Two debtors in separate bankruptcy cases filed Adversary Proceeding complaints against Atlas Acquisitions LLC, which had bought claims from pay-day lenders and filed proofs of claim in the bankruptcy cases. The adversary complaints asserted that Atlas had violated the FDCPA because the underlying claims were not enforceable under applicable state law because the statute of limitations had expired. The bankruptcy court concluded that Atlas’s filing of proofs of claims did not constitute debt collection activity proscribed by the FDCPA and granted Atlas’s s motions to dismiss the Adversary Proceedings. The debtors appealed.
The Fourth Circuit analyzed both the Bankruptcy Code provisions relating to claims and the FDCPA. Disagreeing with the bankruptcy court, the Fourth Circuit found that filing a proof of claim in a bankruptcy case does constitute collections activity regulated by the FDCPA. Digging deeper, and noting in particular that under applicable (Maryland) state law, the running of the statute of limitations did not completely “extinguish” a claim, the Court of Appeals also ruled that the Atlas claims were also properly asserted as claims under the Bankruptcy Code.
Having found that the debt in this case was not extinguished, the court then analyzed whether filing a proof of claim for a time-barred debt violated the FDCPA and concluded that it did not. First, the court stated that if the bankruptcy system worked as it is statutorily written, there are safeguards against such claims being allowed, such as an objection by a trustee, the debtor or even other creditors. Second, the court noted that asserted claims can be discharged with finality in a properly-administered bankruptcy. The court posited that the harm to the debtor in a bankruptcy case was less than the harm to a consumer outside the bankruptcy context because of all of the protections and benefits available to a debtor under the Bankruptcy Code. Ultimately, the Court majority concluded that the filing of a proof of claim on a debt that is time-barred does not violate the FDCPA where the statute of limitations does not extinguish the debt.
Judge Diaz dissented, arguing that companies such as Atlas are gaming the bankruptcy system to try to obtain payments for unenforceable claims due to inattention of other parties in interest.
Thus far, only the Eleventh Circuit has found that filing a proof of claim for a stale debt violates the FDCPA. The issue is on appeal in other jurisdictions. As with much of law in bankruptcy, a creditor should have a firm grasp of the law in the jurisdiction where the bankruptcy case is pending before asserting claims. For any assistance with claims in bankruptcy cases, contact Preti Flaherty’s Bankruptcy, Creditors’ Rights, and Restructuring Practice Group.
