The Supreme Court will decide this term whether the Bankruptcy Code impliedly repealed the federal Fair Debt Collection Practices Act, or FDCPA, and whether the filing of a knowingly time-barred proof of claim violates the FDCPA.

In Midland Funding LLC v. Johnson, the Supreme Court granted certiorari on Oct. 11 to resolve a split among the circuits. In Johnson, the Eleventh Circuit held in May that the later-adopted Bankruptcy Code did not impliedly repeal the FDCPA. The decision was no surprise because the Eleventh Circuit had held in 2014 in Crawford v. LVNV Funding LLC that filing a stale claim barred by a statute of limitations violates the FDCPA. In Crawford, the appeals court had not reached the issue of implied repeal.

The issues are “exceptionally important,” Daniel Geyser told ABI in an e-mailed message, because these “questions have hopelessly divided the courts.” Geyser, of Los Angeles, represents the debtor in Johnson.

Splits in the Circuits

In Nelson v. Midland Credit Management Inc., the Eighth Circuit differed from the Eleventh when it held in July that filing a stale proof of claim does not violate the FDCPA.

In August, the Fourth Circuit likewise held in a 2-1 opinion that filing a time-barred claim does not violate the FDCPA, because the Bankruptcy Code and Rules invite creditors to file proofs of claim based on stale debts.

The Seventh, Eighth and Second Circuits have already held that the FDCPA is not violated when a creditor files a claim based on a debt where collection is precluded by the statute of limitations. The decision by the Seventh Circuit in August encountered a vigorous dissent from Chief Judge Diane P. Wood.

The circuit courts were already split on whether the Bankruptcy Code impliedly repealed the FDCPA. The Second and Ninth Circuits saw implied repeal. The Third, Seventh and Eleventh Circuits held there is no implied repeal because the FDCPA and the Bankruptcy Code may coexist since creditors can comply with both simultaneously.

Courts finding no fundamental conflict between the two statutes note that the Bankruptcy Code does not compel creditors to file proofs of claim.

The Stale Debt Collection Business

An industry came into being when debt collectors began paying small amounts to buy debts where statutes of limitations would preclude recovery were they to file suit.

Purchasers of stale claims have computer systems that alert them to file proofs of claim when their debtors file bankruptcy. The purchasers’ claim forms typically disclose all required information that should alert trustees and debtors to the fact that collection of the debts would be time-barred.

The business model is based on the assumption that there will be no objection to the claims in some cases, either through inadvertence or because objecting is not economically justifiable or is not covered by counsels’ flat-fee arrangements.

Since the creditors will have paid so little for the claims, the allowance of just a few will still make the business profitable.

Courts have held that filing suit on a time-barred claim violates the FDCPA because a consumer is not already represented by counsel, as would be the case in bankruptcy.

The Competing Theories

The Eleventh Circuit in particular was bent on stamping out the business. In addition to adding costs to bankruptcy cases by forcing trustees or debtors to object to patently time-barred claims, the Atlanta-based appeals court said that creditors with legitimate claims suffer from the dilution of their recoveries when trustees or debtors fail to object.

Courts finding no violation of the FDCPA take the view that the system is designed to deal with bogus claims because trustees’ duties include objecting to such claims.

Requiring debt collectors to comply with both the Bankruptcy Code and FDCPA, the Eleventh Circuit rejected the notion that the Code creates a safe harbor by soliciting creditors to file claims. The Atlanta-based court said that the “Code does not at the same time protect those creditors from all liability.” Consequently, the Eleventh Circuit said that a “particular subset of creditors – debt collectors – may be liable under the FDCPA for bankruptcy filings they know to be time-barred.”

To read ABI’s discussion of the Johnson decision in the circuit court, click here. To read about the Eighth Circuit’s opinion in Nelson v. Midland Credit Management Inc., click here. For discussion of the Seventh Circuit opinion from August, click here.

Johnson will likely be argued early next year, with a decision before the end of the Supreme Court’s term in late June.