Debt Collectors Seek Leeway From SCOTUS in Bankruptcy Cases

By Diane Davis

The U.S. Supreme Court Jan. 17 will probe just how much the debt buying and collection industry can leverage the bankruptcy system to collect on debts they otherwise couldn’t pursue ( Midland Funding, LLC v. Johnson, U.S., No. 16-348, oral argument 1/17/17).

The Supreme Court agreed to hear the case to resolve a circuit split on whether filing a proof of claim in a bankruptcy proceeding on a debt that a debt collector knows is otherwise time–barred violates the federal Fair Debt Collection Practices Act (FDCPA). A proof of claim is a written statement setting forth a creditor’s claim in a bankruptcy case.

Midland Funding, LLC is a debt purchaser that acquired debtor Aleida Johnson’s defaulted credit card debt.

This is an “important case,” Henry J. Sommer, president of the National Consumer Bankruptcy Rights Center (NCBRC) and a bankruptcy attorney practicing in Philadelphia, told Bloomberg BNA Jan. 3.

The debt buying industry has grown significantly in recent years, which has resulted in an increase in the number of claims filed in consumer bankruptcy cases. Debt collection is a $13.7 billion dollar industry, according to a brief filed by the U.S. government. Even if only a fraction of that amount results in stale claims filed with bankruptcy courts, the court’s decision in this case could have a significant economic impact.

Explosion of Debt Buying Industry

The law is clear that both the Bankruptcy Code and the FDCPA can operate together, Sommer said. NCBRC and the National Association of Consumer Bankruptcy Attorneys (NACBA) filed an amicus brief in support of the debtor.

The debt buying industry has “exploded in the last six to eight years” with all of the big credit card companies selling overdue debts, Sommer said. Typically, debt buyers pay 2 to 3 cents on the dollar for the debts with the average price lower for older debts, Sommer said.

Debt buyers purchase thousands of debts in bundled packages and “robosign” proofs of claim in bankruptcy cases without even reviewing the claims to see if the applicable statute of limitations has run, according to Sommer.

This practice is a “plague” and presents a “challenge for the bankruptcy system,” according to NACBA and NCBRC’s brief. All amounts paid on a time-barred debt “reduce what gets paid on other debts, which in turn increases the obligations the consumer continues to owe after the bankruptcy case,” the brief states. “Debt collectors and debt buyers work with every community’s businesses, large and small, to get payment for goods and services that consumers have already received but haven’t paid for,” Patrick Morris, Chief Executive Officer of ACA International, told Bloomberg BNA via email Jan. 10. ACA International, which represents credit grantors, collection agencies, attorneys, asset buyers, and vendor affiliates, filed an amicus brief in support of Midland Funding.

“That process helps businesses survive, prevents job losses, and keeps prices and taxes down,” Morris said. “A dollar collected on an older debt works just as hard to keep prices and taxes down, to keep workers employed, and to keep a business open as a dollar collected on a more recent obligation,” he said.

According to Morris, "[t]he bankruptcy process allows the orderly administration of a bankrupt debtor’s unpaid bills, and provides a mechanism for weeding out stale debt. Debt collectors should be allowed to participate in that process as long as they accurately disclose the information that will let the system weed out the stale debt—which is exactly what Midland did in this case,” Morris said. “There may be good reasons why a debtor wants to resolve an old debt—after all, the point of bankruptcy is to get a fresh start without being haunted by unpaid bills of any kind,” Morris told Bloomberg BNA. “To exclude older debt from that process will frustrate the Bankruptcy Code’s purpose of giving debtors a fresh start, and will unfairly impose liability on debt collectors for following a practice that has worked successfully for decades,” he said.

Taking Advantage of Debtors?

“The debt buying industry seems to be taking advantage of the inability of debtors (or trustees, other parties, and courts) to catch each and every time they file stale claims in bankruptcy courts,” Melissa Jacoby, a law professor at University of North Carolina at Chapel Hill who teaches bankruptcy law, told Bloomberg BNA Jan. 4.

“Even though bankruptcy filings are down, bankruptcy courts handle vastly more claims than district court counterparts,” Jacoby said. “Trying to root out stale claims one debt at a time is a poor investment of private and taxpayer funds. It is far more efficient for debt buyers to fix their practices and not file clearly stale claims. And, that happens to be consistent with the best interpretation of the intersection between the Bankruptcy Code and the FDCPA,” Jacoby said.

Resolve Circuit Split

In Johnson v. Midland Funding, LLC, 2016 BL 164318, 823 F.3d 1334 (2016), the Eleventh Circuit concluded that a debt collector violates the FDCPA’s prohibition against misleading or deceptive practices if it files a proof of claim on a time-barred or “stale” debt.

The FDCPA in 15 U.S.C. §1692e prohibits debt collectors from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt.”

The appeals court also found that the Bankruptcy Code and the FDCPA can coexist because they “provide different protections and reach different actors.”

The Fourth, Seventh, and Eighth Circuits have rejected the Eleventh Circuit’s holding.

Midland Funding asked the court to decide two questions: (1) “whether a debt collector violates the FDCPA by filing an accurate proof of claim for an unextinguished time-barred debt in a bankruptcy proceeding,” and (2) “whether the Bankruptcy Code precludes such an application of the FDCPA.”

“All the Court needs to do in this case is to hold that, whatever the propriety of certain practices outside bankruptcy, there is nothing improper about engaging in a practice that the Code specifically invites,” Midland Funding states in its reply brief.

Midland Funding concedes in its reply brief that if the system for processing claims isn’t operating as Congress intended and as claimed by the debtor, the “solution” isn’t to use the “blunt instrument of the FDCPA—a statute never meant to apply in bankruptcy proceedings—to address perceived challenges in bankruptcy administration.”

Consistent With Code’s Core Purpose?

Midland Funding’s brief argues that the Bankruptcy Code entitles a creditor such as the petitioner to file a proof of claim for an unextinguished time-barred debt. A creditor must have a “right to payment” under state law to have a claim, and Midland Funding had a right to payment under Alabama law. Thus, Midland Funding was entitled to file a proof of claim for its debt.

The inclusion of time-barred debts within the Bankruptcy Code’s broad definition of a “claim” is consistent with the policies behind the Code, according to Midland Funding. The Bankruptcy Code’s “core purpose” is to comprehensively bring all of a debtor’s debts into a single bankruptcy proceeding and resolve them, the petitioner states.

Midland Funding argues that there is nothing unjust or unfair about the filing of the proof of claim for a time-barred debt because the bankruptcy process has numerous protections for a debtor, including the appointment of a trustee who is obligated to monitor proofs of claim and raise all necessary objections, and most debtors have their own counsel as an additional layer of review.

If the FDCPA were interpreted to prohibit the filing of a proof of claim for time-barred debt, it would create an irreconcilable conflict with the Bankruptcy Code, Midland Funding contends.

The National Association of Chapter 13 Trustees’ amicus brief takes issue with this argument, stating that "[c]onsumer protection laws are often entirely consistent with bankruptcy laws. Conduct that would otherwise violate these laws should not receive a pass just because it occurs during a bankruptcy case.”

The Trustees’ brief also points out that because the parties’ interests in the case rarely align, the “delineation of responsibilities is not always clear.”

Exploits Claims-Allowance Process

According to the debtor’s brief, the FDCPA prohibits filing proofs of claim on knowingly time-barred debt, and Midland Funding’s “clear abuse of the bankruptcy process violates the FDCPA.”

Midland Funding exploits the claims-allowance process, the debtor argues, and engages in a “systematic effort to ‘flood’ bankruptcy proceedings with thousands of time-barred claims.” “Midland’s entire scheme is premised on the hope that the system will break down and fail—as it predictably does when debtors fail to object and trustees fail to weed out invalid claims,” the debtor’s brief states.

The debtor’s brief also rejects Midland Funding’s argument that the Bankruptcy Code repealed the FDCPA by implication. Repeal must be established through “clear text” or “irreconcilable conflict,” and neither are present in this case, the debtor’s brief states.

U.S. Government Weighs In

The fact that the Acting U.S. Solicitor General, on behalf of the U.S. Trustee Program and the Consumer Financial Protection Bureau, filed an amicus brief in favor of the debtor is “significant,” Jacoby told Bloomberg BNA.

The U.S. Solicitor General has been given permission by the court to participate in oral argument. This gives the debtor’s argument more “weight,” Jacoby said. The U.S. Solicitor is a frequent “player” in cases and the court would recognize the Solicitor’s expertise in bankruptcy, Jacoby said.

According to the Acting U.S. Solicitor’s brief, the FDCPA prohibits a debt collector from filing a proof of claim for a debt that the debt collector knows is time-barred. “The deliberate filing of proofs of claim for debts known to be time-barred reflects a calculated effort to exploit the imperfections of the Code’s disallowance mechanisms…,” the brief states.

Kannon K. Shanmugam of Williams & Connolly LLP, Washington, D.C., represents petitioner Midland Funding, LLC.

Daniel L. Geyser of Stris & Maher LLP, Dallas, represents respondent Aleida Johnson.

Assistant to the Solicitor General Sarah E. Harrington, Department of Justice, Washington, D.C., represents the United States as amicus curiae.

To contact the reporter on this story: Diane Davis in Washington, D.C. at

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

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