by The Eighth Circuit held that because of protections offered by the Bankruptcy Code, a debtor cannot file a separate action for violation of the FDCPA when a debt collector files a proof of claim for a stale debt. Nelson v. Midland Credit Management, Inc., No.15-2984 (8th Cir. July 11, 2016).
Midland filed a proof of claim in Domick Nelson’s chapter 13 bankruptcy case and Mr. Nelson objected to the claim as time-barred under state law. The bankruptcy court disallowed the claim. Mr. Nelson then filed suit against Midland in district court alleging that its attempt to collect a time-barred debt violated the FDCPA. The district court granted Midland’s motion to dismiss on the basis that “filing an accurate and complete claim on a time-barred debt” does not constitute a violation of the FDCPA.
The Eighth Circuit affirmed holding that “The bankruptcy process protects against such harassment and deception. Unlike defendants facing a collection lawsuit, a bankruptcy debtor is aided by ‘trustees who owe fiduciary duties to all parties and have a statutory obligation to object to unenforceable claims.’”
In so holding, the court disagreed with Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014); and Johnson v. Midland Funding, LLC, 2016 WL 2996372, at *3 (11th Cir. May 24, 2016).
A case pending in Texas illustrates why the Eighth Circuit got it wrong. Jarquin v. Midland Funding, LLC, No. 15-31571, Adv. Proc. No. 16-3071 (Bankr. N.D. Tex.). In Jarquin, the debtors failed to object to Midland’s proof of claim despite the fact that it was for a stale debt that Midland had no right to collect. The debtors’ plan, including Midland’s otherwise unenforceable claim, was confirmed. Though that case is still pending, Midland now argues that the Jarquins are estopped from protesting the claim because they did not timely object. This is exactly the result sought by debt collectors like Midland. The sole purpose of filing the claim for a stale debt is to take advantage of error on the part of the debtors or the trustee and slip an unenforceable claim through the cracks. Debt collectors routinely file claims in bankruptcy for debts that are uncollectable under state statutes of limitations as their only hope of recovering on the debt is to catch debtors and trustees unaware. Decisions like the one in Nelson encourage this practice. They essentially tell debt collectors that, like the proverbial fox in the henhouse, if they can slip by the guard dog, they have carte blanche to gobble up the hens.