Building on Midland Funding LLC v. Johnson, 137 S. Ct. 1407, 197 L. Ed. 2d 790, 85 U.S.L.W. 4239 (Sup. Ct. May 15, 2017), Bankruptcy Judge Michelle M. Harner of Baltimore held that an unlicensed debt collector is allowed to file a proof of claim in Maryland and that relevant aspects of state consumer protection laws are preempted by the Bankruptcy Code.
If the holding is recognized nationwide, the opinion is important because a debt collector need not be licensed in states where it files proofs of claim in bankruptcy court. Were the rule otherwise, debt collectors would incur greater costs in filing claims.
A debt collector purchased two claims totaling about $5,000 and filed the claims in the debtor’s chapter 13 case. The creditor was not a licensed debt collector in Maryland. Under that state’s law, an unlicensed debt collector cannot sue, and any judgment it might obtain can be collaterally attacked because the judgment is void.
After confirmation of the plan, the debtor sued the debt collector. Count I alleged that the creditor violated Maryland consumer protection laws because it was not licensed in that state. Count II sought compensatory and punitive damages and attorneys’ fees, and Count III objected to allowance of the claim.
The creditor responded with a motion to dismiss. In her March 8 opinion, Judge Harner granted the motion and dismissed the complaint except for the count objecting to allowance.
Judge Harner described the Supreme Court as having held in Midland Funding that filing a time-barred claim does not violate the federal Fair Debt Collection Practices Act, or FDCPA. The high court held, she said, that a time-barred claim falls within the Code’s definition of a claim. She noted, though, that the high court did not rule on whether the Bankruptcy Code impliedly repealed the FDCPA.
In reference to the debtor’s complaint, Judge Harner framed the question as whether the debt collector’s inability to sue in Maryland “is akin to the time-barred claim addressed by the Supreme Court in Midland Funding.” She said that Midland Funding and the complaint before her “both speak to the enforceability of a claim.”
Although it may be time-barred, a claim is not extinguished by a statute of limitations, as the Supreme Court noted in Midland Funding. Similarly, a debt is not rendered unenforceable in Maryland even if it is in the hands of an unlicensed debt collector who cannot sue.
Analyzing state law, Judge Harner said that the buyer’s status as an unlicensed debt collector did not invalidate the agreement selling the claims, nor did it relieve the debtor of liability on the obligations. The creditor’s inability to sue successfully “goes to the allowances of the underlying claim, not their ability to file a claim,” she said.
Judge Harner agreed with bankruptcy courts in Indiana and Florida that held that a creditor need not be licensed under state law to file a claim.
Judge Harner then turned to the question of whether the Maryland laws were preempted by the Bankruptcy Code.
In the Fourth Circuit, state law is preempted if it is impossible to comply with both state and federal law. To the extent that a creditor has a right to file a claim, “that conduct cannot form the basis of liability under state law,” Judge Harner said.
Judge Harner therefore ruled that the Bankruptcy Code preempted state law because it would “penalize a party for exercising a right under the Code.” Consequently, she dismissed Counts I and II as being “preempted by the Code to the extent that the [creditors] possess a right to payment and, in turn, had a right to file” the proofs of claim.
However, she did not dismiss the third count objecting to allowance of the claim.
Judge Harner also held that confirmation of the plan did not bar a claim objection under the rubric of res judicata, because nothing in the plan or confirmation order ruled on the allowance of the claim.