The Supreme Court of the United States (SCOTUS) heard oral arguments yesterday on a debt collection issue that has received inconsistent opinions from the courts – the practice of filing proofs of claims in a consumer bankruptcy case on out-of-statute (OOS) debt.

The case is Midland Funding, LLC v. Johnson, Docket No. 16-348. It is an appeal from an Eleventh Circuit Court of Appeals decision that determined that filing a Proof of Claim on an OOS debt was, in fact, a violation of the Fair Debt Collection Practices Act (FDCPA).

insideARM has written extensively about the case and other similar cases. On May 25, 2016 we wrote about the original Eleventh Circuit decision. On October 12, 2016 we wrote about SCOTUS agreeing to hear the case. Then on January 3, 2017 we wrote about the Consumer Financial Protection Bureau (CFPB) filing an amicus brief in the case.

Factual/Procedural Background

Our May, 25, 2016 article laid out the factual and procedural background in detail. The following is a summary of the facts.

Aleida Johnson filed a Chapter 13 bankruptcy petition in March 2014. In May 2014, Midland Funding, LLC (“Midland”) filed a proof of claim in her case, seeking payment of $1,879.71. Midland is a buyer of unpaid debt. Midland’s claim against Ms. Johnson originated with Fingerhut Credit Advantage, and the date of the last transaction on her account was listed as May 2003. This was over ten years before Ms. Johnson filed for bankruptcy. The claim arose in Alabama, where the statute of limitations for a creditor to collect an overdue debt is six years.

Ms. Johnson sued Midland under § 1692e of the FDCPA. That section of the FDCPA provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.”

Plaintiff alleged that the claim on its face was barred by the relevant statute of limitations. Plaintiff argued that the proof of claim was thus “‘unfair,’ ‘unconscionable,’ ‘deceptive,’ and misleading” in violation of the FDCPA.

Midland moved to dismiss Ms. Johnson’s FDCPA suit, and the District Court granted the motion. The District Court read the Bankruptcy Code as “affirmatively authorizing a creditor to file a proof of claim—including one that is time-barred—if that creditor has a “right to payment” that has not been extinguished under applicable state law. The District Court identified tension between this provision of the Code and the FDCPA, which makes it unlawful to file a proof of claim known to be time-barred.” The court found this conflict to be irreconcilable and applied the doctrine of implied repeal to hold that a creditor’s right to file a time-barred claim under the Code precluded debtors from challenging that practice as a violation of the FDCPA in the Chapter 13 bankruptcy context.

The Eleventh Circuit determined that the Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time-barred. The court stated: “We recognize that the Code allows creditors to file proofs of claim that appear on their face to be barred by the statute of limitations. However, when a particular type of creditor—a designated “debt collector” under the FDCPA—files a knowingly time-barred proof of claim in a debtor’s Chapter 13 bankruptcy, that debt collector will be vulnerable to a claim under the FDCPA. Our examination of these statutes leads us to conclude that the Code and the FDCPA can be read together in a coherent way.

However, the Eleventh Circuit drew a distinction between a mere “Creditor” and a “Debt Collector”. The court recognized that the FDCPA does not reach all “creditors.” The court noted that the FDCPA applies only to “debt collectors,” who are defined as “any person who . . . regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” The court also noted that “debt collectors” are “a narrow subset of the universe of creditors who might file proofs of claim in a Chapter 13 bankruptcy and not all “creditors” who file a proof of claim in a Chapter 13 bankruptcy case can face potential FDCPA liability as “debt collectors.”

Finally, the Eleventh Circuit noted: “However, when that creditor is also a “debt collector” as defined by the FDCPA, the creditor may be liable under the FDCPA for “misleading” or “unfair” practices when it files a proof of claim on a debt that it knows to be time-barred, and in doing so “creates the misleading impression to the debtor that the debt collector can legally enforce the debt.

The Oral Arguments at SCOTUS

Most lawyers will advise people not to read too much into the questions asked by judges during oral argument. However, there were several interesting exchanges.

The Midland argument can be summarized by the opening statement of their attorney, Kannon K. Shanmugan:

“The Bankruptcy Code sets up a process for evaluating claims that are subject to potential limitations defenses. Under that process, a creditor seeking to collect on a debt files a proof of claim. For certain types of consumer debt, the creditor also includes information to enable the trustee and other parties in interest to assess the claim's timeliness and where appropriate to object. A creditor is not required to go further and to certify that there is no valid limitations defense to its own claim. If that is exactly what Respondent and the government are asking this Court to do, under the guise of interpreting the Fair Debt Collection Practices Act. “

Mr. Shanmugan did not get to complete his opening statement before the questions started coming from the Justices. Justice Sonia Sotomayor seemed to be skeptical of the Midland Argument. She commented:

“I'm sorry. I'm having a great deal of difficulty with this business model. Completely. You buy old, old debts that you know for certainty are not within any statute of limitations. You buy them and you call up….and you say…. you don't have to pay me. But out of the goodness of your heart, you should? Or do you just call them up and say, you owe me money, and you hope that they'll pay you. And is it the same thing in bankruptcy court? You filed a claim and you hope the trustee doesn't see that it's out of time? And apparently, you collect on millions of dollars of these debts. So is that what you do?” 

Sotomayor then pressed attorney Shanmugan further:

“Did you have a good-faith basis to believe the statute of limitations was not applicable? So what do you do with the (advisory) committee notes that say that everyone who files a proof of claim has an obligation to do a good-faith inquiry as to whether it's an enforceable obligation or not? I'm a little bit confused. The fact that the code anticipates that some people will file unenforceable claims even though they shouldn't, that that somehow proves that the code invites unenforceable claims?”

Justice Elena Kagan also challenged the Midland position. She commented: 

“……. it seems hard to understand why Congress would want all these unenforceable proofs of claim to flow in, because only two things can happen. One is that the trustee will properly filter out those claims; and the other is that the trustee will be swamped and won't have the time or the energy or the inclination or he'll make mistakes, and some of those claims will be deemed enforceable when, in fact, they're not. So why would anybody want these proofs of claim to flood into the bankruptcy system?”

insideARM Perspective

The complete transcript of the oral argument can be found here. insideARM will continue to monitor the case and report on developments. It is likely that SCOTUS will issue an opinion on the case sometime before the end of June.

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