November 15, 2016 - On October 11, 2016, the United States Supreme Court granted certiorari to a debt collection agency in its appeal from the Eleventh Circuit case Johnson v. Midland Funding, LLC. In Johnson, the Eleventh Circuit affirmed its decision in Crawford v. LVNV Funding, LLC, which held that a debt collector violates the Fair Debt Collection Practices Act (the “FDCPA”) when it files a proof of claim in a bankruptcy case on a debt that it knows to be time-barred. In view of the emerging circuit split, the Supreme Court agreed to hear the case in order to resolve two issues: (1) whether the filing of a time-barred proof of claim in a bankruptcy proceeding exposes a debt-collection creditor to liability under the FDCPA and (2) whether the Bankruptcy Code, which governs and permits the filing of proofs of claim in bankruptcy, precludes a cause of action under the FDCPA for the filing of a time-barred proof of claim in a bankruptcy proceeding.
In Johnson, which originated in the District Court for the Southern District of Alabama, plaintiff Aleida Johnson (“Johnson”) filed a Chapter 13 bankruptcy petition in March 2014. In May 2014, a debt collection agency—Midland Funding, LLC (“Midland”)—filed a proof of claim in Johnson’s bankruptcy proceeding for an amount of $1,879.71. This debt accrued over ten years before Johnson filed for bankruptcy and its collection was time-barred by Alabama’s statute of limitations, which permits a creditor only six years to collect an overdue debt. Johnson brought suit against Midland’s filing of the proof of claim under the FDCPA, which provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” This prohibition encompasses an attempt to collect a debt that is not permitted by law. Johnson argued that pursuant to the language of the statute, Midland’s time-barred proof of claim was “unfair, unconscionable, deceptive, and misleading in violation of the FDCPA.”
Midland promptly moved to dismiss Johnson’s FDCPA suit. The District Court granted the motion to dismiss, finding that the Bankruptcy Code’s affirmative authorization for creditors to file a proof of claim—regardless of whether it is time-barred—was in direct conflict with the FDCPA’s prohibition on debt collectors filing a time-barred claim. Under the doctrine of implied repeal, the District Court found that the later-enacted Bankruptcy Code effectively repealed the conflicting provision under the FDCPA and precluded debtors from challenging that practice as a violation of the FDCPA in a bankruptcy proceeding.
The Eleventh Circuit reversed the District Court’s decision, holding that “[t]he Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 Bankruptcy when a debt collector files a proof of claim it knows to be time-barred. . . . [W]hen a particular type of creditor—a designated ‘debt collector’ under the FDCPA—files a knowingly time-barred proof of claim in a debtor’s Chapter 13 bankruptcy, that debt collector will be vulnerable to a claim under the FDCPA.” Under the Eleventh Circuit’s analysis, the allegedly conflicting provisions of the Bankruptcy Code and the FDCPA could co-exist harmoniously, and the presence of a “positive repugnancy” between the statutes necessitating application of the un-favored doctrine of implied repeal was lacking. Thus, although the Bankruptcy Code guarantees a creditor’s right to file a proof of claim they know to be time-barred by the statute of limitations, those creditors do not thereby gain immunity from the consequences of filing those claims. The Court rejected Midland’s assertion that such an interpretation would effectively force a debt collector to “surrender its right to file a proof of claim.” The court likened this scenario to filing a frivolous lawsuit, stating that “[i]f a debt collector chooses to file a time-barred claim, he is simply opening himself up to a potential lawsuit for an FDCPA violation. This result is comparable to a party choosing to file a frivolous lawsuit. There is nothing to stop the filing, but afterwards the filer may face sanctions.” Accordingly, the Eleventh Circuit found that the FDCPA lays over the top of the Bankruptcy Code’s regime, so as to provide an additional layer of protection to debtors against a particular kind of creditor—debt collectors.
The Court in Johnson makes clear that its holding is limited in scope and should not have far-reaching consequences for most creditors. Most importantly, the Court acknowledges that the FDCPA’s prohibitions do not reach all creditors—the statute only applies to “debt collectors,” which are a narrow subset of the universe of creditors that might file proofs of claim in a bankruptcy proceeding. Furthermore, the FDCPA provides a safe harbor for debt collectors who unintentionally or in good-faith file a time-barred proof of claim. Thus, a debt collector who files a time-barred proof of claim may escape liability by showing that the violation was not intentional and resulted from a bona-fide error. These two limitations ensure that regardless of how the Supreme Court resolves this circuit split, there will not be a chilling effect on the submission of proofs of claims by the vast majority of creditors.
Although the direct impact of the Johnson ruling may be restricted to a limited creditor base, recent Supreme Court rulings involving bankruptcy cases have had broader knock-on effects on bankruptcy jurisprudence (and jurisdiction), and a decision on preemption as it relates to the Bankruptcy Code has the potential for a significant impact on various aspects of procedural and substantive bankruptcy law outside of the limited issue of the interplay of the FDCPA and the Bankruptcy Code.
. Johnson v. Midland Funding, LLC , 823 F.3d 1334 (11th Cir. 2016).