by “Midland’s filing of a proof of claim that on its face indicates that the limitations period has run does not fall within the scope of any of the five relevant words of the Fair Debt Collection Practices Act.” Midland Funding, LLC v. Johnson, 2017 WL 2039159 (May 15, 2017) (case no. 16-348), reversing Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016).
Justice Breyer delivered the majority opinion finding that, because, under state law, the holder of a debt that is uncollectible due to lapse of the statute of limitations, retains a “right to payment,” a proof of claim on a time-barred debt falls within the meaning of “claim” in section 101(5)(A), and is not “false, deceptive, or misleading,” within the meaning of the FDCPA. Relying on the language and structure of Bankruptcy Code provisions, the Court noted that the Code provides for the possibility that a claim, while prima facie valid, may be contingent or disputed. Upon objection, section 502(b)(1) provides a method for disallowing an unenforceable claim. Under this structure the statute of limitations is an affirmative defense.
Moreover, when considering whether a statement is false, deceptive or misleading, the sophistication of the recipient is a relevant factor. Here, the Court found the bankruptcy trustee was likely to understand that a time-barred debt is subject to disallowance.
The Court turned to the “closer question” of whether assertion of a time-barred debt is “unfair” or “unconscionable.” In answering this question in the negative, the Court distinguished civil cases from bankruptcy. Factors in a civil suit, such as debtor ignorance of the statute of limitations defense, loss of records, and general embarrassment, may cause a debtor with a valid defense to nonetheless pay an uncollectible debt. Those considerations are attenuated in bankruptcy where the debtor has herself initiated litigation, there is a trustee to oversee the process and the Code provides for evaluation of claims.
Both the debtor, Aleida Johnson, and the United States as amicus argued that debt-buyers filing time-barred claims solely in the hope that they will successfully slip them past busy trustees and unsuspecting debtors is sanctionable and, therefore, “unfair” conduct. The Court disagreed, finding that the inherent protections in the Bankruptcy Code, as well as the possibility that the debtor herself could benefit from the stale claim being disallowed and discharged in bankruptcy, militated against carving out an exception to the affirmative defense rule.
The Court added that the differing purposes of the FDCPA—to protect consumers and possibly prevent bankruptcies, and the Bankruptcy Code—to strike a balance between rights of debtors and creditors, further supported treating the assertion of stale claims in bankruptcy differently from the way they are treated in the civil context.
Justice Breyer was joined in the majority by Chief Justice Roberts and Justices Thomas, Kennedy, and Alito.
Taking a real-world approach to the subject in which she recognized the extent of consumer debt and the proliferation of debt buyers, Justice Sotomayor dissented.
“Professional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy proceedings to collect it, and hoping that no one notices that the debt is too old to be enforced by the courts. This practice is both ‘unfair’ and ‘unconscionable.’”
Citing NACBA’s amicus brief, Justice Sotomayor discussed the ever-growing industry of buying stale debts for pennies on the dollar. The practice relies on the likelihood that, after an extensive lapse of time, the debtor will not know or care to raise the affirmative defense of staleness. Because the state courts have uniformly found that filing suit on a stale claim violates the FDCPA debt-buyers have increasingly turned to the bankruptcy system to achieve their goals.
Justice Sotomayor reasoned that the same considerations in state court findings of FDCPA violations, are present in the bankruptcy context. Bankruptcy debtors may feel pressure to make a small payment on the debt, thereby unwittingly restarting the running of the limitations period, or simply fail to realize that they have the ability to object to the claim. The gatekeeping function of the trustee is illusory. “The problem with the majority’s ipse dixit [that the presence of the trustee is protection enough] is that everyone with actual experience in the matter insists that it is false.”
Justice Sotomayor disagreed with the majority’s reasoning that because the debtor in bankruptcy has initiated the legal process she should be held to a higher level of sophistication than a defendant in a civil debt collection action, noting that debtors are in bankruptcy often as a result of lack of sophistication. To the majority’s reasoning that debtors could benefit from the filing of a stale claim because it may lead to disallowance and discharge, the dissent again interjected reality. In fact, a stale claim that slips through the bankruptcy process may result in resuscitation of an otherwise uncollectible debt and a debtor may find herself worse off after bankruptcy than before.
Justice Sotomayor ended with a ray of hope, “I take comfort only in the knowledge that the Court’s decision today need not be the last word on the matter. If Congress wants to amend the FDCPA to make explicit what in my view is already implicit in the law, it need only say so.”
Justice Sotomayor was joined her dissent by Justices Kagan and Ginsburg.
Justice Gorsuch did not take part in the decision.