Creditors and debt collectors are often held to high standards when it comes to consumer protection laws. On December 17, however, the United States Bankruptcy Court for the Northern District of Illinois issued a Memorandum Opinion in In re: Charles V. Cook, Sr., No. 1:14-bk-36424, evincing that debtors’ counsel can be subject to similarly high standards when appropriate.
In Cook, Debtor’s counsel was a firm that represented debtors in bankruptcy as well as non-bankruptcy litigation, especially claims based on violation of the Fair Debt Collection Practices Act. In fact, the majority of the firm’s litigation leads came from existing bankruptcy clients. The firm’s bankruptcy practice used a completely different litigation management system than the litigation practice, and attorneys in the two groups did not have regular access to each system. There were also no formal procedures in place to ensure that FDCPA claims that the firm’s litigation practice was handling were reported in clients’ bankruptcy filings. While a paralegal was supposed to manually flag the bankruptcy system if an FDCPA claim was filed on behalf of a debtor, there was no evidence that this was occurring outside of examples in only five cases.
In the Cook case, Debtor’s counsel failed to list two FDCPA claims in Debtor’s initial bankruptcy filings, both of which were filed pre-petition. One FDCPA claim was settled more than a month before Debtor filed his bankruptcy while the other FDCPA lawsuit was pending at the time of filing. That claim settled during the pendency of the bankruptcy. The lawyer that was defending the pending FDCPA claim against the Debtor noticed the failure to disclose the claims in Debtor’s bankruptcy and instructed Debtor’s bankruptcy counsel to amend the relevant schedules, but counsel failed to do so before the 341 meeting.
The United States Trustee eventually noticed the missing FDCPA claim. At that point, the Trustee moved to reopen the bankruptcy case to pursue sanctions against the Debtor’s counsel in light of the discrepancies and changes in the bankruptcy case, which included the failure to initially disclose the FDCPA claim. The firm made the litigation process extremely difficult “by antics that call into question the good faith nature of [the firm’s] actions.”
After a three-day trial, the Court found that the firm’s policies and procedures to ensure all debtors’ FDCPA claims were included in their bankruptcy were not adequate, resulting in, as the Court described, “a consistent pattern of nondisclosures over a three-year period.” The Trustee moved for sanctions against the firm and also moved for a civil penalty against the law firm for violating the bankruptcy code. Although the Court did not issue sanctions, it issued a $10,000 civil penalty against the firm, required the firm to disgorge the attorneys’ fees it collected from the debtor, and ordered that the firm pay the fees related to this matter to the Trustee.