There is now a stark split among the circuits on the question of whether the filing of a claim based on a time-barred debt violates the federal Fair Debt Collection Practices Act, or FDCPA.
In 2014, the Eleventh Circuit held in Crawford v. LVNV Funding LLC that filing a proof of claim barred by a statute of limitations violates the FDCPA. On July 11, the Eighth Circuit ruled to the contrary, holding that filing an accurate proof of claim is no violation of the FDCPA even though, the court implies, attempting to collect a similarly time-barred debt outside of bankruptcy would give rise to FDCPA liability.
In Crawford, the Eleventh Circuit said it was bent on stemming what it called a “deluge” of claims filed in bankruptcies that attempt to collect “debts deemed unenforceable under state statutes of limitations.”
The Eleventh Circuit analyzed the issue in part by focusing on the effect that the filing of stale claims has on the bankruptcy process and on creditors. Because they ordinarily will not benefit from expunging claims, debtors in chapter 7 cases have no incentive for objecting to stale claims, the Atlanta-based circuit court said.
The Eleventh Circuit noted that chapter 7 trustees also may not object, given their meager compensation. Likewise, chapter 13 debtors with so-called pot plans similarly have no incentive for objecting to time-barred claims. Consequently, creditors with enforceable claims will have diminished recoveries if creditors with stale claims receive distributions from limited funds, because trustees and debtors do not object comprehensively to claims.
The Eighth Circuit’s opinion by Circuit Judge Duane Benton said that the Eleventh Circuit’s Crawford decision “ignores the differences between a bankruptcy claim and actual or threatened litigation.”
Judge Benton interpreted the Eleventh Circuit as holding that filing a claim stemming from a stale debt violates the FDCPA’s “prohibitions against unfair, unconscionable, deceptive, or misleading conduct.” Disagreeing with Crawford, Judge Benton said that the “bankruptcy process protects against such harassment and deception.”
“Unlike defendants facing a collection lawsuit,” Judge Benton said that “a bankruptcy debtor is aided by ‘trustees who owe fiduciary duties to all parties and have a statutory obligation to object to enforceable claims.’” He also said that “debtors have less at stake than a collection defendant” because their liabilities are capped by the loss of non-exempt property.
“There is no need to protect debtors who are already under the protection of the bankruptcy court, and there is no need to supplement the remedies afforded by bankruptcy itself,” Judge Benton said.
One or more FDCPA cases may be headed for the Supreme Court, as early as the term to begin in October, because the Eleventh Circuit handed down Johnson v. Midland Funding LLC on May 24, holding, contrary to Second and Ninth Circuits, that the later-adopted Bankruptcy Code did not impliedly repeal the FDCPA with respect to debt collectors who file claims barred by statutes of limitations.
The Eleventh Circuit in Johnson sided with the Seventh Circuit’s Randolph decision from 2004, which had held that debt collectors can comply with both the Bankruptcy Code and the FDCPA. In Johnson, there is a pending petition for rehearing en banc. To read ABI’s analysis of Johnson, click here.