In overturning an Eleventh Circuit decision that put collectors on the hook for filing bad faith claims against a debtor, the United States Supreme Court in Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (U.S. May 15, 2017) held that filing of a proof of claim that is obviously time-barred is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act (“FDCPA”).
Facts and History. Midland filed a proof of claim for a $1,879.71 credit card debt in Johnson’s Chapter 13 bankruptcy case. The statement attached to Midland’s claim asserted that the last time any charge appeared on the account was more than 10 years before Johnson’s bankruptcy filing. The relevant state statute of limitations for collecting on the account was six years. Johnson objected to the proof of claim. The bankruptcy court sustained the objection and disallowed Midland’s claim.
Johnson then filed suit under the FDCPA in federal district court in Alabama, seeking actual damages, statutory damages, attorneys’ fees and costs. The district judge dismissed the suit, saying the FDCPA did not apply. The Eleventh Circuit reversed the holding that filing of a stale claim violates the FDCPA, thereby enabling the debtor to recover attorneys’ fees and up to $1,000 in statutory damages. Midland petitioned the Supreme Court which granted certiorari to resolve a split among the circuits.
Supreme Court Reasoning. Writing for the majority, Justice Stephen G. Breyer split his opinion in two parts. The first issue raised was whether filing a stale claim was “false, deceptive or misleading.” 137 S. Ct. at 1411-12. The answer to that question, he said, was “reasonably clear.” Id. at 1411. He said a claim is a right to payment and that claim usually continues even after the limitations period has expired. Id. Further, Congress adopted the “broadest available definition of claim,” defining the term in Section 101(5)(A) to include a disputed claim. Id. at 1412. Justice Breyer, agreeing with a majority of circuits that have addressed the issue, concluded that “[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense . . . we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the code’s similar system.” Id.
In addition, he said that to determine whether a statement is misleading requires consideration of the audience. The “audience” in a Chapter 13 case includes a trustee who when examining proofs of claim “is likely to understand” when a claim is time-barred. Id. at 1413.
The second issue considered was whether filing a time-barred claim is unfair or unconscionable. Justice Breyer said that this presented a “closer question.” Id. The “context of a civil suit differs significantly from” a bankruptcy claim, he explained, since a “knowledgeable trustee is available” when a debtor files a bankruptcy petition. Id. The FDCPA and the Bankruptcy Code have “different purposes and structural features.” Id. at 1414. The FDCPA “seeks to help consumers,” but not necessarily by “closing . . . a loophole in the Bankruptcy Code.” Id. To invoke the FDCPA would upset a “‘delicate balance’” and “authorize a new significant bankruptcy-related remedy in the absence of language in the [Bankruptcy] Code providing for it.” Id. at 1415.
Barring debt collectors from filing stale claims would require creditors to investigate the merits of affirmative defenses. “The upshot could well be added complexity, changes in settlement incentives and a shift from the debtor to the creditor the obligation to investigate the staleness of a claim.” Id.
Dissent. Justice Sotomayor, joined by Justices Ginsburg and Kagan, spent much of her dissent discussing how “[p]rofessional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy . . . and hoping no one notices that the debt is too old.” Id. at 1416. She also referenced that Midland had previously entered into a consent decree with the government prohibiting the filing of further civil suits to collect stale debts and had paid $34 million in restitution. Id. at 1417. In Justice Sotomayor’s view, filing a stale claim is unfair and unconscionable, just like filing an ordinary civil suit. In her opinion the debt collectors where trying to game the system, “hoping and expecting the bankruptcy system will fail.” Id. at 1419.
Impact. With its decision, the Court rejected the position that a debt collector who files a creditor claim opens itself up to litigation if it does not have a good faith belief that it has a right to payment. Some commentators and the dissenting Justices argue that this decision opens the door for debt collectors to purchase time-barred claims for pennies on the dollar and profit by filing those otherwise uncollectable claims, because trustees and debtors will not always object. They argue it allows debtors and their estates to be targets for bankruptcy shakedowns with one fewer method of legal recourse against a predatory debt collector. However, as the decision points out, debtors and the estate retain the ability to pursue sanctions against creditors for filing frivolous claims under Bankruptcy Rule 9011(b)(2).
For more information regarding bankruptcy law generally, or the Johnson decision specifically, contact Donald H. Cram III at dhc@severson.com.