POC for Stale Debt May Be FDCPA Violation

Filing a proof of claim for a time-barred debt may constitute an FDCPA violation. Edwards v. LVNV Funding (In re Edwards), No. 14-13263 (Bankr. N.D. Ill. Oct. 6, 2015). Deborah Edwards filed an adversary complaint alleging that LVNV and Resurgent Capital Services violated the FDCPA by filing proofs of claim in her chapter 13 bankruptcy for debts that were barred by the statute of limitations. Ms. Edwards relied on FDCPA section 1692e which prohibits the use of false, deceptive or misleading representations to collect a debt and section 1692f which prohibits use of unfair or unconscionable means to collect a debt. The court denied the defendants’ motion to dismiss with respect to the FDCPA claim.

The court quickly disposed of the defendants’ first two arguments. It rejected the contention that the FDCPA is preempted by the Bankruptcy Code and therefore inapplicable noting that the Seventh Circuit has explicitly found to the contrary. Randolph v. IMBS, Inc., 368 F.3d 726, 733 (7th Cir. 2004). As to the defendants’ argument that filing a proof of claim in a bankruptcy case is not an action to collect a debt, the court was likewise unconvinced. Contrary to the defendants’ assertions, section 501(a) is not an “invitation” to creditors to inform the court of the existence of a right to payment. Rather, the court agreed with other courts including the Eleventh Circuit, that filing a proof of claim is an action to collect a debt. See Crawford v. LVNV Funding LLC, 758 F.3d 1254 (11th Cir. 2014).

The defendants next argued that filing a proof of claim showing the timing of payment and collection activities is not a violation of the FDCPA because it is not misleading, deceptive or unfair. Though the seventh circuit has not spoken on this issue and lower courts are split, the Edwards court looked to Phillips v. Asset Acceptance, LLC, 736 F.3d 5 1076 (7th Cir. 2013) for guidance. There, the circuit court found that filing a lawsuit outside of bankruptcy for a stale debt violated the FDCPA. The Phillips court based its decision on three considerations: “(1) the passage of time not only dulls the consumer’s memory of the circumstances and validity of the debt, but heightens the probability that she will no longer have personal records detailing the status of the debt; (2) unsophisticated consumers would not be aware that a statute of limitations could be used as a defense; and (3) even if the consumer knows about the statute of limitations, she might acquiesce to avoid spending resources and subjecting herself to the embarrassment of court proceedings.” The court found that filing a lawsuit and filing proofs of claim in bankruptcy were sufficiently similar to make Phillips controlling in this case. Despite procedural differences both actions invoke the legal system to seek payment on stale debts and both result in an order to pay if the debtor does not raise the defense of untimeliness.

These considerations were not outweighed by what other courts, including LaGrone v. LVNV Funding, LLC (In re LaGrone), 525 B.R. 419 (Bankr. N.D. Ill. 2015), have found to be significant differences between bankruptcy and non-bankruptcy attempts to collect a stale debt. The fact that in bankruptcy there is a trustee charged with challenging stale proofs of claim under sections 1302(b)(1) and 704(b)(5), did not sway the court. As a practical matter, trustees focus on the easiest to detect defects in POCs such as late filings or improper claims to priority and do not typically object to POCs on the basis of staleness. Confronting the reality that other courts have ignored, the court said, “[i]f trustees were in fact objecting to every stale claim in this district and across the country, the business of buying stale claims and filing proofs of claim in bankruptcy to collect on them would not be profitable and the practice would likely have ended shortly after it began. Instead, it appears to be a big and prosperous business.”

While in chapter 7 it may be true that the debtors have less at stake because the estate is established at the time of the petition, and therefore, payment of a stale claim takes away from other creditors rather than the debtor, the same is not true in chapter 13. There, payments are made out of the debtor’s ongoing income and therefore the amount of unsecured debt to be paid has a direct effect on the debtor financially. This rises to even greater significance where bankruptcy courts, such as those in the Northern District of Illinois, have a required minimum percentage that must be paid to unsecured creditors in chapter 13.

The court wholly rejected the argument that bankruptcy debtors have an advantage in that they are more likely to have legal counsel to discover and object to a stale POC than a defendant in a state collection lawsuit. The court recognized that not all debtors have attorneys and not all attorneys represent their clients diligently. With respect to pro se debtors the court noted that in sixteen years on the bench she was unaware of any unrepresented debtor challenging a stale POC, and unlike in a lawsuit, a POC carries a presumption of validity.

The court concluded that the reasoning of Phillips applied to a POC in bankruptcy and that the distinctions relied on by courts such as LaGrone were illusory or insignificant.

The court did dismiss Ms. Edwards’ “fraud on the court” criminal claims finding that section 105(a) does not extend to enforcing state criminal laws, that Ms. Edwards did not follow proper procedures for seeking sanctions under Rule 9011, and that in any case, there is no basis for sanctioning a creditor for filing a POC.

Edwards Bank ND Ill opinion