SCOTUS Backs Debt Collectors on Stale Claims in Bankruptcy

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By Diane Davis

Debt collectors and the debt buying industry—a $13 billion industry—got a big victory May 15 when the U.S. Supreme Court held that they don’t violate federal law when they pursue debts in bankruptcy that they know are beyond reach due to time limits ( Midland Funding, LLC v. Johnson , U.S., No. 16-348, 5/15/17 ).

Writing for the majority in a 5-3 decision, Justice Stephen G. Breyer said that the filing of a proof of claim that is obviously time-barred “is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act.”

Chief Justice John G. Roberts, Jr., and Justices Anthony M. Kennedy, Clarence Thomas, and Samuel A. Alito, Jr., joined the majority opinion.

Justice Sonia Sotomayor dissented, calling the debt buying industry’s business built out of buying stale debt as both “unfair” and “unconscionable.” “Today’s decision” sets a “trap for the unwary,” she said.

“It takes only the common sense to conclude that one should not be able to profit on the inadvertent inattention of others,” Sotomayor said.

Justices Ruth Bader Ginsburg, and Elena Kagan joined Sotomayor’s dissent.

The debt collection industry applauded the court’s ruling as keeping the “status quo.” Some bankruptcy professionals, on the other hand, expressed concerns over aspects of the decision, but gratefully noted that it is narrow and limited in application.

Eleventh Circuit Reversed

Federal appeals courts are split on whether filing a proof of claim in bankruptcy on old debt, or obligations that have expired under a statute of limitations, violates the FDCPA.

A proof of claim is a document filed with the court stating the amount owed by a debtor to the creditor.

The debt collections act prohibits collectors from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt.”

The Eleventh Circuit held that a debt collector violates the federal statute if it files a proof of claim on a debt that is time-barred, or otherwise uncollectable due to time restrictions.

The Supreme Court reversed that decision, concluding that Midland Funding LLC’s claim wasn’t “false, deceptive, or misleading.” Its proof of claim falls within the Bankruptcy Code’s definition of the term “claim,” which means a “right to payment,” the court said.

The court looked to relevant state law in Alabama, which provides that a creditor has the right to payment of a debt even after the limitations period has expired.

An “unenforceable claim” is “nonetheless a right to payment,” and a “claim” as the code uses those terms, the court said.

To determine whether a statement is misleading, one must consider the legal sophistication of its audience, the court said.

In this case, the audience is the Chapter 13 trustee who must examine proofs of claim and, where appropriate, pose an objection, the court said.

The court also found that the practice at issue here wasn’t “unfair” or “unconscionable” within the meaning of the FDCPA, although it was a “close question.”

The trustee bears the burden of investigating claims and pointing out that a claim is stale, the court said. Protections in Chapter 13 bankruptcy proceedings also minimize the risk to the debtor compared to general civil law suits, the court said.

Narrowly Crafted Decision

Melissa Jacoby, a professor at the University of North Carolina at Chapel Hill, told Bloomberg BNA that although she “hoped Justice Sotomayor’s position would prevail,” she was “relieved that the majority decision is narrower than it might have been.”

“This decision is not a free pass to debt collectors to continue the troubling practices that Justice Sotomayor catalogs in her dissent,” Jacoby said.

According to Jacoby, the majority doesn’t weigh in on whether lower courts correctly have held that debt buyers violate the FDCPA when they file lawsuits in other kinds of courts to endorse stale claims,” she said.

It does, however, retain “some of the ‘catch me if you can’ nature of the debt buyers’ practices,” Jacoby said.

The majority’s decision “causes considerable problems in the bankruptcy system in terms of cost as well as distribution of funds,” Jacoby said.

“If the FDCPA is not going to be the full deterrent to questionable debt buyer practices, courts or Congress will have to consider other remedies,” Jacoby said.

“It is hard to anticipate the impact of this decision since it is narrowly crafted,” G. Ray Warner, professor of bankruptcy law at St. John’s University School of Law, Jamaica, New York, told Bloomberg BNA May 15.

“I fear that the majority’s focus on the fact that the limitations defense is an affirmative defense may draw into question the prevailing non-bankruptcy view that suing on time-barred claims violates the FDCPA,” Warner said.

“The court takes care to distinguish bankruptcy cases from ordinary civil actions, but also explicitly refuses to endorse the non-bankruptcy authority,” he said.

Restored ‘Status Quo’

The credit and debt collection industry views the majority’s decision as clarification of their long-held position on the issue.

“The credit-and-collection industry has relied on a long and consistent series of judicial opinions, going back at least to the 1990s, under which a debt collector or a debt buyer can participate in the bankruptcy process without running afoul of the Fair Debt Collection Practices Act,” Pat Morris, chief executive officer of ACA International, told Bloomberg BNA via email in a statement. ACA International, which represents credit grantors, collection agencies, attorneys, asset buyers, and vendor affiliates, filed an amicus brief for Midland Funding in the case.

“Three years ago, the Eleventh Circuit in Crawford v. LVNV Funding, LLC, called that longstanding and consistent interpretation into question, with results that have confused the credit-and-collection industry, have created an unnecessary conflict between two federal statutes and among the circuit courts of appeals, frustrated the Bankruptcy Code’s purpose of giving debtors a fresh start, and unfairly imposed liability on debt collectors,” Morris said.

“ACA International is pleased that the Supreme Court has corrected the Eleventh Circuit’s frustrating and confusing error, and has restored the status quo ante that had worked successfully for decades,” he said.

“When it comes to old debt, the U.S. Supreme Court today recognized that the law should not force debt collectors and debt buyers (and their attorneys) into the Hobson’s choice of either filing a proof of claim and facing liability under the Fair Debt Collection Practices Act, or being excluded from the bankruptcy process in order to avoid such liability,” Morris said.

“The majority applied traditional rules of statutory construction, in contrast with the dissent, which would abandon those principles to reach a desired outcome,” Manuel Newburger of Barron & Newburger, P.C., a national law firm based in Austin, Texas, told Bloomberg BNA.

“It is good to see the Court recognize the duty of the trustees in the Chapter 13 process, rejecting the efforts of some of the amici to minimize the role of trustees in carrying out their statutory duties,” Newburger said. Newburger represents the National Creditors Bar Association.

Newburger agreed with Jacoby, however, that the court “left for another day the issue of whether suing on a time–barred debt violated the FDCPA.”

“The same rationale used by the Court to reach this outcome world support an argument for reversal of the line of FDCPA cases prohibiting suits on time-barred debts,” Newburger said.

‘Misguided’ But Not Surprising

Some bankruptcy professionals expressed dismay at the court’s ruling, but one still found it “unsurprising.”

“The Court’s opinion is unfortunate and misguided,” Charles J. Tabb, of counsel, Foley & Lardner LLP and Mildred Van Voorhis Jones Chair in Law at the University of Illinois, Champaign, Illinois, told Bloomberg BNA.

“The dissent was correct in concluding that filing a proof of claim in a bankruptcy case when you know that the debt is time-barred is unfair or unconscionable conduct,” Tabb said.

“Lower courts have held that suing in civil court to collect on such a debt violates the FDCPA, but now a debt collector can seek collection in the bankruptcy court without violating the same provision. It is hard to justify why such obviously abusive conduct would escape sanction under the FDCPA,” Tabb said.

“Debt collection is a huge business in the United States and the Court’s decision gives succor to the most loathsome of debt collectors,” he said.

Kara Bruce, associate dean of faculty research and development and professor of law, University of Toledo College of Law, Toledo, Ohio, said she wasn’t surprised by the court’s holding as it was “based on a fairly straightforward textual analysis of the definition of ‘claim.’”

“It is difficult to see how a proof of claim that accurately discloses information relevant to its timeliness is nevertheless false, deceptive, or misleading,” she said.

“That is not to say that this practice does not violate the FDCPA,” Bruce said. “I disagree with the Court because I believe the practice of mass-filing proofs of claim for stale debt—a practice predicated on weaknesses in the bankruptcy system—is ‘unfair or unconscionable’ conduct under the FDCPA,” Bruce said.

Interaction of FDCPA, Bankruptcy Code

Bruce said she was “troubled” by the majority’s discussion of the “interaction between the Bankruptcy Code and the FDCPA.

“The Court takes pains to highlight the ‘different purposes and structural features’ of the Code and the FDCPA,” Bruce said.

“This discussion ignores that the FDCPA is designed to provide an additional layer of protection for consumers when they deal with debt buyers,” according to Bruce.

“There is absolutely no reason why the protections built into the FDCPA should not be available to debtors in bankruptcy,” she said. According to Bruce, the FDCPA’s enforcement structure, which relies on private litigants, complements the Bankruptcy Code’s regulatory design.

“The majority’s concern that allowing the FDCPA to apply in this context would ‘authorize a new significant bankruptcy-related remedy in the absence of language in the Code providing for it’ or license ‘post-bankruptcy litigation [on bankruptcy matters] in an ordinary civil court’ misses the mark entirely,” Bruce said.

“Justice Sotomayor provides some additional grounds for discrediting that argument in a footnote in her dissent,” Bruce said.

“It’s important to note that the court didn’t hold that the Bankruptcy Code displaces the FDCPA (in the proof of claim process or otherwise),” Bruce said. “Litigants can continue to turn to the FDCPA to address bankruptcy-related misconduct by debt collectors,” she said.

Justice Neil M. Gorsuch took no part in the consideration of the case.

Kannon K. Shanmugam of Williams & Connolly LLP, Washington, represented Midland Funding LLC; Daniel L. Geyser of Stris & Maher LLP, Dallas, represented debtor Aleida Johnson; Sarah E. Harrington, Assistant to the Solicitor General, Department of Justice, Washington, represented the United States as amicus curiae.

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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