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.
The Eleventh Circuit’s decisions in Crawford and Johnson spurred an eventual circuit split
The Eleventh Circuit’s opinion in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), was the first reported decision holding that a plaintiff may state a claim under the FDCPA based on a creditor’s proof of claim in bankruptcy for a debt that is time-barred under state law. Just four days after the Crawford opinion was released, five materially-identical nationwide class actions were filed against five different defendants in the District Court for the Southern District of Alabama, one of which was Johnson v. Midland Funding, LLC.
Johnson alleged that by filing a proof of claim for a credit card debt that likely would have been subject to a limitations defense if Midland had filed a collection suit in state court, Midland had violated the FDCPA, which prohibits debt collectors from making any false, deceptive, or misleading representations or engaging in unfair or unconscionable conduct in the course of attempting to collect a debt. Midland moved to dismiss Johnson’s complaint, arguing that to the extent the FDCPA prohibits debt collectors from filing accurate proofs of claim for out-of-statute debts, the statute irreconcilably conflicts with, and therefore is precluded by, the Bankruptcy Code, which provides creditors an absolute right to file a proof of claim even for stale debts, so long as applicable state law continues to recognize that the creditor retains an underlying right to payment.
The district court agreed, and Johnson appealed to the Eleventh Circuit, which declined Midland’s invitation for the Court to narrow or overturn its decision in Crawford. The appellate court also rejected the preclusion argument that the district court had accepted, instead reasoning that any resulting tension between the FDCPA and the Bankruptcy Code was not “irreconcilable.” Johnson v. Midland Funding, LLC, 823 F.3d 1334, 1338 (11th Cir. 2016).
Meanwhile, Balch also defended Midland against similar claims across the country, including a case that reached the Eighth Circuit, which affirmed the district court’s dismissal of the plaintiff’s FDCPA claims in Nelson v. Midland Credit Management, Inc., 828 F.3d 749 (8th Cir. 2016). Soon thereafter, the Seventh and Fourth Circuits likewise concluded that there was nothing deceptive, misleading, unfair, or unconscionable about a proof of claim that truthfully disclosed information indicating the potential availability of a limitations defense.
Given the resulting circuit split, Balch worked with Williams & Connolly to file a petition for certiorari, which the Supreme Court granted just 25 days later—a record for non-emergency cert petitions.
The Supreme Court declines to apply the FDCPA to out-of-statute proofs of claim
The Supreme Court reversed the Eleventh Circuit’s decision in Johnson, in a 5–3 decision that also effectively overturns the earlier Crawford decision upon which it was based. Although the Court thought it “reasonably clear” that Midland’s proof of claim was not “false, deceptive, or misleading,” it considered the question of whether it was “unfair” “unconscionable” to present “a closer question.” Justice Breyer, writing for the majority, ultimately “conclude[d] 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.”
Johnson had argued that Midland’s proof of claim was false or misleading because its “claim” was not “enforceable.” As the Supreme Court pointed out, however, the Bankruptcy Code defines a “claim” as a “right to payment,” and under Alabama law (and the laws of every other state except Mississippi and Wisconsin), a creditor’s right to payment is not extinguished by the lapse of a statute of limitations. Because the Bankruptcy Code allows creditors to file proofs of claim for claims that might later be determined unenforceable, the Court rejected Johnson’s attempt to cast Midland’s proof of claim as “false” or “misleading” by effectively re-defining “claim” to mean an “enforceable claim.”
Next, the Supreme Court assumed, without deciding, that that civil lawsuits to collect time-barred debts are “unfair” or “unconscionable” within the meaning of the FDCPA, as some lower courts have held, but refused to extend the same logic to bankruptcy proofs of claim. As the Court explained, considerations such as the passage of time, the unavailability of evidence, or the risk that a consumer might pay a stale debt to avoid going to court “have significantly diminished force in the context of a Chapter 13 bankruptcy,” a proceeding initiated by the debtor, and which includes the watchful oversight of a bankruptcy trustee with the responsibility for objecting to proofs of claim, when appropriate.
The Court also found support for its decision in the “different purposes and structural features” of the FDCPA, which is aimed in part at “preventing consumer bankruptcies in the first place,” and the Bankruptcy Code, which “creates and maintains what we have called the ‘delicate balance of a debtor’s protections and obligations.’” The Court explained that it was not inclined to upset that delicate balance by recognizing a potential FDCPA claim for damages and attorneys’ fees, which could result in “added complexity, changes in settlement incentives, and a shift from the debtor to the creditor the obligation to investigate the staleness of a claim.”
Bankruptcy and district courts across the country have grappled with the interplay of the Bankruptcy Code and the FDCPA in the wake of the Eleventh Circuit’s decision in Crawford. The Supreme Court’s Johnson decision should finally calm the waters, however, as well as close the floodgates on FDCPA claims based on out-of-statute proofs of claim. Since it concluded that Midland’s conduct was not actionable under the FDCPA, however, the Supreme Court did not reach the secondary issue of whether Johnson’s FDCPA claim posed an irreconcilable conflict with the Bankruptcy Code. Thus, it remains to be seen whether future plaintiffs may grab onto that lifeline and assert other bankruptcy-related FDCPA claims. And only time will tell how Johnson will affect other FDCPA litigation.