July 7, 2017

What is a Right without a Remedy?

The United States Supreme Court reversed the 11th Circuit Court of Appeals in another case concerning the Fair Debt Collection Practices Act (FDCPA) in Midland Funding, LLC v. Johnson, Case No. 16-0348. 

Timeline of events:

  • In March of 2014, an individual debtor filed for Chapter 13 Bankruptcy in the Southern District of Alabama.  A creditor, Midland Funding, filed a Proof of Claim in the debtor’s Chapter 13 case with a written statement that the debt in question ($1,879.71 of credit card debt) was more than 10 years old.  The debtor objected using the statute of limitations as an affirmative defense.  In Alabama the statute of limitations on collection of debt is six years.  Midland did not file a response.  As such, the bankruptcy court disallowed Midland’s Claim.
  • The debtor then sued Midland Funding in District Court for violating the FDCPA by attempting to collect on an expired debt.  The District Court dismissed the case, concluding the FDCPA did not apply.
  • The 11th Circuit Appellate Court reversed the District Court.  Midland Funding then proceeded to file a petition for certiorari, or a petition for review, asking the Supreme Court to weigh in on this question:

“Whether the conduct at issue here is ‘false,’ ‘deceptive,’ ‘misleading,’ ‘unconscionable,’ or ‘unfair’ within the meaning of the FDCPA.”

Issue #1: Claim means Enforceable Claim

One of the main arguments for the Debtor was that under the bankruptcy code, a “claim” = an “enforceable claim.”  This was pertinent to her argument because it would mean Midland’s claim was false (or deceptive, misleading) under the standard of the FDCPA since it was not, in fact, enforceable.  The Debtor used §502(a) and §3001(f) of the code to support her argument that the code conflates claim with enforceability.

The Supreme Court concluded there was no evidence in the bankruptcy code to support this argument.  To the contrary, §502(b)(1) states: If a claim is unenforceable it will be disallowed; showcasing the ability for a claim to be categorized as unenforceable.

Further, §502 and §558 discuss the affirmative defense debtors have available to themselves— a claim is unenforceable because it has passed the statute of limitations.  This is the defense the debtor exercised to object to Midland Funding’s claim, originally, in her Chapter 13 proceeding; and Midland’s claim was disallowed accordingly.

The debtor argued that the code intended claim to mean enforceable claim since it defines a “claim” as a “right to payment.” 11 U.S.C. §101(5)(A).  The Alabama state law statute of limitations to collect on a debt is six years but provides that a creditor has the right to payment of a debt even after the limitations period has expired.  In fact, many states hold this provision. 

In response, the Supreme Court quoted from Ex parte HealthSouth Corp., 974 S. 2d 288, 296 (Ala. 2007), noting that, “passage of time extinguishes remedy but the right remains.”  The Opinion then pointed to a dozen supporting cases.  They also provided two distinctions, Miss. Code Ann. §15-1-3(1) (2012) and Wis. State. §893.05 (2011-2012), which state: expiration of the limitations period extinguishes the remedy and the right.”

Issue #2: Whether Midland’s assertion of an obviously time-barred claim is “unfair” or “unconscionable” within the context of the FDCPA

The debtor noted in her argument that many lower courts have found attempted debt collection, on known expired debt, to be “unfair” under the FDCPA.  The Supreme Court jumped right in to highlight the substantial difference between a civil collection lawsuit and filing a claim in a bankruptcy proceeding; namely a) the existence of the Trustee, who has the duty to investigate claims for their time limitations and b) the Trustee’s ability to invoke the affirmative defense of objecting to claims on time limitations or other grounds.  

The code says a proof of claim is a statement by the creditor that he or she has a, “Right to payment subject to disallowance” 101(5)(A) 502(b) 704(a)(5) and 1302(b)(1).  The ability to file claims past the statute of limitations (in Alabama) preserves the right to payment but not the remedy; you are not guaranteed payment and your claim can still be disallowed.

The Supreme Court explained away the lower courts acknowledgment of “unfair” collection on debt beyond the statute by noting there is no Trustee in civil suit actions thus, consumers need extra protections.  The everyday consumer may not be aware of the available defense of the statute of limitations; Trustees are, or at least should be, aware of and looking for these defenses.

The debtor followed up with the argument that this practice at least risks harm to the debtor, stating: “Would it not be obviously unfair…for a debt collector to adopt a practice of buying up stale claims cheaply and asserting them in bankruptcy knowing they are stale and hoping for careless trustees?”

The Court responded by outlining the many protections a debtor enjoys under a Chapter 13 bankruptcy proceeding which actually minimize their risk to creditors.  The Court also pointed to the fact that a debt can be discharged sooner and disappear from a credit report sooner (1 year sooner, 6 year statute of limitations for collection vs. 7 years debt appears on a credit report) if an expired claim is filed and it is disallowed.  The opinion also notes the administrative headache it would cause to unravel and stitch back together this consideration of both the FDCPA and the Bankruptcy Code. 

The court essentially held that the FDCPA protects consumers while the Bankruptcy Code maintains the delicate balance of a debtor’s protections and obligations – but that creditors have rights as well.  “To find the FDCPA applicable here would upset that balance,” the Supreme Court stated.  The court held it would add a provision to the FDCPA concerning the code which is absent from the code itself.  It would also allow for unnecessary post-bankruptcy litigation (such as this) to sue creditors, when there is already a way to prevent creditors from receiving payment without litigation – the affirmative defense of time-barred claims. 

As the Court says, it is difficult to determine a creditor’s state of mind.  If the FDCPA applied in this circumstance, the burden of defense would shift to the creditor.  When faced with a lawsuit, the creditor would have the burden of proving that they were not intentionally in violation but rather committed a bona fide error – which would be a difficult thing to prove.  As such, the court maintained that the burden of proof should remain with the debtor and Trustee for objecting to untimely claims and having them disallowed. 

The Supreme Court found: “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.  The judgment of the Eleventh Circuit is reversed.”

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