Court Opinion

ID: 770909
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:41:36+00
Date Added: 2024-06-11T17:55:53.825762
License: Public Domain

230 F.3d 890 (7th Cir. 2000)
JAMES W. ADAIR, Plaintiff-Appellant,v.MICHAEL L. SHERMAN and  SHERMAN & SHERMAN, Defendants-Appellees.
No. 99-1736
In the  United States Court of Appeals  For the Seventh Circuit
Argued February 9, 2000Decided August 25, 2000

Appeal from the United States District Court  for the Northern District of Illinois, Eastern Division.  No. 98 C 3946--George M. Marovich, Judge.[Copyrighted Material Omitted]
Before BAUER, EASTERBROOK and RIPPLE, Circuit Judges.
RIPPLE, Circuit Judge.

1
James Adair brought this  action under the Fair Debt Collection Practices  Act ("FDCPA"), 15 U.S.C. sec. 1692 et seq. He  contends that Michael Sherman and his law firm,  Sherman & Sherman (collectively "Sherman &  Sherman"), overvalued their secured claims in Mr.  Adair's Chapter 13 bankruptcy proceedings. The  district court held that Mr. Adair's action was  barred because he had failed to object to the  valuation of the claim in the bankruptcy court.  For the reasons set forth in the following  opinion, we affirm the judgment of the district  court.

2
* BACKGROUND

3
Because the district court dismissed Mr. Adair's  complaint for failing to state a claim, we  consider all facts in the light most favorable to  him. See Hernandez v. Joliet Police Dept., 197  F.3d 256, 262 (7th Cir. 1999). In March 1997, Mr.  Adair obtained a loan from First Midwest Bank  ("FMB"), with an amount financed of $16,483.22.  The loan was secured by a 1995 Chevrolet Lumina  automobile. In July, Mr. Adair filed for  bankruptcy under Chapter 13. His bankruptcy plan  provided that all allowed secured claims would be  paid in full, with unsecured creditors to receive  a percentage of their allowed claims.

4
On September 3, Sherman & Sherman filed a proof  of claim on behalf of FMB. The proof of claim  listed the value of the Chevrolet as $19,841.43,  an amount greater than the car's original  purchase price. Mr. Adair did not object to the  valuation of the car prior to confirmation. The  Chapter 13 trustee confirmed Mr. Adair's  bankruptcy plan on September 15, and allowed  FMB's claim as fully secured. In June 1998, Mr.  Adair filed an adversary proceeding in the  bankruptcy court challenging FMB's proof of  claim; that proceeding was dismissed when Mr.  Adair's Chapter 13 proceeding was dismissed  altogether.1

5
Mr. Adair subsequently filed this FDCPA  complaint in district court, seeking damages for  what he alleged was Sherman & Sherman's practice  of overvaluing collateral in proofs of claims  filed with the bankruptcy court. He contends that  Sherman & Sherman overvalued collateral  fraudulently, in order to establish as secured  claims that should have been unsecured. The  district court granted Sherman & Sherman's motion  to dismiss and held that the action was barred by  claim preclusion, also known as res judicata.

II
DISCUSSION

6
Although the district court articulated its  decision in terms of claim preclusion, we believe  that this case is more appropriately analyzed  under the closely related, although analytically  distinct, doctrine of collateral estoppel or  issue preclusion.2 Under the doctrine of issue  preclusion, an issue may not be litigated if the  following conditions are met: (1) the issue  sought to be precluded is the same as that  involved in a prior action; (2) the issue was  actually relitigated; (3) the determination of  the issue was essential to the final judgment;  and (4) the party against whom estoppel is  invoked was represented in the prior action. See  Chicago Truck Drivers, Helpers & Warehouse Union  (Indep.) Pension Fund v. Century Motor Freight,  Inc., 125 F.3d 526, 530 (7th Cir. 1997); La  Preferida, Inc. v. Cerveceria Mondelo, 914 F.2d  900, 905-06 (7th Cir. 1990). As the Supreme Court  of the United States has stated "Under  collateral estoppel, once an issue is actually  and necessarily determined by a court of  competent jurisdiction, that determination is  conclusive in subsequent suits based on a  different cause of action involving a party to  the prior litigation." Montana, 440 U.S. at 153.  "Whether the issues are identical is a question  of law." E.B. Harper & Co. v. Nortek, Inc., 104  F.3d 913, 922 (7th Cir. 1997). We decide such  questions de novo. See Caruso v. De Luca, 81 F.3d  666, 670 (7th Cir. 1996).

7
Issue preclusion is an affirmative defense. See  Blonder-Tongue Lab., Inc. v. University of Ill.  Found., 402 U.S. 313, 350 (1971). Therefore, the  defendant has the burden to set forth facts  sufficient to satisfy each element of the  defense. See Havoco of Am., Ltd. v. Freeman,  Atkins & Coleman, Ltd., 58 F.3d 303, 306 (7th  Cir. 1995); La Preferida, 914 F.2d at 906. We now  consider whether Sherman & Sherman has satisfied  each of these requirements. As we pointed out in  Havoco, in determining whether these criteria  have been met, it is often necessary for the  court to consult substantive principles of law in  order to determine the scope of the earlier  judicial determination or the parties bound by  that determination. See 58 F.3d at 308. In the  case before us, it will be necessary to refer to  the substantive law of bankruptcy and, indeed, to  some extent, to the FDCPA, to determine whether  the principles of issue preclusion ought to  apply.

A.

8
We begin by examining the action of the  bankruptcy court in order to determine the nature  and the scope of its determination. We must  ascertain whether the bankruptcy court actually  and necessarily decided an issue that would now  preclude recovery in the FDCPA action. Sherman &  Sherman filed a proof of claim listing the value  of the 1995 Chevrolet as $19,841.43. According to  the bankruptcy code, any proof of claim filed by  a creditor is deemed allowed, unless a party in  interest objects. See 11 U.S.C. sec. 502(a); In  re Greenig, 152 F.3d 631, 633 (7th Cir. 1998).3  "A proof of claim executed and filed in  accordance with the Bankruptcy Rules constitutes  prima facie evidence of the validity and amount  of the claim." In re Ross, 162 B.R. 785, 788  (Bankr. N.D. Ill. 1993) (citing Fed. R. Bankr. P.  3001(f)).

9
Mr. Adair had notice of the proof of claim prior  to confirmation, but he chose not to object to  it. "As a general rule, the failure to raise an  objection at the confirmation hearing or to  appeal from the order of confirmation should  preclude attack on the plan or any provision  therein as illegal in a subsequent proceeding."  In re Chappell, 984 F.2d 775, 782 (7th Cir. 1993)  (quotation marks and ellipses omitted); see also  In re Pence, 905 F.2d 1107, 1110 (7th Cir. 1990).  In our decision in Pence, we refused relief to a  creditor who, "instead of attacking the valuation  head-on at the confirmation hearing," chose "a  collateral attack on the confirmation order where  valuation may not be contested." Id. at 1110. Our  sister circuits share our view that once a  bankruptcy plan is confirmed, its terms are not  subject to collateral attack. See Andersen v.  UNIPAC-NEBHELP, 179 F.3d 1253, 1258-59 (10th Cir.  1999); In re Varat Enters., Inc., 81 F.3d 1310,  1315-17 (4th Cir. 1996); In re Justice Oaks II,  Ltd., 898 F.2d 1544, 1553 (11th Cir.), cert.  denied, 498 U.S. 959 (1990); In re Szostek, 886  F.2d 1405, 1413 (3d Cir. 1989); In re Gregory,  705 F.2d 1118, 1121 (9th Cir. 1983).

10
These authorities lead us to the conclusion  that, when a proof of claim is filed prior to  confirmation,4 and the debtor does not object  prior to confirmation,5 the debtor may not file  a post-confirmation collateral action that calls  into question the proof of claim. See Justice  Oaks, 898 F.2d at 1553; Ross, 162 B.R. at 789  ("The law is well settled that a confirmation  order is res judicata as to all issues decided or  which could have been decided at the hearing on  confirmation.").6 Allowing collateral attacks  of the type brought by Mr. Adair would give  debtors an incentive to refrain from objecting in  the bankruptcy proceeding and would thereby  destroy the finality that bankruptcy confirmation  is intended to provide.7

11
In short, the bankruptcy process provides  protection against fraudulent proofs of claims.  Mr. Adair had the opportunity to contest Sherman  & Sherman's proof of claim and practices related  thereto in the bankruptcy court. Because he chose  not to, he is barred from doing so here.8

B.

12
We are also convinced that issue preclusion  applies because the FDCPA is an improper vehicle  for challenging the amount of a debt established  by the bankruptcy court. The FDCPA regulates the  practices used to collect a debt.9 See Keele v.  Wexler, 149 F.3d 589, 594 (7th Cir. 1998) ("[T]he  FDCPA is designed to protect consumers from the  unscrupulous antics of debt collectors,  irrespective of whether a valid debt actually  exists."); see also Hawthorne v. Mac Adjustment,  Inc., 140 F.3d 1367, 1370-71 (11th Cir. 1998);  Mabe v. G.C. Servs. Ltd. Partnership, 32 F.3d 86,  87-88 (4th Cir. 1994); Zimmerman v. HBO Affiliate  Group, 834 F.2d 1163, 1167 (3d Cir. 1987). As Mr.  Adair has framed his FDCPA action, it cannot  succeed without a showing that the existence or  amount of his debt was established improperly.  However, this circuit and other federal courts  have held that an FDCPA action is not an action  to establish a debt but an action contesting the  method of collection of that debt. See Whitaker  v. Ameritech Corp., 129 F.3d 952, 957-58 (7th  Cir. 1998); Alger v. Ganick, O'Brien & Sarin, 35  F. Supp.2d 148, 159 n.20 (D. Mass. 1999) (citing  Whitaker); Blakemore v. Pekay, 895 F. Supp. 972,  983-84 (N.D. Ill. 1995); Azar v. Hegay, 874 F.  Supp. 1314, 1317 (N.D. Fla.), aff'd, 66 F.3d 342  (11th Cir. 1995).

13
Mr. Adair is attempting to use an FDCPA claim to  attack the existence of the underlying debt, a  matter already determined definitively in the  bankruptcy proceeding. "The purpose of the proof  of claim is to alert the court, trustee, and  other creditors, as well as the debtor, to claims  against the estate." In re Fernstrom Storage &  Van Co., 938 F.2d 731, 734 (7th Cir. 1991)  (quotation marks omitted). By allowing FMB's  proof of claim, the bankruptcy court confirmed  the existence of a debt for Mr. Adair. To succeed  on the FDCPA claim that he has brought, Mr. Adair  would have to show that the value of the  Chevrolet is incorrect in the proof of claim; if  $19,841.43 is the proper value of the car, then  Sherman & Sherman's claim is not fraudulent.  However, Mr. Adair is foreclosed from  collaterally attacking the valuation of the car.  The amount of the debt is a matter already  settled in another forum, the bankruptcy court.

14
In sum, as Mr. Adair has framed his FDCPA claim,  he contests the amount of the underlying debt,  not the method employed by the defendants in its  collection. The amount of the debt was determined  definitively, however, in the earlier bankruptcy  proceeding when a proof of claim was submitted  prior to confirmation and Mr. Adair's bankruptcy  claim was later confirmed. The amount of the debt  therefore cannot be relitigated in a subsequent  FDCPA action by operation of the doctrine of  issue preclusion.10

Conclusion

15
For the foregoing reasons, the judgment of the  district court is affirmed.

AFFIRMED

Notes:

1
 Mr. Adair is now once again in bankruptcy  proceedings. His return to bankruptcy does not  foreclose this action because debtors in Chapter  13 proceedings may bring actions in their own  name to vindicate statutory rights. See Cable v.  Ivy Tech State College, 200 F.3d 467, 472-73 (7th  Cir. 1999).

2
 See Montana v. United States, 440 U.S. 147, 153  (1979) (setting forth the differences between the  two related doctrines).

3
 Parties in interest include not only the debtor,  but anyone who has a legally protected interest  that could be affected by a bankruptcy  proceeding. See In re FBN Food Servs., Inc., 82  F.3d 1387, 1391 (7th Cir. 1996). Therefore, if  one creditor files a potentially fraudulent proof  of claim, other creditors have standing to object  to the proof of claim.

4
 We need not address the practice in bankruptcy  courts of allowing proofs of claims to be filed  after confirmation. See, e.g., In re Witkowski,  16 F.3d 739, 741 (7th Cir. 1994); In re Strong,  203 B.R. 105, 114 (Bankr. N.D. Ill. 1996). We  address only the situation in which the creditor  filed a proof of claim before confirmation and  the debtor had enough time to formulate an  objection prior to confirmation.

5
 Mr. Adair has not argued that the time between  the filing of Sherman & Sherman's proof of claim  and the confirmation hearing was insufficient to  allow him to prepare an objection.

6
 There has been some tension in bankruptcy court  cases as to whether debtors are required to  object to proofs of claims prior to confirmation.  See In re Simmons, 224 B.R. 879, 883-84 (Bankr.  N.D. Ill. 1998) (noting cases). We respectfully  choose not to follow those cases allowing post-  confirmation objections to proofs of claims to be  filed even though the proof of claim itself was  filed sufficiently in advance of the confirmation  hearing. See In re Church, No. 96 B 18347, 1998  WL 97691, at *3-*4 (Bankr. N.D. Ill. Mar. 2,  1998).

7
 We note the thoughtful analysis of a different  district court in an action similar to the one  before us:
Plaintiff's claims . . . raise the serious  concern that bankruptcy debtors will deliberately  fail to challenge proofs of claim, despite having  knowledge of possible challenges to the proofs of  claim and despite being represented in their  bankruptcy, in the hope of maintaining collateral  challenges pursuant to statutes, like the FDCPA,  which may provide additional damages, as well as  attorney's fees. If debtors were permitted to  make such strategic decisions and, thus, to delay  their challenges to the legality or correctness  of proofs of claim until after dismissal of the  bankruptcy case, the concept of finality in  bankruptcy will be completely undermined.
Baldwin v. McCalla, Raymer, Padrick, Cobb,  Nichols & Clark, L.L.C., No. 98 C 4280, 1999 WL  284788, at *7 (N.D. Ill. Apr. 26, 1999)  (citations omitted).

8
 We point out that failure to object prior to  confirmation does not foreclose a debtor from  challenging fraudulent proofs of claim in the  bankruptcy court. A bankruptcy confirmation may  be revoked by the bankruptcy court if it was  procured by fraud. See 11 U.S.C. sec. 1330(a).  Further, parties who commit fraud on the  bankruptcy court may be sanctioned by that court  pursuant to Federal Rule of Bankruptcy Procedure  9011, which is analogous to Rule 11 of the  Federal Rules of Civil Procedure. See In re  Bryson, 131 F.3d 601, 603 (7th Cir. 1997). Rule  9011(b) explicitly requires all filings with the  court to present only facts which the party  reasonably believes to have evidentiary support;  debtors facing fraudulent proofs of claim could  seek sanctions under that section. A motion for  sanctions under Rule 9011 must be made separately  from the objection to a proof of claim,  potentially giving debtors additional time to  discover any fraud on the part of the creditor.  See Fed. R. Bankr. P. 9011(c)(1)(A); In re Knox,  237 B.R. 687, 698-99 (Bankr. N.D. Ill. 1999).  Bankruptcy courts also have the authority to  sanction attorneys under 28 U.S.C. sec. 1927,  which allows the court to hold attorneys liable  for any excess expenses caused because of their  unreasonable or vexatious conduct. See In re  Volpert, 110 F.3d 494, 500-01 (7th Cir. 1997).

9
 The FDCPA provides a definition of "debt":
The term "debt" means any obligation or alleged  obligation of a consumer to pay money arising out  of a transaction in which the money, property,  insurance, or services which are the subject of  the transaction are primarily for personal,  family, or household purposes, whether or not  such obligation has been reduced to judgment.
15 U.S.C. sec. 1692a(5).

10
 Because the parties have not presented the issue,  we express no opinion as to whether a FDCPA claim  can ever be predicated on a previous filing in a  bankruptcy proceeding. Cf. Kokoszka v. Belford,  417 U.S. 642, 650-52 (1974) (holding that the  wage garnishment protections of the Consumer  Credit Protection Act sought to prevent persons  from entering bankruptcy in the first place and  therefore were not applicable when bankruptcy did  occur).