The United States Supreme Court recently held that a creditor who files a bankruptcy claim on a time-barred debt does not violate the Fair Debt Collection Practices Act (“FDCPA”). See Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (2017). In the case, the debtor filed for bankruptcy under Chapter 13 of the Bankruptcy Code, and the creditor filed a proof of claim asserting that it was owed credit card debt. However, the credit card had not been used in over ten years, outside Alabama’s six-year statute of limitations. The bankruptcy court disallowed the claim after the debtor’s counsel objected, and the debtor subsequently brought an action against the creditor under the FDCPA, alleging that the filing of a proof of claim on a time-barred debt was “false, deceptive, or misleading” and used “unfair or unconscionable means” to collect the debt. 15 U.S.C. § 1692e; 1692f. The district court dismissed the action, but the United States Court of Appeals for the Eleventh Circuit reversed.
In a decision authorized by Justice Breyer and joined by Chief Justice Roberts and Justices Kennedy, Thomas and Alito, the Supreme Court reversed the Eleventh Circuit. First, the Court held that Alabama law provides that a creditor has a right to payment of a debt even after the limitations period has expired, even if it cannot bring an action on the same. Accordingly, the Court found that the right to payment constitutes a “claim” under the Bankruptcy Code. Second, the Court distinguished this case from those in which courts held that attempts to collect time-barred debts via the filing of civil actions violated the FDCPA, stating that a debtor in bankruptcy is protected by a trustee and a claims resolution process which “makes it considerably more likely” that the creditor’s claim will be “met with resistance, objection, and disallowance.” Similarly, untimeliness is normally treated as an affirmative defense and “the trustee normally bears the burden of investigating claims and pointing out that a claim is stale.” Finally, the Court noted that the Advisory Committee on Rules of Bankruptcy Procedure “specifically rejected a proposal that would have required a creditor to certify that there is no valid statute of limitations defense” while amending the Rules in 2009. Therefore, the Court found that there was not an FDCPA violation.
The dissent, authored by Justice Sotomayor and joined by Justices Ginsburg and Kagan, disagreed with the majority’s conclusion that a debtor would be more protected in a bankruptcy action than in a typical lawsuit. In response to the majority’s claim that the bankruptcy process “makes it considerably more likely” that a time-barred claim will be “met with resistance, objection, and disallowance,” the dissent stated, “such objections require ordinary and unsophisticated people (and their overworked trustees) to be on guard not only against mistaken claims but also against claims that debt collectors know will fail under law if an objection is raised.” The dissent further held that the filing of such a claim would be a “trap for the unwary” that meets the FDCPA standard of “unfair or unconscionable.” The dissent concluded by seeking the intervention of Congress, stating “[i]f Congress wants to amend the FDCPA to make explicit what in my view is already implicit in the law, it need only say so.”