Filing a Proof of Claim for Debt That is Obviously Time-Barred Does Not Violate Fair Debt Collection Practices Act

By: Julia A. Chincheck and Daniel J. Cohn
Banking e-alert
May 15, 2017

The Supreme Court of the United States held today that the filing of 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 (the "FDCPA").

In Midland Funding, LLC v. Johnson, No. 16-348 (May 15, 2017), Midland Funding, LLC ("Midland"), filed a proof of claim in a chapter 13 bankruptcy proceeding for credit card debt charged by the debtor more than ten years prior, despite the relevant statute of limitations being only six years. In that proof of claim, Midland made clear that the statute of limitations had run.

The debtor objected to Midland's proof of claim and the Bankruptcy Court disallowed it because of the time bar. The debtor then sued Midland seeking actual damages, statutory damages, attorneys' fees, and costs for Midland's filing of an obviously-time-barred proof of claim. The debtor claimed that Midland's action was "false," "deceptive," "misleading," "unconscionable," and "unfair," all within the meaning of the FDCPA.

The district court dismissed the action, finding that the FDCPA did not apply. The Court of Appeals for the Eleventh Circuit, however, reversed that decision, finding the FDCPA applicable. The Supreme Court concluded that Midland's filing of a time-barred claim did not fall within the scope of the five relevant words of the FDCPA (i.e., false," "deceptive," "misleading," "unconscionable," or "unfair").

The relevant state law was that of Alabama, which provides that a creditor retains the right to payment of a debt, even after the limitations period has expired. The debtor argued that a "claim" under the Bankruptcy Code meant an "enforceable claim," and that without an enforceable claim, the filing was false, misleading, and deceptive. The Supreme Court described the treatment of unenforceable claims under the Bankruptcy Code, finding that the Code, and other law, provides a system for determining whether a claim will be allowed. The Court then noted that it "saw nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code's similar system."

Whether filing a time barred claim is "unfair" or "unconscionable" presented a closer question for the Court. Courts that have found such a practice to be "unfair" within the meaning of the FDCPA often rest their concern that a consumer might unwittingly repay a time-barred debt or repay such a debt simply to avoid the cost and embarrassment of a lawsuit. The Court noted that such considerations have "significantly diminished force" in a chapter 13 proceeding, where the debtor actually initiates the proceeding and where a knowledgeable trustee is available to examine claims for enforceability.

The Supreme Court also addressed the different purposes of the Bankruptcy Code and the FDCPA, noting that the Code creates and maintains the "delicate balance of a debtor's protections and obligations" while the FDCPA seeks to help consumers, "not necessarily by closing what [the debtor] considers a loophole in the Bankruptcy Code, but by preventing consumer bankruptcies in the first place."  The Court found that to find the FDCPA applicable would be to upset that "delicate balance," and concluded that Midland had not violated the FDCPA by filing a time-barred claim.

The Court did not, however, address either how debt collectors who file time-barred proofs of claim should be treated in chapter 7 proceedings, or whether the result would be different in either case if the debt collector's proof of claim did not expressly indicate the claim was time barred.

As a result of this important holding, courts should not find that debt collectors who file time-barred claims in chapter 13 proceedings and note the time-barred nature of the claims have violated the FDCPA, although those claims may be disallowed as unenforceable. Additionally, although the rationale in this case should apply equally in chapter 7 cases, the Supreme Court's ruling does not expressly apply to those cases, so debt collectors should still carefully consider all the possible consequences of filing proofs of claims for time-barred debts in chapter 7 cases. In any case, debt collectors should consult legal counsel if there are any doubts about the propriety of filing a proof of claim.