Consumer Finance Litigation

In Midland Funding, LLC v. Johnson, No. 16-348 (May 15, 2017), the U.S. Supreme Court held that a debt collector does not run afoul of the FDCPA by filing a proof of claim in bankruptcy on a stale debt. In its 5-3 decision, the Court sided with the majority of the federal courts of appeals to have considered the issue and reversed the Eleventh Circuit Court of Appeals, which had held that filing a proof of claim on a debt for which the statute of limitations had expired amounted to a "false," "deceptive," "misleading," "unconscionable," and "unfair" means of debt collection.

The case arose from Midland Funding's filing of a proof of claim in 2014 in Aleida Johnson's bankruptcy case on a credit card debt. Midland indicated on the proof of claim that the last charge was made on the account in May of 2003, more than ten years before Johnson filed for bankruptcy. Under the applicable state law of Alabama, the statute of limitations to collect the debt is six years. Johnson responded to the proof of claim by suing Midland, claiming that filing a proof of claim to collect a stale debt in bankruptcy violated the FDCPA.

The Supreme Court disagreed. First, the Court held that Midland's proof of claim was not "false, deceptive, or misleading." The Court explained that the Bankruptcy Code defines a "claim" as a right to payment, and state law governs whether a right to payment on a certain debt exists. Under Alabama law, a creditor has the right to collect on a debt even after the limitations period has expired and the debt is no longer enforceable in court. The Court rejected Johnson's assertion that the term "claim" in bankruptcy means "enforceable claim," noting that the word "enforceable" does not appear in the Code's definition and that Congress intended to adopt the broadest definition of "claim" as possible.

The Court found it significant that, under the Bankruptcy Code's system for determining whether a claim will be allowed, the running of the statute of limitations period constitutes an affirmative defense to be asserted in response to a claim. The Court found nothing misleading or deceptive about such a procedure, emphasizing that "to determine whether a statement is misleading normally requires consideration of the legal sophistication of its audience." In bankruptcy, the audience of a proof of claim is the bankruptcy trustee, who, the Court noted, "is likely to understand that . . . a proof of claim is a statement by the creditor that he or she has a right to payment subject to disallowance (including disallowance based upon, and following, the trustee's objection for untimeliness)."

The Court next held that filing a proof of claim on a stale debt was not "unfair" or "unconscionable." In so holding, the Court rejected Johnson's argument that filing a proof of claim in bankruptcy was comparable to filing a lawsuit to collect on a stale debt, which several courts have found to be an "unfair" debt collection practice. The Court explained that "the context of a civil suit differs significantly" from that of a Chapter 13 bankruptcy proceeding. While a consumer "might unwittingly repay a time-barred debt" in response to a civil lawsuit, in bankruptcy "[a] knowledgeable trustee is available," and "[p]rocedural bankruptcy rules more directly guide the evaluation of claims." Therefore, the Court found it "considerably more likely" that an effort to collect on a stale debt in bankruptcy "will be met with resistance, objection, and disallowance."

Justice Sotomayor issued a dissenting opinion in which Justices Ginsburg and Kagan joined. The dissent stated that filing a proof of claim on a debt that the debt collector knows to be time-barred is "unfair or unconscionable" under the FDCPA, as "[d]ebt collectors do not file these claims in good faith; they file them hoping and expecting that the bankruptcy system will fail" and the claim will be allowed. The dissent stated that the majority was unrealistic for thinking that overworked bankruptcy trustees had the time or resources to investigate the timeliness of every single debt on which a proof of claim is filed.

Notably, the majority did not go so far as to hold that the FDCPA is inapplicable in the bankruptcy context or that it is displaced by the Bankruptcy Code, instead narrowly holding that the filing of a proof of claim on a stale debt does not violate the FDCPA. Regardless, the ruling will provide needed relief to debt buyers who routinely file proofs of claim on old debts.