Balancing Act: Supreme Court Rules That Filing A Proof Of Claim For Stale Debt Does Not Violate The Fair Debt Collection Practices Act

The U.S. Supreme Court has held that the filing of a proof of claim in bankruptcy proceedings with respect to time-barred debt is not a "false, deceptive, misleading, unfair, or unconscionable" act within the meaning of the Fair Debt Collection Practices Act ("FDCPA") when there continues to be a right to repayment after the expiration of the limitations period under applicable state law. The Court's decision in Midland Funding, LLC v. Johnson1 resolved a split among the federal courts of appeal about the application of the FDCPA to proofs of claim in bankruptcy proceedings. While the decision is favorable for creditors, applicable state law (Alabama, in this case) played a key role in the Court's conclusion that the creditor held a "claim" under the Bankruptcy Code. Creditors must be aware of and review the relevant state law in the jurisdiction of collection to determine whether the filing of a proof of claim could be deemed false, deceptive, or misleading.

Background

In Midland Funding, the defendant-creditor filed a proof of claim in the plaintiff-debtor's Chapter 13 bankruptcy proceeding for unpaid, ten-year-old credit card debt.2 As such, the applicable six-year statute of limitations under Alabama law for an action to recover the subject debt had expired before the filing of the bankruptcy and the proof of claim.3 The bankruptcy court sustained the debtor's objection and disallowed the creditor's claim.4

After the bankruptcy court disallowed the claim, the plaintiff-debtor filed suit in the U.S. District Court for the Southern District of Alabama alleging, on behalf of herself and a putative class, that the filing of the proof of claim with respect to a time-barred debt violated the FDCPA. The district court dismissed the complaint, finding an "irreconcilable conflict" between the Bankruptcy Code and the FDCPA.5 The district court noted that because the Bankruptcy Code prevails where it is in conflict with the FDCPA, and because the Bankruptcy Code entitles a creditor to file a proof of claim on an outdated debt, there can be no liability under the FDCPA.6 The Eleventh Circuit reversed, holding that a "debt collector" who files a "knowingly time-barred proof of claim" in a Chapter 13 bankruptcy is not insulated from FDCPA liability even though the Bankruptcy Code allows the filing of a proof of claim for time-barred debt.7

The Supreme Court's Opinion

The Supreme Court granted certiorari to consider two questions: (1) whether the...