Federal appeals courts have been split on whether filing a proof of claim in bankruptcy on old debt, or obligations that have expired under a statute of limitations, violates the Fair Debt Collection Practices Act. In a victory for debt collectors and the debt buying industry, the Supreme Court clarified this issue on May 15, 2017 with its decision in Midland Funding, LLC v. Johnson, No. 16-348.
In a 5-3 decision, the Supreme Court reversed the Eleventh Circuit’s decision. The Court found that a creditor’s proof of claim that makes clear that the statute of limitations to collect the debt has run is not “false, deceptive, or misleading” because that obligation remains a “claim” for purposes of bankruptcy law.
The case arose from a 2014 Chapter 13 petition filed by Johnson. Midland Funding, LLC (Midland), a buyer of unpaid debt, filed a proof of claim in her case, seeking payment in the amount of $1,879.71 for a delinquent credit card account. The last transaction on the card, however, was made more than 10 years before Johnson’s bankruptcy filing. Because the relevant state statute of limitations for a creditor to collect an overdue debt was six years, the bankruptcy court dismissed the time-barred claim.
Johnson filed a separate civil action in the U.S. District Court for the Southern District of Alabama. There, Johnson alleged Midland violated the FDCPA by filing a claim of proof barred by the relevant statute of limitations and thus, engaging in conduct that was unfair, unconscionable, deceptive and misleading. The District Court found Midland’s conduct did not violate the FDCPA and dismissed the lawsuit. On appeal, the Eleventh Circuit reversed.
According to the Court, the Bankruptcy Code broadly defines the term “claim” as a “right to payment” (11 U.S.C. §101(5)(A)) and state law determines whether a person has such a right. In this case, under the applicable Alabama law, a creditor still has the right to payment of a debt after the limitations period has expired. The Court also found that by filing a proof of claim, a creditor does not use any “unfair or unconscionable means” to collect a debt under the FDCPA. Distinguishing between a civil lawsuit and a bankruptcy action, the Court explained that the consumer initiates the bankruptcy process and has a knowledgeable trustee who is available and charged with the evaluation of the claims. The process is also “generally a more streamlined and less unnerving prospect for a debtor than facing a collection lawsuit.” Additionally, the debtor and trustee have the right to assert an affirmative defense of timeliness for stale claims, which can potentially benefit the debtor.
Notably, the Court highlighted the different purposes and structural features of the FDCPA and Bankruptcy Code. Specifically, the FDCPA protects consumers by preventing consumer bankruptcies while the Bankruptcy Code creates and maintains the “delicate balance of a debtor’s protections and obligations.” To apply the FDCPA in this case “would upset that ‘delicate balance.’”
With this decision, the debt collection and the debt buying industries are no longer frustrated by the Circuit Courts of Appeals’ inconsistent application of these two federal statutes.