Consumer Finance Insights
June 8, 2017

Debt Collectors Win in Supreme Court Opinion on FDCPA

On May 15, 2017, the U.S. Supreme Court decided Midland Funding, LLC, v. Johnson, No. 16–348, in favor of the debt collectors involved in the case.  Specifically, Justice Breyer, writing for the Court, held that the Fair Debt Collection Practices Act, 15 U. S. C. §1692 et seq.,  (FDCPA), which prohibits any “false, deceptive, or misleading representation,” or using any “unfair or unconscionable means” to collect, or attempt to collect, a debt, id. at §§1692e, 1692f, does not prohibit a debt collector from asserting a claim in a Chapter 13 bankruptcy that is time-barred by a statute of limitations.

Procedural Background

Aleida Johnson filed a FDCPA claim against Midland Funding LLC (Midland) after Midland submitted a proof of claim in her Chapter 13 bankruptcy for a debt that had expired ten years prior to the bankruptcy.  The applicable statute of limitations was 6 years and the bankruptcy court disallowed the claim.  Ms. Johnson, however, pursued a claim against Midland under the theory that the filing of an expired claim was unconscionable, deceptive, false, unfair or misleading.  While the district court found the FDCPA did not apply to the bankruptcy claim, the Eleventh Circuit reversed the district court, and Midland filed a petition for certiorari with the U.S. Supreme Court, asking whether the conduct at issue was false, deceptive, misleading, unconscionable or unfair under the FDCPA.  The Supreme Court, divided 5-3, found the conduct did not qualify as a violation of the FDCPA and reversed the Eleventh Circuit.

The Stale Proof of Claim is Not False, Deceptive, Or Misleading

Justice Breyer’s holding was narrow—“we conclude that Midland’s filing of a proof of claim that on its face indicates that the limitations period has run does not fall within the scope of any of the five relevant words of the Fair Debt Collection Practices Act.”  Johnson, No. 16-348 at 3.   The Court rejected Johnson’s argument that a “claim” under the Bankruptcy Code had to be enforceable, and that if a proof of claim was unenforceable, it was false, deceptive or misleading.   Instead, the Court looked at other provisions in the Code for guidance, and noted that the Code accepted the possibility of time-barred claims as “claims” because it (1) directed unenforceable claims to be disallowed; and (2) provided that the statute of limitations is an affirmative defense.  In addition, Justice Breyer relied on the bankruptcy trustee’s legal sophistication in knowing that a time-barred claim should be disallowed.

A Stale Claim is Not Unconscionable or Unfair

Next, the opinion discussed why Midland’s assertion of an obviously time-barred claim was not “unfair” or “unconscionable.”  In doing so, the Court differentiated the bankruptcy proceedings from civil litigation, observing that a lawsuit creates a different set of circumstances, where an unsophisticated consumer would have to defend herself or might pay the debt to avoid the cost and embarrassment of a suit.  In contrast, a debtor brings the bankruptcy claim herself, and the “bankruptcy proceeding make it considerably more likely that an effort to collect upon a stale claim in bankruptcy will be met with resistance, objection, and disallowance.”  Id. at 7.  In addition, the Court relied heavily on the role of the trustee, the protections of the proceeding, and the potential discharge of disallowed claims, benefiting the consumer.  The Court did not see the need for the FDCPA to provide support to debtors, when the FDCPA’s purpose was to help consumer avoid bankruptcy in the first place.

Accordingly, the Supreme Court “conclude[d] that filing (in a Chapter 13 bankruptcy proceeding) a proof of claim that is obviously time barred is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act.”  Id. at 10.

Justice Sotomayor submitted a passionate dissent, joined by Justices Ruth Bader Ginsburg and Elena Kagan, noting that the law should not be a “trap from the unwary.”  Justice Sotomayor did not agree that it should be the consumer’s job or the trustee’s job to have to stop a stale claim that should not go forward, but for someone’s inattention.  She noted reprovingly that debt buyers have “’deluge[d]’ the bankruptcy courts with claims on ‘debts deemed unenforceable under state statutes of limitations.’”  Johnson, No. 16-348, dissent at 5.

This case was a good outcome for debt collectors, who Justice Sotomayor noted had been methodically shut out of civil litigation forums because the Federal Trade Commission and the Consumer Financial Protection Bureau have brought cases against debt buyers under the FDCPA for filing time-barred claims. This opinion keeps the Bankruptcy Code squarely out of civil litigation, and puts the onus on borrowers to make sure they respond to any legal proceedings.

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