United States: Supreme Court Focuses On Intersection Of FDCPA And Bankruptcy Code

Last Updated: February 6 2017
Article by David N. Anthony, Stephen Piepgrass and Andrew B. Buxbaum

On January 17, 2017, the United States Supreme Court heard oral argument in the case of Midland Funding, LLC v. Johnson, an appeal from the Eleventh Circuit bringing to a head two issues that had been boiling for several years: (i) whether the filing of an accurate proof of claim for an unextinguished time-barred debt in a bankruptcy proceeding violates the Fair Debt Collection Practices Act (FDCPA); and (ii) whether the Bankruptcy Code, which governs the filing of proofs of claim in bankruptcy, precludes application of the FDCPA to the filing of an accurate proof of claim for an unextinguished time-barred debt.

BACKGROUND

In Johnson, the Eleventh Circuit revisited the issue of whether debt collectors are barred by the FDCPA from filing proofs of claims in bankruptcy when those claims are based on unenforceable consumer debts under state law. The Eleventh Circuit affirmed its prior decision in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), concluding that when a "creditor is also a 'debt collector' as defined by the FDCPA, the creditor may be liable under the FDCPA for 'misleading' or 'unfair' practices when it files a proof of claim on a debt that it knows to be time-barred, and in doing so 'creates the misleading impression to the debtor that the debt collector can legally enforce the debt.'"

In 2008, Stanley Crawford filed for protection under chapter 13 of the Bankruptcy Code. A debt buyer filed a proof of claim in that case related to a debt with no account activity since late 2001. Under the Alabama three-year statute of limitations that governed the account, Crawford's debt became unenforceable in both state and federal court in October of 2004. Crawford filed an adversary proceeding in his bankruptcy case alleging an FDCPA violation, which the Bankruptcy Court dismissed on the debt buyer's motion – a ruling the District Court affirmed.

Crawford was appealed to the Eleventh Circuit which reversed the District Court's decision. Section 1692e(2)(A) of the FDCPA prohibits the false representation of the character, amount, or legal status of any debt. Section 1692e(5) prohibits a threat "to take any action that cannot legally be taken or that is not intended to be taken." In Crawford, the Eleventh Circuit held that knowingly filing a time-barred proof of claim violated FDCPA prohibitions against unfair, unconscionable, deceptive or misleading conduct. The Court's rationale was based on the same concerns underlying the rule against litigating time-barred debts – the debtor's faded memory, lost records, ignorance of statute of limitations and expense associated with contesting the sale. The Eleventh Circuit held that a debt collector violated the FDCPA by filing a proof of claim on a debt that was time-barred.

Since then, however, many courts have rejected Crawford. The Eighth Circuit, in Nelson v. Midland Credit Management, Inc., 828 F.3d 739 (8th Cir. 2016), was especially critical of the Crawford rationale, noting that the bankruptcy process protects debtors against harassment and deception. The Eighth Circuit noted, "[u]nlike defendants facing a collection suit, bankruptcy debtors are aided by 'trustees who owe fiduciary duties to all parties and have a statutory obligation to object to unenforceable claims.'" The Eighth Circuit reasoned that "[d]efending a lawsuit to recover a time-barred debt is more burdensome than objecting to a time-barred proof of claim." The Court found, "there is no need to protect debtors who are already under the protection of the bankruptcy court, and there is no need to supplement the remedies afforded by bankruptcy itself."

Beyond the substantive arguments about whether the filing of a proof of claim on a debt outside the statute of limitations violates the FDCPA, courts began wrestling with whether the Bankruptcy Code preempts the FDCPA an issue specifically left unanswered in Crawford. As with the substantive analysis, Circuit Courts have been split on the preemption issue. The Ninth Circuit in Walls v. Wells Fargo Bank N.A., 276 F.3d 502 (9th Cir. 2002), held that the FDCPA is not needed to protect debtors protected by the automatic stay and other provisions of the Bankruptcy Code.

Other courts have reached the opposite conclusion, reasoning one federal statute does not preempt another when they address the same subject in different ways. Cases from the Seventh Circuit ( Randolph v. IMBS Inc., 368 F.3d 726 (7th Cir. 2004)) and Third Circuit (Simon v. FIA Card Servs., N.A., 732 F.3d 259 (3d Cir. 2013)) held a federal statute implicitly repeals another when there is "an irreconcilable conflict between the statutes or a clearly expressed legislative decision that one replaces the other."

Since the preemption argument was not addressed in Crawford, the District Court in Johnson was the first to confront the preclusion question that the Eleventh Circuit left open. In Johnson, the debtor filed for Chapter 13 bankruptcy relief. A debt collector filed a proof of claim that disclosed on its face that the claim was barred by the statute of limitations. The debtor sued the debt collector, alleging that the filing of the proof of claim was deceptive and misleading under § 1692e and unfair and unconscionable under § 1692f. The District Court found that there was an irreconcilable conflict between the Bankruptcy Code and the FDCPA, because a creditor can properly file a proof of claim on a time-barred debt under the Bankruptcy Code as long as the underlying debt has not been extinguished under state law, but the same creditor cannot file the proof of claim without violating the FDCPA, as construed by Crawford. In other words, the District Court said, "the Code authorizes filing a proof of claim on a debt known to be stale, while the [FDCPA] (as construed by Crawford) prohibits that precise practice," and "those contradictory provisions cannot possibly be given effect simultaneously." And in the face of that conflict, the District Court ruled that the FDCPA "must give way" to the Bankruptcy Code.

The Eleventh Circuit reversed stating that it saw no irreconcilable conflict between the Bankruptcy Code and the FDCPA. The Court pointedly ruled: "[A]lthough the (Bankruptcy) Code certainly allows all creditors to file proofs of claim in bankruptcy cases, the Code does not at the same time protect those creditors from all liability. A particular subset of creditors – debt collectors – may be liable under the FDCPA for bankruptcy filings they know to be time-barred." In finding no conflict between the federal statutes, the Eleventh Circuit noted "when a particular type of creditor" – a "debt collector" as defined under the FDCPA – files a proof of claim for a debt it knows is out-of-statute, the creditor must "still face the consequences" imposed by the FDCPA for a 'misleading' or 'unfair' claim."

Midland petitioned the Supreme Court to grant certiorari and the reply by Johnson agreed with the need for review. As Midland pointed out in its reply brief, the case presented an unusual situation where both petitioner and respondent agreed that the questions presented implicate clear circuit conflicts on important issues of federal law.

THE ORAL ARGUMENT

Much of the focus during Midland's argument was on answering the question why creditors are allowed to file such claims in the first place. Midland's counsel noted that under the Bankruptcy Code, a creditor may file a proof of claim in a debtor's bankruptcy. A "claim" is defined as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." In prior cases, the Supreme Court interpreted this language to create an "entitle[ment]" for creditors to file a proof of claim in a bankruptcy proceeding where a "right to payment" exists. A "right to payment" under the Bankruptcy Code "is nothing more nor less than an enforceable obligation."

Consumer advocates, including Johnson, argued that there is no "right" to file a time-barred claim when there is no right to have that claim repaid in a Chapter 13 bankruptcy proceeding. Courts, including the Eleventh Circuit in Johnson, have regularly rejected this argument because the Code does allow claims in a Chapter 13 bankruptcy proceeding by a party who does not necessarily have a right to have his claim paid.

In all but a few states, the expiration of a statute of limitations does not extinguish the right to payment; it only extinguishes the remedy of judicial prosecution of the claim. So, although a party may not be able to enforce its claim because of a statute-of-limitations bar, that party still may assert the claim. As noted by the Eleventh Circuit in Johnson, the Bankruptcy Code's procedure for addressing proofs of claim demonstrates that some filed claims will not ultimately be paid in a bankruptcy proceeding. Where a proof of claim is filed in a bankruptcy case, that claim is generally "deemed allowed," so it will be viewed as a valid claim and paid out of the bankruptcy estate. However, the bankruptcy trustee is charged with examining proofs of claim and objecting to the allowance of any claim that is improper. Once the trustee objects, the bankruptcy court is in turn charged with determining whether the claim "is unenforceable against the debtor . . . under any agreement or applicable law for a reason other than because such claim is contingent or unmatured." Under the Bankruptcy Code, "The estate shall have the benefit of any defense available to the debtor . . . including statutes of limitation."

Thus, where the bankruptcy process is working as intended, a time-barred proof of claim may be filed, but will not be paid by the bankruptcy estate. As the Fourth Circuit noted, going through this exercise may inure to the benefit of the consumer debtor since debtors often fail to list all debts in the bankruptcy schedules. As the Fourth Circuit stated in Dubois, "If the debt is unscheduled and no proof of claim is filed, the debt continues to exist and the debt collector may lawfully pursue collection activity apart from filing a lawsuit. This is detrimental to the debtor and undermines the bankruptcy system's interest in "the collective treatment of all of a debtor's creditors at one time." Clearly, then, when a time-barred debt is not scheduled the optimal scenario is for a claim to be filed and for the Bankruptcy Code to operate as written."

Questions for counsel from some of Justices, especially Justice Sotomayor, indicated concerns with the Bankruptcy claims administration procedures that supposedly incentivize the filing of stale debt, in hopes that no party objects. Counsel for Midland rejected that line of questioning by pointing to the Bankruptcy Code, the Bankruptcy Rules of Procedure and the accompanying advisory committee notes, observing: "Congress very consciously put that burden on the trustee and other parties in interest in the Bankruptcy Code." Other justices seemed to disagree with the line of thinking indicated by Justice Sotomayor's questions, wondering why debtors or trustees do not simply object to these claims if they are time-barred.

Counsel for Johnson faced tough questioning from the Court about the breadth of his position that a creditor must have a good-faith belief that they have a valid claim that is immune from objection in order to file a proof of claim. Chief Justice Roberts led a line of questioning along with Justices Kagan, Breyer and Alito, testing the scope of the consumer's enforceability argument and demonstrating a concern that, if Johnson's position was adopted, it would not be solely limited to the defense of a limitations period, but would implicate other defenses as well, yielding unintended consequences.

Still, other questions focused on bankruptcy court jurisdiction and whether the proper remedy to attack unlawful behavior, if any, was through an FTC enforcement action, or a sanctions motion, rather than an FDCPA claim.

The questioning during the argument demonstrated a divided bench. The Court is likely to issue its decision before June 30, 2017. Meanwhile, hopefully the Supreme Court will provide much-needed clarity on whether the filing of an accurate proof of claim for an unextinguished time-barred debt in a bankruptcy proceeding violates the FDCPA and whether the Bankruptcy Code precludes application of the FDCPA in this context.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
David N. Anthony
Stephen Piepgrass
Andrew B. Buxbaum
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.