• U.S. Supreme Court Rules that Fair Debt Practices Act Does Not Apply to Time-Barred Proofs of Claims Filed in Bankruptcy Cases, Midland Funding LLC v. Johnson
  • June 5, 2017 | Author: Jason K. Wright
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
  • On May 15, 2017, the Supreme Court of the United States (SCOTUS) issued a decision in Midland Funding, LLC v. Johnson, ruling that filing an obviously time-barred proof of claim in a Chapter 13 case does not violate the Fair Debt Collection Practices Act (FDCPA). In doing so, SCOTUS overturned an Eleventh Circuit decision which would have allowed debtors to file suit for damages - and potentially for sanctions and attorneys' fees - against creditors who filed time-barred proofs of claim. SCOTUS also resolved a conflict of authority within the circuits on this issue, as three other circuits (the Fourth, Seventh and Eighth) had ruled that the FDCPA does not apply to claims filed in a bankruptcy case.

    Here are some notable excerpts from the USSC's decision:

    "Like the majority of Courts of Appeal that have considered the matter, we conclude that 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. We believe it reasonably clear that Midland's proof of claim was not 'false, deceptive, or misleading.'"

    "Other provisions make clear that the running of a limitations period constitutes an affirmative defense, a defense that the debtor is to assert after a creditor makes a 'claim.' ... The law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense. ... And we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code's similar system."

    "The Act and the Code 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.'"

    To find the FDCPA applicable here would have upset that "delicate balance." From a substantive perspective, it would authorize a new significant bankruptcy-related remedy in the absence of language in the Code providing for it. Administratively, it would permit post-bankruptcy litigation in an ordinary civil court concerning a creditor's state of mind—a matter often hard to determine. Procedurally, it would require creditors (who assert a claim) to investigate the merits of an affirmative defense (typically the debtor's job to assert and prove) lest the creditor later be found to have known the claim was untimely. The upshot could well be added complexity, changes in settlement incentives, and shifting, from the debtor to the creditor, the obligation to investigate the staleness of a claim."

    The Court's decision was based on a vote of five to three. Justice Stephen G. Breyer wrote the opinion for the majority, which Chief Justice Roberts, and Justices Kennedy, Thomas, and Alito also joined. Justice Sotomayor was joined in her dissenting opinion by Justices Ginsburg and Kagan. Justice Gorsuch, who had not yet been appointed to the bench when the case was argued, did not participate.

    In conclusion, SCOTUS' decision is a positive development for all creditors who file claims in bankruptcy cases. For questions, or an in-depth discussion of the case, please contact your WWR attorney.