A debt collector did not violate the Fair Debt Collection Practices Act (FDCPA) by filing proofs of claim in bankruptcy cases on debts that were time-barred by Maryland’s statute of limitations (SOL), a divided U.S. Court of Appeals for the Fourth Circuit has ruled.

In Dubois v. Atlas Acquisitions LLC, a debt buyer filed proofs of claim in two debtors' Chapter 13 bankruptcy cases based on loans it had purchased that were beyond the SOL at the time of purchase. None of the debts were listed on the debtors' bankruptcy schedules and neither debtor sent a bankruptcy notice to the debt buyer. Each debtor filed an adversary proceeding objecting to the debt buyer's claims and alleging that the debt buyer had violated the FDCPA by filing proofs of claim on time-barred debts. The debt buyer conceded that its claims were time-barred and stipulated to their disallowance. After consolidating argument in the adversary proceedings, the bankruptcy court dismissed the FDCPA claims, concluding that filing a proof of claim does not constitute debt collection activity subject to the FDCPA.

Having permitted a direct appeal by the debtors, the Fourth Circuit disagreed with the reasoning of the bankruptcy court and found that filing a proof of claim "is debt collection activity regulated by the FDCPA." (The debt buyer did not dispute that it was a "debt collector" under the FDCPA.) However, the Fourth Circuit rejected the debtors' arguments that a time-barred debt is not a "claim" within the meaning of the Bankruptcy Code and that filing a claim based on such a debt is an abusive practice that violates the FDCPA. The court observed that a "claim" under the Bankruptcy Code is generally considered to be a "right to payment recognized under state law." Because Maryland's SOL did not extinguish the debt but only barred collection lawsuits, the Fourth Circuit concluded that a time-barred debt still constitutes a "right to payment" and therefore "falls within the Bankruptcy Code's broad definition of claim."

The Fourth Circuit also rejected the debtors' argument that even though the Bankruptcy Code permits filing a proof of claim on a time-barred debt, such a filing nevertheless violates the FDCPA "because such claims are seldom objected to and therefore receive payment from the bankruptcy estate to the detriment of the debtor and other creditors." In the court's view, "when a time-barred debt is not scheduled the optimal scenario is for a claim to be filed" so that the Bankruptcy Code can operate as contemplated, meaning that "the claim will be objected to by the trustee, disallowed, and ultimately discharged, thereby stopping the creditor from engaging in any further collection activity."

The court contrasted this with a scenario in which no proof of claim is filed as to an unscheduled time-barred debt. In the court's view, this scenario was detrimental to the debtor's discharge and the bankruptcy system's interest in the collective treatment of debts because "the debt continues to exist and the debt collector may lawfully pursue collection apart from filing a lawsuit." In response to the debtors' argument that proofs of claim filed on time-barred debts may receive payment because trustees often lack the time and resources to review and object to such claims, the court stated that the solution was not to impose liability under the FDCPA so as to bar such filings, but "to improve the Code's administration such that it operates as written."

In disagreeing with the majority's conclusion that filing the proofs of claim did not violate the FDCPA, the dissenting judge stated that the debt buyer's "alleged debt-collection activity in this case is precisely the sort of unfair and misleading practice that Congress intended the courts to recognize as a violation." In his view, the debt buyer was deliberately "exploiting a weakness in the bankruptcy system and preying on potential error to collect on debts where it should not." The dissenting judge also concluded that the Bankruptcy Code did not preclude or preempt the debtors' FDCPA claims.

With this decision, the Fourth Circuit joins a handful of other federal circuit courts to weigh in on the intersection of the FDCPA and bankruptcy claims process. In its decision, the Fourth Circuit noted that the 11th Circuit is the only federal circuit court to hold that filing a proof of claim on a time-barred debt in a Chapter 13 case violates the FDCPA. The Second, Eighth, and Ninth Circuits have ruled that filing a proof of claim on a time-barred debt does not violate the FDCPA. However, unlike the Fourth Circuit, which found that filing a time-barred claim is actionable under but does not violate the FDCPA, those circuits have ruled that the filing of a time-barred claim is either not actionable under the FDCPA or that an FDCPA claim based on the filing of such a claim is preempted by the Bankruptcy Code. The Fourth Circuit's decision presents an opportunity for the U.S. Supreme Court to resolve these conflicting approaches.

Attorneys in Ballard Spahr's Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.

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