In deciding whether the filing of a stale claim violates the FDCPA, the Supreme Court likely will lay down precedent to resolve an issue pending in the Ninth Circuit: Does a debt collector violate RICO by filing proofs of claim based on debts where collection would be barred outside of bankruptcy by the statute of limitations?
On Oct. 11 the Supreme Court granted certiorari and agreed to resolve a conflict among the circuits by hearing Midland Funding LLC v. Johnson, where the Eleventh Circuit held that a debt collector violates the federal Fair Debt Collection Practices Act, or FDCPA, by filing a stale claim. The high court will also decide whether the later adoption of the Bankruptcy Code impliedly repealed the FDCPA as to the filing of stale claims in bankruptcy.
On a parallel track, the Ninth Circuit is primed to settle a split among district courts in California by deciding whether filing stale claims in chapter 13 cases violates the federal Racketeer Influenced and Corrupt Organizations Act, or RICO. Within weeks of one another, district courts in the Southern District of California filed opinions reaching diametrically opposite results. One held that persistently filing stale claims violates RICO, while another held that it does not.
Practically speaking, the Supreme Court may allow the business of collecting stale debts in bankruptcy to prosper and grow. Or, the Supreme Court may effectively kill the business, leaving debt collectors with large class action liability for thousands of claims they already filed.
The RICO Suits
On the same day in September 2015, lawyers filed companion class actions in San Diego. One was aimed at debt collector Midland Funding LLC, while the other targeted LVNV Funding LLC, another leader in the collection of stale claims in bankruptcies. Both suits alleged that the debt collectors violated RICO by making a business out of filing “massive” numbers of claims based on debts where recovery outside of bankruptcy would be barred by the statute of limitations.
The suits were assigned to different district judges in San Diego.
The debt collectors base their business on the premise that they are allowed to file proofs of claim because a stale debt is not extinguished since the statute of limitations merely permits the debtor to raise an affirmative defense. Because they pay such a tiny amount for each stale claim, the collection of just a small percentage of claims makes the business profitable.
The debt collectors typically file proofs of claim complying with the Bankruptcy Rules by laying out facts indicating that the statute of limitations has lapsed. They assume that trustees or debtors in many instances will not read the claims or will lack the resources or incentive to file objections to otherwise time-barred claims.
One RICO Suit Dismissed, the Other Survives
In the first-filed case, Arce v. LVNV Funding LLC, District Judge Larry Alan Burns wrote a two-page decision in April dismissing the RICO complaint with prejudice on the authority of the Ninth Circuit’s 2002 decision in Walls v. Wells Fargo Bank NA. Walls is one of the cases that the Supreme Court will either impliedly uphold or reverse in Johnson.
In Walls, the Ninth Circuit dismissed a lawsuit aimed at a debt collector, holding that the Bankruptcy Code provides a bankrupt’s only recourse for a violation of the discharge injunction.
The plaintiffs filed an appeal to the Ninth Circuit in Arce. The defendant submitted its answering brief on Oct. 6. Likely as not, the Ninth Circuit will wait for the Supreme Court to rule on Johnson before deciding Arce.
In May, District Judge M. James Lorenz disagreed with Judge Burns and denied the debt collector’s motion to dismiss. In Rivera v. Encore Capital Group, Judge Lorenz held that systematically filing proofs of claim based on stale debts states a cause of action for violation of RICO.
Reading Walls narrowly, Judge Lorenz believes that in adopting RICO, “Congress did intend to provide a statutory cause of action via which bankruptcy debtors could assert bankruptcy fraud claims.” He rested his conclusion in part on 18 U.S.C. Section 1961(1)(D), which provides that fraud in a bankruptcy case constitutes an act of “racketeering.”
On the question of implied repeal, Judge Lorenz said that “Congress certainly did not intend that the Bankruptcy Code operate as a substitute for RICO.” Nor did he see the Code and RICO as being in “irreconcilable conflict.”
On an issue that the Supreme Court will squarely address in Johnson, Judge Lorenz rejected the notion that the Bankruptcy Code “authorizes and endorses” the filing of stale claims. He said that “systematically” filing stale claims “en masse” is “offensive to the provisions” of the Bankruptcy Code and therefore states a racketeering claim because bankruptcy was “enacted to provide for the orderly disposition of legitimate claims.”
The debt collector has a pending motion asking Judge Lorenz to certify an interlocutory appeal to the Ninth Circuit or stay the suit until the appeals court decides Arce.
Implications of a Johnson Decision
If the Supreme Court decides in Johnson that the Bankruptcy Code did not impliedly repeal the FDCPA, the result likely would apply equally to RICO, allowing suits like Arce and Rivera to survive Rule 12(b)(6) motions.
If the Supreme Court does find implied repeal in Johnson, it is possible, although perhaps unlikely, that RICO suits will nonetheless survive. In RICO cases, plaintiffs have the additional argument that Congress specifically made bankruptcy fraud an act of racketeering. Compared with the FDCPA, a civil statute, it’s a longer jump to the conclusion that the Bankruptcy Code impliedly repealed a provision in the federal criminal code.
Assuming no implied repeal, the Supreme Court will also decide whether the Bankruptcy Code permits or encourages the filing of stale claims. If the high court interprets the Code as providing a safe harbor for stale claims, RICO suits likely will meet the same fate.
To read ABI’s discussion of the grant of certiorari in Johnson, click here.
In deciding whether the filing of a stale claim violates the FDCPA, the Supreme Court likely will lay down precedent to resolve an issue pending in the Ninth Circuit: Does a debt collector violate RICO by filing proofs of claim based on debts where collection would be barred outside of bankruptcy by the statute of limitations?