Consumer Finance Litigation

In Dubois v. Atlas Acquisitions LLC, Case No. 15-1945 (4th Cir. Aug. 25, 2016), the Fourth Circuit Court of Appeals held in a 2-1 decision that filing proofs of claim on time-barred debts does not violate the Fair Debt Collection Practices Act ("FDCPA"), at least where state law preserves the right to collect on the payment. In so holding, the court sided with the Second and Eighth Circuit Courts of Appeals in a circuit split regarding the viability of FDCPA claims premised on proofs of claim filed in a debtor's bankruptcy case.

The Fourth Circuit first held that filing a proof of claim is debt collection under the FDCPA, noting that it is more than a mere "request to participate in the bankruptcy process," as the defendant contended, and that "[p]recedent and common sense dictate that filing a proof of claim is an attempt to collect a debt." The court rejected the defendant's claim that such a ruling conflicts with the automatic stay's prohibition on debt collection during bankruptcy, noting that the automatic stay only prohibits debt collection outside of the bankruptcy case, not within it. The court also rejected the defendant's claim that filing a proof of claim could not be an attempt to collect a debt because it is directed to the court and not the debtor, noting, "collection activity directed toward someone other than the debtor may still be actionable under the FDCPA," and a proof of claim is filed "with the purpose of obtaining payment from the debtor's estate," even though it is filed with the court.

The court then found that a "claim" under the Bankruptcy Code includes claims based on time-barred debts. The court explained that the term "claim" is intended to have the "broadest possible definition," and refers to a right to payment as defined by state law. Importantly, under Maryland law, which governed the proofs of claim at issue, the statute of limitations "does not operate to extinguish [a] debt, but to bar its remedy." Therefore, a time-barred debt is a "claim" under Maryland law. The court explained that a debt need not be enforceable in court to constitute a "claim." The court further found that filing proofs of claim on time-barred debts is permitted by the bankruptcy process. While such proofs of claim are to be disallowed under 11 U.S.C. § 558, the court noted that "the Code nowhere suggests that such debts are not to be filed in the first place."

The court emphasized the role of the trustee in finding that filing a proof of claim on a time-barred debt does not raise the same concerns as filing a lawsuit on a time-barred debt. The court explained that "if a bankruptcy proceeds as contemplated by the Code, a claim based on a time-barred debt will be objected to by the trustee, disallowed, and ultimately discharged, thereby stopping the creditor in any further collection activity." The court pointed out that, if no proof of claim is filed, "the debt continues to exist and the debt collector may lawfully pursue collection activity apart from filing a lawsuit," which "is detrimental to the debtor and undermines the bankruptcy system's interest in 'the collective treatment of all of a debtor's creditors at one time.'" The court therefore held that "filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the FDCPA when the statute of limitations does not extinguish the debt."[1] Because the court found no FDCPA violation, the court did not discuss whether the Bankruptcy Code precludes application of the FDCPA in a bankruptcy case entirely.

In dissent, Judge Diaz wrote that the majority's holding permitted debt collectors to take advantage of the bankruptcy court "to garner a payoff on unenforceable debts" by relying on bankruptcy trustees not to object to the time-barred proof of claim. Judge Diaz wrote that such conduct "misleadingly represents to the debtor that [the debt collector] is entitled to collect through bankruptcy when it is not," and that this activity "is precisely the sort of unfair and misleading practice that Congress intended the courts to recognize as a violation" of the FDCPA.

Currently, the Eleventh Circuit remains the only court of appeals to have held that filing a proof of claim on a time-barred debt in a Chapter 13 bankruptcy violates the FDCPA. See Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259-60 (11th Cir. 2014), cert. denied, 135 S. Ct. 1844 (2015). Creditors filing proofs of claim in bankruptcy should stay attuned to the status of the law on this issue in their circuit. When filing a proof of claim on a time-barred debt outside the Eleventh Circuit, the best practice is to file a proof of claim that fully complies with Rule 3001 and provides complete and accurate information about the debt.

[1] The court noted that there was no allegation that the defendant had filed inaccurate proofs of claim, and cautioned that "[a] debt collector who supplies false dates to obscure a claim's staleness may well violate the FDCPA."