Friday, October 14, 2016

FYI: SCOTUS Grants Cert in Proof of Claim on Time Barred Debt Case

The Supreme Court of the United States recently granted certiorari to review the ruling of the U.S. Court of Appeals for the Eleventh Circuit in Johnson v. Midland Funding LLC.


As you may recall, Johnson was the second case decided by the U.S. Court of Appeals for the Eleventh Circuit addressing time-barred proofs of claim in Chapter 13 bankruptcy. In the first case, Crawford v. LVNV Funding, LLC, the Eleventh Circuit held that a debt collector violates the FDCPA when it files a proof of claim in a bankruptcy case on a debt that it knows to be time-barred. In Johnson, the Eleventh Circuit held that there is no irreconcilable conflict between the FDCPA and the Bankruptcy Code.


A copy of the docket is available at:  Link to Docket


In their briefs at the Writ of Certiorari stage, both sides urged the Supreme Court to grant the writ in order to resolve the circuit split created by rulings in the Fourth (Dubois v. Atlas), Seventh (Owens v. LVNV), and Eighth (Nelson v. Midland) Circuits. Those courts have held that the filing of a time-barred proof of claim does not violate the FDCPA.


An interesting wrinkle is that an earlier petition requesting review by the Supreme Court was filed from the Seventh Circuit's decision in Owens. As of this writing, the Court has not ruled on the request.


Appeals involving time-barred proofs of claim are still pending in the First, Third, Fifth, and Sixth Circuits.  It remains to be seen whether the courts might stay the remaining cases until the Supreme Court decides Johnson.


Crawford and Johnson Deny Creditors Due Process


The Crawford and Johnson rulings are far from benign. By making it unlawful for creditors holding a particular claim from participating in a Chapter 13 case, the rulings deny creditors their constitutional due process.


At the same time, to correct the due process violation, the decisions result in excepting the same debts from discharge. A debtor will not receive the "fresh start" a successful Chapter 13 case would have delivered.


In most instances, the expiration of a statute of limitations does not extinguish a consumer debt nor does it deprive a state court of jurisdiction over a claim to enforce the debt.  The FDCPA does not extinguish debts or regulate the contract rights of creditors and debtors. It only regulates a debt collector's conduct when collecting consumer debt.  Generally, creditors can continue to lawfully collect "time-barred" debts in complete compliance with the FDCPA most often if they do not threaten legal action and under other circumstances.


Every ruling since Crawford addressing the issue of proofs of claim for time-barred debts agreed that even these debts are claims within the meaning of the bankruptcy code. The Eleventh Circuit conceded the point in Johnson. In doing so, the Eleventh Circuit implicitly recognized that creditors holding these claims possess a property right; namely, the right to continue to collect the time-barred debt under state law.


A debtor's filing of a Chapter 13 case initiates a judicial proceeding designed to curtail, even strip this fundamental property right.  Once the case is initiated, the bankruptcy code imposes an automatic stay prohibiting the creditor from taking any action to collect "a claim." If the Chapter 13 case is successfully concluded, the court enters a discharge injunction permanently enjoining the creditor from exercising its right to enforce the claim, provided the claim received treatment in the bankruptcy case.


The impact is not limited to "debt collectors" subject to the FDCPA. Their creditor clients, who depend on debt collectors to file proofs of claim on their behalf, are also barred from participating in Chapter 13 cases within the Eleventh Circuit.


Crawford's Absurd Result Harms Consumers


Because of these adverse impacts on a creditor's property rights, every Chapter 13 case requires the creditor to be afforded constitutional due process – notice of the proceeding and an opportunity to be heard. Crawford and Johnson, by prohibiting the filing of a proof of claim against a debt they recognize as a valid claim, deny creditors the opportunity to be heard.


This produces an odd result because in instances where a creditor is denied due process in a bankruptcy case, the debts owed to it are not discharged.


The issue arises mostly when a debtor has not scheduled or inaccurately scheduled a creditor. As a result, the creditor lacked notice of the case and did not have the opportunity to file a proof of claim before the claim bar date. In such instances, courts will except the creditor's debt from discharge unless the debtor can demonstrate that despite his failure to properly schedule the creditor, the creditor did have actual notice of the bankruptcy filing in time to file its proof of claim.


Thus, even when there is a defect in bankruptcy noticing, due process is still satisfied when the creditor had the opportunity to be heard. But that opportunity is exactly what Crawford and Johnson prohibit. Debt collectors cannot file a proof of claim when the debt is subject to the defense of an expired limitations period. The remedy is to prevent discharge and allow the creditor to continue to collect the debt.


This absurd result is one of many created by barring creditor participation in Chapter 13 cases. Consumers seek bankruptcy protection to stop debt collection efforts and to relieve their debt burden. Crawford harms consumers because it takes these protections away from them. The bankruptcy code encourages creditor participation. Crawford prohibits and discourages it.


The Supreme Court will now have the opportunity to end the absurdity and allow the bankruptcy code to operate as Congress intended.





Ralph T. Wutscher
Maurice Wutscher LLP
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