Consumer Finance Litigation

Following the Eleventh Circuit's decision last year in Crawford v. LVNV Funding, LLC, the filing of a proof of claim on a time-barred debt in a bankruptcy case pending in the Eleventh Circuit's jurisdiction violates the Fair Debt Collection Practices Act, 15 U.S.C. § § 1692-1692p ("FDCPA"). But as the U.S. Bankruptcy Court for the Northern District of Alabama recently made clear in Gurganus v. Recovery Management Systems Corp. (In re Gurganus), No. 7:14-ap-70054-BGC, 2015 WL 65089 (Bankr. N.D. Ala. Jan. 5, 2015), before debtors start hauling creditors into court for something most pre-Crawford decisions held does not violate the FDCPA, [1] they better ensure their claim is not barred by the same legal principle on which it is based. Statutes of limitations, of course, can work both ways. The debtors in Gurganus initially filed their Chapter 13 bankruptcy case on January 24, 2013. 2015 WL 65089, at 1. Several months later, on May 12, 2013, Recovery Management Systems Corp. ("RMSC") submitted a proof of claim in the action, seeking to recover the debtors' unpaid credit card debt. Id. Neither the debtors nor the trustee objected to RMSC's proof of claim; to the contrary, the debtors had previously disclosed the debt at issue on a bankruptcy schedule filed with their Chapter 13 petition. Nevertheless, after the Eleventh Circuit entered the Crawford decision more than a year later, the debtors changed their mind regarding RMSC's proof of claim, and on September 23, 2014, commenced an adversary proceeding against RMSC and the RMSC bankruptcy clerk that signed and filed the proof of claim, alleging that the claim was time-barred under Alabama state law, and that its submission violated the FDCPA. Id. RMSC moved to dismiss the complaint, arguing primarily that because the debtors had waited more than a year after RMSC submitted the proof of claim to file their FDCPA claim, the debtors' claim was time-barred under the FDCPA's one-year statute of limitations.[2] Id. at 1-2. The bankruptcy court agreed. In reaching its decision, the bankruptcy court rejected the debtors' attempt to sidestep the FDCPA's statute of limitations by characterizing their adversary complaint as a mandatory counterclaim to RMSC's proof of claim, and thus not subject to the one-year statute. The court stated that despite the debtors' reliance on the Eleventh Circuit's opinion in Ferris v. Chrysler Credit Corp. (In re Ferris), 764 F.2d 1475 (11th Cir. 1985), as support for their "mandatory counterclaim" argument, Ferris was simply not on point. See Gurganus, 2015 WL 65089, at 3-5. In particular, the court emphasized that although the Eleventh Circuit in Ferris "concluded that a debtor may raise a violation of [the Truth-in-Lending Act, § § 1601 et seq. ("TILA")] as a counterclaim to a claim filed by a creditor in a bankruptcy case," because the kind of TILA counterclaim at issue in Ferris "necessarily ar[ose] out of the same transaction as a creditor's action to liquidate and collect the debt," the counterclaim "necessarily constitute[d] a recoupment up to the amount of the creditor's claim." See id. at 4-5 (quoting Davis v. Wells Fargo Fin. Ala., Inc. (In re Davis), No. 2:10-ap-83-BGC, 2011 WL 2458084, at 2-3 (Bankr. N.D. Ala. June 16, 2011), rev'd on other grounds by No. 2:11-cv-2766-WMA, 2011 WL 12544180 (N.D. Ala. Dec. 8, 2011)). And as a claim for recoupment, the court explained that the TILA counterclaim "falls within the savings provision of 15 U.S.C. § 1640(e)," [3] and was therefore "allowed . . . to be filed outside of the TILA statute of limitations." Id. at 5. According to the bankruptcy court, the difference between a TILA claim for recoupment and the debtors' FDCPA claim "is clear" because, unlike a TILA recoupment claim, "[t]here is no 'savings clause' in a FDCPA situation," and, consequently, "no 'counterclaim' possibility in a FDCPA case like the one the Eleventh Circuit referred to in Ferris." Id. For that reason, the bankruptcy court agreed with RMSC that as a claim seeking affirmative relief under the FDCPA for an alleged violation that occurred more than one year before the debtors filed their adversary complaint against RMSC, the debtors' claim was time-barred by the FDCPA's one-year statute of limitations, and due to be dismissed. [1] See, e.g., Simpson v. PRA Receivables Mgmt., LLC (In re Simpson), No. 2:08-ap-137, 2008 WL 4216317, at 3 (Bankr. N.D. Ala. Aug. 29, 2008) (dismissing FDCPA claim based on allegedly time-barred proof of claim because "[a]n FDCPA claim . . . cannot be based on the filing of a proof of claim, regardless of the ultimate validity of the underlying claim") (citations omitted). [2] RMSC also argued, among other things, that the debtors' FDCPA claim was displaced by the United States Bankruptcy Code (a question that the Eleventh Circuit in Crawford had declined to answer, see 758 F.3d at 1262 n.7), but, following the Eleventh Circuit's lead, the bankruptcy court did not address it. [3] The provision states that TILA's statute of limitations "does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law." 15 U.S.C. § 1640(e).