When a debt collector files a claim in a consumer bankruptcy case that is time-barred under state statute of limitations law, whose problem is it? Does the burden of raising the statute of limitations defense fall on the trustee in the consumer debtor's bankruptcy case who must affirmatively object to the claim as not "allowable" because of the time bar? Or, should the burden fall on the debt collector creditor because the act of filing a time barred claim in a bankruptcy case violates the Fair Debt Collection Practices Act's (FDCPA) prohibition on false or deceptive debt collection practices?
The issue was before the Supreme Court yesterday in Midland Funding v. Johnson. A transcript of the oral argument is here. The Eleventh Circuit in 2014 held that when a debt collector files a time -barred claim in a bankruptcy case it violates the FDCPA. Every other circuit court that has considered this question has held the opposite.
The case presents a clash between two federal statues, the Bankruptcy Code and the FDCPA. The Code defines "claim" broadly and deliberately to bring within the jurisdiction of the bankruptcy court all of the debtor's liabilities, even unmatured, contingent, unliquidated or disputed liabilities, so that all such claims can be addressed and potentially forgiven in his bankruptcy case. In a bankruptcy case, a debt that may be subject to one or more defenses is still a "claim." It is common for the debtor to identify a creditor, give that creditor notice of his bankruptcy case, and invite the creditor to file a claim even if the debtor intends to object to it. The debtor's goal is to obtain court-ordered discharge (forgiveness) of as much liability (or potential liability) as possible. And, no "claim" can be discharged in a bankruptcy case if the creditor holding it did not receive notice and an opportunity to be heard (due process). The Eleventh Circuit and all courts considering this issue have held that a creditor on a debt subject to a statute of limitations defense holds a "claim" under the Code.
The Eleventh Circuit held that although a time-barred debt is a "claim" under the Bankruptcy Code, the debt is "unenforceable" under the FDCPA so that when a debt collector asserts such a claim in a bankruptcy case, it violates the FDCPA, which prohibits "false, deceptive, or misleading representation" or "unfair or unconscionable means" to collect a debt.
At the oral argument yesterday, several of the justices asked the debt collector's attorney why debt collectors file time barred claims in the first place. The Eleventh Circuit noted in its opinion: "A deluge has swept through U.S. Bankruptcy courts of late. Consumer debt buyers-- armed with hundreds of delinquent accounts purchased from creditors-- are filing proofs of claim on debts deemed unenforceable under state statutes of limitations." Creditors have always filed claims in consumer bankruptcy cases that are or might be subject to defenses. But, large scale debt collectors like Midland Funding can locate debtors and assert claims more efficiently than ever before.
The Fourth Circuit, in Dubois v. Atlas Acquisitions held in favor of the debt collector-- filing a time barred claim in a consumer's bankruptcy case does not violate the FDCPA. It noted that a contrary ruling would create an incentive for debt collectors to refrain from filing claims in consumer bankruptcy cases to avoid the risk of violating the FDCPA (which provides consumers with a statutory penalty and a right to recover attorneys fees). The Fourth Circuit noted that this effect runs contrary to the purpose of the claims process in a bankruptcy case.
Observers at the oral argument yesterday generally noted that based on the questions of the justices, it appeared that five were concerned about the implications of a consumer friendly decision. The Court will decide the case by the end of June.