Are You a Creditor? Your Proof of Claim Could Violate FDCPA
Creditors should tread lightly when filing proofs of claims against a debtor -- at least under the recent ruling at the Eleventh Circuit in Johnson v. Midland. According to that federal appeals court, collectors could potentially be liable under the Fair Debt Collection Practices Act if the collector knows the debt to be time-barred.
The court's decision changes the collectors' analysis substantially from "why not?" to "that's why."
The Good Old Days
Prior to the case that was at bar, the standard practice of creditors seeking to lay claim to debtor property was relatively simple: creditors would submit a form to the bankruptcy court or claims agent. The process has only been made faster and easier with the advent of electronic filing that is acceptable to many bankruptcy courts.
Besides having to worry about the Bankruptcy Code itself, filers had very little incentive not to file a claim, even if the claim might turn out to be unenforceable. The motive for filing would be driven by a simple expected payoff analysis: file any possible claim with the hopes that the estate will not challenge the filing and get a payoff; but don't file, and the creditor risks getting nothing. The choice, then, is easy.
Crackin' the Whip
But the case of Johnson v. Midland threatens to change all of that. The case involves two commercial debtors who sued their creditors under the Fair Debt Collection Practices Act arguing that time-barred attempts to collect on debts were "unfair, unconscionable, deceptive, and misleading," in violation of the FDCPA. This was essentially a revisiting of the issue that had earlier been addressed in the 2014 decision of Crawford v. LVNV Funding, LLC, but which inconveniently did not deal with the issue of preclusion.
District Analysis, Step by Step
At the district court, the judge's analysis went like this. Although Alabama's (the state where the claim arose) statute of limitations on the creditor's claims was six years, sec. 501(a) of the Bankruptcy Code fairly authorized a creditor to file even a time-barred claim so long as that creditor had a "right to payment" that could not be defeated by applicable state laws. This was the first line of conflict.
Thus, the conflict had to be resolved. Ironically, this involved an analysis between two more conflicting federal laws: the Bankruptcy Code itself and FDCPA. Here, there existed what the district court called an "obvious tension" because the Bankruptcy Code allowed time-barred filings, but the latter did not. Turning to the doctrine of implied repeal, the court found that the FDCPA "must give way" the Bankruptcy Code, thus allowing creditors to make time-barred filing with the hope of an eventual windfall.
The circuit took this opportunity to flesh out any ambiguities that it had earlier left in its Crawford decision and held that the Bankruptcy Code had no preemptive effect over an FDCPA claim within a chapter 13 context if the debtor knew that a claim was time-barred by applicable state law -- or other law.
Part of the circuit's disagreement with the lower court's characterization of an "irreconcilable conflict" between the two federal statutes had to do with its finding that the laws were aimed at different goals and certainly at different actors within the whole bankruptcy process. In particular, the Eleventh Circuit opined that the Bankruptcy Code allows "all creditors" to file proofs of claims, while the FDCPA merely proscribes the conduct of collectors within and without the bankruptcy process.
Grand Takeaways for Creditors
At least in the Eleventh Circuit, the court's ruling places further onus on companies and their legal counsel to review debt collection practices and their possible non-compliance with the current law. This does not appear to mean, however, that all time-barred claims automatically mean a viable claim by a debtor under FDCPA. Rather, it means that one cannot simply file claims knowing that a claim is definitely barred under applicable state law.
The court of appeals did note that the FDCPA does provide safe harbor for creditors-collectors who file claims in good faith on time-barred accounts. As creditors are likely to push back against this change in the legal landscape, it certainly marks a change in what could have been the primary modus operandi of debt collection companies in at least one circuit in this country.
- Bankruptcy Code Doesn't Conflict With Debt Collection Statute (Bloomberg BNA)
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- Officer Jails Real Estate Agents Who Foreclosed on His House (FindLaw's U.S. Eleventh Circuit Blog)
- Rooker-Feldman Strikes Again for a Florida Bar Applicant (FindLaw's U.S. Eleventh Circuit Blog)