According to Midland, shortly after Aleida Johnson
filed for Chapter 13 bankruptcy relief, Midland Funding filed a proof of claim
for outstanding credit card debt of approximately $1,800. On its face, the proof
of claim stated that the last charge on the debtor’s account was made more than
ten years prior to the bankruptcy filing—clearly outside of the relevant
statute of limitations for enforcement under state law. (Although the relevant
state law nevertheless permitted a creditor to receive payment on account of
its stale claim.) After the debtor objected, the bankruptcy court disallowed
Midland’s claim. The debtor then filed a lawsuit in the district court, seeking
damages for violations of the FDCPA. The district court found that the FDCPA
did not apply to filing proofs of claim; however, the 11th Circuit Court of
Appeals disagreed and reversed the decision. Midland appealed the 11th
Circuit’s decision to the Supreme Court. At issue was whether filing a proof of
claim on account of a stale debt was “false,” “deceptive,” “misleading,”
“unconscionable,” or “unfair” as those terms are used in the FDCPA.
Siding with the majority of
courts that have ruled on this issue, the Supreme Court determined that filing
a proof of claim on account of stale debt is neither “false,” “deceptive,”
“misleading,” “unconscionable,” nor “unfair.” The Court rejected the debtor’s
contention that “claim” under the Bankruptcy Code means “enforceable claim.” The
Court further found it was “more difficult to square [the debtor’s]
interpretation with other provisions of the Bankruptcy Code.” For example, in
the definitions section in the Bankruptcy Code, the term “claim” includes
claims that are disputed (by such affirmative defenses as statutes of
limitations).
The majority was also not
persuaded by the debtor’s arguments that finding in favor of Midland would
encourage debt collectors to buy up stale debts at steep discounts and then
file proofs of claim in bankruptcy proceedings, hoping to fool careless
trustees. In particular, the Court pointed to the relative sophistication of
parties in bankruptcy—particularly the trustees—who are well equipped to
challenge creditor claims when necessary.
The Court determined that it
should leave the current system intact, in which creditors’ proofs of claim are
prima facie evidence of the
creditors’ claim but subject to challenge on account of affirmative defenses
and otherwise. This would allow the bankruptcy system to weed out defective
claims. And to rule otherwise would require a far greater examination of the
claims process than the Midland case
contemplated. For example, would a creditor need to assess the merit of all affirmative defenses to its claim
prior to filing a proof of claim?
The debtor and the United
States, which had filed an amicus brief, had more traction with the dissent.
Justice Sotomayor, joined by Justices Ginsberg and Kagan, wrote with concern
that the majority’s ruling does nothing to stem the practices of debt buyers who
are now seeking to take advantage of bankruptcy courts to be paid on stale
debts because they are not able to do so in state courts. Because creditors’ rights
to collect on time-barred claims vary from state to state, creditors should
consult with counsel when preparing proofs of claim.
The majority appears to come
to the right answer; but this may not be the end of the story. The Court leaves the door wide open for
debtors and trustees to seek sanctions under Rule 9011 against creditors trying
to game the system. And the dissent suggests, rather strongly, that Congress
should amend the FDCPA to specifically address attempts by creditors to collect
on time-barred debt in bankruptcy.
There’s more to come on the
intersection of the Bankruptcy Code and the FDCPA, we are sure.
