SUPREME COURT RULES IN FAVOR OF DEBT COLLECTOR ON CONTENTIOUS TIME-BARRED PROOF OF CLAIM ISSUE
Monday, May 15th, 2017
The United States Supreme Court ruled in favor of Midland Funding LLC, a debt buyer and debt collector, in a case determining whether filing a stale claim in a bankruptcy proceeding violates the Fair Debt Collection Practices Act. Midland purchases defaulted debts from creditors and tries to collect them. When a debtor files a Chapter 13 bankruptcy case, the debtor’s creditors are allowed to file claims for payment with the bankruptcy court. The creditors then get paid on their claim, usually a fraction of what is actually owed.
Midland filed a claim in Johnson’s bankruptcy case on a debt that was “stale.” Stale is a term used for debts where the statute of limitations has passed. This means that had Midland filed a lawsuit in state court to collect the debt, Johnson could have won the lawsuit by raising the statute of limitations as a defense. For the most part, the statute of limitations does not mean that a person does not owe the debt; it only means that the time to file a lawsuit to collect the debt has ended. In most states, including Tennessee, the statute of limitations is an “affirmative defense.” This means that the defendant is responsible for raising the defense and if the defense is not raised, the person filing the lawsuit could still win.
Federal courts (but not the Supreme Court) have ruled that filing a lawsuit against a consumer debtor on stale debt violates the FDCPA. These courts have reasoned that it is unfair for debt collectors to sue a debtor when the debt collector knows that the debtor could win the lawsuit based on the statute of limitations because an unsophisticated debtor might not know how to properly raise the statute of limitations. But the courts were split on whether filing a claim in an existing bankruptcy proceeding filed by the debtor should be treated the same way.
The Supreme Court based its reasoning on the language of the bankruptcy code. A creditor’s claim in bankruptcy is broadly defined. Almost any conceivable right to payment can be a claim, whether the debtor has defenses or not. To make a stale claim actionable under the FDCPA would upend the bankruptcy process.
The Court also reasoned that the protections given to debtors by the FDCPA were unnecessary in bankruptcy. Both filing a lawsuit against a debtor in state court and filing a claim in a debtor’s bankruptcy case are assertions of a right to payment. But the procedural protections are different. When a debt collector sues a debtor in state court, the debtor may not know how to defend themselves or may pay the debt to avoid the embarrassment of the court action. Not so in a bankruptcy proceeding. In bankruptcy, the reverse is true: the debtor (usually) has an attorney that is handling the case for them and they are already admitting they are bankrupt.
The Supreme Court was careful to make two things clear: First, the claim itself was not false or misleading. The claim clearly stated that the last payment on the debt was so long ago that the statute of limitations had long since passed. Second, it was not disturbing the lower court rulings that state court lawsuits based on stale debt violate the FDCPA.
One issue the Court did not address is whether there would have been any financial harm to the debtor had the claim been paid. In many Chapter 13 bankruptcies, the debtor pays a set amount of money to all creditors regardless of the total amount of debt. So, for example, a debtor might only pay $25,000 on all her debts, whether the total amount of the debt is $200,000 or $250,000. This is significant because it is possible that allowing Midland’s claim would not have made any difference to Johnson, only to her other creditors.
Stone & Hinds has collected debts professionally and lawfully for decades. If your business is owed money by debtors in Tennessee, contact our office discuss your options.