This week, the United States Supreme Court issued its decision in Midland Funding, LLC v. Johnson, 581 U.S. ___ (2017), holding that a debt collector does not violate the Fair Debt Collection Practices Act (FDCPA) by filing an “obviously time-barred” proof of claim in a bankruptcy proceeding. This case should stem the tide of FDCPA lawsuits against debt collectors for efforts to collect potentially time-barred debts in bankruptcy proceedings.
In Midland Funding, a creditor filed a proof of claim in a consumer’s Chapter 13 bankruptcy on account of a credit card debt. The proof of claim, however, demonstrated that the debt was barred by the applicable Alabama statute of limitations. The consumer’s counsel objected to the claim, the creditor did not respond and the Bankruptcy Court disallowed the claim. Later, the consumer sued the creditor and argued that, by filing a proof of claim on account of a time-barred debt, it committed an act that was “false,” “deceptive,” “misleading,” “unconscionable” or “unfair” within the meaning of the FDCPA. The consumer theorized that a “claim” means an enforceable claim, and a time-barred claim was not an enforceable claim, rendering the proof of claim false, deceptive, misleading, unconscionable or unfair. The Eleventh Circuit reversed the dismissal of the consumer’s claim.
In reversing the Eleventh Circuit, the Court, in a decision authored by Justice Breyer, analyzed whether the creditor’s claim was “false, deceptive, or misleading” versus “unfair” or “unconscionable.” The Court held that it was “reasonably clear that the proof of claim was not ‘false, deceptive, or misleading’” for three reasons. First, a claim is a right to payment, which is “usually” a question of state law. In Alabama (and, the Court observed, in other states, like Ohio, Illinois, New York and New Jersey), a creditor has a right to payment after the statute of limitations has expired. Second, the Court held that the Bankruptcy Code does not limit “claims” to “enforceable claims” and stated that, although an unenforceable “claim” is to be disallowed, it “is nonetheless a ‘right to payment,’ [and] hence a ‘claim’” under the Code. Finally, determining whether a statement is misleading normally “requires consideration of the legal sophistication of its audience.” The audience in Chapter 13 bankruptcy cases includes a trustee, who is unlikely to be misled, because the trustee will understand that a proof of claim is a statement by the creditor that he or she has a right to payment subject to disallowance.
The Court also rejected the argument that the claim was “unfair” or “unconscionable.” While some lower courts have held that filing a time-barred claim in a civil suit can be “unfair,” the Court stated that the “context of a civil suit differs significantly” from a Chapter 13 bankruptcy proceeding, which has a trustee and procedural rules to guide the evaluation of claims. The Court also was not persuaded by the respondent’s argument that there is no “legitimate reason” to allow such behavior, and an argument asserted by the Department of Justice that certifying a claim as warranted by existing law in a proof of claim is sanctionable and thus “unfair.” The Court rejected these arguments because untimeliness is an affirmative defense under the Code, and because the Chapter 13 bankruptcy proceedings minimize the risk of paying barred claims. In sum, the Court determined that neither the FDCPA nor the Code provides “reason to believe that Congress intended an ordinary civil court applying the [FDCPA] to determine answers to these bankruptcy-related questions,” and that neither the Code nor its drafters intended to impose an affirmative obligation on a creditor to make a prefiling investigation of a potential time-bar defense.
Justice Sotomayor dissented, joined by Justices Ginsburg and Kagan, and rejected the Court’s distinctions between civil and bankruptcy claims. The dissent stated that time-barred claims set a trap for the unwary, and that filing such a claim would constitute “unfair” and “unconscionable” conduct under the FDCPA. The dissent focused on “debt-buyers” – entities that purchase debts from creditors and attempt to collect them – and noted that a case pending before the Court, Henson v. Santander Consumer USA Inc., No. 16–349, asks whether a certain kind of debt-buyer is a “debt collector” under the FDCPA. Justice Gorsuch did not participate in the consideration or decision.
The Midland Funding decision should end FDCPA lawsuits for time-barred claims in bankruptcy cases. It leaves open, however, the related question of whether debt collectors can be liable under the FDCPA for filing lawsuits to collect time-barred debt. The Court noted that several lower courts have found that filing suit for a time-barred claim is “unfair,” and assumed “for argument’s sake” that these lower courts were correct. But the Court added that it “has not decided” and “does not now decide” that issue, perhaps suggesting that issue may come before the Court soon. We will continue to monitor developments in this space.