U.S. Supreme Court Rejects FDCPA Liability in Bankruptcy Proceeding
On Monday, May 15, 2017, the Supreme Court put to rest a theory of liability under the Fair Debt Collections Practices Act (FDCPA or Act) that had a major impact not only upon the credit and collection industry, but bankruptcy practitioners who represent creditors as well. In the matter of Midland Funding, LLC v. Johnson, __ U.S. ___, (2017), the Court, in a 5-3 decision, found that "the filing of a proof of claim that is obviously time-barred is not a false, deceptive, misleading, unfair or unconscionable debt collection practice" under the FDCPA, reversing the judgment of the Eleventh Circuit.
The Johnson case was the by-product of another Eleventh Circuit matter: Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir, 2014). In that case, the Eleventh Circuit found that the filing of a time-barred proof of claim in a Chapter 13 bankruptcy case was in fact a violation of the FDCPA, even though the filing of such a proof of claim does not violate the Bankruptcy Code (Code). What happened thereafter was nothing short of mayhem. Hundreds upon hundreds of lawsuits were filed against third-party debt collectors. Certiorari was denied as to Crawford, but as the lawsuits multiplied and a split of decisions by the Circuit Courts grew, the high court took up the Johnson case, which was factually identical to Crawford.
The consumer in Johnson filed for bankruptcy in Alabama under Chapter 13 of the Bankruptcy Code. Midland was a creditor of Johnson, purchasing the credit card account some years prior. Midland filed a proof of claim in the amount of $1,879.71 and accurately acknowledged that the last transaction on the account was in 2002, some 10 years before Johnson's bankruptcy. The relevant statute of limitations for collecting unpaid debt in Alabama is six (6) years. Johnson objected to the proof of claim and the Bankruptcy Court disallowed the claim. Johnson then sued Midland for violations of the FDCPA. The District Court in Alabama dismissed the case but the Eleventh Circuit reversed based upon the decision in Crawford.
Writing for the majority, Justice Breyer rejected the Crawford analysis and the arguments asserted by Johnson as follows:
- Definition of a "Claim". Under 11 U.S.C. § 101(5)(A) of the Bankruptcy Code, a claim is defined broadly as a "right to payment…whether or not such right is…fixed, contingent, matured, unmatured, [or] disputed." The Court noted that state law determines whether a person has a "claim," or "right to payment" under § 101(5)(A). In this case, the relevant state law is the law of Alabama, which provides that a creditor has the right to payment of a debt even after the limitations period has expired. The Court found no validity in Johnson's argument that a claim under the Code is synonymous with an "enforceable claim," as no such word appears in the Code's definition. The Court found it difficult to square Johnson's interpretation with other provisions of the Code. For example, § 502(b)(1) of the Code says that if a "claim" is unenforceable, it will be disallowed; it does not say that an "unenforceable" claim is not a "claim." § 101(5)(A) makes clear that a right to payment exists even if the claim is not enforceable and it is still a "claim" under the Code.
- A Proof of Claim is Not a Civil Law Suit. Crawford, Johnson and those cases that followed have all argued that the filing of a proof of claim is similar to the filing of a civil lawsuit. The filing of a lawsuit to collect a debt beyond the statute of limitations is in fact an FDCPA violation. The Supreme Court did not see them as the same. For one, it is the consumer who initiates the bankruptcy process. In a Chapter 13 context, a knowledgeable trustee is available and is charged with the evaluation of the claims. Further, the claims process is a more streamlined and a less unnerving prospect for a debtor than facing a collection lawsuit. It is these features of a Chapter 13 bankruptcy that makes it considerably more likely that an effort to collect upon a stale claim will be met with resistance, objection and disallowance. The Court noted that the debtor as well as the trustee has the right to assert an affirmative defense of timeliness. The Court further rejected the notion that carving out an exception for debtors in bankruptcy to avoid asserting such an affirmative defense would require defining the boundaries of that exception.
- The Independent Purposes of the Act and the Code. The Court noted that the FDCPA and the Code serve separate purposes. In the case of the FDCPA, the Acts works to protect consumers by preventing consumer bankruptcies in the first place. By way of contrast, the Code creates and maintains the delicate balance of a debtor's protections and obligations; to find the FDCPA applicable in this bankruptcy scenario – filing a proof of claim that is otherwise permissible under the Code – would upset that "delicate balance." To go down that path, the Court concluded, would result in a new and significant bankruptcy related remedy in the absence of language in the Code to support it.
Justice Sotomayor's dissent, joined by Justices Kagan and Ginsburg, did very little to analyze the facts of the case and to acknowledge the plain language of both the FDCPA and the Code. They simply felt that the claims process was rigged and that debt buyers were using a "loophole".
Unlike other federal consumer protection statutes, the FDCPA has been subject to a tortured interpretation due to a lack of regulations. For years, the courts have been willing to stretch and pull the Act beyond what Congress had intended. Exactly one year ago from today, the Supreme Court rejected another unrealistic reading of the FDCPA in the case, Sheriff v. Gillie, ___ U.S. ___ (2016) which attempted to find a FDCPA violation against a law firm for using an accurate designation of "Special Counsel" on their firm letterhead. The law firm had in fact had been hired by the Ohio Attorney General. In that case, Justice Ginsberg, then writing for the majority, stated that the section of the Act in question "bars debt collectors from deceiving and misleading consumers, it does not protect consumers from fearing the actual consequences of their debt."
The FDCPA is a strict liability statute which serves a remedial purpose. However, many courts have construed the Act broadly in order to achieve that purpose. Today's decision attempts to reign in that far-fetched analysis that has been so predominate in this area of consumer protection law. The decision was a quick 10-page read and took aim at the attempts to use the FDCPA as a substitute when other statutes do not provide the "right" outcome. The majority looked for simplicity and found it in the four-corners of the Act. Other courts need to do the same.
If you have any questions, please contact Joann Needleman at (215) 640-8536 | firstname.lastname@example.org or Beth L. Slaby at (412) 394-2486 | email@example.com.
Clark Hill's Consumer Financial Services Regulatory & Compliance Practice Group is a national leader in the field of consumer financial services law, providing strategic legal counsel to clients in all areas of consumer finance. We provide counsel, consultation and litigation services to financial institutions, law firms and debt buyers throughout the country. Our group can help you navigate this rapidly evolving regulatory environment. Our exceptional team of lawyers and government and regulatory advisors has extensive experience in – and an in-depth understanding of – the laws and regulations governing consumer financial products and services. We can assist you in developing and implementing compliance programs, as well as defending consumer litigation and regulatory enforcement actions.
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