Chapter 7 Bankruptcy

Bankruptcy Proofs of Claim Based on Time-Barred Debt

To say that there was a split among the circuits may be a bit of an oversell. In Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), the 11th Circuit Court of Appeals held that a plaintiff stated a claim under the Fair Debt Collection Practices Act (“FDCPA”) where a creditor filed a bankruptcy proof of claim based on a debt that was beyond the statute of limitation. While debtor-side attorneys began to immediately salivate at the opportunity to gain traction against debt-collectors, as the district courts declined to expand the holding and other circuits declined to follow its reasoning altogether, it quickly became apparent that the impact of Crawford would minimal at best.

In Crawford, a debt-collector acquired an owed by the debtor on which the last transaction October 2001. Under Alabama’s three-year statute of limitations, the debt became unenforceable in October 2004. In February , 2008, the debtor filed bankruptcy under chapter 13 of the Bankruptcy Code and the debt-collector thereafter filed a proof of claim; neither the debtor nor the trustee objected the claim and a pro-rata share of the claim was distributed according the the Chapter 13 Plan. The debtor filed a lawsuit in the bankruptcy court alleging that the mere filing of a proof of claim for the time-barred debt was a violation of the FDCPA; both the bankruptcy court and the district court disagreed and granted the debt-collector’s motion to dismiss. On appeal, the Eleventh Circuit, reversed reasoning that Congress enacted the FDCPA in order “to stop ‘the use of abusive, deceptive, and unfair debt collection practices by many debt collectors’” and that a debt-collector’s filing of a time-barred proof of claim, similar to the filing of a stale lawsuit, creates the misleading impression to the debtor that the debt-collector can legally enforce the debt.

No lower court in any other jurisdiction has directly applied Eleventh Circuit’s conclusion that filing a time-barred proof of claim is a per se violation of the FDCPA. Instead, lower courts have crafted their own solutions to avoid directly addressing whether the FDCPA preempts the Bankruptcy Code, the Bankruptcy Code preempts the FDCPA, or whether the two can exist in peach and harmony.

Well, now we have a resolution: The U.S. Supreme Court ruled today in Midland Funding, LLC v. Johnsonthat “[t]he filing of 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.” (Docket No. 16-348). So, the lesson to take away from this is not that the Court is ignoring that the “least sophisticated consumer” needs protection from unscrupulous debt-collectors, but, that in a bankrupcty, it is the bankruptcy code, procedure, and court that is best situation to monitor creditor claims.