On May 15, 2017, a divided U.S. Supreme Court held in Midland Funding, LLC v. Johnson that a debt collector’s filing of a facially time-barred claim in Chapter 13 bankruptcy proceedings was not a violation of the Fair Debt Collection Practices Act (“FDCPA”). The Court’s decision draws from the text of the Bankruptcy Code and the FDCPA, but also relies heavily upon the systemic differences between resolving cases in bankruptcy court versus civil court. The result is an important victory for debt collectors pursuing claims in bankruptcy, but leaves open significant questions regarding exposure for pursuit of stale claims outside bankruptcy proceedings.
In 2014, the plaintiff, Aleida Johnson, filed for Chapter 13 bankruptcy. In the bankruptcy, Midland Funding, LLC (“Midland”) filed a proof of claim asserting that Johnson owed Midland $1,879.71 in credit-card debt. Under Alabama law, the statute of limitations for Midland’s claim was 6 years. Midland’s proof of claim, however, stated on its face that no charges had appeared on Johnson’s credit card account since 2003. Johnson objected and, after the bankruptcy court had disallowed Midland’s claim, filed a civil suit under the FDCPA seeking actual damages, statutory damages, attorneys’ fees, and costs. The district court dismissed Johnson’s FDCPA suit, but the Eleventh Circuit reinstated it, widening a circuit split on whether a debt collector’s filing of a time-barred claim in bankruptcy is “false,” “deceptive,” “misleading,” “unconscionable,” or “unfair,” as those terms are used in the FDCPA.
The Supreme Court’s opinion, authored by Justice Breyer and joined by the Chief Justice and Justices Kennedy, Thomas, and Alito, held that Midland had committed no FDCPA violation by filing its “obviously” time-barred claim. The Court first considered whether Midland’s filing the proof of claim was “false,” “deceptive,” or “misleading.” Johnson had argued that, under the Bankruptcy Code, a “claim” must mean an enforceable claim. The Court rejected her argument, pointing out that the word “enforceable” appeared nowhere in the Bankruptcy Code’s definition of the term “claim” and that Congress had intended to adopt the “broadest available definition” of that term. For these and other textual reasons, the Court concluded that the term “claim” includes both enforceable and unenforceable claims, so that Midland’s filing the proof of claim was not false, deceptive, or misleading.
The Court also considered the structure of Chapter 13 bankruptcy proceedings. The Court observed that a statute of limitations is an affirmative defense that must be proved and asserted by either the debtor or the bankruptcy trustee—not the creditor. Following this routine burden-shifting framework is neither misleading nor deceptive. The Court also noted that whether a statement is misleading depends upon the “legal sophistication of [the] audience,” which, under these circumstances, includes the bankruptcy trustee. The trustee, the Court explained, is likely to understand that a time-barred claim is subject to objection and disallowance.
The Court next turned to the “closer question” of whether Midland’s filing of the proof of claim was either “unfair” or “unconscionable,” but concluded that there had been no FDCPA violation. The Court again drew a distinction between asserting a right to payment in civil litigation and Chapter 13 bankruptcy proceedings. Unlike ordinary civil litigation, the Court explained, there are diminished concerns in bankruptcy about: (1) the consumer’s lack of sophistication, (2) the effect of time on memory and evidence, and (3) the possibility of paying stale debts to avoid cost and embarrassment. Namely, in a Chapter 13 bankruptcy: (1) there is a “knowledgeable” bankruptcy trustee; (2) procedural bankruptcy rules “more directly guide the evaluation of claims”; and (3) the consumer initiates the proceedings, which are more “streamlined” and “less unnerving” than a civil debt collection lawsuit. Therefore, in bankruptcy, it is “considerably more likely” that collection efforts for time-barred claims “will be met with resistance, objection, and disallowance.”
The Court also expressed its desire to preserve a “delicate balance” of the protections and obligations in the Bankruptcy Code by not blurring the line between the Code and the consumer protection aims of the FDCPA. Allowing these types of FDCPA claims would, for example, “permit postbankruptcy litigation in an ordinary civil court concerning a creditor’s state of mind” and could place additional burdens on creditors to investigate affirmative defenses in lieu of allowing creditors to comply with the procedures set forth in the Bankruptcy Code.
Finally, the Court rejected the position of the United States, as amicus curiae, that the practice of filing time-barred claims is sanctionable under the Bankruptcy Code. After reviewing the Advisory Committee’s meeting records, the Court concluded that the Committee had made a conscious decision not to place the pre-filing investigatory burden on creditors. Although creditors are responsible for ensuring the accuracy of the information in a proof of claim, the Committee specifically rejected a proposal to require creditors to certify the absence of a time bar before filing a claim.
Justice Sotomayor, in a dissent joined by Justices Ginsburg and Kagan, would have held that filing a time-barred claim is “unfair” and “unconscionable.” The dissent began by criticizing the debt collection industry and suggested that filings such as Midland’s are merely a way to avoid statutes of limitations that would be enforced in state court. The dissent argued that consumers remain disadvantaged in bankruptcy proceedings because it is impractical for bankruptcy trustees to review every claim for potential time bars. Further, the dissent argued that debtors in bankruptcy remain unsophisticated and doubted that the procedural rules of bankruptcy, which automatically allow claims until an objection is made, will protect those consumers. Finally, the dissent noted that debtors who make payments toward stale debts will unwittingly “rescuscitat[e]” the creditors’ claims and lose their statute of limitations defense.
The Court’s decision in Midland is an important win for the debt collection industry, providing protection from liability for claims filed on stale debts. As noted by both the majority and the dissent, however, the Court’s holding only applies to time-barred claims in bankruptcy proceedings—not to time-barred civil suits. The majority was clear that its opinion did not address that topic. As a corollary, the Court’s opinion also does not address the topic of non-litigation debt collection activity with respect to discharged debts—i.e., attempts to collect debts after a claim has been disallowed or the debtor has been discharged. Nor did the Court foreclose the possibility that other actions within the context of bankruptcy proceedings may violate the FDCPA. The dissent was careful to point out that, while Midland had requested such a rule, the majority had “decline[ed] its invitation.”