On May 15, 2017, the U.S. Supreme Court issued a 5-3 decision in Midland Funding, LLC v. Johnson, holding that a debt collector does not violate the federal Fair Debt Collection Practices Act (the "FDCPA") by filing a proof of claim in a bankruptcy case where the underlying debt is time-barred by the applicable statute of limitations.
As a result of the Johnson ruling, debt buyers and debt collectors now have protection in the bankruptcy arena in that filing a proof of claim for a time-barred debt does not violate the FDCPA. The ruling, however, is limited to the bankruptcy context, and debt buyers and collectors must also know what the relevant state's law dictates as to the statute of limitations and what acts are subject to the limitations period. Also, the Court stated several times that the proof of claim made clear the statutes of limitation governing collection of the debt had expired. While the proof of claim in Johnson did not include an express disclaimer along those lines, the claim included supporting documentation that stated the last date of a transaction on the account and the date on which the account was charged-off. Debt buyers and collectors in bankruptcy cases should, therefore, provide clear detail in the proof of claim that allows a party to know and evaluate the relevant, underlying dates concerning the debt.
The facts of Johnson are straightforward. In 2014, the debtor, Aleida Johnson, filed a chapter 13 bankruptcy case in Alabama. Midland Funding filed with the bankruptcy court a proof of claim asserting an unsecured claim of approximately $1,800. Midland had acquired the underlying consumer credit debt from another entity that had previously acquired the claim from the original creditor. Notably, the proof of claim, filed in May 2014, included an account summary, which stated that the last transaction on the account occurred in 2003 and the account had been charged-off in early 2004.
Johnson objected to Midland's claim in the bankruptcy case, to which Midland did not respond, and the objection was sustained and the claim was deemed disallowed. Subsequently, Johnson filed a complaint against Midland in federal court, asserting that Midland violated the FDCPA for seeking payment on a stale, time-barred debt. Johnson asserted that Midland's practice was deceptive, misleading, unfair, and unconscionable, as prohibited by 15 U.S.C. §§ 1692e and 1692f. The district court ruled in favor of Midland, but the 11th Circuit reversed, ruling in favor of Johnson.
The Supreme Court reversed the 11th Circuit and ruled in favor of Midland. The Court noted that under state law—in this instance Alabama law—the applicable statute of limitations was 6 years but also that a creditor retains a right to payment after the expiration of that limitations period. The limitations period extinguishes the remedy—i.e., a state court lawsuit—but not the right to payment. Not all states, however, have a similar law, and in some states both the remedy and the right to payment are extinguished by the statute of limitations. Debt buyers and debt collectors must be aware of the relevant state law prior to filing proofs of claim on stale or time-barred debt.
The Court contrasted a non-bankruptcy civil action with a bankruptcy case. The Court declined to adopt the approach of lower, non-bankruptcy courts that have found a debt collector in violation of the FDCPA by seeking payment of time-barred debt outside the bankruptcy context. The Court also made it clear that it was not deciding the issue of whether seeking payment of time-barred debt in non-bankruptcy courts violated the FDCPA.
Unlike the non-bankruptcy context, the Court reasoned, concerns regarding consumers' sophistication had "diminished force" in the bankruptcy context because, in large part, proofs of claim are evaluated by a bankruptcy trustee. The trustee, not the consumer debtor, will investigate claims and object on a variety of bases, including timeliness.
Consumer advocates will no doubt seize on points raised in the dissenting opinion, including the statement that every non-bankruptcy court to have considered whether a debt collector that intentionally files suit to collect a time-barred has violated the FDCPA. For now, though, debt buyers and debt collectors can take comfort in the bankruptcy setting in that not only may they recover on otherwise uncollectable debts, they will face fewer risks from those recovery efforts.
The complete opinion is available here.