In a split decision, the U.S. Court of Appeals for the Fourth Circuit recently held that "filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the Fair Debt Collection Practices Act when the statute of limitations does not extinguish the debt."
A copy of the opinion is available at: Link to Opinion
This action involved two consolidated adversary proceedings. In both underlying bankruptcies, a debt buyer filed proofs of claim on loans that were beyond Maryland's three-year statute of limitations. The debtors filed adversary proceedings seeking disallowance of the claims as time-barred plus damages, costs, and attorneys' fees under the FDCPA.
The debt buyer stipulated that the debts were time-barred and that the claims could be disallowed, but it moved to dismiss the FDCPA claims. The bankruptcy court dismissed the claims on the grounds that filing a proof of claim is not debt collection activity within the meaning of the FDCPA. The debtors then appealed the bankruptcy court's ruling directly to the Fourth Circuit.
The Fourth Circuit first determined that the filing of a proof of claim is "debt collection" as defined under the FDCPA, even if there is no direct demand for payment, and even though the bankruptcy court may disallow the claim. The Court disagreed that treating a proof of claim as an attempt to collect a debt would conflict with the automatic stay, explaining that the automatic stay only prohibits debt collection outside of the debtor's bankruptcy proceeding.
The Court then examined whether a time-barred debt could be a "claim" under the Bankruptcy Code. The Fourth Circuit noted that the Bankruptcy Code provides a very broad definition of the term "claim," referring to a right of payment recognized under state law.
The Fourth Circuit also noted that, in Maryland, the statute of limitations merely bars the remedy and does not operate to extinguish the debt. In addition, the Maryland statute of limitations can be revived if the debtor sufficiently acknowledges the debt. The Court thus found that Maryland law recognizes a right to payment on time-barred debt, and thus the holder of a time-barred debt may file a proof of claim in bankruptcy.
The Court next explained that a debt need not be enforceable in court to be a claim in bankruptcy. Under the Bankruptcy Code, debts that are contingent or unmatured can be claims even though they would not be enforceable in court.
Also, the Fourth Circuit noted that, although the Bankruptcy Code provides that time-barred debts are to be disallowed, it does not prohibit the filing of them. The Court noted that the 2012 amendments to the Bankruptcy Code made it easier to determine the timeliness of a proof of claim because creditors are now required to list the last transaction date, the last payment date, and the charge-off date. According to the Court, this provision suggests that the Bankruptcy Code contemplates that untimely claims will be filed, objected to by the trustee, disallowed, and then discharged.
The Court explained that, once discharged, the creditor may not engage in any further effort to collect the debt. On the other hand, if a debt is unscheduled and no proof of claim is filed, then that debt is not discharged and the creditor can continue to seek payment.
The Fourth Circuit was not convinced by the debtors' argument that overburdened trustees are unable to sufficiently examine and object to each time-barred claim. The Court also noted that Chapter 13 debtors are rarely required to pay more due to the allowance of additional unsecured claims. Although other unsecured creditors will receive a smaller share of payments when time-barred claims are included in the plan, the debtor's payments are generally unaffected. As a result, the Court did not agree that imposition of liability under the FDCPA was the best way to address time-barred claims that evade objection.
The Fourth Circuit then examined some important differences between collection litigation and the bankruptcy process.
First, in bankruptcy a creditor is required to provide specific information, such as the date of last payment, that makes it easier to detect a time-barred proof of claim. Second, the debtor in bankruptcy is protected by a trustee and, in most cases, by counsel. Third, a Chapter 13 debtor voluntarily commences a bankruptcy case, while a defendant in a collection suit is unwillingly sued.
The Fourth Circuit concluded that the protections afforded to a debtor in a chapter 13 bankruptcy diminish the concern that a time-barred proof of claim is "unfair" or "misleading" in the way that a collection suit on a time-barred debt might be. The Court further noted that the debtor potentially benefits from having the debt treated within the debtor's bankruptcy case, because the discharge will apply to disallowed claims or to claims included within a completed plan.
Finally, the Court explained that treatment of a time-barred proof of claim under the FDCPA should not change regardless of whether the debt is unscheduled, scheduled as disputed, or scheduled as undisputed.
The debtors conceded that a creditor would not violate the FDCPA by filing a proof of claim on a debt that is scheduled as undisputed, as the scheduling of a debt as undisputed acts as an invitation to the creditor to participate in the bankruptcy plan. But the debtors argued that creditors who are debt collectors should be subject to liability under the FDCPA for filing proofs of claim on time-barred debts that a debtor scheduled as disputed.
The Fourth Circuit disagreed, holding that a disputed debt is more likely to be objected to and disallowed. For time-barred proofs of claims on unscheduled debts, the Court found that FDCPA liability should not attach because of the previously-described interests in discharge and collective treatment of claims.
The dissenting opinion cited the United States Court of Appeals for the Eleventh Circuit's opinion in Crawford v. LVNV Funding, LLC and contended that the FDCPA's prohibition on collection suits on time-barred debts should apply equally to proofs of claim on unscheduled debts in bankruptcy. The dissent was not persuaded that the trustees provide adequate protection, noting that a time-barred proof of claim wastes the time of the attentive trustee and takes advantage of the distracted trustee. The dissent also opined that if trustees caught and objected to every time-barred proof of claim then there would be no incentive to purchase stale debts for the purpose of asserting them in Chapter 13 bankruptcies.
The dissent took issue with the majority's opinion that debtors benefit from the filing of time-barred proofs of claim when they are discharged, either after being disallowed or after being paid in the debtor's plan with no additional money required from the debtor. While noting that the ideal debtor would remember and list as disputed every time-barred debt, the FDCPA protects the unsophisticated debtor who is unlikely to do so. For time-barred debts that go unaddressed in the bankruptcy and are thus not included in a discharge, the dissent believed that the FDCPA's general restrictions on collection and its imposition of liability for filing a collection suit on a time-barred debt served as adequate protection.
The dissent also addressed whether the Bankruptcy Code and the FDCPA are in conflict, a topic that he majority did not need to reach because it found that the FDCPA does not apply to the filing of proofs of claim such as the ones involved in this case. The dissent disagreed with the Second and Ninth Circuits, which have held that the Bankruptcy Code precludes the filing of certain FDCPA claims. Instead, the dissent would, on the facts presented in this case, follow the Third, Seventh, and Eleventh Circuits in finding that the Bankruptcy Code and the FDCPA are compatible. The dissent cited the Eleventh Circuit's recent opinion in Johnson v. Midland Funding LLC, which held that creditors who are debt collectors can comply with both the Bankruptcy Code and the FDCPA by not filing proofs of claim on time-barred debts.
Ralph T. Wutscher
Maurice Wutscher LLP
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