCPA against debt collectors who attempted to collect a discharged debt which had been paid in full. Manikan v. Peters & Freedman, L.L.P, 2020 WL 6938318 (9th Cir. 11/25/20).

To view the opinion, click here.

FACTS

Plaintiff Vincent Manikan lives in and owns a home in San Diego, California, located in an HOA to which he pays monthly dues. In January 2009 he fell behind on his dues, which caused the HOA to send notices and after three years record a “Notice of Delinquent Assessment/Lien” in the County Recorder’s Office. In 2012 the HOA initiated a nonjudicial foreclosure on the lien, which prompted Manikan to file a chapter 13 bankruptcy case. Manikan’s confirmed chapter 13 plan proposed to pay the full amount of the HOA lien through the plan while he made direct payments of the ongoing assessments outside the plan to the HOA.

In March 2014 the HOA’s property management and debt collection company advised the bankruptcy trustee that the HOA debt was paid in full even though the amount paid by the trustee was less than the amount stated in the HOA’s proof of claim. Based on the collection company’s contact, the trustee issued a notice stating the claim was “deemed as fully paid.”. More than a year and half later, Manikan completed his plan and the trustee sent notice of plan completion which also verified the HOA debt was paid in full. Two months later, the bankruptcy court entered an order of discharge in Manikan’s case.

Despite these undisputed events, the law firm representing the HOA, Peterson & Freedman (P&F), hired a process server to reserve Manikan with the 2012 Notice of Default, which was accomplished after a breach of the peace. Manikan contacted P & F, advising it that the debt was paid in full, which the firm eventually admitted had been true at the time it hired the process server. Manikan sued the HOA and its agents, including P & F, for unfair debt collection practices. The parties filed cross summary judgment motions on whether as a matter of law the attempt to collect the “paid in full” debt was a violation of the FDCPA. The district court denied Manikan’s motion and granted P&F’s motion, concluding that Manikan’s FDCPA claims were precluded because “they are premised upon violations of the bankruptcy post-discharge injunction,” relying on the Ninth Circuit authority in Walls v Wells Fargo Bank, 276 F. 3d 502 (9th Cir. 2002).

Manikan appealed and the Ninth Circuit reversed.

REASONING

The Ninth Circuit panel was faced with its precedential holding in Walls that a debtor is precluded from bringing a FDCPA claim based on a violation of a bankruptcy discharge order. This 2002 decision turned on the Circuit’s determination that the proper remedy for a violation of the discharge injunction was contempt. When the Walls debtor sought to bring an implied private right of action for the alleged violation, the Ninth Circuit said “no”, explaining that such a claim would put enforcement of the discharge order in the hands of a court which did not issue it, whether it was a direct claim under the Code or an FDCPA action.

To step around Walls the Circuit here found Manikan’s action was not based on the discharge order since the HOA claim had been paid in full more than 18 months prior to the bankruptcy court issuing that order. His FDCPA claim alleged that the HOA tried to collect a fully paid debt, which in itself is forbidden by that statute. Because Manikan’s claim was premised on a “wholly independent theory of relief”, the precedent in Walls did not apply. It was also significant to the Circuit that the amount paid on the defaulted debt was determined by the HOA’s records, not the proof of claim filed with the bankruptcy court nor the amount provided by the debtor in his chapter 13 plan.

AUTHOR’S COMMENT

Constrained by its own precedent, the Ninth Circuit has given debtors a very narrow window to argue that remedies under the Bankruptcy Code and the FDCPA can co-exist, creating a private right of action for a debtor damaged by a creditor proceeding without regard for the discharge injunction only in a factually limited circumstance. Except for the rare circumstance where a creditor declares a debt paid in full before the bankruptcy discharge order is issued, most debtors will still be compelled to only seek redress through a contempt motion. And, as the recent Taggart decision from the Supreme Court and its progeny have shown, contempt may be difficult to prove and, even if proved, the damages limited by the constraints of civil contempt. The aggrieved debtor has no right to take his grievance before a jury.

In a concurrence to a Ninth Circuit BAP case, In re Chaussee, 399 BR 225 (9th Cir. BAP 2008), I criticized the hardline rule of Walls because, among other analytical shortcomings, it relied as precedent on a preemption case, MSR Exploration, LTD. V Meridian Oil, Inc., 74 F. 3d 910 (9th Cir. 1996), without recognizing the acute differences between federal law preempting state law and one federal statute precluding the application of a co-existing federal statute. My concurrence favored the more nuanced approach of the Seventh Circuit in Randolph v IMBS, Inc., 368 F. 3d 726 (7th Cir. 2004), which ruled that the two statutes could be equally applicable, depending on the facts and circumstances of each case. I wrote that concurrence with the hope that Chaussee would be appealed to the Ninth Circuit and that the Circuit would take another look at its holding that the Bankruptcy Code precludes a claim under the FDCPA in all circumstances. Alas, the case settled and no Circuit decision ever materialized.

I recognize that the Circuit would need to sit en banc to modify its precedent more broadly than a case like Manikan has done. I am still hoping that an appropriate appeal will allow this to happen.

These materials were written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.) a member of the ad hoc group, with editorial contributions by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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