SCOTUS Asked to Hear Two Cases on Stale Claims in Bankruptcy

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By Daniel Gill

Sept. 16 — Parties in two appeals have asked the U.S. Supreme Court to decide whether a credit collection agency can pursue claims in bankruptcy that would be time barred in another court ( Midland Funding, LLC v. Johnson, U.S., No. 16-348, petition filed 9/16/16 ); ( Owens v. LVNV Funding, LLC, U.S., No. 16-315, petition filed 8/26/16 ).

The question for review is whether it is a violation of the Fair Debt Collection Practices Act for a collection agency to file a proof of claim in a bankruptcy case for a debt in which the applicable statute of limitation has expired.

Although the results in the two circuit court decisions are opposite, the petitions to the high court agree that the issue begs a ruling by the high court.

There is an “undeniable circuit conflict,” attorneys for three separate petitioners write in the petition for review filed in the Owens case, “and there is no chance that this conflict will resolve itself: The split is clear and intractable.”

In the other case, the petitioning credit company, Midland Funding, agrees, saying, “The district and bankruptcy courts that routinely confront these questions, moreover, are hopelessly divided. This court's review is sorely needed.”

On the other hand, a bankruptcy expert, Professor Melissa B. Jacoby at UNC School of Law in Chapel Hill, N.C., told Bloomberg BNA that it may not be necessary for the high court to resolve the circuit split for the sake of “uniform laws of bankruptcy.” In a Sept. 19 e-mail, Prof. Jacoby said that “while the 11th Circuit decision stands, national debt buyers and their collectors are incentivized to take more care in their accounting as well as their decisions whether to pursue collection.”

She told Bloomberg BNA that the dissents in the Seventh Circuit case (as well as one in a Fourth Circuit case reaching the same conclusion) “bolster the 11th Circuit's reasoning.”

The Decisions Below

Both of the cases arose when a debt collection company filed a proof of claim in one or more debtors' bankruptcy cases, in order that they might collect on the claims if no one successfully objected to the bankruptcy claim. In the cases here, objections to the time-barred claims were sustained, meaning they were taken off the creditor register, before the debtor sought recovery for the claim filing under the FDCPA.

In the Owens case, the Seventh Circuit found that the definition of a “claim” in bankruptcy is broad and can include a right to payment even when an action to enforce that right is prohibited by expiration of an applicable statute of limitation. “[A] time barred debt is still a debt, even if the creditor cannot file a collection suit,” the court said (28 BBLR 1052, 8/18/16).

The decision included a strongly worded dissent by Chief Judge Diane P. Wood. She said that allowing debt collectors to file stale claims creates a scenario that the creditor knows will “result in payment only if the staleness of the debt slips past the debtor, her lawyer (if she has one), and the trustee, and thus become collectible through the bankruptcy court (at the expense of other creditors).”

In Johnson v. Midland Funding, the Eleventh Circuit made two rulings for which the debt collection company now seeks high court review. First, it answered a threshold question and said that the FDCPA and the Bankruptcy Code can coexist; neither of the federal statutes must preempt the other (28 BBLR 707, 6/2/16).

Then the court addressed whether the debt collector can file a bankruptcy proof of claim for a time-barred debt.

The Eleventh Circuit decided that 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. 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.

To Review or Not to Review

Whether the Supreme Court decides to grant a writ for certiorari (meaning it agrees to hear the matter) in one or both the cases of course remains to be seen.

If it elects to hear the Johnson v. Midland Funding case, it will be called upon to decide two questions: (1) whether the Bankruptcy Code precludes applying the FDCPA to the act of filing a proof of claim for a time-barred debt; and (2) whether that act is actionable under the FDCPA.

If the court elects to hear only the Owens v. LVNV Funding, the question is more pointed — whether filing a proof of claim on a knowingly time-barred debt violates the FDCPA.

Daniel L. Geyser, who represents the petitioning debtor in the Owens case, and whose firm also represents the debtor respondent in Johnson, told Bloomberg BNA in a Sept. 16 e-mail, “These issues are exceptionally important, and they affect countless consumers in bankruptcies nationwide. The lower courts are hopelessly divided, and we look forward to litigating these issues in the Supreme Court.”

But contrary to the parties to both these actions, Prof. Jacoby appears to think that review by the high court isn't necessarily required.

“The national debt buying industry does not need a Supreme Court ruling to deter lawsuits — it has the power to protect itself today: stop asking lawyers or collectors to try to get paid for obviously time-barred debts that they know are legally unenforceable. Keep better records,” Jacoby told Bloomberg BNA.

Balch & Bingham LLP, Birmingham, Ala., and Williams & Connolly LLP, Washington, filed the petition in Midland Funding v. Johnson. Counsel for the petitioner declined to comment for this article.

The petitioners in Owens v. LVNV Funding are represented by Philipps & Philipps, Ltd., Palos Hills, Ill., and Stris & Maher LLP, Los Angeles. Counsel for LVNV Funding in the Seventh Circuit case did not comment for this article by press time.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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