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To Claim or Not to Claim? That is the Question

Posted By USFN, Tuesday, August 1, 2017
Updated: Monday, August 14, 2017

August 1, 2017

by Michael Freeman
Samuel I. White, P.C
USFN Member (Virginia)

and Charles Pullium
Millsap & Singer, LLC
USFN Member (Missouri)

In May, the U.S. Supreme Court issued what one could conceive to be a “unifying” decision (in some, if not all, respects) as to the position the bankruptcy courts take on addressing the applicability of the Fair Debt Collection Practices Act (FDCPA) (15 U.S.C. §§ 1692, et seq.) to the filing of an initial proof of claim (POC). [Midland Funding, LLC v. Johnson, 581 U.S. __ (May 15, 2017)]. Some may hail it as a landmark case, but others (including these authors) advise to proceed with caution because certain issues are still open questions. The biggest disparity in approaches is in non-bankruptcy.

Previously the circuits were split regarding bankruptcy cases — with the Johnson case from the Eleventh Circuit finding that the FDCPA applied in the context of a disallowed, time-barred proof of claim. On the other hand, the Fourth Circuit held, in In re Dubois, 834 F.3d 522 (4th Cir. 2016), that a time-barred debt could be included in a proof of claim.

The Decision — The Supreme Court’s decision itself is clear: the filing of a POC on a time-barred debt was held to not be false, deceptive, misleading, unfair, or an unconscionable debt collection practice within the meaning of the FDCPA. In its discussion, the Court thoroughly examined the issues that would result if it ruled the other way. Still, the need for caution comes from one of the simplest of statements: “But the context of a civil suit differs significantly from the present context, that of a Chapter 13 bankruptcy proceeding. The lower courts rested their conclusions upon their concern that a consumer might unwittingly repay a time-barred debt.” These sentences left breathing room for additional arguments to be made.

In its analysis, the Court looked at various factors. First, the Court found that the Bankruptcy Code defines the word “claim” without any mention of a right to enforceability or the statute of limitations (specifically referencing several sections, including 11 U.S.C. § 502(b)(1) and § 101(5)(A)). Second, the Court looked at the difference between a Chapter 13 bankruptcy and a civil court lawsuit. This was important, as a bankruptcy differs in a few ways from a civil suit — including that there is an additional party involved (namely the Chapter 13 trustee) and that the debtor institutes the proceeding. Third, because the claim is part of the bankruptcy case, the ultimate result is that the debt will be discharged if it is asserted. Accordingly, there is a benefit to the debtor even if it is unenforceable, and it would be removed from any credit report. Fourth, and perhaps most importantly, is that attempting to switch the burden to be on the creditor — prior to filing the proof of claim — would cause the Court to create a categorical exception with vague boundaries about when the exception should and shouldn’t apply, instead of the “simple affirmative-defense approach” that now exists.

The Court also relied on the fact that in a previous review for amendments to the Bankruptcy Code in 2009, the Advisory Committee had an opportunity to incorporate a similar option; i.e., to include a certification that there was no valid statute of limitations defense when filing a proof of claim. This was rejected and, instead, the committee noted that Rule 9011’s general obligations regarding a review of existing law and the claim were sufficient when signing the certification. In the particular case before the Court, it was clearly stated on the POC that the last time a charge appeared was more than ten years before the subject bankruptcy was filed (with the relevant statute of limitations being six years).

A Strong Dissent — The 11-page dissenting opinion, authored by Justice Sotomayor and joined by Justices Ginsburg and Kagan, was rather scathing in its disagreement. Sotomayor began by castigating all who qualify as “professional debt collectors” as a group who “have built a business out of buying stale debt, filing claims in bankruptcy proceedings to collect it, and hoping that no one notices that the debt is too old to be enforced …”.

The first portion of the two-part dissent focuses on the debt collection industry, the abusive tactics employed, and the efforts by the courts and government to rein in the abuse. The second part focuses on the FDCPA, statutes of limitation, and discrediting the majority’s contention that the structural features of bankruptcy provide protections to the debtor. Sotomayor recites the practice of debt collectors filing suit in ordinary civil courts to collect debts that they know are time barred, and notes that “[e]very court to have considered this practice holds that it violates the FDCPA.” (This position may or may not be accurate in that these authors are unaware of any courts of appeal that have directly considered the issue.) Further, the dissent’s focus on statutes of limitation does not address the glaring reality that, in 48 of the 50 states, the expiration of the statute of limitations does not extinguish the debt; it simply gives rise to an affirmative defense. Affirmative defenses may be waived. Moreover, a debtor can revive a debt that was otherwise stale or subject to a statute of limitation.

Indeed, Sotomayor’s dissent points out that when debt collectors try to collect the debts, “many consumers respond by offering a small partial payment to forestall suit” and thereby revive a once time-barred (but not extinguished) debt, restarting the statute of limitations. The dissent speaks forcefully in stating: “Debt collectors’ efforts to entrap consumers in this way have no place in honest business practice.”

Lastly, the dissent emphatically makes two points: First, it observes that the question of whether the Bankruptcy Code precludes application of the FDCPA to the process of filing proofs of claim was not addressed by the majority’s holding. Second, the dissent also takes advantage of the majority’s reluctance to declare a position on whether a debt collector violates the FDCPA by filing suit in an ordinary court to collect a debt that it knows is time barred. Rather, the majority “concludes, even assuming [emphasis added] that such a practice would violate the FDCPA, a debt collector does not violate the Act by doing the same thing in bankruptcy proceedings.” Whether or not such an assumption has basis in law, the dissent’s implication is clear: filing such a suit may well invite an FDCPA lawsuit.

The Takeaway
— With the entry of this opinion, we circle back to a cautious approach. While the Chapter 13 context is resolved to a great extent, from a lender/creditor perspective this would seem to open the door to the filing of more proofs of claim. However, there are still impacts that may be felt from a state court and litigation aspect that must be taken into account. As such, although the Court may not require it, lenders and creditors should institute a review for the obvious triggers — last activity date and last payment date — of the FDCPA as a part of their claims process so that they can quickly respond to any challenges. And, in the context of civil litigation, beware: The dissent has given warning.

Copyright © 2017 USFN. All rights reserved.
Summer USFN Report

Note for consideration of the USFN Award of Excellence: This article is not a "Feature."


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