Supreme Court Rules That Filing Bankruptcy Claim on Time-Barred Debt Does Not Violate FDCPA
In Midland Funding, LLC v. Johnson, No. 16-348, 2017 BL 161314 (U.S. May 15, 2017), the U.S. Supreme Court ruled that a credit collection agency does not violate the Fair Debt Collection Practices Act ("FDCPA") when it files a claim in a bankruptcy case to collect on a debt which would be time-barred in another court.
The FDCPA prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt."
In Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016), the Eleventh Circuit ruled that there is no irreconcilable conflict between the Bankruptcy Code and the FDCPA. Thus, the court concluded, a creditor may file a proof of claim in a bankruptcy case even though the debt is time-barred, but when the creditor is a "debt collector," it may be liable under the FDCPA for "misleading" or "unfair" practices.
The Eleventh Circuit’s ruling was at odds with decisions issued by other circuit courts of appeal. See In re Dubois, 834 F.3d 522 (4th Cir. 2016); Owens v. LVNV Funding, LLC, 832 F.3d 726 (7th Cir. 2016); Nelson v. Midland Credit Management, Inc., 828 F.3d 749 (8th Cir. 2016). The circuit split created uncertainty concerning the extent to which professional debt buyers could attempt to pursue unpaid "stale" debts in bankruptcies.
Writing for a 5-3 majority, Justice Stephen G. Breyer stated that the filing of a proof of claim which is obviously time-barred "is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the [FDCPA]." Writing that "[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense," he added that "we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code’s similar system."
Justice Breyer rejected the argument that this issue was settled by the Advisory Committee on Rules of Bankruptcy Procedure (the "Committee") in connection with amendments to the Federal Rules of Bankruptcy Procedure in 2009. The Committee rejected a proposal which would have amended Rule 9019 to require a creditor to certify in a proof of claim that there is no valid statute of limitations defense—in part, because it did not want to impose an affirmative obligation on a creditor to conduct a pre-filing investigation of a potential time-bar defense. In rejecting that proposal, Justice Breyer added, the Committee noted that Rule 9011 imposes a general "obligation on a claimant to undertake an inquiry reasonable under the circumstances to determine . . . that a claim is warranted by existing law and that factual contentions have evidentiary support" and to certify as much in its proof of claim. The Committee acknowledged, however, that this requirement would "not addres[s] the statute of limitation issue," but would only ensure "the accuracy of the information provided."
Justice Sonia Sotomayor filed a dissenting opinion, in which Justices Ginsburg and Kagan joined. In her dissent, Justice Sotomayor explained that debt buyers have "deluge[d]" the bankruptcy courts with claims "on debts deemed unenforceable under state statutes of limitations" because they recognize that consumers are ill-equipped to respond and under-resourced (citing Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1256 (11th Cir. 2014); In re Jenkins, 456 B.R. 236, 239, n.2 (Bankr. E.D.N.C. 2011) (noting a "plague of stale claims")). Stating that filing a stale claim in a bankruptcy case is unfair and unconscionable, Justice Sotomayor wrote that "[d]ebt collectors do not file these claims in good faith; they file them hoping and expecting the bankruptcy system will fail."
Justice Neil Gorsuch took no part in the consideration or decision of the case.
Court Rules That Purchaser of Defaulted Debt Is Not "Debt Collector" Under FDCPA
In another case construing the FDCPA, but not in a bankruptcy context, the Court ruled on June 12, 2017, in Henson v. Santander Consumer USA Inc., No. 16-349, 2017 BL 198032 (U.S. June 12, 2017), that the purchaser of a defaulted debt is not a "debt collector" subject to the FDCPA.
The FDCPA applies to "debt collectors," a term defined in 15 U.S.C. § 1692a(6) as anyone who "regularly collects or attempts to collect . . . debts owed or due . . . another." The term includes "any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts."
The FDCPA defines the term "creditor" to mean:
any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.
15 U.S.C. § 1692a(4).
The statutory definition of "debt collector" excludes a person attempting to collect a debt that was originated by such person, a debt that was not in default at the time it was acquired, or a debt obtained by a secured party in a commercial credit transaction involving the creditor. 15 U.S.C. § 1692a(6)(F).
Santander Consumer USA Inc. ("Santander") purchased a portfolio of defaulted auto loans from a bank. A federal district court and the U.S. Court of Appeals for the Fourth Circuit ruled that Santander did not qualify as a debt collector because it did not regularly seek to collect debts "owed . . . another," but instead, sought only to collect debts which it purchased and owned. However, the Fourth Circuit acknowledged that some circuits faced with the same question have ruled otherwise. Compare Henson v. Santander Consumer USA, Inc., 817 F.3d 131 (4th Cir. 2016) (case below); Davidson v. Capital One Bank (USA), N.A., 797 F.3d 1309 (11th Cir. 2015), with McKinney v. Caldeway Properties, Inc., 548 F.3d 496 (7th Cir. 2008); FTC v. Check Investors, Inc., 502 F.3d 159 (3d Cir. 2007).
Writing for a unanimous court in his first opinion, Justice Gorsuch framed the question as whether the FDCPA treats "the debt purchaser . . . more like the repo man or the loan originator."
Justice Gorsuch explained that the "plain language" of the definition "focuses our attention on third party collection agents working for a debt owner—not on a debt owner seeking to collect debts for itself." He further noted that the statute "does not appear to suggest that we should care how a debt owner came to be a debt owner."
"All that matters," Justice Gorsuch wrote, "is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.’ " That analysis, he observed, "would seem" to mean that a debt purchaser does not fall under the statutory definition.
Justice Gorsuch rejected the policy argument that, because the business of purchasing defaulted debt did not exist when the FDCPA was adopted, lawmakers would have viewed defaulted debt purchasers more like debt collectors than debt originators. He wrote that "it is never our job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done"; instead, that job is to "apply, not amend, the work of the People’s representatives."
The Court declined to address the argument that Santander fell within the scope of the FDCPA because it regularly collected debts for another, since the question was not raised in the petition for review. In addition, the Court had not agreed to address another aspect of the definition of "debt collector" in 15 U.S.C. § 1692a(6), which includes someone "in any business the principal purpose of which is the collection of any debts."
Court Agrees to Review Ruling Concerning Standard for Recharacterizing Debt as Equity
On June 27, 2017, the Court granted certiorari n PEM Entities LLC v. Levin, No. 16-492 (U.S. June 27, 2017), in which it will have the opportunity to consider "[w]hether bankruptcy courts should apply a federal rule of decision (as five circuits have held) or a state law rule of decision (as two circuits have held, expressly acknowledging a split of authority) when deciding to recharacterize a debt claim in bankruptcy as a capital contribution." The Court agreed to review the Fourth Circuit’s ruling in PEM Entities, LLC v. Province Grande Olde Liberty, LLC (In re Province Grande Olde Liberty, LLC), 655 Fed. Appx. 971, 2016 BL 261725 (4th Cir. 2016), where the court applied the 11-factor test adopted from federal tax law—an approach that has been adopted by at least four other circuits. The Fifth and Ninth Circuits have ruled that state law should determine whether a debt should be recharacterized as equity.
However, on August 10, 2017, the Court entered a summary disposition of the writ of certiorari in PEM. See PEM Entities LLC v. Levin, No. 16-492, 2017 BL 279440 (U.S. Aug. 10, 2017). The summary disposition states only that the "petition for a writ of certiorari is dismissed as improvidently granted." In light of the disposition, it appears that the Fourth Circuit’s ruling stands.
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