Deepening an existing split of circuits, the Fourth Circuit held in a 2-1 opinion that filing a time-barred claim does not violate the federal Fair Debt Collection Practices Act, or FDCPA, because the Bankruptcy Code and Rules invite creditors to file proofs of claim based on stale debts.
The Seventh, Eighth and Second Circuits 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. Prior to the Fourth Circuit’s decision on Aug. 25, the most recent opinion came down on Aug. 10 in a 2-1 ruling from the Seventh Circuit, with Chief Judge Diane P. Wood dissenting.
On the other side of the fence, the Eleventh Circuit holds that filing a stale claim violates the FDCPA.
The Supreme Court might visit the issue as soon as the term beginning in October. In Johnson v. Midland Funding LLC, the Eleventh Circuit split with the Second and Ninth Circuits in May by holding that the Bankruptcy Code did not impliedly repeal the FDCPA. The debt collector filed a motion for rehearing en banc that was denied on Aug. 19.
On Aug. 25, the debt collector in Johnson filed a motion imploring the Eleventh Circuit to stay the issuance of the mandate. In the motion, the debt collector promised to file a petition for certiorari and predicted the Supreme Court would hear the case to resolve the splits of circuits.
The Fourth Circuit Majority
In the Fourth Circuit case, a debt collector purchased debts and filed proofs of claim in two bankruptcies based on obligations where collection would be barred by the statute of limitations. The debtors objected to the claims and mounted FDCPA lawsuits. The debt collector stipulated to disallowance of the claims, and the bankruptcy court granted motions to dismiss the FDCPA suits. The Fourth Circuit allowed direct appeals.
In his majority opinion, Fourth Circuit Judge Henry F. Floyd acknowledged that filing a lawsuit based on a time-barred claim violates the FDCPA. He then proceeded to determine whether the debt collector met the initial definitional requirements of the FDCPA.
First, he held that filing a claim is a debt-collection activity regulated by the FDCPA. Next, he considered whether filing a stale claim in bankruptcy violates the FDCPA in light of the Bankruptcy Code.
On that score, Judge Floyd said that the statute of limitations only bars a remedy but does not extinguish the underlying debt. Consequently, he said, the debt collector held a “claim” within the broad definition of that term contained in the Bankruptcy Code. He said that the Bankruptcy Code “nowhere suggests that such debts are not to be filed in the first place.” He even said that recent amendments to the Bankruptcy Rules – requiring the disclosure of facts showing that a claim is time barred – “suggest[] that the Code contemplates that untimely debts will be filed as claims but ultimately disallowed.”
Judge Floyd then ruled that permission granted by the Bankruptcy Code to file stale claims overrides a violation of the FDCPA that would result if that statute were considered alone.
Judge Floyd admitted that trustees sometimes lack the time or resources for objecting to claims, thus permitting the allowance of stale claims, which dilute recoveries by creditors with legitimate claims.
Although Judge Floyd said “we appreciate the harm,” he said the solution would lie in “allocating additional resources to trustees” or by having U.S. Trustees rigorously enforce trustees’ obligations to object to claims.
The Fourth Circuit Dissent
Circuit Judge Albert Diaz agreed that filing a claim is a debt-collection activity, but he otherwise dissented, believing that the debt collector’s conduct was inconsistent with the FDCPA.
Judge Diaz said that the debt collector’s “sharp practice is misleading and unfair to debtors and other creditors.” He characterized the creditor as playing the odds to “garner a payoff on unenforceable debts” while “sheepishly” admitting that the claim is “meritless” if someone objects. In his opinion, the debt collector was “exploiting a weakness in the bankruptcy system and preying on potential error to collect on debts where it should not.” The business practice, he said, “subverts a core purpose of bankruptcy by diverting estate assets from the creditors entitled to receive them.”
For those reasons, Judge Diaz would hold that the FDCPA does not impliedly repeal the FDCPA.
Because the majority did not reach the question, Judge Diaz said he would have held that the FDCPA “on its own terms” would apply to filing time-barred claims. On that score, he would follow the Third, Seventh and Eleventh Circuits, which have held that the FDCPA and the Bankruptcy Code can coexist and that creditors can comply with both simultaneously, because the Bankruptcy Code does not compel creditors to file proofs of claim.
The result in the Fourth Circuit cannot be said to be the result of a conservative bench. Both Judges Floyd and Diaz were appointed by President Obama.
To read ABI’s discussions of the Seventh and Eleventh Circuit Opinions, click here and here.