On May 15, 2017, the United States Supreme Court issued its decision in Midland Funding, LLC v. Johnson, 581 U.S. ___ (2017) in which it held that filing an “obviously time-barred” proof of claim in a bankruptcy proceeding does not violate the Fair Debt Collection Practices Act (FDCPA).
The facts of Midland Funding are fairly straightforward. The respondent filed for personal bankruptcy under Chapter 13 of the Bankruptcy Code (Code). Midland, the petitioner, filed a proof of claim in the respondent’s bankruptcy on account of a credit card debt. The proof of claim, however, demonstrated that the debt was barred by the applicable Alabama statute of limitations. The respondent’s counsel objected to the claim, Midland did not respond, and the Bankruptcy Court disallowed the claim.
The respondent sued Midland, alleging that by filing its proof of claim, it committed an act that was “false,” “deceptive,” “misleading,” “unconscionable” or “unfair” within the meaning of the FDCPA. The respondent’s theory was that a “claim” means an enforceable claim, and that because Midland’s claim was time-barred, it was not enforceable, and the proof of claim was therefore false, deceptive, misleading, unconscionable or unfair. The District Court decided that the FDCPA did not apply, and dismissed the action. The Court of Appeals for the Eleventh Circuit disagreed and reversed the District Court. Midland then successfully petitioned for certiorari.
In reversing the Eleventh Circuit, the majority’s decision, authored by Justice Breyer and joined by Justices Kennedy, Thomas and Alito and Chief Justice Roberts, split its analysis into whether Midland’s claim was “false, deceptive, or misleading” versus “unfair” or “unconscionable.” The Court held that it was “reasonably clear that Midland’s proof of claim was not “false, deceptive, or misleading” for three reasons. First, whether one has a claim (right to payment) is “usually” a question of state law. And in Alabama, a creditor has a right to payment after the statute of limitations has expired. The Court stated that “many other states,” such as Ohio, Illinois, New York and New Jersey, follow the same rule, though some states (Mississippi and Wisconsin) do not.
Second, the Court examined the text of the Code, which states that an “unenforceable” “claim” will be disallowed, not that an unenforceable claim is not a “claim.” The Court held that the Code “makes clear that the unenforceable claim is nonetheless a ‘right to payment,’ [and] hence a ‘claim.’” Finally, determining whether a statement is misleading normally “requires consideration of the legal sophistication of its audience.” The audience in Chapter 13 bankruptcy cases includes a trustee, who is unlikely to be misled, because the trustee will understand that a proof of claim is a statement by the creditor that he or she has a right to payment subject to disallowance.
The Court stated it was a closer question whether Midland’s claim was “unfair” or “unconscionable.” While courts have held that filing a time-barred claim in a civil suit can be “unfair,” the Court stated that the “context of a civil suit differs significantly” from a Chapter 13 bankruptcy proceeding, which has a trustee and procedural rules to guide the evaluation of claims. The Court also was not persuaded by respondent’s argument that there is no “legitimate reason” to allow such behavior, and the United States’ argument, via an amicus brief, that certifying a claim as warranted by existing law in a proof of claim is sanctionable, and thus “unfair.” The Court rejected these arguments because untimeliness is an affirmative defense under the Code, and because the Chapter 13 bankruptcy proceedings minimize any risk of paying barred claims. The Court even noted that filing stale claims can be beneficial, as the discharge of such a claim would eliminate the debt on a credit report. In sum, the Court determined the neither the FDCPA nor the Code provides “reason to believe that Congress intended an ordinary civil court applying the [FDCPA] to determine answers to these bankruptcy-related questions,” and that neither the Code nor its drafters intended to impose an affirmative obligation on a creditor to make a prefiling investigation of a potential time-bar defense.”
The dissent, authored by Justice Sotomayor and joined by Justices Ginsburg and Kagan, rejected the Court’s distinctions between civil and bankruptcy claims, stated that time-barred claims set a trap for the unwary, and would hold that filing a time-barred claim constitutes “unfair” and “unconscionable” conduct under the FDCPA. The dissent also dedicated a lot of time to discussing “debt-buyers” – entities that purchase debts from creditors and attempt to collect – and noted that a case pending before the Court, Henson v. Santander Consumer USA Inc., No. 16–349, asks whether a certain kind of debt-buyer is a “debt collector” under the FDCPA. Justice Gorsuch did not participate in the consideration or decision.