District Court (Cal.) Says Attempted Collection of BK Discharged Debt Triggers Bankruptcy Code, Not FDCPA, under 9th Cir.’s Walls Decision

In Scally v. Ditech Financial, LLC, 2017 WL 371996, at *5–6 (S.D.Cal., 2017), Judge Hayes dismissed an FDCPA class action arising out of collection of discharged debt.

In this case, the first amended complaint alleges that Defendant sent letters to the Plaintiff attempting to collect on a discharged debt which contain various statements “falsely implying that the debt remained viable.” (ECF No. 11 at ¶¶ 64-71). The Court concludes that Plaintiff’s FDCPA and Rosenthal Act claims are based on violations of the discharge injunction and precluded by the Bankruptcy Code. The Court of Appeals in Walls reasoned that a FDCPA claim based on an alleged violation of § 524 would “entail bankruptcy-laden determinations” more appropriate for a bankruptcy court. Walls, 276 F.3d at 510. In this case, a determination will need to be made regarding the underlying § 524 discharge of Plaintiff’s alleged debt to resolve Plaintiff’s allegations. The Court finds that the claims alleged by Plaintiff, including those alleged in Class B and Class C, hinge on the allegation that the debt had been discharged. Plaintiff’s claims are not independent of the § 524 discharge injunction and are precluded by the Bankruptcy Code.  Plaintiff contends that Walls is inapplicable here because Defendant was not the original creditor and was not served with the discharge injunction. The Bankruptcy Appellate Panel of the Ninth Circuit has recognized a broad view of a § 524 discharge injunction. In re Gurrola, 328 B.R. 158, 175 (B.A.P. 9th Cir. 2005) (“The 524(a) discharge and the discharge injunction are effective against the world to the full extent of their statutory terms, regardless of notice”). A bankruptcy court can provide a remedy for violations of a discharge injunction through sanctions pursuant to § 105 of the Bankruptcy Code. Sanctions for violation of a discharge injunction are appropriate if the movant “prove[s] that the creditor (1) knew the discharge was applicable and (2) intended the actions which violated the injunction.” In re Zilog, Inc., 450 F.3d 996, 1007 (9th Cir. 2006). The Court concludes that Plaintiff’s allegations are dependent on the discharged nature of the debt and are properly addressed under the remedial scheme provided for in the Bankruptcy Code. See Walls, 276 F.3d at 511 (“While the FDCPA’s purpose is to avoid bankruptcy, if bankruptcy nevertheless occurs, the debtors’ protection and remedy remain under the Bankruptcy Code.”).