Filing a proof of claim in a debtor's Chapter 13 bankruptcy case on a debt that is "obviously time barred" does not violate the Fair Debt Collection Practices Act (FDCPA), the U.S. Supreme Court has ruled in a 5-3 decision. The decision represents a defeat for the Consumer Financial Protection Bureau, which filed an amicus brief with the Court in support of the debtor.

In Midland Funding, LLC v. Aleida Johnson, Midland had filed a proof of claim asserting that the debtor owed Midland a credit card debt in a specified amount and indicating that a specified month and year (which was more than 10 years before the debtor filed her bankruptcy) was the last time a charge appeared on the debtor's account. The relevant statute of limitations was six years. The debtor's counsel objected to the claim, which was disallowed by the bankruptcy court. Thereafter, the debtor brought an FDCPA suit against Midland, which was dismissed by the district court. The 11th Circuit reversed, holding that the filing of a proof of claim that is accurate but based on a time-barred debt can violate the FDCPA and that such an FDCPA claim was not precluded by the Bankruptcy Code.

The Supreme Court, in an opinion written by Justice Breyer, reversed the 11th Circuit's decision and found that by filing its proof of claim, Midland had not made a "false, deceptive, or misleading representation" or used an "unfair or unconscionable means" to collect or attempt to collect a debt in violation of the FDCPA. The debtor had argued that Midland's proof of claim was "false, deceptive, or misleading" because under the Bankruptcy Code, a "claim" means an "enforceable claim." Unable to find support in the Code for the debtor's interpretation, the Court indicated that "to determine whether a statement is misleading normally 'requires consideration of the legal sophistication of its audience.'" The Court found that this standard was not met, observing that "the audience in Chapter 13 bankruptcy cases includes a trustee" and "that trustee is likely to understand that, as the Code says, a proof of claim is a statement by the creditor that he or she has a right to payment subject to disallowance (including disallowance based upon…untimeliness.)"

Calling it a "closer question" whether Midland's filing of an obviously time-barred claim was "unfair" or "unconscionable" under the FDCPA, the Court observed that it was "not convinced" by circuit court precedent finding a debt collector's assertion of a time-barred claim in ordinary civil litigation to be "unfair." In the Court's view, the context of a Chapter 13 bankruptcy proceeding "differs significantly" from the context of civil suits where "the lower courts rested their conclusions upon their concern that a consumer might unwittingly repay a time-barred debt." The Court found that such concern had "significantly diminished force" in the bankruptcy context because of the claims process, which includes "a knowledgeable trustee."

The Court was also "not persuaded" by the debtor's arguments that the practice of filing time-barred claims "risks harm to the debtor" and that there was no legitimate reason for allowing such filings. Observing again that the bankruptcy claims process treats untimeliness as an affirmative defense, the Court was unwilling to carve out an exception to "the simple affirmative defense approach" and "authorize a new significant bankruptcy-related remedy in the absence of language in the [Bankruptcy] Code providing for it."

The Supreme Court expressly stated that it "has not decided and does not now decide" whether a debtor collector's assertion of a time-barred claim in an ordinary civil lawsuit is an FDCPA violation. Indeed, in a blog post about the Midland decision, a law professor commented that although it reached the correct result, the Supreme Court should have used a different rationale, namely that the FDCPA only covers non-judicial debt collection and was not intended to address attempts to collect unenforceable debt through the judicial system.

In her dissent, in which Justices Ginsburg and Kagan joined, Justice Sotomayor took aim at debt buyers who "file claims in bankruptcy proceedings for stale debts and hope that no one notices that they are too old to be enforced." In her view, "it does not take a sophisticated attorney to understand why [such] practice is unfair" and instead "takes only the common sense to conclude that one should not be able to profit on the inadvertent inattention of others." She expresses hope that Congress will "amend the FDCPA to make explicit what in [her] view is already implicit in the law."

The Supreme Court is expected to soon issue another important FDCPA decision. In April 2017, it heard oral argument in a case involving whether a company that purchases debts, including debts that are in default, from another company and then attempts to collect those debts for its own benefit, is considered a "debt collector" under the FDCPA.

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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