The majority of lower courts in the Eleventh Circuit bar bankrupts from filing suit under the federal Fair Debt Collection Practices Act, or FDCPA, when a creditor files a proof of claim barred by the statute of limitations.
Those courts have not taken the hint given by the Eleventh Circuit in its 2014 opinion in Crawford v. LVNV Funding LLC. That case held that filing a time-barred claim in bankruptcy violated the FDCPA. Because the issue had not been raised on appeal, Crawford pointedly failed to decide whether the later adoption of the Bankruptcy Code barred some or all suits by bankrupts under the FDCPA.
Lower courts jumped into the gap, with the majority holding that time-barred proofs of claim can be filed without sanction because the statute of limitations only bars a remedy but does not eradicate the claim. Consequently, they say, the FDCPA cannot create a private right of action to punish the filing of a claim permitted by the Bankruptcy Code.
Crawford was important because the Eleventh Circuit said it was bent on ending a practice where speculators buy worthless, time-barred claims with the intent of filing proofs of claim. When trustees or debtors do not bother to object, the occasional small distributions will result in profits because the worthless claim would have been purchased for a tiny fraction of face value.
The Eleventh Circuit seemed to establish policy suggesting that lower courts should uphold FDCPA claims if the statutes permit. Most courts, however, do not believe they have that power because they see an irreconcilable conflict with the Bankruptcy Code.
The most recent opinion, on Jan. 4 by District Judge John E. Steele in Fort Myers, Fla., dismissed an FDCPA suit. Quoting another district court in Florida, Judge Steele said that allowing FDCPA suits in response to time-barred proofs of claim would encourage debtors “to file adversary proceedings instead of simply objecting to the creditor’s claim, which is incredibly inefficient and undermines the process provided by the Bankruptcy Code.”
Judge Steele arguably missed the point. If there is an FDCPA claim upheld in the Eleventh Circuit, creditors will cease filing time-barred claims to avoid sanctions that automatically include the plaintiff’s legal fees. Because claim purchasers typically know when a claim is stale, there will be no flood of lawsuits.
In Crawford, the Eleventh Circuit wanted to prevent trustees and debtors from wasting resources by filing claim objections on debts that are clearly unenforceable. Because trustees sometimes lack the incentive to object, the circuit also wanted to ensure that distributions to legitimate creditors are not diluted.
A story yesterday on the ABI website regarding a Second Circuit opinion highlights the circuit split on issues surrounding the intersection of the Bankruptcy Code and the FDCPA. To read about Garfield v. Ocwen Loan Servicing LLC, click here.