On October 11, 2016, the United States Supreme Court granted the petition for certiorari of Midland Funding, LLC v. Johnson, an appeal from the Eleventh Circuit bringing to a head two issues that has 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; and (ii) 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.
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, 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 debt with a 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, 2004. Crawford filed an adversary proceeding in his bankruptcy case alleging a 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, expense to contest the sale. When the Eleventh Circuit held that a debt collector violated the Fair Debt Collection Practices Act by filing a proof of claim on a debt that it was time barred from litigating, a litany of litigation was born.
Since then, however, many courts have rejected Crawford. The Eighth Circuit, in Nelson was specifically 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 rationalized 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.”
In August of this year, the Fourth Circuit also rejected Crawford. In Dubois, a debt collector filed proofs of claim on loans outside of Maryland’s three year statute of limitations. The Debtor filed adversary proceeding seeking disallowance of claim and damages, costs and attorneys’ fees under the FDCPA. The Bankruptcy Court dismissed on grounds that filing a claim is not debt collection under FDCPA. On appeal, the Fourth Circuit held that the filing of a claim is in fact debt collection under FDCPA, disagreeing with an argument that treating it as such would conflict with automatic stay. The Fourth Circuit noted: (i) “claim” under the Bankruptcy Code is broad and refers to a right to payment under state law; (ii) in Maryland, the statute of limitations merely bars the remedy and does not operate to extinguish the debt; (iii) in Maryland, statute of limitations can be revived if the debtor acknowledges the debt; and (iv) Maryland law therefore recognizes a right to payment on time-barred debts and thus holders may file proof of claim. The Fourth Circuit noted that although Bankruptcy Code provides that time barred debts are to be disallowed, it does not prohibit the filing of them.
Likewise, the Seventh Circuit in Owens rejected Crawford. “A proof of claim on a time-barred debt does not purport to be anything other than a claim subject to dispute in the bankruptcy case. Filing such a proof of claim is not inherently misleading or deceptive.”
The Seventh Circuit found nothing in the proof of claim was deceptive or misleading or otherwise abusive conduct prohibited by the FDCPA, but noted “if defendants had filed proofs of claim with inaccurate information, or had otherwise engaged in deceptive or misleading debt collection practices, plaintiffs would have had a cause of action under the FDCPA.”
The Third Circuit is currently considering the issue of whether filing a time barred claim violates the FDCPA.
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. This issue was specifically left unanswered in Crawford. As with the substantive analysis, Circuit Courts have been split on the preemption issue. The Ninth Circuit in Walls held that the FDCPA is not needed to protect debtors protected by the automatic stay and other protections of the Bankruptcy Code.
Other courts have reached the opposite conclusion, reasoning one federal statute does not preempt another when the address the same subject in different ways. Other cases from the Seventh Circuit (Randolph) and Third Circuit (Simon) 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 an out-of-statute 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 stated, “although 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, “This is the extremely rare case in which both petitioner and respondent agree not only that the questions presented implicate clear circuit conflicts on important issues of federal law, but also that the case is an excellent vehicle for addressing those questions.” Fortunately, the Court agreed and will have the opportunity to provide much needed clarity in this space.