Supreme Court Says No FDCPA Liability for Time-Barred Claims
Law Offices of Louis Robin
The Supreme Court, in Midland Funding, LLC v. Johnson, issued on May 15, 2017, has ruled that the filing of a proof of claim which is otherwise barred by the applicable statute of limitations is not a violation of the Fair Debt Collection Practices Act.
There were two issues before the Court. First, whether the filing of a proof of claim constituted a “false, deceptive, or misleading representation”, and, second, whether the creditor was using any “unfair or unconscionable means” to collect a debt. §§1692e and 1692f. Regarding the first, the Court found that the creditor was not making a false, deceptive or misleading representation because a claim under the Bankruptcy Code is a “right to payment” and under many (but not all) state laws the “passage of time extinguishes the remedy but not the right”. Similar, the Bankruptcy Code defines claims broadly, nothing restricts the definition to only enforceable claims, and Bankruptcy Code §502(b)(1) provides that, if a “claim” is “unenforceable” it will be disallowed (recognizing the difference between the claim and enforceability).
The Court had a more difficult time concerning the standard of “unfair or unconscionable means”. Justice Breyer, writing for the 5 – 3 majority, essentially ruled that the Bankruptcy Court case was not a civil action commenced by the creditor (where most courts find the assertion of a stale claim is an FDCPA violation). Justice Breyer also ruled that Rule 9011 standards, may not be applicable to filing of stale claims.
Justice Breyer usually writes with a clarity that may be lacking in this case. It is troubling that a creditor can knowingly file a claim which the creditor knows will be voided when a trustee or debtor files an objection. Perhaps I am relying more on common sense than technicalities (which, as lawyers, we should be familiar), but there must be an element of practicality in the application of standards, otherwise routine reliance on the laws may be questioned.
The dissent, written by Justice Sotomayor (and joined by Justices Ginsburg and Kagan), provides such clarity (which may be easier to provide in a dissent). After providing some background and history of the practices of debt collectors seeking collection in state courts for stale debts (and finding severe penalties), Justice Sotomayor states that statutes of limitations “are not simply technicalities” but represent strong public-policy determinations that “promote justice”. Justice Sotomayor then provides several pages of discussions on how the majority’s reasoning does not serve the dynamics nor purposes of the Bankruptcy forum and purposes. I will not try to summarize the Justice’s words further, but suggest that one read these words as they give some solace to bankruptcy practitioner and the issues they struggle with on a day to day basis. Ironically, Justice Scalia, on occasion, provided similar empathy; see Justice’s Scalia’s dissent in Dewsnup v. Timm, 502 U.S. 410 (1992). I understand that Justice Scalia had some background in the bankruptcy forum in the 1970’s, and perhaps Justice Sotomayor had some similar experiences. There would be an element of irony if Justice Sotomayor took up the mantel from Justice Scalia.
Now that I’ve said my peace, it might be fair to give you my perspective as my practice concentrates (although is not limited to) debtor representation. Despite my (presumably) vigorous representation of debtors, I would tell you the following – I have occasionally told debtors that, after receiving a bankruptcy discharge, if circumstances change wildly, they should consider paying discharged debts (and such circumstances include winning the lottery). Similarly, I do not have an issue with a creditor whose claim is time barred communicating with a debtor as long as it is plainly and conspicuously stated that the debt cannot be pursued in any civil action – debtors, presumably, have received benefits from the extension of credit, and there is a moral responsibility to pay debts. I would remind all that debtors also have a moral responsibility to provide for themselves and their families food, shelter, and other necessities.
But I still have issue with filing of claims that are time barred. Even if trustees and/or debtors have Rule 9011 options, Rule 9011 requires the service of a motion prior to filing the motion so that the creditor has the opportunity to withdraw the claim prior to litigation. This causes expenses are not reimbursed to the estate. There may even be time restraints (see Massachusetts Local Rule 13-13 which requires filing of objections to claims within 30 days of the bar date deadline). Filing of proof of claims, for which a plain affirmative defense is applicable, does not serve the bankruptcy forum.