In the recent case of Johnson v. Midland Funding, LCC, the United States Court of Appeals for the Eleventh Circuit held that the Bankruptcy Code does not protect creditors who file proofs of claim in bankruptcy cases from all liability. In particular, debt collectors may be liable for damages for violating the Fair Debt Collections Practice Act if they file claims in Chapter 13 cases they know to be time-barred. This decision reaffirmed its similar finding in 2014 in the case of Crawford v. LVNV Funding LLC.
This case was initially brought in the United States District Court for the Southern District of Alabama in 2015 when the plaintiff, Johnson, filed for Chapter 13 bankruptcy relief. The defendant, Midland, filed a proof of claim that disclosed that the claim was barred by the statute of limitations. The complaint alleged that this filing violated the Fair Debt Collection Practices Act because it was “deceptive and misleading” and “unfair and unconscionable.” The defendant moved to dismiss the plaintiff’s FDCPA suit and the District Court granted this motion. The District Court interpreted the Bankruptcy Code as “affirmatively authorizing a creditor to file a proof of claim—including one that is time-barred—if that creditor has a right to payment that has not been extinguished under applicable state law.” Additionally, the District Court found that there was an irreconcilable conflict between the Bankruptcy Code and the FDCPA. It applied the doctrine of implied repeal to hold that a creditor’s right to file a time-barred claim precluded debtors from bring FDCPA suits against creditors in the Chapter 13 bankruptcy context.
On appeal, the Eleventh Circuit turned to its reasoning in Crawford and reaffirmed its conclusion that filing a time-barred proof of claim is akin to filing a time-barred lawsuit, determining that both actions are prohibited by the FDCPA. The Eleventh Circuit also disagreed with the District Court and found that the Bankruptcy Code and the FDCPA could be reconciled. In its opinion, the Eleventh Circuit stated “when a particular type of creditor—a designated ‘debt collector’ under the FDCPA—files a knowingly time-barred proof of claim in a debtor’s Chapter 13 bankruptcy, that debt collector will be vulnerable to a claim under the FDCPA.” The court recognized that the Bankruptcy Code does allow claims in a Chapter 13 bankruptcy proceeding by a party who does not necessarily have a right to have his or her claim paid. It is the responsibility of the bankruptcy trustee and bankruptcy court to determine whether the claim is “unenforceable against the debtor.” The bankruptcy process therefore allows for time-barred proofs of claim to be filed. However, when the process is working as intended, such claims will not be paid by the bankruptcy estate.
The court main point of reconciliation stems from the FDCPA’s prohibition of the use of “unfair or unconscionable” or “false, deceptive, or misleading” means to collect a debt. While the court recognized that creditors may file time-barred proofs of claim under the Bankruptcy Code, it also recognized that a certain subgroup of creditors—debt collectors—who violate the rules of the FDCPA may face civil liability to the debtor. The court concluded that this construction allows for the goals and purposes of both statutes may be accomplished.