Two decisions issued within a day of each other highlight the continuing debate over whether a time barred proof of claim violates the FDCPA and more importantly, whether the Bankruptcy Code preempts the FDCPA. As copycat cases continue to be filed, courts continue to resoundingly reject the rationale ofCrawford v. LVNV Funding, LLC, a decision out of the Eleventh Circuit.
Recapping Crawford v. LVNV Funding LLC. In Crawford, the debtor filed an adversary proceeding against several debt buyers, alleging that the filing of a time barred proof of claim violated the automatic stay and the FDCPA. The adversary proceeding was commenced almost four years after the suspect proof of claim was filed. The debt buyer ultimately withdrew the proof of claim; however, the adversary proceeding proceeded forward. The Bankruptcy Court granted the debt buyers’ motion to dismiss holding that the filing of a proof of claim, even one on time barred debt, did not constitute a violation of the FDCPA. The district court agreed and affirmed the bankruptcy court. On appeal, the Eleventh Circuit reversed, holding that the filing of a proof of claim was an attempt to collect a debt and that the filing of a proof of claim for time barred debt violated the FDCPA. Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014). In so holding, the court took issue with the fact that an otherwise uncollectible debt would result in some recovery under the Chapter 13 plan. “Such a distribution of funds to debt collectors with time-barred claims then necessarily reduces the payments to other legitimate creditors with enforceable claims.” Crawford, 758 F.3d at 1261. Additionally, the court premised its reversal on the notion that “a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt.” Id. In April of this year, the Supreme Court refused to grant review of the decision. More recently, the bankruptcy court dismissed the adversary proceeding on remand because the debt failed to file its adversary proceeding within the applicable statute of limitations. Crawford v. LVNV Funding, LLC, Case No. 08-30192-DHW, Adv. Pro. No. 12-030333-DHW (Sep. 29, 2015). Left unaddressed by the Crawford parties was whether the Bankruptcy Code’s claim procedures precluded an FDCPA violation. In a footnote which ultimately has had more value than the actual opinion, the Eleventh Circuit declined “to weigh in on a topic the district court artfully dodged whether the Code “preempts” the FDCPA when creditors misbehave in bankruptcy.” Crawford, 758 F.3d at 1262, n.7. The Crawforddecision, therefore, has limited precedential value because the court specifically declined to consider whether the Bankruptcy Code precludes the FDCPA in the bankruptcy context.
Two courts recently tackled the preemption issue and while they reached different conclusions as to preemption, they reached the same ultimate conclusion: that filing a proof of claim on a time barred debt is not a per se violation of the FDCPA. The decisions highlight the real story: the debate as to preemption. While the majority of courts ultimately agree that the holding of Crawford was wrong, they are not as united on the preemption issue and we are likely to continue to see preemption debated until it is ultimately addressed by the Supreme Court.
Castellanos v. Midland Funding LLC (Middle District of Florida). In Castellanos v. Midland Funding LLC, the district court rather summarily granted summary judgment in favor of the debtor buyer, holding that the Bankruptcy Code precludes an FDCPA claim for filing a time barred claim. Castellanos v. Midland Funding LLC, 2016 U.S. Dist. LEXIS 165 (M.D. Fl. Jan. 4, 2016). In its opinion, the Court noted that while the Bankruptcy Code allows debt collectors to submit proofs of claim without regard to the statute of limitations on the debt, the FDCPA prohibits filing suit on a time barred claim. Thus, the Court found the two statutes were in direct conflict and as such, one must preclude the other. In these instances, the Court noted that the Bankruptcy Code provides debtors a remedy to object to proofs of claim the debtor disagrees with. Thus, the later statute (in this case the FDCPA) should not implicitly repeal the Bankruptcy Code, and must actually give way to the Bankruptcy Code as it already provides a remedy for debtors. In dicta, the Court took a practical view of the situation: allowing debtors to file these claims in District Court when they have a perfectly good defense to them under the Bankruptcy Code is inefficient and undermines Bankruptcy Code.
Glenn v. Cavalry Investments LLC (Eastern District of Illinois Bankruptcy Court). Taking a different tact, a Bankruptcy Court in the Northern District of Illinois disagreed and held that neither the Bankruptcy Code nor the FDCPA preempted the other and that “mere noncompliance with the Bankruptcy Code or Bankruptcy Rules is not enough to give shelter from FDCPA claims “. Glenn v. Cavalry Investments LLC, Case No. 14bk31070 (Bkrptcy E. D. Ill. Jan. 5, 2016), Slip Op. at 8. In doing so, the court relied upon prior Seventh Circuit precedence holding that the Bankruptcy Code can be read in conjunction with the FDCPA. See Randolph v. IMBS, Inc., 368 F.3d 726, 732 (7th Cir. 2004).
The Court, however, refused to hold that the filing of a proof of claim on a time barred debt constituted aper se violation of the FDCPA. Id. at p. 13. In doing so, the court noted that “bankruptcy is a collective process, designed to gather together the assets and debts of the debtor and to effect an equitable distribution of those assets on account of debts…While it would be unfair to allow the creditor to do whatever it pleases as a result of the debtor’s actions, it would be more unfair to say that the creditor may do nothing at all in response [to the debtor’s bankruptcy filing].” Id. at 9-10. The court concluded that the mere submission of a proof of claim of a time barred debt with no other factual allegations of misconduct on the part of the debt collector does not rise to the level of a violation under the FDCPA. Facts matter, and in this case the facts alleged were not deceptive, false, or misleading nor were they unfair or unconscionable.