A recent decision from a United States Bankruptcy Court in the Northern District of Illinois provides a detailed analysis of why proofs of claim on “time-barred” debt do not violate the federal Fair Debt Collection Practices Act (FDCPA) or the Bankruptcy Code. The decision, Glenn v. Cavalry Investments, LLC, is among the growing number of decisions rejecting Crawford v. LVNV from the Eleventh Circuit Court of Appeals.

A copy of the opinion is available at: Link to Opinion.

The debtor, Darryl Glenn, voluntarily commenced a chapter 13 bankruptcy in August 2014.  The creditor, Cavalry Investments, filed a timely proof of claim along with addenda setting forth the basis for assessing the timeliness of the claim in accordance with Rule 3001 of the Federal Rules of Bankruptcy Procedure.  Among the information contained in Cavalry’s proof of claim was that the last activity on the account was May 24, 2002, and that the account had been charged off on Oct. 21, 2002, each more than 10 years prior to Glenn’s petition date.

After the Court confirmed Glenn’s chapter 13 plan, he filed an objection to the creditor’s proof of claim, arguing that the creditor’s claim was timed barred.  Cavalry did not respond to the objection or appear at the hearing, and Glenn’s objection was sustained by the Court.

Prior to the hearing on the debtor’s objection, Glenn filed an adversary complaint asserting the proof of claim violated Sections 1692e and 1692f of the FDCPA.  Glenn also claimed the filing of the proof of claim with actual knowledge that the debt was timed barred under state law constituted a fraud on the court.

Cavalry moved to dismiss.  The Court rejected Glenn’s contention that the mere filing of a proof of claim on a time-barred debt is a per se violation of the FDCPA.  The Court acknowledged that in Phillips v. Asset Acceptance, LLC, the Seventh Circuit Court of Appeals held that debt collection lawsuits based upon time-barred debts violated the FDCPA.  See Phillips v. Asset Acceptance, LLC, 736 F.3d 1076, 1083 (7th Cir. 2013).  The Court, however, distinguished Phillips by pointing to the differences in the bankruptcy claims process and a creditor commenced lawsuit.

Claims Process is Not Similar to a Collection Lawsuit

As the Court explained, while the filing of a proof of claim is often likened to the filing of a complaint, and an objection to a claim may be waived like a statute of limitations defense, the similarities end there.  The bankruptcy process requires participation from the debtor and creditors to effect an equitable distribution of assets.  In fact, as the Court further explained, the creditor in this case did not drag the debtor into bankruptcy, it merely responded to the debtor’s bankruptcy.

Moreover, unlike in Phillips, the Court opined that neither state statutes of limitations nor the Bankruptcy Code barred the filing of these claims.  The filing of a lawsuit on a time-barred debt sent the message that the creditor was entitled to do so and therefore may be deceptive, particularly to unsophisticated pro se defendants.

In contrast, the Bankruptcy Code recognizes holders of time-barred claims as creditors.  See 11 U.S.C. § 101(5) (a “claim” is defined broadly in the Bankruptcy Code as a “right to payment, whether or not such right is … disputed …”).  In fact, according to the Court, time-barred debts remain viable claims in most jurisdictions.  Illinois law, for example, separately classifies statutes of limitations (which do not extinguish debts) from statutes of repose (which do extinguish debts).  See, e.g., DeLuna v. Burciago, 223 Ill. 2d 49, 61, 857 N.E. 2d 229, 237 (2006).  The Seventh Circuit had also recognized a creditor’s right to payment on time-barred debts post Phillips in McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1020 (7th Cir. 2014).

The Court continued its analysis by pointing to the Bankruptcy Code provisions, which permitted the filing of time-barred claims.  See 11 U.S.C. § 501(a) (“A creditor … may file a proof of claim.”); 11 U.S.C. § 101(10)(A) (“The term ‘creditor’ means – [an] entity that has a claim against the debtor …”); 11 U.S.C. § 101(5) (A “claim” is a “right to payment, whether or not such right is … disputed …”).  Because the Bankruptcy Code permitted the filing of such claims, the Court concluded that the filing of time-barred claims did not violate the FDCPA.

Proofs of Claim on ‘Time-Barred’ Debts Not Misleading

As you may recall, section 1692e of the FDCPA prohibits the use of any false, deceptive, or misleading representations in connection with the collection of any debt.  FDCPA section 1692f prohibits the use of unfair or unconscionable means to collect or attempt to collect any debt.

The Court held that the filing of a proof of claim on a time-barred debt was neither false nor misleading because the proof of claim did not disguise the fact that the debt is old.  In fact, by complying with Bankruptcy Rule 3001, the creditor made it abundantly clear that a defense to the claim may exist.  The creditor exercised its rights provided in the Bankruptcy Code and nothing more.  The Court concluded that the creditor’s proof of claim did not constitute a sanctionable fraud on the court, and dismissed Counts I and II of the debtor’s complaint.

Fifth Amendment Implications

At the end of the opinion, the Court discussed the Fifth Amendment, which was not stressed in the parties’ brief, but apparently influenced the Court’s ruling.  The Court expressed its concerns regarding the surge in the number of FDCPA claims being asserted in bankruptcy based upon the filing of proof of claims on time-barred debts.

The Fifth Amendment to the United States Constitution contains what is commonly referred to as the Taking Clause, which states that “[n]o person shall … be deprived of … property, without due process of law.”  U.S. Const. amend. V.  The Court opined that the FDCPA appeared to be carefully drafted to not foreclose on the collection rights of time-barred debts.  According to the Court, preventing creditors holding time-barred debts from filing a proof of claim in bankruptcy may arguably be a taking under the Fifth Amendment.

The FDCPA bars no collection and extinguishes no debt.  The only remedy afforded consumers is monetary.  Thus, it is only under the Bankruptcy Code that otherwise unextinguished, time-barred debts can be extinguished.  Therefore, the Court explained, creditors have something to lose in bankruptcy.  Unlike the FDCPA, bankruptcy and the bankruptcy discharge changed the underlying rights of the parties.  To adopt a per se rule that bars the filing of such claims in bankruptcy would deny creditors due process from being heard when their property rights may be extinguished.

Accordingly, the Court granted the creditor’s motion to dismiss.