The Fair Debt Collection Practices Act (“FDCPA”) prohibits false, deceptive, or misleading representations or unfair and unconscionable means to be used when collecting a debt. In Midland Funding, LLC v. Johnson, No. 16-348, the Supreme Court decided that filing a proof of claim for a debt that is beyond the statute of limitations is not unfair debt collection under the FDCPA.
When Aledia Johnson filed for bankruptcy in March 2014, Midland Funding filed a proof of claim for credit card debt. The proof of claim noted that Johnson had not charged the account since May 2003, more than ten years before the bankruptcy case was filed. The relevant statute of limitations under Alabama law was six years.
Johnson responded by filing a lawsuit against Midland alleging a violation of the FDCPA by filing a proof of claim that was obviously time-barred. The Court noted that Alabama law determined whether a creditor had a right to payment, and while an action to enforce the debt collection was time-barred, the creditor still had a right to the payment, even after the statute of limitations had expired.
Johnson argued that the filing of an unenforceable claim should be considered unfair debt collection, but the court was not convinced, noting that the Bankruptcy Code only defines claims as a “right to payment”. The word “enforceable” is not part of the definition of a claim.
The court also noted that this case was different than a civil lawsuit filed by a debt collector that is time-barred. Bankruptcy is filed at the initiation of the debtor, and the bankruptcy trustee is available to vet claims. Unlike a civil debt collection suit, there is little risk that the debtor will pay the debt to avoid going to court, or fail to present the defense that the statute of limitations had run.
In her dissent, Justice Sotomayor noted that every court to decide if filing a civil suit for time-barred claim violated the FDCPA had answered affirmatively, and that the protections of bankruptcy court offered by the majority may not effectively prevent time-barred proof of claims from being collected.
Debtors should be aware that debt collectors may attempt to file both civil lawsuits and bankruptcy proof of claims that are time-barred, and that a failure to present an affirmative defense or object to a claim could cost them the chance to avoid payment of the debt.
Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us to discuss your case with an experienced real estate attorney.