Resolving a split of circuits, the Supreme Court held 5/3 today in Midland Funding LLC v. Johnson that a debt collector who files a claim that is “obviously” barred by the statute of limitations has not engaged in false, deceptive, misleading, unconscionable, or unfair conduct and thus does not violate the federal Fair Debt Collection Practices Act.
Writing the opinion for the majority in favor of the debt collector, Justice Stephen G. Breyer said that the conclusion on one issue — false, deceptive or misleading — was “reasonably clear.” The second issue — unfair or unconscionable — presented a “closer question,” he said.
Although importuned to do so by the debt collector, the majority did not rule that the later adoption of the Bankruptcy Code impliedly repealed aspects of the FDCPA. However, the opinion opens the door for debt collectors to purchase time-barred claims for pennies on the dollar and profit by filing those otherwise uncollectable claims, because trustees and debtors will not always object.
Justice Sonia Sotomayor dissented, in an opinion joined by Justices Ruth Bader Ginsburg and Elena Kagan. Justice Sotomayor said, “It takes only common sense to conclude that one should not be able to profit on the inadvertent inattention of others.” Justice Neil M. Gorsuch did not participate because he had not been seated on the Supreme Court when the case was argued in January.
Before the high court adjourns for the summer in late June, the justices will rule on a second FDCPA case, Henson v. Santander Consumer USA Inc., and decide whether someone who purchases a claim outright becomes exempt from the FDCPA.
The Facts
The Supreme Court granted certiorari to review a decision from the Eleventh Circuit holding that the filing of a stale claim violates the FDCPA, thereby enabling the debtor to recover attorneys’ fees and up to $1,000 in statutory damages. The case involved a proof of claim filed by a debt collector where the statute of limitations “had long since run,” Justice Breyer said.
The face of the proof of claim disclosed the date of the last activity, from which a lawyer would have known that the claim would be uncollectible.
The chapter 13 debtor objected to the claim, and it was disallowed. The debtor then filed suit under the FDCPA in federal district court in Alabama. The district judge dismissed the suit, saying the FDCPA did not apply. The Eleventh Circuit reversed in May 2016. To read ABI’s discussion of the Eleventh Circuit’s opinion and the splits of circuits, click here and here.
The Majority Opinion
Justice Breyer broke his majority opinion into two parts. First, he asked whether filing a stale claim was “false, deceptive or misleading.” The answer to that question, he said, was “reasonably clear.”
Like “the majority of Courts of Appeals that have considered the matter,” he said that filing stale claims was neither false, deceptive, nor misleading, in part because Alabama, like most other states, provides that “a creditor has a right to payment of a debt even after the limitations period has expired.” He also said that Congress adopted the “broadest available definition of claim,” defining the term in Section 101(5)(A) to include a disputed claim. The statute of limitations, Justice Breyer said, has always been an affirmative defense.
He said that the “audience” in a chapter 13 case is a trustee who “is likely to understand” when a claim is time-barred.
Although the courts of appeals have uniformly found a violation of the FDCPA when debt collectors file ordinary civil suits to collect a time-barred claims, Justice Breyer was careful to say that the Court was not deciding that issue.
The second issue — whether filing a time-barred claim is unfair or unconscionable — was a “closer question,” Justice Breyer said. The “context of a civil suit differs significantly from” a bankruptcy claim, he explained, since a “knowledgeable trustee is available” when a debtor files a bankruptcy petition.
The FDCPA and the Bankruptcy Code, Justice Breyer said, have “different purposes and structural features.” The FDCPA “seeks to help consumers,” but not necessarily by “closing a loophole in the Bankruptcy Code.” To invoke the FDCPA would upset a “delicate balance” and “authorize a new significant bankruptcy-related remedy in the absence of language in the [Bankruptcy] Code providing for it.”
Effectively barring debt collectors from filing stale claims, Justice Breyer said, would require creditors to investigate the merits of affirmative defenses. “The upshot could well be added complexity” and a “change in settlement incentives.”
Justice Sotomayor’s Dissent
Joined by Justices Ginsburg and Kagan, Justice Sotomayor devoted a significant portion of her dissent to explaining how “[p]rofessional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy . . . and hoping no one notices that the debt is too old.” She mentioned that the very same debt collector before the Supreme Court had entered into a consent decree with the government prohibiting the filing of further civil suits to collect stale debts and had paid $34 million in restitution.
Justice Sotomayor believes that filing a stale claim is unfair and unconscionable, just like filing an ordinary civil suit. She said, “Debt collectors do not file these claims in good faith; they file them hoping and expecting the bankruptcy system will fail.”
“[E]veryone with actual experience in the matter insists” it is false, Justice Sotomayor said, to believe that bankruptcy trustees are effective gatekeepers who weed out time-barred claims.