One of the more appealing aspects of the U.S. bankruptcy process is the relative ease in which parties in interest may file proofs of claim. In years passed all it took was to mail in a simple form to the bankruptcy court or claims agent and now it is even easier with the advent of email and electronic claims uploading. This relatively easy process, however, often comes with a plethora of invalid or unenforceable proofs of claim.
Parties in interest may file proofs of claim knowing they may not necessarily be entitled to a recovery from the bankruptcy estate in hopes of a windfall if an objection to such claim is not made as there is no provision under the Bankruptcy Code prohibiting such behavior. That may no longer be the case, however, for certain creditors as the 11th Circuit recently held in Johnson v. Midland that a debt collector may be liable under the Fair Debt Collection Practices Act when it files a proof of claim in a bankruptcy case on a debt that it knows to be time-barred.
That case involved two separately consolidated matters where proofs of claims were filed by debt collectors against individual chapter 13 debtors. In the first action, Midland Funding, LLC, a purchaser of unpaid debts, filed a proof of claim in Aleida Johnson’s chapter 13 case based on a transaction that occurred over ten years prior to the commencement of Ms. Johnson’s chapter 13 case. The claim arose in Alabama where the statute of limitations for a creditor to collect on an overdue debt is six years. In the second action, Resurgent Capital Services, L.P., a manager and servicer of domestic and international consumer debt portfolios for credit grantors and debt buyers, filed a proof of claim in the chapter 13 case of Judy Brock. Resurgent’s filing was an attempt to collect on Ms. Brock’s debt on behalf of LVNV Funding, LLC, which is a purchaser of unpaid debt similar to Midland. The underlying debt in that case arose over six years prior to the commencement of Ms. Brock’s chapter 13 case.
Ms. Johnson and Ms. Brock sued their respective creditors under the FDCPA, which provides that “a debt collector may not use and fair, deceptive, or misleading representation or means in connection with the collection of any debt.” This includes attempting to collect a debt that is not “expressly authorized by the agreement creating the debt or permitted by law.” Both debtors alleged that the claims on their face were barred by the relevant statute of limitations and argued that the proofs of claim were thus “unfair, unconscionable, deceptive and misleading” in violation of the FDCPA.
The district court dismissed Ms. Johnson’s FDCPA suit. The district court read section 501(a) of the Bankruptcy Code as affirmatively authorizing a creditor to file a proof of claim, including one that is time-barred, if that creditor has a “right to payment” that has not been extinguished under applicable state law. The district court found an “obvious tension” between the Bankruptcy Code and the FDCPA because the Bankruptcy Code permits creditors to file proofs of claim on debts known to be time-barred while the FDCPA prohibits debt collectors from engaging in such conduct. Finding the two statutes to be in direct conflict, the district court applied the doctrine of implied repeal to hold that a creditor’s right to file a time-barred claim under the Bankruptcy Code precluded debtors from challenging that practice as a violation of the FDCPA. Under that doctrine, where two federal statutes are found to “irreconcilably conflict,” the later enacted statute may be read as an implied repeal of the earlier statute.
In Ms. Brock’s suit, the district court granted Resurgent’s motion for judgment on the pleadings based on its prior rationale and holding in the Johnson case. The two cases were then consolidated for appeal.
On appeal, the debtors argued that the district court’s decision conflicted with the 11th Circuit’s prior holding in Crawford v. LVNV Funding, LLC, which held that a debt collector violates the FDCPA by knowingly filing a proof of claim in a bankruptcy case on account of a time-barred debt. The debtors maintained that the Bankruptcy Code did not preclude this type of FDCPA claim “simply because the claim was made in the context of a Chapter 13 bankruptcy case.” The 11th Circuit’s opinion in Crawford, however, declined to rule on whether the Bankruptcy Code preempts the FDCPA when creditors misbehave in bankruptcy.
Expanding on its prior holding in Crawford, the 11th Circuit held that the Bankruptcy Code did not preclude an FDCPA claim in the context of a chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time-barred. The 11th Circuit recognized that the Bankruptcy Code allowed creditors to file proofs of claim that appear on their face to be barred by the statute of limitations; however, “when a particular type of creditor—a designated ‘debt collector’ under the FDCPA—knowingly files a time-barred proof of claim in a debtor’s Chapter 13 bankruptcy, that debt collector will be vulnerable to a claim under the FDCPA.”
While the district court previously found the Bankruptcy Code and the FDCPA to be in “irreconcilable conflict” on this issue, the 11th Circuit found no such conflict holding that the two statutes differed in their scopes, goals, and coverage, and could be construed together in a way that allowed them to co-exist. The 11th Circuit held that “the Bankruptcy Code and the FDCPA can be reconciled because they provide different protections and reach different actors.” Specifically, the 11th Circuit found that the Bankruptcy Code “allows ‘all creditors’ to file proofs of claims, while the FDCPA dictates the behavior of only ‘debt collectors’ both within and outside of bankruptcy.”
The 11th Circuit noted further that it “read these regimes together as providing different tiers of sanctions for creditor misbehavior in bankruptcy.” In a chapter 13 case, the 11th Circuit found that the first “potential line of protection” against a creditor who files a time-barred proof of claim is for the trustee to object to the claim during the case which may result in denial of payment. Where a creditor’s misbehavior is more severe, however, the 11th Circuit found that “the Code provides a more powerful remedy.” The Court of Appeals found that the FDCPA “easily lies over the top of the Code’s regime, so as to provide an additional layer of protection against a particular kind of creditor” and it kicked in only when the creditor is a debt collector that “regularly collects” or is in “any business the principal purpose of which is the collection of debts.”
The 11th Circuit rejected the claimants’ assertion that potential consequences under the FDCPA for filing a time-barred proof of claim effectively forces a debt collector to “surrender” its right to file a proof of claim. In so doing, the 11th Circuit found that there was no blanket prohibition on filing a time-barred claim in bankruptcy; however, if a debt collector chose to file a time-barred claim, he is “simply opening himself up to a potential lawsuit for an FDCPA violation.” The Court of Appeals likened this to a party choosing to file a frivolous lawsuit noting that there was nothing to stop the filing but afterwards the filer may face sanctions. The Court of Appeals also noted that the FDCPA provides a safe harbor for debt collectors who might unintentionally or in good faith file a time-barred claim.
In conclusion, the Court of Appeals noted that its holding was further bolstered by the fact that there was no provision in either the FDCPA or the Bankruptcy Code that purported to govern the relevant interaction between the two statutes and that Congress never expressed a “clear and manifest intent” to repeal the protections of the FDCPA when it enacted the Bankruptcy Code.
Accordingly, the 11th Circuit found that there was no irreconcilable conflict between the Bankruptcy Code and the FDCPA and the two may be read to coexist.
Although the holding of the 11th Circuit should not prevent most parties from taking the precaution of filing proofs of claim in bankruptcy to protect their rights, debt collectors should proceed with caution when filing proofs of claim where the underlying debts that may be time-barred.