Proofs of Claim on Time-Barred Debts Do Not Violate the FDCPA

A divided Supreme Court has ruled in Midland Funding, LLC v. Johnson that filing a time-barred proof of claim in bankruptcy does not violate the Fair Debt Collection Practices Act.  The opinion by Justice Breyer was joined by four conservative justices.  The opinion drew a dissent from Justice Sotomayor who was joined by Justices Ginsberg and Kagan.  Justice Gorsuch did not participate in the case.

The Supreme Court had granted certiorari in to reconcile splits among the circuits with regard to whether an action under the FDCPA could be maintained based on filing a proof of claim on a debt which was beyond the applicable state statute of limitations.  The lower appellate courts had split into three camps.  In Walls v. Wells Fargo Bank, N.A., the Ninth Circuit ruled that that bankruptcy law displaces the FDCPA such that a violation of the Bankruptcy Code could only be remedied under the Bankruptcy Code and never under FDCPA.  On the other hand, in Crawford v. LVNV Funding, LLC, the Eleventh Circuit allowed debtors to pursue FDCPA claims based on filing stale claims in bankruptcy.  Crawford held that filing a stale proof of claim was similar to filing suit on a debt that was beyond the statute of limitations.  In the third camp, the Second, Fourth, Seventh, and Eighth Circuits would allow FDCPA claims based on actions taken in bankruptcy generally but would not allow an FDCPA claim based on filing a time-barred debt.

The Court granted certiorari on two questions corresponding to the positions taken by the Ninth and Eleventh Circuits:

1. whether the filing of an accurate proof of claim for an unextinguished time-barred debt in a bankruptcy proceeding violates the Fair Debt Collection Practices Act; and

2. whether the Bankruptcy Code, which governs the filing of proofs of claim in bankruptcy, precludes the application of the Fair Debt Collection Practices Act to the filing of an accurate proof of claim for an unextinguished time-barred debt.

The majority opinion examined whether filing a claim that was beyond the statute of limitations was “false, misleading or deceptive” under the FDCPA and whether it was an unfair or unconscionable practice (also under the FDCPA).

On the first question, a majority of the justices held that the term “claim” under the Bankruptcy Code included debts which were rendered unenforceable by the passage of time.  Because the creditor held a “claim” within the meaning of the Bankruptcy Code, it was not false, misleading or deceptive to say so by filing a claim form in Johnson’s bankruptcy case.  The Court also recognized that whether a statement was “misleading” depended on “the legal sophistication of (the) audience” receiving the communication.  Part of that audience would be the chapter 13 trustee who would be “likely to understand that, as the Code says, a proof of claim is a statement by the creditor that he or she has a right to payment subject to disallowance.”

Whether asserting a time-barred claim was “unfair” or “unconscionable” was a closer question.  Noting that lower courts have ruled that suing on a time-barred debt is unfair or unconscionable, Justice Breyer said that he was not convinced by this precedent in the bankruptcy context.  The Court noted that chapter 13 is a proceeding initiated by the debtor with built-in safeguards including a “knowledgeable trustee.”  He also cited approvingly to an Eighth Circuit Bankruptcy Appellate ruling that the claims resolution process was generally “more streamlined and less unnerving” than a collection suit.  Finally, he noted that the statute of limitations was an affirmative defense which the trustee could be expected to consider.

In a dissenting opinion, Justice Sotomayor lashed out at the debt-buying industry, stating:

Professional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy proceedings to collect it, and hoping that no one notices that the debt is too old to be enforced by the courts. This practice is both “unfair” and “unconscionable.”

Her dissent would have extended the lower court decisions holding that filing suit on a time-barred debt was an unfair practice into the bankruptcy context.  She also dismissed the protective role of the chapter 13 trustee declaring “everyone with actual experience in the matter insists that it is false.”

It is clear that not “everyone with actual experience” would agree with Justice Sotomayor.  In Robinson v. JH Portfolio Debt Equities, LLC, the bankruptcy judge (a former Chapter 13 trustee) explained:

(T)he Court must stress that a Chapter 13 Trustee, who has the fiduciary duty to examine and object to any improper proofs of claim, was appointed in this case. Therefore, in a Chapter 13 bankruptcy, even a debtor or debtor’s counsel who chooses not to prosecute claim objections is protected by additional oversight in the form of a trustee. The trustee and/or any party in interest, including the debtor and his creditors, may object to a claim.  (citation omitted).

In addition, the claim process, including claims disallowance in Chapter 13 cases, cannot be an abuse of process because the process itself is highly regulated and court controlled. One must only read the Bankruptcy Code and Rules to reach such a conclusion . . . The claims allowance and objection process is under almost constant court oversight. It would be highly difficult, perhaps impossible, to consistently abuse the claims process in a Chapter 13 bankruptcy given the scrutiny of the claims process by the debtor, the Chapter 13 Trustee and the bankruptcy court.

This opinion may end the cottage industry of FDCPA litigation based upon Crawford.  However, the Court did not address the larger question of whether the bankruptcy claims filing process completely displaces the FDCPA.  However, the majority’s reliance on the protective role of the trustee suggests that the Court might be willing to go further.

The Court also did not reach the question of whether the FDCPA prohibits filing suit on a time-barred debt.  Justice Breyer’s opinion assumed “for argument’s sake that the precedent is correct.”  At oral argument, several of the justices seemed troubled that filing a claim subject to an affirmative defense could give rise to FDCPA liability.  Thus, while this opinion did not expressly address the issue in the civil suit context, it is sure to stir debate (and future case law) as to whether these precedents remain vital.