The U.S. Supreme Court in Midland Funding, LLC, v. Johnson, 581 U.S. ___, 2017 WL 2039159 (2017) ruled that filing a bankruptcy proof of claim on time-barred debt does not violate the Fair Debt Collection Practices Act (“FDCPA”), thereby resolving a circuit split on the issue. The Court held that such a proof of claim is not false, deceptive, misleading, unfair, or unconscionable because a “claim” under the bankruptcy code includes any right to payment even if the right is unenforceable. Johnson, 2017 WL 2039159, at *4-5. The Court distinguished filing a civil case on time-barred debt, which lower courts have found violates the FDCPA, because bankruptcy court offers protections to consumers that are unavailable in civil cases. Id. at *6-7. This decision will protect FDCPA defendants from claims arising out of conduct during a bankruptcy.
District Court: The FDCPA conflicts with the Bankruptcy Code.
Midland acquired plaintiff’s defaulted credit-card debt and filed a proof of claim in plaintiff’s bankruptcy. The bankruptcy court denied the proof of claim because the debt’s statute of limitations had expired. Plaintiff then sued Midland under the FDCPA, alleging the proof of claim was a “false representation of … the character, amount, or legal status of any debt,” which the FDCPA prohibits. 15 U.S.C. § 1692e.
The district court dismissed the complaint. The court noted that, under Alabama law, the expiration of a limitations period eliminates only a judicial remedy for a debt and not a creditor’s right to payment. The court held that because the creditor retained a “right to payment,” the Bankruptcy Code permitted a proof of claim. As a result, the court believed that the FDCPA conflicted with the Bankruptcy Code’s scheme for permitting and resolving claims, and that the FDCPA’s provision had to give.
Eleventh Circuit: The Bankruptcy Code and the FDCPA can be harmonized.
The Eleventh Circuit reversed the dismissal. It began by reaffirming its prior holding in Crawford v. LVNV Funding
, 758 F.3d 1254 (11th Cir. 2014) that filing a proof of claim for a time-barred debt violates the FDCPA. The Eleventh Circuit agreed that creditors holding time-barred debt retained a right to payment and that the Bankruptcy Code thus authorized filing a proof of claim, and it noted the resulting potential conflict between the FDCPA and Bankruptcy Code. But the court tried to harmonize the two statutes by holding that creditors could typically file proofs of claim on time-barred debt
the creditor were a debt collector under the FDCPA, in which case such a proof of claim would violate the FDCPA.
The Eleventh Circuit’s holding created a circuit split.
The Eleventh Circuit’s holding broadly conflicted with two other existing circuit court of appeal decisions holding that conduct in connection with bankruptcies must be resolved in the bankruptcy court rather than under the FDCPA. Simmons v. Roundup Funding, LLC
, 622 F.3d 93, 96 (2d Cir. 2010) (rejecting inflated proof of claim; “filing a proof of claim in bankruptcy court cannot form the basis for an FDCPA claim”); Walls v. Wells Fargo Bank, N.A.
, 276 F.3d 502, 510 (9th Cir. 2002) (rejecting FDCPA claim for violation of discharge injunction; “the debtor’s protection and remedy remain under the Bankruptcy Code”). Three other circuit courts of appeal rejected FDCPA claims based on untimely proof of claims after the Eleventh Circuit’s decision. Nelson v. Midland Credit Management, Inc.
, 828 F.3d 749, 752 (8th Cir. 2016) (“This court rejects extending the FDCPA to time-barred proofs of claim.”); Owens v. LVNV Funding, LLC
, 832 F.3d 726 (7th Cir. 2016) (rejecting FDCPA claim based on time-barred debt); In re Dubois
, 834 F.3d 522 (4th Cir. 2016) (same).
Supreme Court: Filing a proof of claim does not violate the FDCPA.
The Court found it “reasonably clear” that filing the proof of claim on time-barred debt was not “false,” “deceptive,” or “misleading” under the FDCPA. Johnson
, 2017 WL 2039159, at *4. The Court noted that a “claim” is a right to payment as defined by state law, and that Alabama law (like many other states) preserves a creditor’s right to payment after the limitations period expires; the right simply becomes unenforceable. Id
. at *4-5. The Court rejected the argument that a “claim” must be enforceable because the Bankruptcy Code’s definition of “claim” is not so limited. Id
. The Court also noted that a statute of limitations is an affirmative defense for a debtor to assert, so filing a proof of claim is not deceptive because the debtor could assert a limitations defense. Id
. The Court also relied on the audience of a proof of claim—a bankruptcy trustee—who the Court determined was sophisticated enough to recognize the limitations defense. Id
. at *6.
The Court said a closer question was whether a claim on time-barred debt was “unfair” or “unconscionable” under the FDCPA, and noted lower courts’ holdings that civil suits to collect time-barred debt are unfair under the FDCPA. Id. at *6 citing Phillips v. Asset Acceptance, LLC
, 736 F.3d 1076, 1079 (7th Cir. 2013); Huertas v. Galaxy Asset Mgmt.
, 641 F.3d 28, 32-33 (3rd. Cir. 2011); Castro v. Collecto, Inc.
, 634 F.3d 779, 783 (5th Cir. 2011); Freyermuth v. Credit Bureau Servs., Inc.
, 248 F.3d 767, 771 (8th Cir. 2001) (other citations omitted). The Court declined to rule on that issue, but noted that a civil suit is very different from a bankruptcy proceeding where the debtor initiates the bankruptcy proceeding and a knowledgeable trustee is available. Id.
Impact: Stronger defenses are available against FDCPA claims arising out a bankruptcy proceeding and possibly in other contexts.
The Court’s ruling should help defendants facing FDCPA claims for actions taken in a bankruptcy proceeding because the Court recognizes that the procedural protections in a bankruptcy court reduce the opportunities to take advantage of an unsophisticated debtor. This could factor into another FDCPA circuit split over whether the Bankruptcy Code provides the exclusive remedy (displacing FDCPA claims) regarding conduct that occurs during bankruptcy. Compare Walls
, 276 F.3d 502 and Simmons
, 622 F.3d 93 (FDCPA claims regarding bankruptcy conduct displaced by Bankruptcy Code) with Simon v. FIA Card Services, N.A.
, 732 F.3d 259 (3d Cir. 2013) and Randolph v. IMBS, Inc.
, 368 F.3d 726 (7th Cir. 2004) (no general displacement). Finally, by refusing to rule on the issue, the Court signaled it may be willing to overrule the (so far) unanimous position of Circuit Courts that filing civil suits on time-barred debt, even outside a bankruptcy, violates the FDCPA. But this last point is very uncertain because the Court’s holding relied heavily on the differences between a bankruptcy proceeding and an ordinary civil case.