Bankruptcy Code Doesn’t Conflict With Debt Collection Statute

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By Diane Davis

May 27 — There is no “irreconcilable conflict” between the Bankruptcy Code and the Fair Debt Collections Practices Act (FDCPA), the U.S. Court of Appeals for the Eleventh Circuit held May 24, deepening a circuit split with the Second and Ninth Circuits and opening the door for the U.S. Supreme Court to decide the issue ( Johnson v. Midland Funding, LLC, 2016 BL 164318, 11th Cir., No. 15-14116, 5/24/16 ).

Judge Beverly B. Martin concluded that the debtors' FDCPA claims aren't precluded by the Bankruptcy Code and reversed and remanded the case to the district court for further proceedings.

“The Eleventh Circuit correctly reversed the district court and also rightly closed the hole the prior Eleventh Circuit panel had left undecided in Crawford v. LVNV Funding, LLC, 2014 BL 191857, 758 F.3d 1254 (11th Cir. 2014),” Professor of Law Melissa Jacoby of the University of North Carolina—Chapel Hill, N.C., told Bloomberg BNA May 26.

“Implied repeal when evaluating the intersection between two federal statutes is not a doctrine to be used lightly,” Jacoby said, who is also serving as the American Bankruptcy Institute's Scholar in Residence for Spring 2016.

“Given the timing and goals of the Bankruptcy Code and the Fair Debt Collection Practices Act, the drafters of these statutes would have been shocked to see people arguing that debtors who are distressed enough that they need bankruptcy relief should get less protection against deceptive practices than debtors in other contexts,” she said. “Both statutes have consistent remedial objectives even if they operate differently as the Eleventh Circuit panel observed,” Jacoby told Bloomberg BNA.

Statutes Can ‘Coexist.'

In two cases consolidated for appeal, the district court interpreted Crawford as having placed the FDCPA and the Bankruptcy Code in irreconcilable conflict.

In Crawford, the Eleventh Circuit held that a debt collector violates the FDCPA when it files a proof of claim in a bankruptcy case on a debt that it knows to be time-barred. Crawford left open the issue whether the Bankruptcy Code preempts the FDCPA,” according to , pt. VII, ch. 221 (D. Michael Lynn et al. eds., 2015). That issue has now been addressed by the Eleventh Circuit, which found that the FDCPA and Bankruptcy Code can “coexist.”

“Although the Code certainly allows all creditors to file proofs of claim in bankruptcy cases, the Code does not at the same time protect those creditors from all liability,” the Eleventh Circuit said in these consolidated cases. “A particular subset of creditors — debt collectors — may be liable under the FDCPA for bankruptcy filings they know to be time-barred,” the court said.

Incentive to Examine Debts?

“The debt buying market holds the keys to reducing further litigation on this issue,” Jacoby said.

“Absent the principles set forth in Crawford and Johnson, debt buyers have little incentive to examine their debts and the proofs of claim they file, leaving it to debtors or other creditors to try to fight time barred debts one at a time by objecting to proofs of claim,” Jacoby said. “Debtors often cannot afford to engage in this litigation or do not have an incentive to do so, leaving other creditors less well off too because they have to share any assets or payments with time-barred claims,” she said.

“If the law gives debt buyers an incentive to screen the debts and take more responsibility for the proofs of claim they file in bankruptcy courts, then fewer such claims will be filed and the whole consumer credit system will work better,” Jacoby said.

“It is great that the Eleventh Circuit issued this opinion so quickly to clarify the issues for the district courts that seemed resistant to Crawford,” Jacoby said.

Debt Collectors Violated FDCPA?

Debtor Aleida Johnson filed a Chapter 13 petition, which allows individuals receiving regular income to obtain debt relief while retaining their property, but to do so, the debtor must propose a plan that uses future income to repay a portion of her debts over a three to five year period. Creditor Midland Funding, LLC's claim against the debtor originated more than 10 years before she filed for bankruptcy and the statute of limitations to collect an overdue debt in Alabama is six years.

Debtor Judy Brock also filed a Chapter 13 petition, and Resurgent Capital Services, L.P. filed a proof of claim for $4,155 to collect a debt on behalf of LVNV Funding, LLC. The debtor's debt originated more than six years before she filed for bankruptcy.

Both debtors sued their respective creditors under the FDCPA, which provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt,” under 15 U.S.C. §§ 1692e. They argued that the proofs of claim were “unfair, unconscionable, deceptive, and misleading” in violation of the FDCPA.

Midland moved to dismiss Johnson's suit, and the U.S. District Court for the Southern District of Alabama granted the motion, concluding that a creditor's right to file a time-barred claim under the Code precluded debtors from challenging that practice as a violation of the FDCPA in the Chapter 13 context ( Johnson v. Midland Funding, LLC, 2015 BL 80952, S.D. Ala., No. 1:14-cv-00322-WS-C, 3/23/15) (27 BBLR 523, 4/9/15). According to the Johnson case, there was an “irreconcilable conflict” between the Bankruptcy Code and the FDCPA.

In Brock's case, the U.S. District Court for the Southern District of Alabama followed Johnson and dismissed the case ( Brock v. Resurgent Capital Servs., LP, 2015 BL 268279, S.D. Ala., No. 1:14-cv-00324-WS-M, 8/20/15) (27 BBLR 1195, 8/27/15).

After consolidation on appeal, the debtors argued that the district court's decision conflicts with Eleventh Circuit precedent in Crawford. According to the debtors, there is no “right” to file a time-barred claim when there is no right to have that claim repaid in a Chapter 13 bankruptcy proceeding.”

Debtor's Argument Rejected

The Eleventh Circuit rejected the debtor's argument because the Code allows claims in a Chapter 13 proceeding by a party who doesn't necessarily have a right to have his claim paid. “Although a party may not be able to enforce its claim because of a statute-of-limitations bar, that party still may assert the claim in the first place,” the court said.

Creditors can file proofs of claim that they know to be barred by the statute of limitations, but those creditors aren't free from all consequences of filing those claims, the court said.

The FDCPA applies to “debt collectors,” the court said. Debt collectors are a subset of creditors who might file proofs of claim in a Chapter 13 bankruptcy. A debt collector is “any person who … regularly collects or attempts to collect, directly or indirectly, debts owed to due or asserted to be owed or due another,” the court said. Any “creditor” that has a claim against a debtor may file a proof of claim, the court said, citing Bankruptcy Code Section 101(10)(A).

Read Statutes Together

The Eleventh Circuit read these two “regimes” together as providing “different tiers of sanctions for creditor misbehavior in bankruptcy.” The FDCPA lies over the top of the Code's regime “so as to provide an additional layer of protection against a particular kind of creditor,” the court said. It “kicks in only when the creditor is a debt collector,” the court said. The creditor's behavior must reach the point of “unconscionability” or “deception,” the court said, citing 15 U.S.C. §§ 1692e, 1692f.

The FDCPA and the Bankruptcy Code can “coexist,” the court concluded. A creditor can file a claim in a debtor's bankruptcy proceeding, but when a debt collector files a proof of claim for a debt that the debt collector knows to be time-barred, that creditor must face the consequences imposed by the FDCPA for a “misleading” or “unfair” claim, the court said.

“There is no blanket prohibition on filing a time-barred claim in bankruptcy, and we say nothing to the contrary here,” the court said, rejecting the debtors' assertions. If a debt collector chooses to file a time-barred claim, he is “simply opening himself up to a potential lawsuit for an FDCPA violation,” the court said.

This result, the Eleventh Circuit said, is “comparable to a party choosing to file a frivolous lawsuit.” “There is nothing to stop the filing, but afterwards the filer may face sanctions,” the court said.

Judge Charles Reginald Wilson and Judge Patrick E. Higginbotham of the U.S. Court of Appeals for the Fifth Circuit, sitting by designation, joined the opinion.

Earl Price Underwood, Jr., Underwood & Riemer, PC, Fairhope, Ala.; Daniel Luke Geyser, Stris & Maher, LLP, Los Angeles; and Kenneth J. Riemer, Kenneth J. Riemer Attorney at Law, Mobile, Ala., represented plaintiffs/appellants Judy N. Brock, Donald Cunningham; Derek Wayne Edwards, Todd Ryan Hambidge, Waller Lansden Dortch & Davis, LLP, Nashville, Tenn.; Larry Brittain Childs, Charles W. Prueter, Waller Lansden Dortch & Davis, LLP, Birmingham, Ala., represented defendants/appellees Resurgent Capital Services, L.P., LVNV Funding, LLC; Brian Melendez, Dykema Gossett, PLLC, Minneapolis, Minn., represented amicus curiae ACA International; Daniel Luke Geyser, Peter K. Stris, Stris & Maher, LLP, Los Angeles; Earl Price Underwood, Jr., Underwood & Riemer, PC, Fairhope, Ala.; Kenneth J. Riemer, Kenneth J. Riemer Attorney at Law, Mobile, Ala., represented plaintiff/appellant Aleida Johnson, f.k.a. Aleida Hill; Jason Brent Tompkins, Chase T. Espy, Balch & Bingham, LLP, Birmingham, Ala., represented defendant/appellee Midland Funding, LLC.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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