Two federal district courts have dismissed lawsuits filed against debt collectors, holding that filing proofs of claim in a bankruptcy case on debt subject to a statute of limitations defense is not actionable under the Fair Debt Collection Practices Act.
In Donaldson v. LVNV Funding, LLC, Civil Action No. 1:14-cv-01979-LJM-TAB (S.D. Ind. Apr. 7, 2015) and Torres v. Asset Acceptance, LLC, Civil Action No. 2:14-cv-6542-ER (E.D. Pa. Apr. 7, 2015), the debt collectors filed proofs of claim in the plaintiffs’ Chapter 13 bankruptcy cases. The plaintiffs filed lawsuits under the FDCPA alleging that filing the proofs of claim violated the FDCPA by making false representations of the character, amount, or legal status of the debt, by threatening to take action that cannot legally be taken, by using false representations or deceptive means to collect or attempt to collect the debts, and by using unfair or unconscionable means to collect or attempt to collect the debts. By granting the debt collectors’ motions to dismiss in both cases, the Southern District of Indiana and the Eastern District of Pennsylvania have declined to follow the Eleventh Circuit’s decision in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014).
Donaldson v. LVNV Funding, LLC
In Donaldson, the court rejected the plaintiff’s argument that filing the proofs of claim mischaracterized the legal status of the debt. Under Indiana law, a debt that has become uncollectible due to the statute of limitations is not extinguished. Rather, “the money is still owed, and the FDCPA only regulates the remedies available to the debt collector.”
The court also held that filing a “stale” proof of claim does not violate the provision of the FDCPA prohibiting threats to take action that cannot legally be taken since “there is no ‘threat’ in a proof of claim that accurately reflects information about an unsecured debt that the debtor himself has listed on his schedules.” In fact, the court held, the Bankruptcy Code specifically states that such debts are allowed, unless objected to by any party in interest. If a party in interest wishes to avoid the debt on the grounds of staleness, that party must object or raise the statute of limitations defense. Otherwise, it is waived.
Importantly, the court applied the “competent lawyer” standard to evaluate whether filing the proofs of claim amounted to an FDCPA violation, instead of the “least sophisticated consumer” standard applied by the Eleventh Circuit in the Crawford decision. In so doing, the court noted that “with both a trustee and a lawyer looking out for the consumer in the bankruptcy context, the unsophisticated consumer standard has no real application.”
Torres v. Asset Acceptance, LLC
In Torres and its companion case, Torres v. Cavalry SPV I, LLC, Civil Action No. 2:14-cv-5915-ER (E.D. Pa. Apr. 7, 2015), the court discussed the split in the circuits that considered the issue of whether filing proofs of claim on time-barred debt amounts to an FDCPA violation, in particular noting the Eleventh Circuit’s decision in Crawford and the Second Circuit’s decision in Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2d Cir. 2010). Ultimately, the court rejected Crawford and sided with the Second Circuit, concluding that filing the proofs of claim did not violate the FDCPA.
The court based its reasoning on the fact that debtors are already adequately protected by the provisions of the Bankruptcy Code. “[W]hile the risk of being duped into settling a stale debt is especially high for debtors who are not represented by counsel and who have little experience with the court system, this risk is attenuated for debtors in bankruptcy, who are ‘already under the protection of the bankruptcy court.’” Therefore, “the Crawford court’s apprehensions are not justified in the bankruptcy context.” Additionally, the court found that the Bankruptcy Code already provides adequate remedies to address potential creditor misconduct, and that the plaintiff “does not explain why these remedies were insufficient, or what justifies the bypassing of these remedies in favor of the ‘more procedurally complicated route of filing an adversary complaint.’”