In the
United States Court of Appeals
For the Seventh Circuit
No. 99-1736
JAMES W. ADAIR,
Plaintiff-Appellant,
v.
MICHAEL L. SHERMAN and
SHERMAN & SHERMAN,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 98 C 3946--George M. Marovich, Judge.
Argued February 9, 2000--Decided August 25, 2000
Before BAUER, EASTERBROOK and RIPPLE, Circuit Judges.
RIPPLE, Circuit Judge. 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.
I
BACKGROUND
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.
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
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
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).
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.
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)).
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).
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
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.
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).
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.
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
For the foregoing reasons, the judgment of the
district court is affirmed.
AFFIRMED
/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).