The U.S. Supreme Court in Midland Funding, LLC, v. Johnson, 581 U.S. ___, 2017 WL 2039159 (2017) ruled that filing a bankruptcy proof of claim on time-barred debt does not violate the Fair Debt Collection Practices Act (“FDCPA”), thereby resolving a circuit split on the issue. The Court held that such a proof of claim is not false, deceptive, misleading, unfair, or unconscionable because a “claim” under the bankruptcy code includes any right to payment even if the right is unenforceable. Johnson, 2017 WL 2039159, at *4-5. The Court distinguished filing a civil case on time-barred debt, which lower courts have found violates the FDCPA, because bankruptcy court offers protections to consumers that are unavailable in civil cases. Id. at *6-7. This decision will protect FDCPA defendants from claims arising out of conduct during a bankruptcy.
District Court: The FDCPA conflicts with the Bankruptcy Code.
Midland acquired plaintiff’s defaulted credit-card debt and filed a proof of claim in plaintiff’s bankruptcy. The bankruptcy court denied the proof of claim because the debt’s statute of limitations had expired. Plaintiff then sued Midland under the FDCPA, alleging the proof of claim was a “false representation of … the character, amount, or legal status of any debt,” which the FDCPA prohibits. 15 U.S.C. § 1692e.
The district court dismissed the complaint. The court noted that, under Alabama law, the expiration of a limitations period eliminates only a judicial remedy for a debt and not a creditor’s right to payment. The court held that because the creditor retained a “right to payment,” the Bankruptcy Code permitted a proof of claim. As a result, the court believed that the FDCPA conflicted with the Bankruptcy Code’s scheme for permitting and resolving claims, and that the FDCPA’s provision had to give.
Eleventh Circuit: The Bankruptcy Code and the FDCPA can be harmonized.
The Eleventh Circuit reversed the dismissal. It began by reaffirming its prior holding in Crawford v. LVNV Funding
, 758 F.3d 1254 (11th Cir. 2014) that filing a proof of claim for a time-barred debt violates the FDCPA. The Eleventh Circuit agreed that creditors holding time-barred debt retained a right to payment and that the Bankruptcy Code thus authorized filing a proof of claim, and it noted the resulting potential conflict between the FDCPA and Bankruptcy Code. But the court tried to harmonize the two statutes by holding that creditors could typically file proofs of claim on time-barred debt
unless the creditor were a debt collector under the FDCPA, in which case such a proof of claim would violate the FDCPA.
The Eleventh Circuit’s holding created a circuit split.
The Eleventh Circuit’s holding broadly conflicted with two other existing circuit court of appeal decisions holding that conduct in connection with bankruptcies must be resolved in the bankruptcy court rather than under the FDCPA. Simmons v. Roundup Funding, LLC, 622 F.3d 93, 96 (2d Cir. 2010) (rejecting inflated proof of claim; “filing a proof of claim in bankruptcy court cannot form the basis for an FDCPA claim”); Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 510 (9th Cir. 2002) (rejecting FDCPA claim for violation of discharge injunction; “the debtor’s protection and remedy remain under the Bankruptcy Code”). Three other circuit courts of appeal rejected FDCPA claims based on untimely proof of claims after the Eleventh Circuit’s decision. Nelson v. Midland Credit Management, Inc., 828 F.3d 749, 752 (8th Cir. 2016) (“This court rejects extending the FDCPA to time-barred proofs of claim.”); Owens v. LVNV Funding, LLC, 832 F.3d 726 (7th Cir. 2016) (rejecting FDCPA claim based on time-barred debt); In re Dubois, 834 F.3d 522...
