Supreme Court Holds that the Fair Debt Collection Practices Act Does Not Impose Liability on a Creditor Who Files a Proof of Claim to Collect a Time-Barred Debt

In September, we wrote that a major question ripe for Supreme Court consideration was whether a creditor can be held liable under the Fair Debt Collection Practices Act (“FDCPA”) when it files a proof of claim in a bankruptcy case to collect a time-barred debt.  On May 15, 2017, in a 5-3 decision, the Supreme Court ruled in favor of debt collectors.  Midland Funding, LLC v. Johnson, ___ U.S. ___ (2017).

In or before mid-2003, Aledia Johnson (“Johnson”) took out credit with Fingerhut Credit Advantage.  Johnson’s last payment was made in May 2003, and the debt was “charged off” in January 2004.  The debt appears to have been sold a few times, and ultimately was owned by Midland Funding, LLC (“Midland”) — one of the nation’s largest buyers of unpaid debt.

In March 2014, Johnson filed a chapter 13 bankruptcy petition in Alabama.  Midland filed a proof of claim for $1,879.71, even though any suit to recover the debt would have been time-barred under Alabama’s 6-year statute of limitations.  Johnson objected to the claim, Midland did not contest the objection, and the bankruptcy court disallowed the claim.

Johnson then filed a lawsuit against Midland, seeking actual damages, statutory damages, attorneys’ fees and costs for violating the FDCPA.  The district court dismissed the lawsuit, but the 11th Circuit reversed.

The Supreme Court concluded that Midland’s filing of a proof of claim to recover a time-barred debt did not violate the FDCPA.  Among other things, the Court noted that in most states (including Alabama) creditors have the right to payment of a debt even after the limitations period has expired.  There are procedural rules which allow for a streamlined evaluation of claims in bankruptcy cases, and the Bankruptcy Code preserves the estate’s ability to raise affirmative defenses such as statutes of limitations.  Also, in chapter 7 and 13 cases there are relatively sophisticated trustees who examine proofs of claims and, where appropriate, pose objections.  Thus, in the Court’s estimation, Midland’s assertion of a time-barred claim was not “false, deceptive, or misleading,” “unfair” or “unconscionable.”

Justice Sotomayor filed a dissent, joined by Justices Ginsburg and Kagan.  In their view, the practice of filing claims in bankruptcy proceedings in the hope that no one notices that the debt is time-barred is both “unfair” and “unconscionable.”  The FDCPA was enacted to, among other things, beat back debt collectors’ practice of filing lawsuits to collect time-barred debts.  But that has not entirely halted the behavior; indeed, in 2015 Midland and its parent company entered into a consent decree with the Government prohibiting them from filing suit to collect time-barred debts and ordering them to pay $34 million in restitution.  Now, debt buyers have shifted their focus to bankruptcy cases, where they file time-barred proofs of claims in the hope that nobody notices that they are too old to be enforced.  In the dissenting justices’ view, these claims are not filed in good faith; indeed, they are filed in the hope and with the expectation that the bankruptcy system will fail.  Thus, they conclude, the practice of filing time-barred claims violates the FDCPA.

The majority places great trust in the bankruptcy system to weed out time-barred claims.  However, for small claims such as Midland’s claim in Johnson’s bankruptcy case (less than $2,000), debtors usually have little incentive to object and the cost to trustees and creditors of doing so is often prohibitive — even when it seems clear that the claim is time-barred and the claimant will not contest the objection.  And of course, whether a claim is time-barred is usually not clear from the face of the proof of claim.  If the Court had ruled in favor of Johnson, its ruling would have had a significant impact on debt collectors by making them responsible for ensuring that they don’t file time-barred claims.  Instead, absent a Congressional adjustment to the FDCPA or the Bankruptcy Code, its ruling will allow debt collectors to file, and sometimes get paid on, stale claims without fear of liability under the FDCPA.

Supreme Court to Decide Whether the Fair Debt Collection Practices Act Imposes Liability on a Creditor Who Files a Proof of Claim to Collect a Time-Barred Debt

timemoneyJust a few weeks ago, we wrote that a major question begging for Supreme Court consideration is whether a creditor can be held liable under the Fair Debt Collection Practices Act (“FDCPA”) when it files a proof of claim in a bankruptcy case to collect a time-barred debt.  In May 2016 the Eleventh Circuit said yes; in July 2016 the Eighth Circuit said no (as long as the proof of claim is accurate and complete).

At the request of both the petitioning creditor and the responding debtor, the Supreme Court has agreed to review the Eleventh Circuit’s decision in Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. May 24, 2016).  The questions to be examined by the Court are as follows:

(1)  Whether the filing of an accurate proof of claim for an unextinguished time-barred debt in a bankruptcy proceeding violates the Fair Debt Collections Practices Act.

(2)  Whether the Bankruptcy Code, which governs the filing of proofs of claim in bankruptcy, precludes the application of the Fair Debt Collection Practices Act to the filing of an accurate proof of claim for an unextinguished time-barred debt.

The stakes are high, particularly for collection companies and claims purchasers (like Midland Funding) that are most at risk for filing proofs of claims relating to time-barred debts.  This will be a very hotly contested case with many amici curiae briefs likely to be filed.  We hopefully will have a resolution to these issues by next summer.

Does the FDCPA Apply When a Creditor Files a Proof of Claim to Collect a Time-Barred Debt?

The U.S. Supreme Court has accepted a number of bankruptcy cases over the last few years, and another issue seems ripe for the big stage:  Can a creditor be held liable under the Fair Debt Collection Practices Act (“FDCPA”) when it files a proof of claim in a bankruptcy case to collect a time-barred debt?  On July 11, 2016, the Eighth Circuit added to the existing circuit split regarding application of the FDCPA in bankruptcy cases.  See Nelson v. Midland Credit Mgmt., Inc., ___ F.3d ___ (8th Cir. 2016).Continue reading

Unmarried Same-Sex Couples Are Not Eligible to File Joint Bankruptcy Petitions Even If They Are Registered Domestic Partners

Section 302 of the Bankruptcy Code provides that a debtor “and such individual’s spouse” may file a joint bankruptcy case. Courts have held that persons who cohabitate, but are not legally married, are not eligible to file a joint petition. See In re Malone, 50 B.R. 2 (Bankr. E.D. Mich. 1985) (opposite-sex couple); Bone v. Allen (In re Allen), 186 B.R. 769 (Bankr. N.D. Ga. 1995) (same-sex couple); In re Lucero, 408 B.R. 348 (Bankr. C.D. Cal. 2009) (opposite-sex couple). On the other hand, legally married couples – including same-sex couples – may file joint petitions. See In re Somers, 448 B.R. 677 (Bankr. S.D.N.Y. 2011) (same-sex couple legally married in Vermont).Continue reading

Supreme Court: “Actual Fraud” Exception to Discharge Is Not Limited to Cases in Which the Debtor Has Made a False Representation to the Creditor

A principal purpose of the Bankruptcy Code is to provide a fresh start to an “honest but unfortunate debtor.”  Under certain circumstances, a creditor may ask the bankruptcy court to determine that a particular debt is nondischargeable.  If the court agrees, the debtor will continue to owe that debt even after the case is over and all other debts are discharged.

Section 523(a)(2)(A) of the Bankruptcy Code provides that an individual debtor’s discharge does not cover any debt “for money, property [or] services . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud.”  Over the years, courts have disagreed about the meaning of “actual fraud.”  Continue reading

Don’t Lose Your Shirt

Recently there have been a series of high profile retailer bankruptcies – Radio Shack, Haggen Stores and Quicksilver. These cases shine a light on a very difficult problem for commercial property owners. This problem is exacerbated for single-tenant net-leased investments that rely exclusively on the income from one tenant and have become a virtual safe-haven for many investors, especially 1031 exchanges. So what is an owner to do when his formerly blue chip tenant files for Chapter 11?Continue reading

A Bankruptcy Horror Story

In the case of State Bank v. Covey (In re Duckworth), an opinion was issued in late 2014 by the United States Court of Appeals for the Seventh Circuit which voided a $1.1 million security interest because of just one small mistake.

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