Stale Claim in Bankruptcy Case Doesn't Violate Collection Law

A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...

By Daniel Gill

Aug. 17 — The Seventh Circuit has chosen sides in a split of circuit courts considering whether a debt collector can file a time-barred claim in a bankruptcy case without liability under the Fair Debt Collection Practices Act (FDCPA). The circuit ruled that there is no violation of the FDCPA for filing a stale claim in the debtor's bankruptcy ( Owens v. LVNV Funding, LLC, 2016 BL 258333, 7th Cir., No. 15-2109, 8/10/16 ).

Circuit Judge Joel M. Flaum wrote the majority opinion for the Seventh Circuit. The court disposed of three separate, consolidated appeals, holding that a debtor cannot mount an FDCPA claim against a collection agency because it filed a bankruptcy claim on a time-barred debt, even though the collectors would be liable for a FDCPA violation if they had commenced a lawsuit to collect on the stale debts. In each case, the bankruptcy court sustained objections to the time-barred claims.

The circuit chose to follow the Second and Eighth Circuits and rejected the holding of the Eleventh Circuit in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014)(26 BBLR 1001, 7/24/14). Crawford held that filing a proof of claim for a time-barred debt was a deceptive practice in violation of the FDCPA.

On July 11, the Eighth Circuit rejected Crawford and found no violation of the debt collection law, in Nelson v. Midland Credit Mgmt., Inc., 2016 BL 22120 (8th Cir. 2016). Both the Nelson court and this court relied on the Second Circuit's decision in Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2d Cir. 2010), which concluded that “the filing of a proof of claim in bankruptcy court cannot form the basis for an FDCPA claim.”

The court 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.

Wood's Dissent

Chief Judge Diane P. Wood disagreed. In her dissenting opinion, Judge Wood opined 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).”

Judge Wood found the filing of the claim “with the hope that it will slip through the cracks and be reborn as an allowed claim in bankruptcy” to be the sort of deceptive practice the FDCPA was meant to prohibit. “To the extent [debt collectors] are leaving the door open for an FDCPA claim when a bankruptcy petitioner ( pro se or otherwise) is misled by the scheduling of the stale claim, I welcome that limitation,” she said.

Circuit Judge William J. Bauer joined the majority opinion.

Debtor Alphonse Owens was represented by David P. Leibowitz, Allen Chern Law LLC, Chicago. Debtor Tia Robinson was represented by David J. Philipps, Philipps & Philipps, Palos Hills, Ill. Debtor Joshua Birtchman was represented by Thomas Bradburn, Noblesville, Ind.

LVNV Funding, LLC was represented by Jeanine Kerridge, Barnes & Thornburg LLP, Indianapolis; and Joel D. Bertocchi, Hinshaw & Culbertson LLP, Chicago. Defendant-Appellee Ecast Settlement Corp. was represented by Rosa M. Tumialan, Dykema Gossett PLLC, Chicago.

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

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.