In Midland Funding, LLC v. Johnson, No. 16-348, 2017 BL 161314 (U.S. May 15, 2017), the U.S. Supreme Court ruled that a credit collection agency does not violate the Fair Debt Collection Practices Act ("FDCPA") when it files a claim in a bankruptcy case to collect on a debt which would be time-barred in another court.
The FDCPA prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt."
In Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016), the Eleventh Circuit ruled that there is no irreconcilable conflict between the Bankruptcy Code and the FDCPA. Thus, the court concluded, a creditor may file a proof of claim in a bankruptcy case even though the debt is time-barred, but when the creditor is a "debt collector," it may be liable under the FDCPA for "misleading" or "unfair" practices.
The Eleventh Circuit’s ruling was at odds with decisions issued by other circuit courts of appeal. See In re Dubois, 834 F.3d 522 (4th Cir. 2016); Owens v. LVNV Funding, LLC, 832 F.3d 726 (7th Cir. 2016); Nelson v. Midland Credit Management, Inc., 828 F.3d 749 (8th Cir. 2016). The circuit split created uncertainty concerning the extent to which professional debt buyers could attempt to pursue unpaid "stale" debts in bankruptcies.
Writing for a 5-3 majority, Justice Stephen G. Breyer stated that the filing of a proof of claim which is obviously time-barred "is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the [FDCPA]." Writing that "[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense," he added that "we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code’s similar system."
Justice Breyer rejected the argument that this issue was settled by the Advisory Committee on Rules of Bankruptcy Procedure (the "Committee") in connection with amendments to the Federal Rules of Bankruptcy Procedure in 2009. The Committee rejected a proposal which would have amended Rule 9019 to require a creditor to certify in a proof of claim that there is no valid statute of limitations defense—in part, because it did not want to impose an affirmative obligation on a creditor to conduct a pre-filing investigation of a potential time-bar defense. In rejecting that proposal, Justice Breyer added, the Committee noted that Rule 9011 imposes a general "obligation on a claimant to undertake an inquiry reasonable under the circumstances to determine . . . that a claim is warranted by existing law and that factual contentions have evidentiary support" and to certify as much in its proof of claim. The Committee acknowledged, however, that this requirement would "not addres[s] the statute of limitation issue," but would only ensure "the accuracy of the information provided."
Justice Sonia Sotomayor filed a dissenting opinion, in which Justices Ginsburg and Kagan joined. In her dissent, Justice Sotomayor explained that debt buyers have "deluge[d]" the bankruptcy courts with claims "on debts deemed unenforceable under state statutes of limitations" because they recognize that consumers are ill-equipped to respond and under-resourced (citing Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1256 (11th Cir. 2014); In re Jenkins, 456 B.R. 236, 239, n.2 (Bankr. E.D.N.C. 2011) (noting a "plague of stale claims")). Stating that filing a stale claim in a bankruptcy case is unfair and unconscionable, Justice Sotomayor wrote that "[d]ebt collectors do not file these claims in good faith; they file them hoping and expecting the bankruptcy system will fail."
Justice Neil Gorsuch took no part in the consideration or decision of the case.