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 recently clarified that sending periodic mortgage statements following a debtor’s bankruptcy discharge is not misleading to the “least sophisticated consumer.” In Helman v. Bank of America, 15-13672, 2017 WL 1350728 (11th Cir. April 12, 2017) Gayle Helman filed suit, alleging that Bank of America violated the Fair Debt Collections Practices Act (FDCPA), Florida Consumer Collection Practices Act (FCCPA), and other state laws when it sent Ms. Helman periodic mortgage statements after her mortgage loan was discharged in bankruptcy. She claimed that the statements unlawfully attempted to collect a discharged debt and that such communications would be misleading to the least sophisticated consumer because it suggested she remained liable for the debt.
Few issues involving the Fair Debt Collection Practices Act (FDCPA) are more hotly contested than whether filing a proof of claim on a time-barred debt violates the FDCPA. In bankruptcy, creditors have a right to file proofs of claim outlining the debt owed to them by the bankrupt debtor. In some instances, the statute of limitations for filing a lawsuit on that debt has run, and up until July 10, 2014, when the Eleventh Circuit Court of Appeals issued its decision in Crawford v. LVNV Funding, LLC, it was common practice to file a proof of claim on such a time-barred debt. Crawford—for the first time—likened the filing of a proof of claim to the filing of a lawsuit, finding that if one is wrongful, so is the other. After Crawford, debt collectors have faced a tidal wave of cases across the country, raising numerous defenses, one of which is res judicata. The argument goes like this: if a debt collector files a proof of claim to which neither the debtor nor the trustee objects and the court subsequently confirms the debtor’s plan, then a final judgment exists stating the debt is valid. Thus the debtor is barred by res judicata from further challenging the debt.
Despite a chorus of cases adopting this reasoning, the United States District Court for the Southern District of Georgia recently dealt a blow to the res judicata argument, finding that the grounds upon which the FDCPA claim was raised and the grounds upon which the proof of claim was confirmed were not sufficiently similar such that one could foreclose the other. For two years the so-called Crawford cases have raged; circuit splits exist; and this recent decision from the Southern District of Georgia shows that further disagreement is likely. Creditors and debt collectors alike should monitor the development of these cases to ensure they know how their claims will be treated in the bankruptcy courts.
Bankruptcy courts are currently divided on whether a debtor has a right to redeem property sold at a tax sale after the redemption period has run. The time for redemption depends on the law of the state where the property is located. In Alabama, for example, the statutory redemption period is three (3) years. Usually, a debtor must redeem by paying the full amount within the redemption period or be time barred. However, recent bankruptcy cases in Pennsylvania allowed debtors to treat tax purchasers as secured creditors, thereby permitting the debtors to pay the redemption amount as a secured claim over the life of a confirmed chapter 13 plan. See In re Gonzalez, Case No. 15-10628 (Bankr. E.D. Pa. May 18, 2016); In re Pittman, Case No. 14-17665 (Bankr. E.D. Pa. May 6, 2016). In these cases, the debtors filed chapter 13 petitions before the right of redemption expired under local law, but confirmation of their chapter 13 plans did not occur until after the redemption period would have expired. The rationale for this treatment is based on the view that a debtor’s right to redeem property after a tax sale resembles a mortgagor / mortgagee relationship with the tax purchaser. The opposing view—expressed by a California bankruptcy judge last year In re Richter, 525 B.R. 735 (Bankr. C.D. Cal. 2015)—is that the right of redemption following a tax sale is an asset of the debtor, rather than a claim. Until this issue is resolved by higher courts, tax sale purchasers should consult the law of their local jurisdiction so that they are not left waiting for years while a Chapter 13 debtor repays the redemption amount.
In recent years, there has been a growing consensus among the courts that a debt collector’s threat to file suit on a debt otherwise barred by the applicable state statute of limitations violates the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. §§1692-1692p (2006).
Now that consensus has been extended to proofs of claim in bankruptcy court. In a decision last week, the Eleventh Circuit became the first court of appeals to hold that filing a proof of claim in a Chapter 13 bankruptcy for a debt that is time-barred under state law violates the FDCPA.
In Crawford v. LVNV Funding, LLC, Case No. 13-12389 (11th Cir. July 10, 2014) (see opinion here), the debt collection agency argued that its proof of claim was not “collection activity.” Instead, it characterized the claim as “a request to participate in the distribution of the bankruptcy estate under court control.” See In re McMillen, 440 B.R. 907, 912 (Bkrtcy. N.D. Ga. 2010). The Eleventh Circuit rejected this argument, concluding that there was no substantive difference between threatening to initiate suit outside of the bankruptcy courts and the filing of a proof of claim with the court:
The same is true in a bankruptcy context. In bankruptcy, the limitations period provides a bright line for debt collectors and consumer debtors, signifying a time when the debtor’s right to be free of stale claims comes to prevail over a creditor’s right to legally enforce the debt. . . .
Similar to the filing of a stale lawsuit, a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt. The “least sophisticated” Chapter 13 debtor may be unaware that a claim is time barred and unenforceable and thus to object to such a claim. . . . For all of these reasons, under the “least-sophisticated consumer standard” in our binding precedent, LVNV’s filing of a time-barred proof of claim against Crawford in bankruptcy was “unfair,” “unconscionable,” “deceptive” and “misleading” within the broad scope of §1692e and §1692f.
Crawford, Case No. 13-12389, pp. 11-12. The court also declined to address whether the Bankruptcy Code preempts the FDCPA, noting that the trial court had not addressed that grounds below. Id. at 14, n. 7.
Given the spate of recent decisions in this area, debt collection agencies should be mindful of the dangers of seeking to collect stale debts. While simply requesting payment of a stale debt itself may not be a violation of the FDCPA, the courts have reached an apparent consensus that threatening or initiating legal action to collect legally unenforceable debts constitutes a misleading collection activity under the least sophisticated consumer test. Debt collectors should consider reviewing their procedures to make sure they adequately identify stale debts and implement collection procedures appropriate to such claims.