Last week, the Seventh Circuit chimed in on whether time barred proofs of claim violate the FDCPA.In Owens v. LVNV Funding, LLC, the Seventh Circuit affirmed three district court decisions which dismissed consumer’s FDCPA claims against debt buyers who filed time barred proofs of claim.Owens v. LVNV Funding, LLC, Nos. 15-2044, 15-2082, 15-2109 (7th Cir. Aug. 10, 2016).In doing so, the Seventh Circuit joins the Second and Eighth Circuits in siding against the Eleventh Circuit’s decision in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014).

In Owens, the consumers argued that the act of filing a proof of claim on a time-barred debt is inherently misleading because the term “claim” only includes legally enforceable obligations.The consumers additionally argued that the filing of a time barred proof of claim is inherently deceptive because a debt buyer’s business plan depends upon the reality that the debtor, its counsel or the trustee may sometimes fail to object to time-barred claims, thus allowing the time-barred claim to receive payment to the detriment of the debtor and other creditors.

The Definition of a "Claim".

In rejecting the consumers’ arguments, the Court first noted that in most states, the statute of limitations does not extinguish the debt. It simply limits the avenues of recourse. The court went on to reject the consumers’ narrow definition of “claim” instead holding that a “claim” is defined as a right to payment and that a creditor with a stale debt retains some right to payment.The Court drew support for its position from the Bankruptcy Code’s claim allowance procedure and the fact that the Bankruptcy Code contemplates the statute of limitations as one of the enumerated grounds for disallowing a claim.The Court therefore concluded that “a proof of claim on a time-barred debt does not purport to be anything other than a claim subject to dispute in the bankruptcy case.” Slip Op. at 13.

The Dispositive Issue.

While the Court defined a claim broadly to include time-barred proofs of claim, it held that that issue was not dispositive of the case. The dispositive issue before the Court was whether defendants’ conduct in filing the proofs of claim was false, deceptive or misleading under the FDCPA.In concluding that it was not, the Court first noted that the act of filing a time-barred proof of claim is not in and of itself a violation of the FDCPA. The Court sided with the Second and Eighth Circuit in rejecting the rationale of the Eleventh Circuit in Crawford. The court distinguished between litigation and bankruptcy proofs of claim and held that concerns regarding the misleading or deceptive nature of filing time-barred claims is less acute in the bankruptcy context because the bankruptcy rules require the proof of claim to include the age of the debt and the claims process is designed to allow the debtor, its counsel, and the trustee to object to the claim.

The Competent Attorney Standard.

In addressing whether the proofs of claim were false or misleading, the court rejected the unsophisticated consumer standard adopted in the Eleventh Circuit. Noting the presence of counsel in most cases and trustees in all cases, the court concluded the proper standard to evaluate the debt buyers’ action is that of the “competent attorney”. Slip Op. at 18. In reviewing the actions of the debt buyers, the Court concluded that there was nothing deceptive or misleading about the debt buyers’ conduct. In each instance, the proofs of claim provided accurate and complete information about the status of the debts and the debtor’s counsel had to look no further than the proof of claim to determine whether or not the statute of limitations had run.

Keys to the Decision.

The opinion is important for a number of reasons.Parties seeking to rely upon it should note the following:

  • First, the opinion does not hold that the Bankruptcy Code preempts the FDCPA.Instead, the court’s opinion is consistent with its prior holding in Randolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004) (holding that the Bankruptcy Code does not preempt the FDCPA) and that the two statutes can be read consistently and together.
  • Second, the opinion does not hold that the act of filing a time-barred proof of claim is in and of itself a violation of the FDCPA.
  • Finally, the court’s decision is limited to the facts presented.In fact, the court goes to great lengths to note that “if defendants had filed proofs of claim with inaccurate information, or had otherwise engaged in deceptive or misleading debt collection practices, plaintiffs would have a cause of action under the FDCPA.” Slip Op. at 19.