Consumer Finance Litigation

In Jenkins v. Midland Credit Management, Inc.,[1] the U.S. Bankruptcy Court for the Northern District of Alabama held that the filing of a proof of claim based on a time-barred debt cannot give rise to a claim for damages under the Fair Debt Collection Practices Act ("FDCPA"), reasoning that any such claim is precluded by the Bankruptcy Code's comprehensive claims-allowance procedure. The court further held that the filing of a proof of claim on a stale debt does not merit sanctions under Bankruptcy Rule 9011 where the proof of claim is filed in compliance with the Code. Accordingly, the court dismissed the debtor's adversary complaint for FDCPA damages and sanctions based on the creditor's filing of a proof of claim on a time-barred debt. At first glance, the bankruptcy court's dismissal of the FDCPA claim appears at odds with In re Crawford, 758 F.3d 1254 (11th Cir. 2014), in which the Eleventh Circuit held that the filing of a proof of claim by a debt collector for a time-barred debt is an unfair, unconscionable, deceptive and misleading means of attempting to collect a debt under the FDCPA's "least sophisticated consumer" standard, and, therefore, violates the FDCPA. However, Crawford left undecided the question of whether the Bankruptcy Code precluded the imposition of FDCPA penalties when the debt collection action at issue was simply the filing of a proof of claim-as the Second and Ninth Circuit Courts of Appeals have held-because the argument had not been raised by the defendant. The Crawford court "decline[d] to weigh in" on whether the Code preempts or displaces the FDCPA in the bankruptcy context, instead simply holding that the filing of a proof of claim amounts to actionable collection activity under the FDCPA. In Jenkins, the defendant raised the precise argument left undecided post-Crawford: that "an otherwise cognizable claim for FDCPA damages is precluded by the Code's and Rule's comprehensive and detailed protocols for the filing, and allowance or disallowance, of claims." The Jenkins court agreed with the defendant, noting that the idea that the FDCPA penalizes the filing of a proof of claim on a time-barred debt "loses traction" in light of the Bankruptcy Code's procedural framework for allowing and disallowing claims, the Code's broad definition of "claim" as a "right to payment," and Alabama case law holding that a creditor retains a "right to payment" for time-barred debt even though such debt may not be judicially enforceable. The Jenkins court therefore held that "the FDCPA must yield to the Code and Rules under these facts," and that the debtor's sole recourse in response to an objectionable claim was within the claims allowance process set forth in the Code. The court also held that the filing of a proof of claim on time-barred debt was not sanctionable conduct under the Code, stating that "the filing of a claim on a debt that is stale under state law-where the proof of claim is otherwise in all material respects compliant-is not egregious and offensive conduct that Rule 9011 was intended to address." The court disagreed with other courts that considered a proof of claim filed on a stale debt to be subject to an "obvious" defense and therefore deserving of sanctions, noting that this logic "would chill the filing of any claim that was even arguably subject to an affirmative defense, and stands in opposition to the Code's invitation for '[a] creditor . . . [to] file a proof of claim . . . .' which will be 'deemed allowed, unless a party in interest . . . objects.'"[2] While Jenkins provides relief to creditors seeking to recover on time-barred debts in a bankruptcy case, its ruling is not binding elsewhere in Alabama or the Eleventh Circuit. However, the validity of the court's reasoning will be decided in the near future by the Eleventh Circuit in the case Johnson v. Midland Funding, LLC, (Case No. 15-11240), which raises the issue of whether the Bankruptcy Code displaces the FDCPA. [1] Case No. 14-40226-JJR13, AP No. 14-40040-JJR, 2015 WL 5472513 (Bankr. N.D. Ala. Sept. 17, 2015). [2] See 11 U.S.C. § § 501(a), 502(a).