On May 15, 2017, the Supreme Court ruled that filing proof of a time-barred claim in a Chapter 13 bankruptcy case is not “false,” “deceptive,” “misleading,” “unconscionable,” or “unfair” within the meaning of the Fair Debt Collection Practices Act (“FDCPA”).
By way of background, the plaintiff-debtor filed for personal bankruptcy under Chapter 13 of the Bankruptcy Code. The defendant-creditor filed a “proof of claim,” which is a written statement asserting that the plaintiff owed a credit card debt. The proof of claim also stated that the last time any charge appeared on the plaintiff’s account was in May 2003, more than 10 years before the plaintiff filed for bankruptcy. The applicable statute of limitations on said debt is six years. The plaintiff, who was represented by counsel in the bankruptcy proceeding, objected to the claim and it was disallowed by the bankruptcy court. The plaintiff then filed suit against the creditor, arguing that the defendant’s conduct was “false,” “deceptive,” “misleading,” “unconscionable,” or “unfair;” and therefore violated the FDCPA. The district court dismissed the case, but the U.S. Court of Appeals for the Eleventh Circuit reversed the district court and reinstated the plaintiff’s claim.
In reversing the Court of Appeals, the Supreme Court first addressed whether the defendant-creditor’s proof of claim was false, misleading, or deceptive. The Court reasoned that the term “claim” in the context of a “proof of claim” under the Bankruptcy Code includes both enforceable and unenforceable claims. The Court explained that a “claim” is a “right to payment” and state law typically determines whether a person has such a right. In this particular case, Alabama law applied, which like the laws of many other states, provides that a creditor has the right to payment of a debt after the limitations period has expired. While the claim may be unenforceable because of the applicable limitations period, it is still considered a “claim” under the Bankruptcy Code. These reasons led the Court to conclude that filing a proof of claim for a time-barred debt is not false, misleading, or deceptive under the FDCPA.
Next, the Supreme Court addressed whether the defendant-creditor’s assertion of an obviously time-bared claim was unfair or unconscionable under the FDCPA. The Court distinguished a number of lower court decisions holding that filing a lawsuit attempting to collect a time-barred debt violates the FDCPA. The central concern in such cases was that a consumer might unwittingly pay a time-barred debt, or pay part of such debt and lose the protection of the statute of limitations. In the bankruptcy context, a trustee is appointed and the bankruptcy procedural rules guide the evaluation of claims. These additional protections diminish the possibility of a consumer mistakenly paying a time-barred debt. Thus, the Court held that the defendant’s proof of claim was not unfair or unconscionable.
The case is Midland Funding, LLC v. Johnson, and is available here.