This article previously appeared on The Consumer Financial Services Blog and is republished here with permission.
The U.S. District Court for the Middle District of Florida recently dismissed allegations that a debt buyer violated the federal Fair Debt Collection Practices Act by filing a proof of claim on time-barred debt, holding that such claims are precluded by the Bankruptcy Code, and that the FDCPA does not provide a private right of action against debt collectors who file time-barred proofs of claim in bankruptcy court.
A copy of the opinion in Castellanos v. Midland Funding LLC is available at: Link to Opinion.
The plaintiff individual owed a credit card debt and filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code. The statute of limitations on the credit card debt expired before the plaintiff’s bankruptcy petition was filed. The owner of the debt filed a proof of claim in the bankruptcy.
The debtor filed a civil action in federal district court, alleging that the filing of the proof of claim on a time-barred debt violated the FDCPA by supposedly “(1) making a false representation of the legal status of a debt; (2) using a false representation and deceptive means to collect a debt; and (3) using unfair and unconscionable means to collect a debt.”
The defendant debt buyer moved to dismiss, arguing that “because the Bankruptcy Code permits creditors to file time-barred proofs of claim, such conduct cannot constitute a FDCPA violation.”
The Court began by explaining that although the Eleventh Circuit Court of Appeals held in Crawford v. LVNV Funding LLC that filing a time-barred proof of claim in bankruptcy court violates the FDCPA, it expressly “’declin[ed] to weigh in on … [w]hether the Code preempts the FDCPA when creditors misbehave in bankruptcy,’ and noted that its sister circuits are split on the issue.”
The Court then pointed out that post-Crawford, courts in the Middle District of Florida have confronted the preclusion issue “head on.” Two judges held that the Bankruptcy Code precludes an FDCPA claim, while another held that the debtor could pursue an FDCPA claim for filing a proof of claim on time-barred debt.
The two opinions in the majority reasoned that the Bankruptcy Code provides remedies for stale claims such as objecting to the claim followed by a contested hearing, and concluded that “the FDCPA must yield to the Bankruptcy Code,” and the “FDCPA does not provide a private right of action against a creditor who files a stale proof of claim in a bankruptcy case.”
The Court here agreed with the reasoning of the majority, explaining that “if FDCPA actions were allowed in this context, ‘debtors would be encouraged to file adversary proceedings instead of simply an objection to the creditor’s claim, which is incredibly inefficient and undermines the process provided in the Bankruptcy Code.’ ”
The Court in the case at bar did not find the lone minority case persuasive because it relied heavily on the Eleventh Circuit’s Crawford decision, which declined to address the preclusion issue because the debt buyer in Crawford did not raise it.
Instead, the Court found the other two opinion persuasive, holding that “[u]nder the facts presented here, the FDCPA and the Bankruptcy Code are at an irreconcilable conflict because the FDCPA prohibits filing a time-barred claim while the Bankruptcy Code permits it. In such cases, the FDCPA must yield to the Bankruptcy Code, which already provides protections for debtors faced with stale proofs of claim.” Thus, the Court joined the majority in the Middle District of Florida “in holding that the FDCPA does not provide a private right of action against creditors who file time-barred proofs of claim in bankruptcy court.”
Because all six counts in the complaint were based on the filing of a proof of claim on time-barred debt, the Court granted the motion to dismiss with prejudice against filing any independent FDCPA claim based on the same facts, but without prejudice to the debtor’s ability to object to the claim in the bankruptcy case.