In Midland Funding LLC v. Johnson, the Supreme Court will decide this term whether filing a claim barred by the statute of limitations violates the federal Fair Debt Collection Practices Act and whether the Bankruptcy Code impliedly repealed the FDCPA.
The breadth of the high court’s decision may also indicate whether the Bankruptcy Code preempts state consumer protection laws when it comes to suits alleging damages for violation of the automatic stay. For the time being, however, courts are holding that state consumer protection laws are preempted.
In Illinois, a consumer filed bankruptcy and surrendered his home. The lender obtained a modification of the automatic stay and foreclosed. The foreclosure judgment included a $3,500 deficiency judgment against the debtor.
Rather than pursue a claim in bankruptcy court for willful violation of the stay under Section 362(k), the debtor filed suit in federal district court in Chicago under the Illinois Consumer Fraud and Deceptive Business Practices Act, or ICFA.
Although he said that obtaining the deficiency judgment violated the automatic stay, District Judge Harry D. Leinenweber nonetheless dismissed the suit, holding in an opinion on Nov. 10 that the Bankruptcy Code preempted the ICFA.
At first blush, the decision might seem at odds with Randolph v. IMBS Inc., where the Seventh Circuit held in 2004 that the later-adopted Bankruptcy Code did not impliedly repeal the FDCPA when it comes to redress for violation of the automatic stay. However, Judge Leinenweber pointed out that Randolph dealt with implied repeal of one federal statute by another, not the doctrine of preemption, which applies when a federal statute is at odds with state law.
Judge Leinenweber said that courts have ruled that state laws, including the IFCA, are preempted “when the claim would not exist but for some violation of” the Bankruptcy Code. He said that preemption is particularly applicable “when the Bankruptcy Code itself provides a remedy for such a violation.”
Judge Leinenweber pointed out how Randolph itself said that “preemption is more readily inferred,” while implied repeal is a “rare bird.” The standards are different, he said, and finding implied repeal is “stricter than to find a preemption.”
Even if there were no preemption, Judge Leinenweber still would have dismissed the complaint because the debtor “did not plead actual damages” as required under the IFCA. Claiming to suffer emotional distress and spending time consulting with counsel do not constitute damages required by the state statute, he said.
To read ABI’s discussion of Midland Funding, click here.