Supreme Court Issues Midland Funding Decision

On May 15, 2017, the Supreme Court issued a 5-3 decision holding that it is not a violation of the Fair Debt Collection Practices Act (“FDCPA”) to file a proof of claim in bankruptcy related to a debt for which the statute of limitations has expired, resolving a previous circuit court split over the issue.

The case is Midland Funding, LLC v. Johnson, No. 16-348, 2017 U.S. LEXIS 2949 (May 15, 2017).  The original case arose in 2014 after Aleida Johnson, the respondent, filed a civil action alleging Midland Funding, LLC (“Midland”) violated the FDCPA when it filed a proof of claim in Johnson’s bankruptcy case that related to a credit card debt for which the state statute of limitations had already expired.  The district court had ruled that Midland’s conduct did not violate the FDCPA, and the Eleventh Circuit reversed on appeal.

The Supreme Court, reversing the Eleventh Circuit decision, found that “filing of a proof of claim that on its face indicates that the limitations period has run” was not “false, deceptive, or misleading.”  The Court determined that the Bankruptcy Code broadly defines “claim” as a “right to payment,” and that applicable state law controls whether a right to payment exists.  Examining Alabama law, the Court found Midland Funding would still have a right to payment even after expiration of the statute of limitations period.  The Court therefore found that even a debt for which the relevant statute of limitations had expired would be a “claim” for purposes of bankruptcy law (and rejected the argument that “claim” under the Bankruptcy Code means an “enforceable claim”).

Addressing whether filing such a claim constituted “unfair” or “unconscionable” means of collection under the FDCPA, the Court concluded it did not, and distinguished between consumer civil lawsuits and bankruptcy actions.  The Court elaborated by pointing out that in a bankruptcy proceeding: (1) the consumer initiates the proceeding (making it unlikely the consumer would “pay a stale claim just to avoid going to court”), (2) a “knowledgeable trustee” is available to the consumer, and (3) the claims resolution process is “generally a more streamlined and less unnerving prospect for a debtor than facing a collection lawsuit.”  In the Court’s opinion, the combination of these factors would “make it considerably more likely that an effort to collect upon a stale claim in bankruptcy will be met with resistance, objection, and disallowance.”

The Court was unpersuaded by the argument that allowing such claims could risk harm to debtors, noting that the debtor and trustee have the right to assert an affirmative defense of timeliness for stale claims, which can potentially benefit the debtor, and that “protections available in a Chapter 13 bankruptcy proceeding minimize the risk to the debtor.”  The Court also elaborated on the “different purposes and structural features” of the FDCPA and the Bankruptcy Code, explaining that the FDCPA is intended to help consumers “by preventing consumer bankruptcies in the first place,” while the Bankruptcy Code creates and maintains a “delicate balance of a debtor’s protections and obligations.”  In the Court’s view, finding the FDCPA to be applicable would serve to upset this “delicate balance” substantively (by authorizing “a new significant bankruptcy-related remedy” that was not explicitly provided), administratively (by “permit[ing] postbankruptcy litigation”), and procedurally (by essentially shifting the burden “to investigate the merits of an affirmative defense” and “investigate the staleness of a claim” from debtors to creditors). 

The Supreme Court’s decision provides clarity to the debt collection and the debt buying industry, which will no longer have to contend with differing applications of the FDCPA and the Bankruptcy Code by circuit courts.  The decision should also serve to eliminate the prospect of an FDCPA lawsuit for creditors filing time-barred bankruptcy claims.  Because the Court’s decision was limited in application to FDCPA claims in a bankruptcy context, the issue of whether debt collectors could be liable for violating the FDCPA for attempting to collect time-barred debt by filing a lawsuit in a non-bankruptcy context was not addressed (and the Court noted that it was not deciding this issue). 

The Court’s decision is available here.

David Scheffel

David Scheffel

David has extensive experience in consumer financial services litigation and co-chairs Dorsey’s Consumer Financial Services practice. He defends financial institutions against individual and class action claims alleging discrimination, predatory lending, violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Fair Housing Act, the Equal Credit Opportunity Act, and disputes between lenders and securitization trusts.

Brent Ylvisaker

Brent Ylvisaker

As an associate in Dorsey’s Finance & Restructuring Group, the types of areas in which he works include: banking regulations (e.g., affiliate transaction rules), consumer financial protection laws, Bank Secrecy Act and anti-money laundering regulations, financial data privacy and protection, state financial laws (including lending license requirements and usury laws) and e-commerce (e.g., E-SIGN and virtual currency).

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