Debt collectors scored a win on Monday when the United States Supreme Court ruled that pursuing stale debt is not a violation of the Fair Debt Collection Practices Act (“FDCPA”).
The case of Midland Funding LLC v Aleida Johnson addressed an ongoing issue for creditors, debt collectors and consumers. As debts age, and are often sold, there remains a question of how far collectors may go to pursue payment on the debt.
The case started when Johnson filed for Chapter 13 protection. During the bankruptcy case, Midland filed a proof of claim for the payment of $1,879 in credit card debt. In turn, Johnson filed a lawsuit against Midland, alleging that Midland violated the FDCPA.
The FDCPA enacted in 1977 prohibits debt collectors from making false, deceptive or misleading statements in an attempt to collect a debt. In her suit, Johnson alleged that Midland violated the FDCPA when it filed its proof of claim on a time-barred debt. Specifically, Johnson resided in Alabama, which has a six year statute of limitation for collection on debt. That Midland’s claim was unenforceable in Johnson’s bankruptcy was undisputed, because Midland filed its claim in 2014 on a credit card whose last transaction occurred in 2003, well beyond the six year statute of limitations.
The federal trial court granted Midland’s motion to dismiss, finding that the U.S. Bankruptcy Code permits all creditors to file proof of claims. However on appeal, the Eleventh Circuit Court of Appeals reversed the dismissal. The Eleventh Circuit’s decision created a split amongst the Circuits, and Midland appealed to the US Supreme Court, which decided to hear Midland’s appeal.
In a 5-3 decision, the Supreme Court ruled that the Eleventh Circuit erred in finding that Midland could be liable under the FDCPA, finding that Midland’s actions were not false, deceptive or misleading. At oral argument, counsel for Johnson argued that Midland knew its debt was time barred when it filed its proof of claim. But the Court held that Midland’s claim was not false, deceptive, or misleading because it disclosed the 2003 date of the Johnson’s last credit card transaction. The Court found that unenforceability of a claim creates an affirmative defense and the Supreme Court sees “nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the code’s similar system.”
Justice Breyer wrote the majority opinion. He explained that the case involved a Chapter 13 bankruptcy and not a civil suit, which would provide the consumer with assistance from the Chapter 13 trustee who likely would not pay a stale claim. Further, there appeared to be concern that permitting the civil suit would create significant post-bankruptcy litigation regarding a collector’s state of mind or knowledge of time-barred debt. The Court determined that it was inappropriate to upset the Bankruptcy Code’s burden-shifting balance, under which the filing of a claim is facially valid unless the Debtor or Trustee objects to the claim. In the dissent, Justice Sonia Sotomayer, joined by Justices Elena Kagan and Ruth Bader Ginsburg, said that placing the burden on the trustee to sort through debts to determine if they are time-barred is flawed. Further, she stated that the debt collection industry’s business of purchasing stale debt and filing claims is “unfair” and “unconscionable.” Interestingly, Judge Breyer’s authorship of the opinion departs from his usual support of the dissenting Justices in this case. That shift combined with Justice Neil Gorsuch’s recent confirmation may signify an era of more creditor-friendly rulings from the Supreme Court.
While Monday’s decision resolves the Circuit split, it does not provide a green light to debt collectors to pursue time-barred debt. The decision highlights the consumer’s ability to raise affirmative defenses and file claims for frivolous conduct in a civil suit. The decision is limited to the filing of proof of claims within a bankruptcy case. Collectors must still heed state specific rules addressing the ability to file civil claims or collect on time-barred debts.