Filing a proof of claim with a bankruptcy court representing a debt subject to an expired state law limitations period does not violate the federal Fair Debt Collection Practices Act (FDCPA) under an opinion released yesterday from the Seventh Circuit Court of Appeals.
Under the ruling, in Owens v. LVNV, the Seventh Circuit joins the Eighth Circuit Court of Appeals in rejecting the Eleventh Circuit’s holding under Crawford v. LVNV that such proofs of claim violate the FDCPA.
A copy of the opinion is available at: Link to Opinion.
In this consolidated appeal of three cases, debt purchasers or their attorneys had filed proofs of claims in Chapter 13 cases. The debtors in each Chapter 13 case objected to the proofs of claim on the basis they were “time-barred.” The objections were sustained and each claim was disallowed.
Each objecting debtor then sued in federal district court alleging that because the debts represented by the proofs of claim were time-barred, the debts were not valid claims because they were not “legally enforceable.” Therefore, the claims filings in the bankruptcy courts amounted to false, unfair and deceptive practices in violation of the FDCPA.
The federal district courts dismissed the complaints, finding that the proofs of claim were complete and accurate and the mere filing of a proof of claim for a debt subject to an expired limitations period did not violate the FDCPA.
Out of Statute Debts are Claims
The Court of Appeals rejected the argument that the Bankruptcy Code only permits “legal enforceable” claims. Finding that the Bankruptcy Code’s definition of a claim is broadly construed, the Court pointed to Third Circuit law, which considered a claim “more extensive than the existence of a cause of action that entitles an entity to bring suit.” The Bankruptcy Code, the opinion notes, contemplates claims subject to expired state-law limitations periods and, through the bankruptcy process, the debtor can object and cause them to be disallowed.
Bankruptcy Process Provides Protections
The debtors also argued that the process of filing such proofs of claims can be false and deceptive because even though the claims may be subject to disallowance, debt collectors contemplate that no objection will be made because the “process sometimes will break down and fail.” This same rationale is behind the Eleventh Circuit’s decision in Crawford.
Here the Seventh Circuit, like the Eighth Circuit, looked to the Second Circuit Court of Appeals decision in Simmons v. Roundup Funding, decided long beforeCrawford. In Simmons, the Second Circuit held that the mere filing of a proof of claim representing an inflated debt did not violate the FDCPA. The bankruptcy process provides debtors with sufficient protections against, as the Seventh Circuit put it, an “invalid or enforceable” claim. Unlike a civil lawsuit, where the debtor may be misled to believe no defense exists to entry of a judgment and simply “give in,” in a bankruptcy case (particularly one where the debtor has counsel, as was the situation in all three of the consolidated cases here), the same concern is not present. The proof of claim must identify the age and the origin of the debt, providing sufficient information to determine whether the debt is subject to an expired limitations period.
Another factor distinguishing the bankruptcy process is the presence of trustees, who are “duty-bound” to object to claims and cause them to be disallowed for a variety of reasons, such as a defense that the claim is past a state-law limitations period.
Finally, unlike a civil lawsuit, because the debtor initiated the bankruptcy process, he “thus demonstrated a willingness to participate” and would be “unlikely to give in rather than fight the claim.”
No Evidence of False, Deceptive or Unfair Practices
The Seventh Circuit evaluates communications subject to the FDCPA by not examining how the plaintiff interpreted them, but instead considers how the communication would be interpreted by a hypothetical “unsophisticated consumer.” However, because in each of the three bankruptcy cases here the debtors were represented by counsel, the Seventh Circuit employed its less stringent, “competent attorney” standard. Under this standard the Court reasoned that a hypothetical competent attorney was provided all the information required from the face of each of the three proofs of claim to determine whether any were subject to a state-law expired statute of limitations.
Because the proofs of claim would not confuse the hypothetical competent attorney, no evidence was presented that any of the proofs of claim contained deceptive or misleading information or constituted unfair or abusive conduct.
FDCPA Not Precluded by Bankruptcy Code
The opinion notes that it is sympathetic to situations where claims subject to state-law limitations periods are not disallowed and are paid through a Chapter 13 plan because it “harms not only the debtor, who is forced to pay a portion of the stale debt out of limited means, but also creditors with legally enforceable debts whose share of the pie is reduced because an additional creditor is claiming a piece.” But that risk did not support a finding of an FDCPA violation here because all three claims were in the bankruptcy process because all the plaintiffs here object to the claims, which were not allowed in their bankruptcy cases.
Further, the opinion does not preclude the FDCPA from the bankruptcy process when debt collectors file proofs of claim “with inaccurate information” or otherwise engage in “deceptive or misleading debt collection practices.”
Other Circuits Expected to Weigh in Soon
Appeals on the same issue are pending before the First, Third, Fourth and Sixth Circuit Courts of Appeals.