The Supreme Court Finds No Violation of FDCPA Where Creditor Files Proof of Claim Barred by Statute of Limitations

On May 15, 2017, the Supreme Court in Midland Funding, LLC v. Johnson ruled that a creditor does not violate the Fair Debt Collection Practices Act (FDCPA) by filing a proof of claim that discloses on its face that it is time-barred by the statute of limitations.[1] Most noteworthy about the opinion is that the majority scarcely touches on the policy implications of its ruling. The dissent, however, provides a full-throated critique of this type of practice by “professional debt collectors.”

Midland Files Claim for 10-Year-Old Debt

In March 2014, Aleida Johnson filed for chapter 13 bankruptcy relief.[2] Midland Funding, LLC, filed a proof of claim asserting that Johnson owed Midland a credit card debt of $1,879.71.[3] On its face, however, Midland’s claim asserted that the last time Johnson made any charge on the account was in May 2003, 10 years before Johnson filed for bankruptcy.[4] In Alabama, Johnson’s home and the relevant law for the analysis, the statute of limitations for collecting upon a judgment is six years.[5] Johnson objected to Midland’s claim, and the bankruptcy court disallowed that claim.[6] Johnson next sued Midland seeking actual damages, statutory damages, attorneys’ fees and costs for violation of the Fair Debt Collection Practices Act.[7] The district court dismissed the action, but the Eleventh Circuit Court of Appeals reversed.[8] Midland filed a petition for certiorari, highlighting the division of opinion among the courts on whether filing a proof of claim after the limitations period is “false,” “deceptive,” “misleading,” “unconscionable” or “unfair” within the meaning of the Act.[9]

Justice Sotomayor, in her dissent, provides the missing details about what was really going on in Midland. She noted, “Professional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy proceedings to collect it, and hoping that no one notices that that is too old to be enforced by the courts.”[10] For years, collectors “have filed suits in state courts — often in small claims courts, where formal rules of evidence do not apply — to collect debts too old to be enforced by the courts.”[11] She also noted that the FDCPA’s prohibitions on “misleading” and “unfair” conduct have largely beaten back this practice, and that every court to consider the question has held that a debt collector that knowingly files suit in a court to collect on time-barred debt violates the FDCPA.[12] She added, “Stymied in state courts, debt buyers have now turned to a new forum: bankruptcy courts.”[13]

Nothing “False, Deceptive or Misleading” in Filing Stale Claims, Per Plain Language of Code

Nonetheless, the majority quickly dispatched the notion that Midland’s time-barred proof of claim was “false, deceptive or misleading.”[14] Justice Breyer, who authored the opinion, noted that a proof of claim falls within the Bankruptcy’s Codes definition of “claim,” defined there as a “right to payment,”[15] and it is state law that determines whether a person has a right to payment.[16] Alabama’s law provides that a creditor has a “right to payment” on a debt even after the limitations period expires.[17]

Johnson also argued that the Code’s use of the word “claim” requires an “enforceable claim,[18] noting that the Supreme Court once referred to a bankruptcy “claim” as an “enforceable obligation.”[19] And so, Johnson’s position was that Midland’s proof of claim was false, deceptive or misleading because the “claim” was not enforceable.[20]

The Court disagreed, noting that the word “enforceable” appears nowhere in the Code’s definition of “claim.”[21] In Davenport, it noted, the Court was dealing with an enforceable debt, which is likely why it used the word “enforceable” descriptively.[22] Moreover, Justice Breyer discussed that “Congress intended . . . to adopt the broadest available definition of ‘claim.’”[23] Added to this, the Code further describes a claim as a “right to payment,” “whether or not such right is . . . fixed, contingent, . . . [or] disputed.”[24] So a claim with a non-arising contingency, or one that is successfully disputed, may be unenforceable, but it is a “right to payment” nonetheless, making it a “claim.”[25]

Johnson pointed to other provisions of the Code — like § 502(a) and Rule 3001(f) (provisions relating to allowance of claims in absence of objection and describing claims as presumptively valid) — to argue that claims must be enforceable.[26] The Court found that these statutes merely show that a “claim” may be subject to a process of determining whether it is valid, or a process to determine whether an affirmative defense against it exists.[27] Regardless of the result, a claim remains a claim.

In addition, Justice Breyer held that whether a statement is misleading “requires consideration of [the] legal sophistication of its audience.”[28] In bankruptcy, the audience is a bankruptcy trustee tasked with examining proofs of claim and posing necessary objections, including the timeliness thereof. [29] Thus, filing a proof of claim subject to a statute-of-limitations defense was not misleading.

Filing Stale Claims Also Not “Unfair” or “Unconscionable”

The Court found it to be a closer question whether filing a time-barred claim was “unfair” or “unconscionable” within the meaning of the Fair Debt Collections Practices Act.[30] Johnson raised two points in support of this: (1) that several lower courts have found or indicated that a collector’s assertion of a claim known to be time-barred in ordinary civil actions has been deemed to be “unfair,” and (2) that the practice of filing time-barred claims risks harm to the debtor, since there is not a “single legitimate reason” to allow this behavior.[31]

As to the “unfair” argument, the Court disregarded the precedent cited by Johnson, since that precedent related to debt collectors’ statements in nonbankruptcy civil suits involving stale claims.[32] In the bankruptcy context, Justice Breyer noted, it is the consumer who initiates the proceeding, an entirely different situation than when an unsuspecting debtor-defendant may simply pay a claim to avoid being hauled to court, as in a civil case.[33] In bankruptcy, a “knowledgeable Trustee” is available,[34] along with a claims-resolution process that is “a more streamlined and less unnerving process than where debtor is facing a collection lawsuit.”[35] To the majority, these features about chapter 13 bankruptcy make it considerably more likely that an effort to collect upon the stale claim in bankruptcy will be met with “resistance, objection, and disallowance.”[36]

The Court likewise noted that the bankruptcy system treats untimeliness as an affirmative defense, and that the trustee has the task of investigating claims to determine whether they are stale.[37] Altogether, these aspects of bankruptcy minimize the risk to the debtor.[38] In any event, the Court notes, the inclusion of a stale claim in the claims-analysis process means that the improper claim could be discharged if disallowed — a “benefit [to the] debtor.”[39]

Lastly, in addressing an issue raised by an amicus curiae brief filed by the U.S., the Court held that the Advisory Committee Rules of Bankruptcy Procedure did not decide the issue when it promulgated Bankruptcy Rule 9011.[40] The Committee, in considering amendments to that rule in 2009, rejected a proposal that would require a creditor to certify that there was no statute-of-limitations defense to its claim.[41]

The Strident Dissent

The dissent brings to the fore what the majority ignores: that “debt collectors . . . hope that no one notices that [the claims] are too old to be enforced.”[42] And the consequences are real: Requiring stale claims to be detected “require[s] ordinary and unsophisticated people (and their overworked trustees) to be on guard not only against mistaken claims but also against claims that the collectors know will fail under law if the objection is raised.”[43] These debt collectors are “hoping and expecting that the bankruptcy system will fail.”[44] The dissent shunned the majority’s assertion that a consumer could actually benefit from the filing of untimely claims:

[G]iven the high rate [at] which debtors are able to fully pay off their debts in Chapter 13 proceedings . . . most debtors who fail to object to a claim will end up worse off than had they never enter bankruptcy at all: they will make payments on stale debts, thereby resuscitating them . . . and may thus walk out of bankruptcy court owing more to their creditors than they did when they entered it. There is no benefit to anyone in such proceeding — except the debt collectors.[45]

The dissent concludes strongly, “It is said that the law should not be a trap for the unwary. Today’s decision sets just such a trap.”