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The United States Supreme Court Finds Bankruptcy Claims Filed by Debt Collector on Stale Debt Do Not Violate the Fair Debt Collection Practices Act

The Supreme Court recently overturned a decision by the United States Court of Appeals for the Eleventh Circuit finding a debt collector can file a claim in a bankruptcy proceeding even though, due to the age of the debt and the relevant statute of limitations, the debt is no longer collectible (“stale”). Midland Funding v. Johnson, 197 L.Ed.2d 790, 794 (U.S. May 15, 2017). This order became final May 31, 2017. The Court reasoned such a claim did not constitute a “false, deceptive, or misleading representation” nor did it amount to an “‘unfair or unconscionable means’ to collect, or attempt to collect, a debt” as contemplated by the Fair Debt Collection Practices Act (“FDCPA”). Id., at 793 (citing the FDCPA, 91 Stat. 874, 15 U.S.C. § 1692 et seq.). The Court concluded: “Midland’s filing of a proof of claim that on its face indicates that the limitations period has run does not fall within the scope of any of the five relevant words of the Fair Debt Collection Practices Act.” Midland Funding, 197 L.Ed.2d at 794.

The Court summarily concluded it was “reasonably clear that Midland’s proof of claim was not ‘false, deceptive, or misleading’” because “a ‘claim’ is a right to payment” and “a creditor has the right to payment of a debt even after the limitations period has expired.” Id. However, the Court struggled more with the concept of whether filing a stale claim in a bankruptcy proceeding constituted using “unfair or unconscionable means” to collect a debt. Ultimately, the Court concluded this practice was not unfair or unconscionable and therefore did not violate the FDCPA. Id., at 796. The Court acknowledged its holding conflicted with “several lower courts” which found, in the context of a collection lawsuit, “a debt collector’s assertion of a claim known to be time barred is ‘unfair.’” Id. The Court explained: “The lower courts rested their conclusions upon their concern that a consumer might unwittingly repay a time-barred debt.” Id. However, the Court concluded the “context of a civil suit differs significantly” from a Chapter 13 bankruptcy proceeding, noting that in bankruptcy proceedings: (1) the consumer initiates the proceeding and therefore “is not likely to pay a stale claim just to avoid going to court;” (2) a “knowledgeable trustee” is available who “normally bears the burden of investigating claims and pointing out that a claim is stale;” (3) there are procedural bankruptcy rules which “more directly guide the evaluation of claims;” and (4) the resolution process is ‘generally more streamlined and less unnerving prospect for a debtor than facing a collection lawsuit.” Id., at 796.

The debtor argued there was no legitimate reason for allowing a stale claim in a bankruptcy proceeding reasoning such conduct was patently unfair since the debt collector knows the claims are stale, but is “hoping for careless trustees” who will fail to object. Id. The United States, which filed an amicus curiae brief supporting the debtor’s position, added that such a practice was sanctionable under the Federal Rules of Bankruptcy Procedure and concluded “sanctionable conduct is unfair conduct.”  Id., at 797. The Court, unpersuaded by those arguments, explained the “bankruptcy system…treats untimeliness as an affirmative defense…” and concluded that a change “in the simple affirmative-defense approach…would require defining the boundaries of the exception.” Id. The Court refused to carve out such exceptions or require “an ordinary civil court” to do so. The Court went on to explain:

The Act [FDCPA] and the Code [Bankruptcy] have different purposes and structural features. The Act seeks to help consumers, not necessarily by closing what Johnson and the United States characterize as a loophole in the Bankruptcy Code, but by preventing consumer bankruptcies in the first place….The Bankruptcy Code, by way of contrast, creates and maintains what we have called the delicate balance of a debtor’s protections and obligations.

Id., at 797-98 (quotation marks and citations omitted). The Court concluded application of the FDCPA to prevent a debt collector from filing a claim on stale debt in bankruptcy proceedings would upset this “delicate balance” because it would create a new “bankruptcy-related remedy” not provided for in the Code. Id., at 798 The Court also pointed out “it would permit postbankruptcy litigation in an ordinary civil court concerning a creditor’s state of mind—a matter often hard to determine.” Id. The Court surmised this would result in “added complexity, changes in settlement incentives, and a shift from the debtor to the creditor the obligation to investigate the staleness of a claim.” Id.

The Court concluded filing “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.” Midland Funding, 197 L. Ed. 2d at 799.