An opinion was issued by the Supreme Court of the United States
last week in a case that bankruptcy lawyers, trustees and judges
had been anxiously following. The question was whether the act of
a creditor filing a 'stale' proof of claim in a Chapter 13
bankruptcy violated the Fair Debt Collection Practices Act
(FDCPA). A 'stale' claim means that the dates on the proof of
claims show that the applicable state statute of limitations had
run before the Chapter 13 was filed. The complete opinion can be
viewed here.
There are creditors in the business of buying and selling debts
in bulk, and sometimes these debts may be past the statute of
limitations. A couple of the largest nationwide debt buyers have
been sanctioned recently over the practice of filing lawsuits in
state courts over debts that have passed the statute of
limitations and hoping to win by default judgment (that the
Defendant never files a response). As an example, the Consumer
Finance Protection Bureau sanctioned two debt buyers in 2015.
Bankruptcy practitioners wondered how the Court would rule.
Creditor lawyers wanted a holding stating that bankruptcy law
precluded the FDCPA, meaning an FDCPA claim could not be brought
against a creditor for filing a stale claim in a Chapter 13
bankruptcy. Debtor lawyers wanted a ruling that said not only did
the FDCPA apply, but that filing a stale claim was a clear
violation of the FDCPA.
The issued ruling is largely creditor-friendly with a few
caveats. The Court held that "the filing of a proof of claim that
is obviously time barred is not a false, deceptive, misleading,
unfair, or unconscionable debt collection practice within the
meaning of the Fair Debt Collection Practices Act." The Court
analyzed the different statutory features of the FDCPA and the
Bankruptcy code and how the two sets of laws intersect and
interact in reaching their decision.
The dissent (Judge Sotomayor with Ginsburg and Kagan) wrote that
the practice of knowingly filing time-barred debts in hopes that
no one will notice and the creditor will collect payments, is
both "unfair" and "unconscionable."
The majority explained that they thought Chapter 13 bankruptcy
trustees would object to stale claims, but I believe this opinion
leaves the burden on the Debtor to continue objecting to these
stale claims. I read the opinion to say that Debtors may still
bring FDCPA claims in a Chapter 13 bankruptcy, but that the mere
act of filing a stale claim is not itself a violation of the
FDCPA.
The biggest question left unanswered (though mentioned in the
opinion) is whether a debt buyer filing a lawsuit for a stale
debt violates the FDCPA. In light of the decision in this case,
one wonders whether that question may be more heavily litigated
by creditors in an attempt to percolate the issue in the hope
that the SCOTUS may hear the issue and make a pro-creditor
ruling.
Another question remaining unanswered in the wake of the ruling
is whether Debtors can bring an action against creditors under
state debt collection laws for the practice of filing a stale
claim in a Chapter 13 bankruptcy.
The information contained in this blog is for general information
and educational purposes and is not legal advice. Reading these
posts does not create an attorney/client relationship.
Blog: Midland vs.
Johnson