What happens in a Chapter 13 bankruptcy case when a creditor files a proof of claim involving a debt for which the statute of limitations to collect the debt has run? More specifically, does the filing of such a claim violate the Fair Debt Collection Practices Act (the “Act”)? That’s the issue considered by the U.S. Supreme Court in its recent decision in the case of Midland Funding, LLC v. Johnson. 1
In the underlying case, Johnson filed for bankruptcy under Chapter 13 of the Bankruptcy Code (the “Code”). Midland Funding, LLC (“Midland”), the Petitioner in the Supreme Court appeal, filed a proof of claim in the bankruptcy alleging that Johnson owed Midland $1,879.71 in credit card debt. The proof of claim explained that the last charge on the credit card account took place over a decade earlier. The statute of limitations for collection of the debt under Alabama law was six years.
Johnson objected and the Bankruptcy Court disallowed the claim. Johnson later filed suit against Midland alleging that Midland violated the Act. Johnson argued that Midland’s filing of the claim was “false,” “deceptive,” “misleading,” “unconscionable,” or “unfair” under the Act. The District Court ruled that the Act did not apply. The case was appealed to the U.S. Court of Appeals for the Eleventh Circuit, which reversed.
The Supreme Court reversed the Eleventh Circuit, and held that a creditor’s proof of claim that made clear “on its face” that the statute of limitations to collect the debt had run was not “false, deceptive, or misleading” and did not use any “unfair or unconscionable means” to collect a debt under the Act.
The Supreme Court’s decision is consistent with the majority of Courts of Appeals that have considered the issue. The Supreme Court explained that the Bankruptcy Code defines the term “claim” very broadly. A “claim” under the Bankruptcy Code is defined as a “right to payment.” Since state law usually determines whether such a right to payment exists, the Supreme Court looked to Alabama law, which “provides that a creditor has the right to payment of a debt even after the limitations period has expired.”
Johnson argued that under the Bankruptcy Code the word “claim” means “enforceable claim.” The Supreme Court explained, however, that a “claim” does not have to be “enforceable.” The unenforceability of a claim, in this case based on the timeliness of a claim, is an affirmative defense. Accordingly, the Court concluded that the proof of claim was not “false, deceptive, or misleading.”
According to the Supreme Court, a “closer question” was whether Midland’s filing of the time barred claim was “unfair” or “unconscionable.” Johnson pointed to several lower court decisions that “found or indicated that, in the context of an ordinary civil action to collect a debt, a debt collector’s assertion of a claim known to be time barred is ‘unfair’.”
The Supreme Court was not swayed by these cases, however, because the context of a civil suit “differs significantly” from Chapter 13 bankruptcy proceedings. In ruling that Midland’s actions were not “unfair” or “unconscionable,” the Supreme Court explained that the Act and the Code have “different purposes and structural features.” Finding that Midland’s actions violated the Act under these circumstances would upset the “delicate balance” of a debtor’s protections and obligations under the Bankruptcy Code.