No.

14-1016
United States Court of Appeals, Fourth Circuit.

Covert v. LVNV Funding, LLC

779 F.3d 242 (4th Cir. 2015)
Decided Mar 3, 2015

No. 14–1016. claim against each Plaintiff and filed proofs of

those claims in each proceeding.1 Each Chapter 13
2015-03-3
plan was approved, the Defendants' claims were
Christopher M. COVERT; Thomas E. Haworth; allowed, and each Plaintiff made payments on
Carol J. Haworth; Kifle Ayele; Dwan L. Brown, these claims. In March 2013, the Plaintiffs filed
Plaintiffs–Appellants, v. LVNV FUNDING, LLC; this putative class action lawsuit in the District of
Resurgent Capital Services Limited Partnership; Maryland, alleging that the Defendants had
Sherman Originator LLC, Defendants–Appellees. violated the federal Fair Debt Collection Practices
Act (FDCPA) and various Maryland laws by filing
Lawrence P. Block, Janet M. Nesse, Stinson
these proofs of claim without a Maryland debt
Leonard Street LLP, Washington, D.C., for
collection license. The Defendants moved to
Appellants.
dismiss and the court granted the motion, finding
that the state common law claims were barred by
SHEDD
res judicata and that the federal and state statutory
Affirmed on other grounds. claims failed to state a claim because filing a proof
of claim does not constitute an act to collect a
244 *244 ARGUED: Laura J. Margulies, Laura
debt. For the reasons stated below, we affirm the
Margulies & Associates, LLC, Rockville,
dismissal of all claims, but we do so on res
Maryland, for Appellants. Ronald S. Canter, Law
judicata grounds.
Offices of Ronald S. Canter, LLC, Rockville,
1 A proof of claim is a form filed by a
Maryland, for Appellees. ON BRIEF: Lawrence
P. Block, Janet M. Nesse, Stinson Leonard Street creditor in a bankruptcy proceeding that
states the amount the debtor owes to the
LLP, Washington, D.C., for Appellants. Before
creditor and the reason for the debt.
NIEMEYER, SHEDD, and KEENAN, Circuit
Judges. Affirmed by published opinion. Judge
I.
SHEDD wrote the opinion, in which Judge
NIEMEYER and Judge KEENAN joined. In 2008, each Plaintiff filed a petition for
SHEDD, Circuit Judge: individual bankruptcy under Chapter 13 in the
Bankruptcy Court for the District of Maryland.
Christopher M. Covert, Thomas E. Haworth, LVNV had acquired a defaulted debt against each
Carol J. Haworth, Kifle Ayele, and Dwan L. Plaintiff from Sherman Originator, LLC, and
Brown (collectively “Plaintiffs”) each separately LVNV then filed a proof of unsecured claim based
filed a petition for individual bankruptcy under on these debts in each bankruptcy proceeding
Chapter 13 in Maryland in 2008. LVNV Funding, 245 through its servicer, Resurgent Capital *245
LLC (“LVNV”) and its affiliated companies Services Limited Partnership. The bankruptcy
(collectively “Defendants”) held an unsecured court confirmed a plan in each proceeding that

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 Covert v. LVNV Funding, LLC 779 F.3d 242 (4th Cir. 2015)

provided for unsecured claims to be paid in pro action is barred by res judicata. We
rata amounts. The Defendants' claims were therefore adopt the reasoning of the district

allowed, and they received payments from the court dismissing this claim.

Chapter 13 Trustees on these claims. At all

Plaintiff Covert filed several additional Maryland
relevant times, none of the Defendants was
state law claims. Specifically, Covert alleged
licensed to do business as a debt collection agency
unjust enrichment, violations of the Maryland
in Maryland.
Consumer Debt Collection Act (MCDCA), and
In March 2013, the Plaintiffs filed this lawsuit in violations of the Maryland Consumer Protection
the District of Maryland, alleging that the Act (MCPA).
Defendants had violated the FDCPA by filing
The Defendants moved under Federal Rule of
proofs of claim without a Maryland debt
Civil Procedure 12(b)(6) to dismiss all claims for
collection license. The FDCPA defines a “debt
failure to state a claim upon which relief could be
collector” as “any person ... who regularly collects
granted. The district court granted the motion.
or attempts to collect, directly or indirectly, debts
Covert v. LVNV Funding, LLC, No. DKC 13–
owed or due or asserted to be owed or due
0698, 2013 WL 6490318 (D.Md. Dec. 9, 2013). It
another.” 15 U.S.C. § 1692a(6). Under the
held that the Maryland unjust enrichment claim
FDCPA, debt collectors “may not use any false,
was barred by res judicata, but that the FDCPA,
deceptive, or misleading representation or means
MCDCA, and MCPA claims could not be barred
in connection with the collection of any debt,”
by res judicata absent an adversary proceeding in
including “[t]he threat to take any action that
each bankruptcy action, which had not occurred.
cannot legally be taken,” 15 U.S.C. § 1692e(5).
Nonetheless, the district court dismissed these
Under the Maryland Code, it is a misdemeanor for
statutory claims on the merits because it found that
a person to “knowingly and willfully do business
filing a proof of claim is not a “collection activity”
as a collection agency in the State unless the
within the meaning of those statutes. The Plaintiffs
person has a license.” Md.Code Ann., Bus. Reg. §
timely appealed.
7–401. The Plaintiffs allege that because the
Defendants filed claims in the bankruptcy II.
proceedings without a license, the Defendants
We review de novo the district court's dismissal of
were not legally entitled to collect those debts and
a complaint for failure to state a claim under 12(b)
thus took an “action that cannot legally be taken”
(6). United States ex rel. Rostholder v. Omnicare,
in violation of the FDCPA. The Plaintiffs also
Inc., 745 F.3d 694, 700 (4th Cir.2014). Federal law
asked for an injunction deeming the Defendants'
governs the res judicata effect of earlier
proofs of claim invalid and instructing the
bankruptcy proceedings. See Grausz v. Englander,
Defendants to return to the Plaintiffs all money
321 F.3d 467, 472 (4th Cir.2003) (“We look to res
paid pursuant to those claims.2
judicata principles developed in our own case law
2 The Plaintiffs also asserted a claim seeking to determine whether an earlier federal judgment,
attorneys' fees and reasonable expenses 246 including the judgment of a bankruptcy *246 court,
incurred in litigating this suit. Because a bars a claim asserted in a later action.”).
request for expenses and attorneys' fees is
not a separate claim, but rather a request
“Under res judicata principles, a prior judgment
for a particular form of relief, this request between the same parties can preclude subsequent
necessarily fails because the underlying litigation on those matters actually and necessarily
resolved in the first adjudication.” In re Varat
Enters., Inc., 81 F.3d 1310, 1314–15 (4th
Cir.1996). As we have applied it, the doctrine of

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 Covert v. LVNV Funding, LLC 779 F.3d 242 (4th Cir. 2015)

res judicata encompasses two concepts: claim The second res judicata requirement is also
preclusion, which bars later litigation of all claims satisfied because both the Plaintiffs and the
that were actually adjudicated or that could have Defendants in this action were parties to the earlier
been adjudicated in an earlier action, and issue Chapter 13 plan confirmation proceedings. Self-
preclusion, which bars later litigation of legal and evidently, each Plaintiff participated in the
factual issues that were “actually and necessarily confirmation proceedings for his own bankruptcy
determined” in an earlier action. Id. at 1315 plan. See Varat, 81 F.3d at 1316 n. 6 (“A party for
(internal citation omitted). Rather than attempting the purposes of former adjudication includes one
to draw a sharp distinction between these two who participates in a ... plan confirmation
aspects here, we conduct our analysis under the proceeding.”). Here, the Defendants were also
general res judicata framework, as has been our parties to these proceedings because of their
practice in bankruptcy cases. We have held that a financial interest in the amount allotted to satisfy
prior bankruptcy judgment has res judicata effect unsecured claims. See Grausz, 321 F.3d at 473
on future litigation when the following three (“In the bankruptcy context a party in interest is
conditions are met: one who has a pecuniary interest in the
distribution of assets to creditors.”). See also In re
1) [T]he prior judgment was final and on the
Snow, 270 B.R. 38, 40 (D.Md.2001) (holding that
merits, and rendered by a court of competent
both debtor and creditor were parties to Chapter
jurisdiction in accordance with the requirements of
13 plan confirmation for res judicata purposes).
due process; 2) the parties are identical, or in
privity, in the two actions; and, 3) the claims in the The third res judicata condition requires that
second matter are based upon the same cause of Plaintiffs' claims be “based upon the same cause
action involved in the earlier proceeding. of action involved in” the plan confirmation
Id. All three requirements are met here. proceedings. Varat, 81 F.3d at 1315. Although we
have said that “no simple test exists to determine
The first requirement is easily satisfied because
whether claims are based on the same cause of
confirmation of a bankruptcy plan is a final
action for claim preclusion purposes,” Grausz,
judgment on the merits. See, e.g., id. (“[T]he
247 321 F.3d at 473 ( quoting *247 Pittston Co. v.
[bankruptcy plan] confirmation order constitutes a
United States, 199 F.3d 694, 704 (4th Cir.1999)),
final judgment on the merits with res judicata
generally, “claims are part of the same cause of
effect.”); In re Linkous, 990 F.2d 160, 162 (4th
action when they arise out of the same transaction
Cir.1993) (same). 11 U.S.C. § 1327(a) states the
or series of transactions, or the same core of
general rule that “[t]he provisions of a confirmed
operative facts,” id. at 473 ( quoting Varat, 81 F.3d
plan bind the debtor and each creditor, whether or
at 1316).
not the claim of such creditor is provided for by
the plan, and whether or not such creditor has Applying these principles, it is clear that the
objected to, has accepted, or has rejected the Plaintiffs' current claims are based upon the same
plan.” It is this provision that gives plan cause of action as the Defendants' claims in the
confirmation the res judicata effect of a final confirmed bankruptcy plans. To prove his unjust
judgment. Linkous, 990 F.2d at 162; see also In re enrichment claim, Covert would have to show that
Beard, 112 B.R. 951, 954 (Bankr.N.D.Ind.1990) the Defendants had accepted and retained a benefit
(“The Bankruptcy Code gives confirmation a under inequitable circumstances, see Hill v. Cross
binding effect, through 11 U.S.C. § 1327.”). Country Settlements, LLC, 402 Md. 281, 936 A.2d
343, 351 (2007), because the claim on which he
had paid the Defendants was procedurally invalid.
Similarly, to establish their claims for

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 Covert v. LVNV Funding, LLC 779 F.3d 242 (4th Cir. 2015)

reimbursement and injunctive relief, Covert and Accordingly, all three requirements are satisfied
the other Plaintiffs would have to show that they and the Plaintiffs' claims are barred by res
made payments on claims that are invalid because judicata.
they were illegally filed. Finally, to succeed on
their statutory claims for damages under the III.
FDCPA, MCDCA, and MCPA, the Plaintiffs Res judicata bars not only those claims that were
would need to show that these statutes prohibited actually raised during prior litigation, but also
the Defendants from filing the proofs of claim. A those claims that could have been raised, and the
finding for the Plaintiffs on any of these claims, Plaintiffs in this case did indeed have the
therefore, would entail a holding that the opportunity to raise their statutory claims for relief
Defendants' proofs of claim are invalid, which under the FDCPA, the MCDCA, and the MCPA
would directly contradict the bankruptcy court's during the bankruptcy proceedings. The Plaintiffs,
plan confirmation order approving those proofs of as debtors in their own bankruptcy proceedings,
claim as legitimate. could have objected to LVNV's proofs of claim at
the time they were filed on the basis that they
We have held, in fact, that even claims that do not
violated these consumer protection statutes. See 11
directly contradict confirmed orders, but merely
U.S.C. § 502(a)-(b)(1) (if a party in interest
“assert rights that are inconsistent with” those
objects to a proof of claim, the bankruptcy court
orders, are sufficient to satisfy the third res
will hold a hearing and will determine whether the
judicata requirement. Varat, 81 F.3d at 1317. See
248 claim is “unenforceable against the debtor *248 ...
also Grausz, 321 F.3d at 475 (debtor's malpractice
under any ... applicable law”); see also Sampson v.
action was precluded by bankruptcy court's prior
Chase Home Finance, 667 F.Supp.2d 692, 696–97
order which had allowed firm's fees because a
(S.D.W.V.2009) (plaintiffs' consumer protection
successful “malpractice action at this stage could
challenges to allowed claim were barred by res
impair rights accorded the ... firm in the final fee
judicata after plan was confirmed because the
order”) (internal citation omitted). Our sister
challenges could have been raised during the
circuits share this view that “once a bankruptcy
bankruptcy proceedings). The Plaintiffs could also
plan is confirmed, its terms are not subject to
have brought their affirmative claims for damages
collateral attack” through suits that raise claims
during the bankruptcy process under Federal Rule
inconsistent with the confirmed plan. Adair v.
of Bankruptcy Procedure 7001(1), which provides
Sherman, 230 F.3d 890, 894 (7th Cir.2000)
that “a proceeding to recover money or property”
(dismissing post-confirmation FDCPA action
may be brought as an adversary action. But the
alleging that creditor had inflated the amount of its
Plaintiffs were not free to raise statutory
claim). See also, e.g., In re Szostek, 886 F.2d 1405,
objections after the court had entered its
1413 (3d Cir.1989) (creditor could not challenge
confirmation order when those objections were
amount of claim in confirmed plan, even though a
known or should have been known to them during
hearing to consider a Truth in Lending Act
the bankruptcy proceedings. See Varat, 81 F.3d at
challenge to that claim amount had been
1317. See also U.S. Dept. of Air Force v. Carolina
scheduled before the plan was confirmed). In sum,
Parachute Corp., 907 F.2d 1469, 1473 (4th
because all of the Plaintiffs' claims implicitly ask
Cir.1990) (government, as creditor, could not
the district court to reconsider the provisions of
bring post-confirmation statutory challenge to
the confirmed plans, they are based on the same
plan's assignment of government's contract with
cause of action as the plan confirmation orders.
debtor, even though the government had already
begun court proceedings to terminate the
contract); Grausz, 321 F.3d at 474 (res judicata

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 Covert v. LVNV Funding, LLC 779 F.3d 242 (4th Cir. 2015)

barred debtor's malpractice claim after fee order they would be unable to meet their burden
because “by the time the bankruptcy court entered of establishing cause for reconsideration

the final fee order, [debtor] knew or should have under § 502(j).

known there was a real likelihood that he had a

One of the core purposes of bankruptcy is to
malpractice claim against the firm.”).
collect all of “the debtor's assets for equitable
Here, Plaintiffs do not assert that any information distribution amongst creditors.” Kuehner v. Irving
necessary to make out their statutory claims was Trust Co., 299 U.S. 445, 452, 57 S.Ct. 298, 81
unavailable to them at the time their plans were L.Ed. 340 (1937). Were we to hold that proofs of
confirmed. Accordingly, Plaintiffs should have claim are subject to post-confirmation challenge,
raised these statutory claims during the plan we would risk undermining this purpose by
confirmation hearings, and their failure to do so creating an incentive for debtors to enrich
means that these claims are barred by res themselves at the expense of their creditors.
judicata.3 See Varat, 81 F.3d at 1317 (“When all of Debtors would be motivated to refrain from
the requirements for claim preclusion are satisfied, pursuing claims for monetary damages until after
the judgment in the first case acts as an absolute a plan has been confirmed in order to obtain
bar to the subsequent action with regard to every 249 additional*249 post-plan assets that would not be
claim which was actually made ... and those which subject to distribution in bankruptcy. The only
might have been presented.”). recourse for creditors in this situation would be to
petition the court to revoke the discharge order
3 We note that the Plaintiffs failed to raise a
based on a showing of fraud under 11 U.S.C. §
claim for equitable relief under 11 U.S.C. §
727(d). In the majority of cases, however, it is
502(j), which states that “[a] claim that has
been allowed ... may be reconsidered for
unlikely that a showing of fraud could be made,
cause,” until oral argument in this case. We leaving the creditors without a remedy and
thus consider this argument waived. See frustrating bankruptcy's goal of collecting and
Equal Rights Center v. Niles Bolton equitably distributing all of a debtor's assets.
Assocs., 602 F.3d 597, 604 n. 4 (4th
Moreover, allowing these kinds of post-
Cir.2010) (arguments not raised in
confirmation collateral attacks on a bankruptcy
appellant's opening brief are deemed
waived). We also note, however, that the
plan's terms would “destroy the finality that
burden of establishing cause for bankruptcy confirmation is intended to provide.”
reconsideration under 502(j) rests with the Adair, 230 F.3d at 895. See also Grausz, 321 F.3d
moving party, In re Starlight Group, LLC, at 475 (allowing debtor's malpractice action after
515 B.R. 290, 293 (Bankr.E.D.Va.2014), confirmation of final attorneys' fees order would
and “the clearest cause for reconsideration “undermine a fundamental purpose of the doctrine
is the discovery, subsequent to allowance, of res judicata: ... encouraging reliance on
of new relevant facts or evidence that could adjudication”) (internal citation omitted). Thus,
not have been discovered at an earlier allowing the kinds of post-confirmation actions
stage, or the discovery of clear error in the that the Plaintiffs bring in this case would frustrate
order of allowance,” In re Gold &
two fundamental aims of the bankruptcy process.
Silversmiths, Inc., 170 B.R. 538, 545
(Bankr.W.D.N.Y.1994) (quoting Collier on IV.
Bankruptcy 14th Ed., ¶ 57.23(3)). Here, the
In deciding that these statutory claims were not
Plaintiffs freely admit that no new relevant
barred by res judicata, the district court relied on
facts have come to light since their plans
our opinion in Cen–Pen Corp. v. Hanson, 58 F.3d
were confirmed, and they allege no clear
error in the confirmation order. As a result,
89 (4th Cir.1995). In Cen–Pen, we held that a

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 Covert v. LVNV Funding, LLC 779 F.3d 242 (4th Cir. 2015)

creditor may challenge a plan's treatment of his Second, our reasoning in Cen–Pen was motivated
secured claim as unsecured even after the plan is by the need to protect the rights of parties in
confirmed, because “Bankruptcy Rule 7001(2) interest who are not directly involved in a
expressly requires initiation of an adversary bankruptcy proceeding. In Cen–Pen, the party
proceeding to determine the validity, priority or 250 seeking post-confirmation*250 reinstatement of its
extent of a lien.” Id. at 93 (emphasis in original). secured lien apparently did not participate in the
We then held that “[i]f an issue must be raised debtors' bankruptcy proceedings at all, and its
through an adversary proceeding it is not part of liens were “nowhere mentioned or otherwise
the confirmation process and, unless it is actually acknowledged” in the debtors' proposed plans.
litigated, confirmation will not have a preclusive Cen–Pen, 58 F.3d at 94. Under such
effect.” Id. circumstances, we found that a creditor's lien
could not be avoided simply because a plan had
Although there is no lien at issue in this case, the
been confirmed because “[w]here [an adversary
district court nevertheless read Cen–Pen to create
proceeding] is required to resolve the disputed
a blanket rule that plan confirmation does not have
rights of third parties, the potential defendant has
preclusive effect as to any issue that must have
the right to expect that the proper procedures will
been decided through an adversary process.
be followed.” Id. at 93 (internal citation omitted).
Covert, 2013 WL 6490318 at *5. It then
Any such concerns over the notice necessary
concluded that the Plaintiffs' statutory claims for
before altering the rights of third parties are
damages were claims to “recover money or
inapplicable here, where the Plaintiffs seeking
property,” and were thus not precluded because
relief from the confirmation orders are the debtors
Federal Rule of Bankruptcy Procedure 7001(1)
themselves, and they clearly suffered from no lack
requires such claims to be raised in adversary
of notice of the claims against them.
proceedings. Id.
The Cen–Pen exception simply does not apply in
This reading of Cen–Pen is too broad. First, Cen–
this case. The Plaintiffs' statutory claims are
Pen dealt with the status of secured claims
therefore subject to the normal principles of res
following a bankruptcy proceeding, noting “the
judicata, and are thus precluded by the
general rule that liens pass through bankruptcy
confirmation of the Chapter 13 plans.
unaffected.” Id. at 92. We noted that this rule has
statutory support in 11 U.S.C. § 506(d)(2), which V.
states that liens are not voided “due only to the
For the foregoing reasons, the judgment of the
failure of any entity to file a proof of such claim.”
district court is affirmed.
Cen–Pen, 58 F.3d at 93. Here, by contrast,
Plaintiffs challenge the legality of the process used AFFIRMED.
to collect an unsecured claim. There is no
analogous rule or statute establishing that claims
challenging the filing process pass through
bankruptcy unaffected, nor any rule that unsecured
claims pass through bankruptcy unaffected.
Indeed, the opposite is true. See 11 U.S.C. §
1327(c) (stating the general rule that “[e]xcept as
otherwise provided in the plan or in the order
confirming the plan, the property [that a confirmed
plan distributes] is free and clear of any claim or
interest of any creditor provided for by the plan.”).

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Covert v. LVNV Funding, LLC 779 F.3d 242 (4th Cir. 2015)