On August 25, 2016, the Fourth Circuit held in In re Eric Dubois, Case No. 15-1945, that filing a proof of claim based on a time-bared debt in a Chapter 13 bankruptcy does not violate the Fair Debt Collection Protection Act (FDCPA) when the applicable state statute of limitations does not extinguish the debt. This decision rejects the reasoning of the Eleventh Circuit in multiple opinions and widens the circuit split created by an Eight Circuit decision in July 2016 and a Seventh Circuit decision in August 2016.
The Proceedings in the Bankruptcy Court
The debtors each filed for Chapter 13 bankruptcy. Atlas Acquisitions LLC (Atlas) filed proofs of claim on debts that were beyond Maryland's three year statute of limitations when Atlas purchased them. Neither debtor listed Atlas on their bankruptcy schedules nor did they send Atlas notice of their bankruptcies.
The debtors filed separate adversary complaints against Atlas in the Bankruptcy Court. Both objected to Atlas' claims as being time-barred and alleged FDCPA violations for filing proofs of claim on "stale debts." The debtors sought disallowance of the claims as well as damages and other relief under the FDCPA and the Maryland Consumer Debt Collection Act (MCDCA).
Atlas conceded that its claims were based on time-barred debts and stipulated to their disallowance. However, Atlas moved to dismiss that FDCPA and MCDCA claims, arguing they failed to state a claim upon which relief could be granted. The bankruptcy court agreed, granting the motions to dismiss and concluding that filing a proof of claim does not constitute debt collection activity within the meaning of the FDCPA. The Fourth Circuit permitted the debtors to appeal the bankruptcy court's decision directly to it, and the Fourth Circuit proceeded to decide the issues without reference to the decision of the bankruptcy court.
The Fourth Circuit's Majority Opinion
The debtors argued that filing a proof of claim on a time-barred debt in a bankruptcy proceeding violates the FDCPA, just like filing or threatening to file a lawsuit to collect on a time-barred debt. Atlas asserted that filing a proof of claim is not debt collection activity; therefore, it is not subject to the FDCPA. Further, even if the FDCPA applies, Atlas contended filing a proof of claim on time-barred debt does not violate the FDCPA.
In reaching its decision on the consolidated appeal, the majority of the Fourth Circuit panel did not address the arguments regarding whether the Bankruptcy Code precludes the FDCPA or preempts the MCDCA from applying to the filing of a proof of claim. Instead, in an opinion written by Judge Henry F. Floyd and joined by Judge Stephanie D. Thacker, the Court conducted its analysis in two parts: (1) first, disagreeing with the bankruptcy court and holding that filing a proof of claim is debt collection activity regulated by the FDCPA; and (2) second, ruling that filing a proof of claim on time-barred debt does not violate the FDCPA when the statute of limitations does not extinguish the debt.
In reaching its conclusion that filing a proof of claim is debt collection activity falling under the auspices of the FDCPA, the Fourth Court noted that, as Atlas admitted that it was a debt collector and that the debtors were consumers, the only relationship between the parties is that of a debtor and debt collector. The Court then held that "[p]recedent and common sense dictate that filing a proof of claim is an attempt to collect a debt" because the "animating purpose" of a proof of claim is to obtain payment from the debtor's bankruptcy estate. It also concluded the "absence of an explicit demand for payment" and "the fact that the bankruptcy court may ultimately disallow the claim" does not change that conclusion. The Court rejected Atlas' position that treating a proof of claim as an attempt to collect a debt would conflict with the automatic stay provision of the Bankruptcy Code. The Fourth Circuit also snubbed Atlas' argument that since a proof of claim is not directed to the consumer, but instead to the bankruptcy court and trustee, it is not collection activity. The Court noted that collection activity directed at someone other than the consumer may still violate the FDCPA.
In reaching its conclusion that filing a proof of claim based on a time-barred debt does not violate the FDCPA when the statute of limitations does not extinguish the debt, the Fourth Circuit initially concluded that a time-barred debt falls within the Bankruptcy Code's definition of a claim. Relying on decisions interpreting Maryland law, the Fourth Circuit reiterated that the statute of limitations in Maryland only limits the remedies of the creditor and does not extinguish the debt, noting that a stale debt may be revived if the debt acknowledges its existence. Because, "under Maryland law, a time-barred debt still constituted a 'right to payment,'" the Court concluded it is "a 'claim' that the holder may file under the Bankruptcy code." It rejected the arguments that a debt must be enforceable in court to be a claim. The Fourth Circuit acknowledged that the Bankruptcy Code provides that time-barred debts are to be disallowed, but interpreted the Code and Bankruptcy Rules to require the filing of claims with a statement identifying the last transaction date, last payment date, and charge-off date on the account.
Having decided that the Bankruptcy Code permits the filing of a proof claim on a time-barred debt, the Court reached the conclusion that it would be detrimental to debtors and would undermine the bankruptcy system for a debt to go unscheduled without a proof of claim being filed. Regardless of whether bankruptcy trustees have the resources to object to claims on time-barred debts, Chapter 13 debtors benefit from the filing of time-barred claims because "the amount they pay into their bankruptcy plans is unaffected by the number of unsecured claims that are filed." The Court did not see any "reason to attached FDCPA liability to a claim filed on a time-barred debt that is scheduled as disputed," and believed that "the interests of discharge and collective treatment of claims ... convince us that FDCPA liability should not attach where a debtor fails to schedule a time-barred debt."
The Dissent by Judge Albert Diaz
In his dissent, Judge Diaz agreed that filing a proof of claim is debt collection activity regulated by the FDCPA and that a time-barred claim is a "claim" under the Bankruptcy Code. He concluded, however, that Atlas' conduct is not consistent with the FDCPA or MCDCA. He would have also held that the Bankruptcy Code does not repeal the FDCPA or preempt the MCDCA. In his view, FDCPA liability should attach to filing time-barred proofs of claim on unscheduled debts in bankruptcy.
The Eleventh Circuit's 2014 opinion in Crawford v. LVNV Funding, LLC, condemned the "deluge" of proofs of claim filed by debt collectors on debts that are unenforceable under state statutes of limitations. It held that the filing of a "stale" claim in bankruptcy violates the FDCPA and led to a surge of FDCPA claims based upon the filing of proofs of claim, which are typically referred to as "Crawford claims."
The Fourth Circuit's opinion reaches a different conclusion, requiring debt collectors to conduct an analysis to determine what state statute of limitations applies and whether the applicable state's statute of limitations extinguishes a debt under applicable state law. In re Eric Dubois certainly provides comfort for those entities collecting on debt subject to Maryland law and may provide helpful fodder in arguing there is no FDCPA liability for filing proofs of claim on time-barred debts based on the purposes of the Bankruptcy Code and the effects of how a debt is (or is not) scheduled in a bankruptcy petition. As appeals on this same issue are currently pending before the First, Third and Sixth Circuit Courts of Appeals, this certainly will not be last word on an issue that has ushered in a tidal wave of litigation.
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