This week, the United States Supreme Court issued a key decision under the Fair Debt Collection Practices Act in a case litigated by Balch & Bingham lawyers, Jason Tompkins and Chase Espy. In Midland Funding, LLC v. Johnson, the Supreme Court resolved a circuit split over the issue of whether debt collectors who file bankruptcy proofs of claim for stale debts are subject to suit under the Fair Debt Collection Practices Act. Siding with Midland, one of the nation’s largest buyers of unpaid debt, the Supreme Court held that “filing a proof of claim that on its face indicates that the limitations period has run” is not actionable under the FDCPA, thereby avoiding a potential conflict between the FDCPA and the Bankruptcy Code. Although ostensibly limited to the bankruptcy context, the Johnson decision could potentially ripple into other FDCPA cases. In the meantime, though, Johnson will undoubtedly turn off the faucet for would-be FDCPA plaintiffs who had hoped to capitalize on what the Eleventh Circuit complained is a “deluge” of out-of-statute proofs of claim.
From the moment it was published in July 2014, Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014)—the first reported appellate decision holding that a plaintiff may state a claim under the Fair Debt Collection Practices Act based on a creditor’s bankruptcy proof of claim for an out-of-statute debt—spawned a flurry of litigation both within and outside the Eleventh Circuit. Looking back, however, district courts have largely rebuffed attempts at expanding Crawford’s holding and have refused to sanction enterprising attempts at exporting the Eleventh Circuit’s decision to other jurisdictions. The fallout from Crawford is far from over, however, as several cases are now pending before the various Courts of Appeals, setting up a potential circuit split that could eventually make its way to the Supreme Court.
Most recently, in Castellanos v. Midland Funding, LLC, No. 2:15-CV-559, 2016 WL 25918, at *2 (M.D. Fla. Jan. 4, 2016), the court adopted what is quickly becoming the majority view. Like most of the other lower courts in the Eleventh Circuit that have considered the issue that the Crawford court did not address—“[w]hether the [Bankruptcy] Code ‘preempts’ the FDCPA when creditors misbehave in bankruptcy”—the district court in Castellanos concluded that “the FDCPA and the Bankruptcy Code are at an irreconcilable conflict because the FDCPA prohibits filing a time-barred claim while the Bankruptcy Code permits it. In such cases, the FDCPA must yield to the Bankruptcy Code, which already provides protections for debtors faced with stale proofs of claim” in the form of the bankruptcy claims-allowance process.”
Though the plaintiff in Castellanos has already appealed the dismissal of her FDPCA claims, the issue has already reached the Eleventh Circuit in the form of Johnson v. Midland Funding, LLC, 528 B.R. 462 (S.D. Ala. 2015). As the progenitor of Castellanos and the cases that it followed, the district court in Johnson was the first to confront the preclusion question that the Eleventh Circuit expressly left open. Chief Judge Steele held in Johnson that even if a debtor could otherwise state a claim under the FDCPA, any such claim irreconcilably conflicts with, and therefore is precluded by, the Bankruptcy Code, which gives all creditors (even those who are also debt collectors under the FDCPA) the express right to file a proof of claim for any debt for which they have a right to payment. In other words, “the Code authorizes filing a proof of claim on a debt known to be stale, while the [FDCPA] (as construed by Crawford) prohibits that precise practice,” and “those contradictory provisions cannot possibly be given effect simultaneously.” And in the face of that conflict, “the Act must give way to the Code.” Accordingly, the court dismissed the plaintiff’s would-be nationwide Crawford class action.
Meanwhile, a similar movement has been afoot in the other circuits in which plaintiffs have attempted to assert FDCPA claims in the same vein as Crawford. However, unlike federal district courts in Alabama, Florida, and Georgia, none of the lower courts in any other jurisdiction in the country is constrained by the Eleventh Circuit’s conclusion that filing a time-barred proof of claim is a per se violation of the FDCPA. To date, Crawford still stands alone in that regard. Thus, courts outside the Eleventh Circuit have been able to fashion their own ways of handling copycat Crawford claims without necessarily confronting the issue of whether application of the FDCPA to proofs of claim is precluded by the Bankruptcy Code, and several such cases have percolated their way up to the various Courts of Appeals.
For example, a bankruptcy court in the Sixth Circuit and a district court in the Eighth Circuit both reasoned that “the FDCPA should not be implicated with regard to stale debts when a creditor merely … files an accurate proof of claim … [that] includes all the required information including the timing of the debt … [and] the applicable statute of limitations is one that does not extinguish the right to collect the debt but merely limits the remedies.” Nelson v. Midland Credit Mgmt., Inc., No. 4:15-CV-00816-ERW, 2015 WL 5093437, at *3 (E.D. Mo. Aug. 28, 2015) (quoting In re Broadrick, 532 B.R. 60, 75 (Bankr. M.D. Tenn. 2015)). Now, both Courts of Appeals are set to review those decisions. At the same time, the Sixth Circuit’s Bankruptcy Appellate Panel will also be confronted with appeals in two other cases that followed the Broadrick court’s analysis—In re Deborah Ash and In re Candace Gabay, Nos. 16-8001 & 16-8002 (6th Cir. B.A.P. 2016).
Rather than base its decision on anything particular to proofs of claim, the district court in Torres v. Asset Acceptance, LLC, 96 F. Supp. 3d 541 (E.D. Pa. 2015) took a slightly different tack in dismissing yet another nationwide Crawford class action. In particular, the court opted to follow the rationale of an earlier decision from the Second Circuit, in which that court had more broadly held that a proof of claim “cannot serve as the basis for an FDCPA action” because there “is no need to protect debtors who are already under the protection of the bankruptcy court.” The Torres court agreed, and likewise declined to “insert judicially created remedies into Congress’s carefully calibrated bankruptcy scheme, thus tilting the balance of rights and obligations between debtors and creditors.” The plaintiff’s appeal in Torres is now pending before the Third Circuit Court of Appeals.
Related cases are also presently pending before the Fourth and Seventh Circuits. Regardless of how the issue shakes out in any given case, however, an ultimate showdown before the Supreme Court to decide the destiny of Crawford claims almost seems inevitable at this point. Until then, however, courts across the country appear to be coalescing around the view that the Bankruptcy Code either provides debtors with sufficient protection from potentially abusive debt collection practices, or that the Code provides creditors with the right to file proofs of claim even for stale debts notwithstanding the FDCPA.
To date, Balch attorneys Jason Tompkins and Chase Espy have handled and managed nearly 150 Crawford cases, including the above-referenced cases now pending before the Third, Eighth, and Eleventh Circuit Courts of Appeals and the Sixth Circuit Bankruptcy Appellate Panel, with the assistance of Geremy Gregory, Chris Heinss, and Jonathan Hoffmann of Balch, Joshua Dickinson of Spencer Fane, and Andrew Schwartz of Marshall Dennehey.
The Eleventh Circuit’s opinion in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), cert. denied, — U.S. –, 2015 WL 246891 (Apr. 20, 2015), was the first reported decision holding that a plaintiff may state a claim under the Fair Debt Collection Practices Act based on a creditor’s proof of claim in bankruptcy for a debt that is time-barred under state law. But just as the Eleventh Circuit’s decision in Crawford was aimed at stemming the tide of “proofs of claim on debts deemed unenforceable under state statutes of limitations,” another “deluge has swept through U.S. bankruptcy courts of late” in the form of copycat Crawford claims.
The tide may be turning, however, as two federal district courts recently dismissed nationwide class actions based on Crawford. In both cases, the courts answered the question that the Eleventh Circuit left open in the most famous footnote since Footnote 4 (at least in the world of FDCPA litigation): “Whether the [Bankruptcy] Code ‘preempts’ the FDCPA when creditors misbehave in bankruptcy.” Crawford, 758 F.3d at 1262 n.7.
In Johnson v. Midland Funding, LLC, No. 14-CV-0322-WS-C, 2015 WL 1345431 (S.D. Ala. Mar. 23, 2015), the plaintiff asserted FDCPA claims against Midland Funding, LLC, in a nationwide class action based on its filing of a proof of claim for a stale debt. Midland moved to dismiss Johnson’s claim and argued, among other things, that “the tension between the Bankruptcy Code and [the FDCPA] precludes the plaintiff from pursuing her claim” under the FDCPA. The district court agreed, noting that “the Code authorizes filing a proof of claim on a debt known to be stale, while the [FDCPA] (as construed by Crawford) prohibits that precise practice.” As the court explained, for “creditors under the Code that are also debt collectors under the Act, those contradictory provisions cannot possibly be given effect simultaneously.” To the court, “[a] clearer demonstration of irreconcilable conflict would be difficult to imagine,” and in the face of that conflict, “the Act must give way to the Code.”
The district court in Torres v. Asset Acceptance, LLC, No. 14-CV-6542, 2015 WL 1529297 (E.D. Pa. Apr. 7, 2015) reached a similar result. Though unconstrained by the Eleventh Circuit’s decision in Crawford, the court in Torres also found no guidance from the Third Circuit’s decision in Simon v. FIA Card Servs., N.A., 732 F.3d 259 (3d Cir. 2013). While Simon likewise involved the intersection of the FDCPA and the Bankruptcy Code, the two sets of overlapping claims in that case “involved (1) mutually prohibited conduct (yielding no conflict), and (2) contradictory obligations (yielding a direct conflict).” In Torres, on the other hand, the court recognized that “the Code invests creditors with the right—but not the obligation—to file time-barred proofs of claim, while the FDCPA would oblige creditors not to file them.” Reasoning that this “rights-versus-obligations dichotomy does not easily fit within the Simon court’s direct conflicts framework,” the court instead based its decision on “larger systemic concerns with respect to the two statutory schemes.”
Thus, the district court in Torres adopted the rationale of the Second Circuit’s decision in Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2d Cir. 2010). There, the court held that a proof of claim “cannot serve as the basis for an FDCPA action” because there “is no need to protect debtors who are already under the protection of the bankruptcy court,” and because “[n]othing in either the Bankruptcy Code or the FDCPA suggests that a debtor should be permitted to bypass the procedural safeguards in the Code in favor of asserting potentially more lucrative claims under the FDCPA.” The Torres court agreed, and declined to “insert judicially created remedies into Congress’s carefully calibrated bankruptcy scheme, thus tilting the balance of rights and obligations between debtors and creditors.” Accordingly, the court held in no uncertain terms “that filing a time-barred proof of claim in bankruptcy court cannot form the basis for an FDCPA claim.”
If the decisions in Johnson and Torres are any indication, the floodgates may be closing on FDCPA claims based on time-barred proofs of claim in bankruptcy. But in the meantime, the Eleventh Circuit likely will have another chance to speak on the topic it previously declined to address, as the Supreme Court denied LVNV’s cert petition in Crawford and the plaintiff in Johnson already has filed a notice of appeal.
Balch attorneys Jason Tompkins and Chase Espy represented Midland Funding in the Johnson case and Asset Acceptance in the Torres case (with the assistance of Marshall Dennehey attorney Andrew Schwartz).