Sunday, July 27, 2014

FYI: 11th Cir Holds Filing Proof of Claim on Time-Barred Debt Violates FDCPA

The U.S. Court of Appeals for the Eleventh Circuit recently held that filing a proof of claim in a bankruptcy action based on a debt that is time-barred under state law violates the federal Fair Debt Collection Practices Act. 


A copy of the opinion is available at:  Link to Opinion


A consumer owed a debt to a furniture company, which sold the debt to a debt collector.  The last transaction on the account took place in October of 2001, such that under the applicable state statute of limitations, the debt became time-barred in October of 2004. 


The consumer filed for bankruptcy in 2008.  The debt collector filed a proof of claim in that action to collect the debt.  The borrower filed a counterclaim against the debt collector, alleging that its attempt to collect a time-barred debt violated the federal Fair Debt Collection Practices Act, 15 U.S. Sec. 1692(d)-1692(f) (2006) ("FDCPA").  


The bankruptcy judge dismissed the counterclaim, and the district court affirmed.  The consumer then appealed to the Eleventh Circuit. 


As you may recall, the FDCPA provides that debt collectors may not use false, deceptive, misleading, unconscionable or unfair means to collect a debt.  15 U.S.C. Sec. 1692(e)-(f).  Courts have adopted a "least sophisticated consumer" standard to evaluate whether a debt collection practice runs afoul of the FDCPA. See, e.g., Leblanc v. Unifund CCR Partners, 601 F.3d 1185, 1193-94, 1200-01 (11th Cir. 2010).


The Eleventh Circuit began its discussion of the consumer's appeal by examining the reason behind the debt collector's practice of filing time-barred proofs of claim, noting that "[a]bsent an objection...the time-barred claim is automatically allowed against the debtor" such that "the debtor must then pay the debt from his future wages as part of the Chapter 13 repayment plan." 


Next, the Eleventh Circuit noted that federal and district courts have "uniformly held" that attempting to collect a stale debt in state court violates the FDCPA -- and found the reasoning that supported those decisions applicable here as well.  Specifically, the Court noted that the passage of time since the debt became stale would "make it difficult for a consumer debtor to defend against the time-barred claim," and further that filing a time-barred proof of claim "creates the misleading impression to the debtor that the debt collector can legally enforce the debt." 


Accordingly, the Eleventh Circuit held that filing a time-barred proof of claim in bankruptcy was unfair, unconscionable, deceptive and misleading under the FDCPA. 


The debt collector argued that filing a proof of claim did not constitute a "debt collection activity" aimed at the consumer, and accordingly was not regulated by the FDCPA. 


The Eleventh Circuit disagreed, noting that its conclusion that the FDCPA regulates the debt collector's conduct here was consistent with the FDCPA's definition of debt collector to include "any person who...regularly collects or attempts to collect, directly or indirectly, debts owed..."  15 U.S.C. Sec. 1962a(6). 


Accordingly, the Eleventh Circuit held that "just as [the debt collector] would have violated the FDCPA by filing a lawsuit on stale claims in state court, [the debt collector] violated the FDCPA by filing a stale claim in bankruptcy court." 






Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





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