As we discussed in February of this year, a District Court in Kentucky granted defendant, DH Capital Management’s (DHC), motion to dismiss a FDCPA action filed by Dionte Tyler in which the court found that the case failed on the grounds of res judicata and lack of standing due to Tyler’s bankruptcy filing. (A full accounting of the lower court’s decision may be found at FDCPA Claim Barred by res judicata and Lack of Standing).
Tyler believed the District Court had erred by holding that his claims were barred because he failed to present them as counterclaims in the original state-court action and that he had no standing because the cause of action belonged to his bankruptcy estate. Tyler appealed to the U.S. Sixth Circuit Court of Appeals, which in turn found that the District Court erred in the application of res judicata but affirmed on the issue of standing.
The Court of Appeals addressed the two issues in turn. Beginning with the procedural bar, the court held that while there will be instances where compulsory counterclaims that are not raised should be barred in a suit that was voluntarily dismissed without prejudice, in this instance the case was not sufficiently advanced to warrant application of the bar. Tyler filed his answer two days after DHC filed its notice of dismissal. Under Kentucky Rule 41.01, a notice of dismissal is effective immediately; the case was closed before Tyler filed his answer and so the content thereof does not matter. In addition, the principles of res judicata only apply to adjudications on the merits. Obviously, no such finality exists here. After a voluntary dismissal, the rules of res judicata do not prevent a party from asserting an unraised counterclaim, any more than it prevents a party from re-filing suit.
While successful on his first assignment of error, Tyler was less so on his second: the Court held that the suit was the property of Tyler’s bankruptcy estate and as such, only the bankruptcy trustee had standing to bring it. The law surrounding this question is fairly straightforward: all legal or equitable interests of the debtor in property as of the commencement of the case are considered property of the bankruptcy estate. However, the inquiry required to determine at what point it becomes bankruptcy property, followed by when the actionable violation occurred, is far less straightforward.
A cause of action becomes the property of the bankruptcy estate, when the asset is “sufficiently rooted in the pre-bankruptcy past” of the debtor. Pre-petition conduct or facts alone will not root a claim in the past; there must be a pre-petition violation. All causes of action that hypothetically could have been brought pre-petition are property of the estate. Therefore, in Tyler’s case, if DHC’s alleged violation occurred prior to the filing of the bankruptcy petition, the cause of action may only be properly initiated by the bankruptcy trustee.
Tyler argued that the cause of action accrued when he was served with notice. The Court disagreed: violation occurred at filing, and thus Tyler’s FDCPA claim is pre-petition property of the estate. The Court stated several reasons for their conclusion. First, filing a complaint may cause harm to the debtor even before service is perfected. Second, the alternative to dating violations from the filing of the complaint can become factually complicated. Third, there is no viable logic for protecting debt collectors who have filed complaints but not yet served process. And finally, the relevant bankruptcy-law question is when the claim is minimally actionable, not when it is fully matured.
The final issue the court had to resolve in determining standing was whether Tyler’s failure to schedule the asset in his bankruptcy filings deprives him of the right to bring the claim. Failure to schedule an asset does have an affect on whether the trustee abandoned it. If the trustee abandons it, Tyler can pursue it. But he must schedule it first. After that, it is only when the trustee declines to pursue it that Tyler will possess the requisite standing to bring his claim.
Special thanks to Meredith Hughes for her contributions to this article. Meredith is a Litigation Clerk with Slovin & Associates Co., L.P.A. and student at the University of Cincinnati College of Law.
Brad A. Council is an associate in the Cincinnati based law firm of Slovin & Associates Co., LPA. His practice covers all areas of commercial litigation, creditor’s rights including compliance with federal and state consumer credit and collection laws, and landlord-tenant matters. He frequently represents national banking associations, medical service providers, debt-buyers, and other credit grantors in the areas of creditor’s rights and account receivables management. He also regularly advises and counsels these organizations on issues related to compliance with the federal Fair Debt Collection Practices Act and federal Fair Credit Reporting Act as well as similar state law acts and regulations.