Is it unlawful for a creditor to file an accurate proof of claim for a time-barred debt in a bankruptcy proceeding?
This case provides the Supreme Court with the opportunity to resolve a conflict over the interplay between the Fair Debt Collection Practices Act (“FDCPA”) and the Bankruptcy Code. The parties disagree over whether a creditor may file an accurate proof of claim for a time-barred debt in a bankruptcy proceeding. Petitioner, Midland Funding, LLC (“Midland Funding”) argues that the Bankruptcy Code creates a right to file time-barred claims and that filing such claims does not violate the FDCPA. Midland Funding asserts that filing claims for time-barred debts helps to fulfill the objectives of the Bankruptcy Code, such as collectively addressing all claims against the bankruptcy estate. Respondent, Aleida Johnson, argues alternatively that filing time-barred claims is an unfair, misleading practice that violates the FDCPA and does nothing to further the goals of the bankruptcy process. Johnson contends that creditors file stale claims solely in hopes of taking advantage of malfunctions in the legal process and that these claims waste judicial resources.
Questions as Framed for the Court by the Parties
- Whether the filing of an accurate proof of claim for an unextinguished time-barred debt in a bankruptcy proceeding violates the Fair Debt Collection Practices Act.
- Whether the Bankruptcy Code, which governs the filing of proofs of claim in bankruptcy, precludes the application of the Fair Debt Collection Practices Act to the filing of an accurate proof of claim for an unextinguished time-barred debt.
In 2014 Respondent, Aleida Johnson, filed for bankruptcy under Chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Alabama. Petitioner, Midland Funding, LLC, had previously purchased Johnson’s $1,879.71 defaulted credit card debt. After Johnson, an Alabama resident, failed to list the aforementioned credit card debt in the schedule accompanying her bankruptcy petition, Midland Funding filed a proof of claim for the debt in the bankruptcy proceeding. The last transaction on Johnson’s account was in May of 2003 and the state of Alabama has a six-year statute of limitations period for the claims at issue, so Midland Funding’s claim was for a time-barred debt.
Since Johnson’s debts were greater than her eligible assets, the bankruptcy court confirmed a repayment plan under which she would repay less than one hundred percent of the debts. Under these so-called “non 100% repayment plans,” the amount the debtor repays is based on her projected income. The plan that the court confirmed for Johnson detailed that she would pay back $402 per month for sixty months. This plan required Johnson to pay back around 77% of her outstanding debt.
Three days after the court disallowed Midland Funding’s claim, Johnson brought a class action lawsuit against Midland Funding in the United States District Court for the Southern District of Alabama. Johnson alleged that Midland Funding had violated the Fair Debt Collection Practices Act (“FDCPA”) by filing a proof of claim for a time-barred debt. The complaint asserted that filing the claim violated the FDCPA because it was a deceptive, misleading, and unfair debt collection practice.
The district court granted Midland Funding’s motion to dismiss the complaint, so Johnson filed an appeal with the United States Court of Appeals for the Eleventh Circuit. The Court of Appeals reversed the district court’s decision on May 24, 2016 and denied rehearing en banc without a vote on August 19, 2016. Midland Funding then filed a petition for a writ of certiorari with the Supreme Court and the Court granted the writ of certiorari on October 11, 2016.
THE BANKRUPTCY CODE
Midland Funding, LLC argues that the Bankruptcy Code provides a right for creditors during bankruptcy proceedings to file a proof of claim for an unextinguished time-barred debt. Midland Funding asserts that the definition of a “claim” in the Bankruptcy Code is broad, as the Code defines a claim as a “right to payment.” Midland funding argues that state law creates a debtor’s obligations. Midland Funding contends that under Alabama Law, it has a right to payment; Midland Funding emphasizes that while the running of the statute of limitations abolishes a judicial remedy, it does not abolish a right to payment.
Moreover, according to Midland Funding, the Bankruptcy Code anticipates the filing of proofs of claim for unextinguished time-barred debts. In support of this assertion, Midland Funding notes that the Code provides rights to payment for claims that are disputed or contingent even though such claims are not enforceable at the time of filing. Midland Funding also points out that the Code says that a debtor can raise and litigate a statute of limitations defense in response to a claim it believes is time-barred. Therefore, Midland Funding claims that the Code invites the filing of proofs of claim for unextinguished time-barred debts. In addition, Midland Funding maintains that allowing such claims further the purpose of the Code by allowing all of a debtor’s creditors to be treated together.
Aleida Johnson, however, counters that the Bankruptcy Code does not create a right for creditors to file claims for time-barred debt. Johnson argues that providing a right to file a losing claim would be illogical. Johnson asserts that to have a right to payment under the Code, the debtor must have a legally enforceable obligation to pay the creditor. While Johnson agrees that Alabama law may preserve the debtor’s obligation, Johnson claims that the obligation it preserves after the statute of limitations runs is merely a moral obligation, not a legally enforceable one. In other words, Johnson argues that debts are not legally enforceable under Alabama law after the statute of limitations expires, though the moral obligation still remains. Thus, Johnson contends that Midland Funding does not have a right to payment and therefore cannot file a proof of claim. Moreover, Johnson counters that time-barred claims are different from disputed and contingent claims because a time-barred claim, unlike disputed and contingent claims, will never become an enforceable obligation.
In addition, Johnson insists that a right to file claims for unextinguished time-barred debt is at odds with the purpose of the Bankruptcy Code. Johnson argues that if trustees are required by law to reject to time-barred claims, it does not make sense for parties to have a right to file such claims. Moreover, Johnson contends that time-barred claims offer no benefits to society and waste party and judicial resources. Johnson asserts that the filing of time-barred claims is at odds with the aim of the claims process as a whole, which Johnson argues is to fairly and efficiently process claims. Johnson notes that Congress chose for all claims to be presumptively valid and enforceable. Thus, Johnson maintains that Congress did not also intend for parties to knowingly file unenforceable and invalid claims. Johnson also states that courts sometimes sanction parties for filing claims that the parties know are time-barred. Johnson counters that it is therefore illogical to consider the filing of time-barred claims as a right.
THE FAIR DEBT COLLECTION PRACTICES ACT (“FDCPA”)
Midland Funding asserts that the Fair Debt Collection Practices Act (“FDCPA”) also permits creditors to file a proof of claim for an unextinguished time-barred debt during a bankruptcy proceeding, as filing a claim for a time-barred debt is neither deceptive nor unfair. First, Midland Funding contends that filing a claim for a time-barred debt is permitted under Section 1692e, which prohibits creditors from using deceptive, false, or misleading “representation or means” while attempting to collect a debt. Midland Funding states that its proof of claim is not misleading and is accurate. Further, Midland Funding maintains that its claim contains all of the information that is required by the Bankruptcy Code, including the date of the account’s last payment and the date of the last transaction of the account’s holder. Midland Funding states that its proof of claim was also accurate in the way it described the debt’s legal status. Midland Funding contends that if the Court does consider from whose perspective a potentially misleading statement should be analyzed, the Court should analyze it from the perspective of an attorney or trustee, neither of whom would be misled by an accurate, time-barred proof of claim.
In addition to not violating 1692e, Midland Funding asserts that filing a proof of claim for an unextinguished time-barred debt also does not violate Section 1692f, which forbids collectors from using “unfair or unconscionable means” while attempting to collect a debt. Midland Funding states that its proof of claim was accurate and honest. Midland Funding maintains that its claim is unlike the type of claims that prompted Congress to enact the FDCPA, such as creating fake legal documents or harassing consumers. Midland Funding also emphasizes that its filing of a time-barred claim has virtually no effect on the debtor; Midland Funding notes that if a time-barred claim is ultimately permitted, it would generally affect other creditors, not the debtor. Moreover, Midland Funding states that there are numerous procedures that protect debtors in a bankruptcy proceeding, which reduce the possibility of coercion from the filing of a time-barred claim.
Johnson, however, contends that the filing of a time-barred claim is both misleading and unfair, in violation of both Section 1692e and Section 1692f. Johnson asserts that Midland Funding violates Section 1692e because it exploits the fact that claims are presumed valid by filing claims it knows are not valid, hence falsely asserting that it is entitled to payment. Though Johnson concedes that Midland Funding’s time-barred claims may be accurate, Johnson contends that the FDCPA prohibits “more than just falsehoods.” Johnson argues that because all claims are entitled to a presumption of validity, the chances that time-barred claims are thoroughly reviewed and objected to are reduced. Johnson notes that bankruptcy courts cannot spend as much time as district courts can on each claim. Further, Johnson counters that Midland Funding’s filing would deceive not only debtors, but also busy trustees and attorneys. Johnson states that if time-barred filings were reviewed thoroughly by an attorney, they would be rejected every single time.
Moreover, Johnson asserts that the filing of a time-barred proof of claim is also unfair and unconscionable under Section 1692f. Johnson claims that Midland Funding’s time-barred claims only succeed when the bankruptcy process malfunctions: that is, when debtors or trustees fail to object to time-barred claims, thus forcing debtors to repay a creditor whose claim is time-barred. Johnson argues that Midland Funding hopes that its claims slip through the supervision of the court by flooding bankruptcy courts with time-barred claims. Johnson also disputes Midland Funding’s claim that filing time-barred claims do not harm debtors. Johnson counters that when a debtor must repay 100% of their debts or when a debtor fails to complete a Chapter 13 bankruptcy plan, that debtor will be harmed significantly by having to pay time-barred claims.
RESOLVING CONFLICT BETWEEN THE FDCPA AND THE BANKRUPTCY CODE
Midland Funding argues that the FDCPA allows creditors to file a proof of claim for a time-barred debt. But, Midland Funding contends that if the FDCPA is ambiguous on the matter, it should not be interpreted to conflict with the Bankruptcy Code, which Midland Funding claims clearly permits the filing of time-barred claims. Midland Funding asserts that courts should attempt to harmonize statutes when they appear contradictory. Furthermore, Midland Funding argues that the FDCPA should not be interpreted to conflict with the Bankruptcy Code because the FDCPA was not created to apply within bankruptcy proceeding, at least in this instance, and because the FDCPA is not a comprehensive scheme, unlike the Code. However, Midland Funding argues in the alternative that if the FDCPA could somehow be interpreted to forbid the filing of a time-barred claim, the Bankruptcy Code prohibits applying the FDCPA to forbid time-barred claims. Midland Funding claims that because the Bankruptcy Code was enacted later, if there is a conflict, the FDCPA must yield to the Code.
Johnson, on the other hand, argues that without a clear congressional intention, both statutes must be considered effective. Johnson states that the FDCPA and the Bankruptcy Code do not conflict, as filing a time-barred proof of claim is prohibited under both. In the alternative, Johnson counters that if the Code somehow permitted the filing of time-barred claims, the Code would not repeal the FDCPA. Johnson asserts that even if the Code permits such filings, it certainly does not require them. Johnson maintains that to repeal the FDCPA, the Code would have had to compel what is prohibited by the FDCPA. Because the Code does not compel the filing of time-barred proofs of claim, Johnson argues it cannot repeal the FDCPA.
OBJECTIVES OF THE BANKRUPTCY PROCESS
Midland Funding argues that disallowing claims for time-barred debts in bankruptcy proceedings would undercut central objectives of the Bankruptcy Code, such as collectively addressing all claims against the bankruptcy estate and providing the debtor with a fresh start. Midland Funding points out that if time-barred debts are excluded from bankruptcy proceedings, these debts will not be discharged and the relevant creditors could continue contacting the debtor and attempting to collect the debt when the bankruptcy proceedings end. According to Midland Funding, this robs the debtor of her fresh start following the bankruptcy process. The Chamber of Commerce also contends in support of Midland Funding that the main beneficiaries of disallowing claims for time-barred debts from bankruptcy proceedings would be a small group of plaintiffs’ lawyers in the FDCPA litigation business. The Chamber of Commerce claims that attorneys’ fees make up a significant amount of the costs for these suits and that the number of plaintiffs bringing FDCPA suits in federal court has grown by nearly 900% since 2001. Alternatively, Midland Funding argues that the FDCPA should not be read to apply in the bankruptcy context. Midland Funding contends that Congress did not indicate any intent for the FDCPA to interfere with the “delicate balance” of bankruptcy proceedings. .
However, Aleida Johnson and supporting amici claim that disallowing claims for time-barred debts is in line with the objectives of the Bankruptcy Code, since the goal of the bankruptcy process is to collectively address all of the debtor’s legal obligations. Since time-barred debts will never mature, Johnson and amici contend that concerns about creditors disrupting the debtor’s fresh start by later attempting to collect them are irrelevant. Johnson also argues that the statute of limitations provides the debtor with a fresh start. Furthermore, Johnson and amici assert that objecting to stale claims wastes judicial resources. The National Association of Consumer Bankruptcy Attorneys et al. argue that an increase in the number of claims for time-barred debts will essentially impose a tax on the entire bankruptcy system that will increase debtors’ fees. Additionally, Johnson and amici allege that filing a proof of claim for a time-barred debt is unjust, unfair, and out of line with normal standards of good faith Johnson and supporting amici contend that the business model of organizations like Midland Funding is to take advantage of malfunctions in the legal system and to attempt to fool debtors into paying back stale claims to the detriment of legitimate creditors.
HARM TO DEBTORS
Midland Funding and supporting amici contend that allowing creditors to file claims for time-barred debts in bankruptcy proceedings would not harm debtors, since most debtors end up repaying less than 100% of their debts according to repayment plans based on their projected incomes. Consequently, any extra money that the debtor would owe to repay a time-barred debt would merely affect the amount he repays to other creditors, rather than the total amount of money he owes. Furthermore, DBA International, Inc. points out that the bankruptcy process already contains many safeguards to protect debtors from unfair claims. For example, the Bankruptcy Code contains remedies for noncompliant claims and provides for sanctions for frivolous pleadings and motions.
ACA International (“ACA”) contends that courts should recognize that debt collection is an important industry in our society that we should not over-deter or discourage. ACA points out that debt collectors play the important role of helping businesses collect payment for services rendered. ACA also contends that debtors often want to resolve debts—even those that may be time-barred—for many reasons. For instance, many debtors feel a moral obligation to repay their debts. ACA argues that disallowing claims for time-barred debts will over-deter creditors from attempting to collect rightfully owed debts by forcing them to choose between filing a proof of claim and risking FCDPA liability or being excluded from the bankruptcy process.
However, Johnson argues that it is nonsensical to claim that creditors have a right to file stale claims, because Congress provided that debtors can object to such claims. Johnson contends that it would be a pointless exercise to allow creditors to file stale claims since debtors possess a directly opposing right. Johnson also contends that filing time-barred claims does harm debtors, since many bankruptcy plans fail and leave the debtor having to repay his debts in full. Additionally, paying funds to satisfy stale debts reduces the ability of the debtor to repay legitimate debts.
- Tim Bauer, Eleventh Circuit Court of Appeals Determines that a “Debt Collector” filing a Bankruptcy Court Proof of Claim on a Time-Barred Account is an FDCPA Violation, insideARM (May 25, 2016).
- Sarah Chaney & Jacqueline Palank, Supreme Court Agrees to Hear Debt-Collection Cases, Wall Street Journal (October 12, 2016).
- Daniel Gill, SCOTUS Asked to Hear Two Cases on Stale Claims in Bankruptcy, Bloomberg BNA (September 23, 2016).