Filing Proof of Stale Claim in Chapter 13 Bankruptcy Held to Violate FDCPA

In the consolidated appeals of Johnson v. Midland Funding, LLC and Brock v. Resurgent Capital Services, L.P., Nos. 15-11240 and 15-14116, 2016 WL 2996372 (11th Cir. May 24, 2016), the Eleventh Circuit doubled down on its previous holding that filing “a proof of claim to collect a stale debt in Chapter 13 bankruptcy violates the Fair Debt Collection Practices Act,” Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1256–57 (11th Cir. 2014). By holding that the “Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time-barred,” Johnson, 2016 WL 2996372, at *3, the court sided with consumer debtors in a circuit split over whether FDCPA remedies are available “when creditors misbehave in bankruptcy,” Crawford, 758 F.3d at 1262 n.7.

The Johnson court, in an opinion by Judge Beverly Martin, faced a question that had been avoided in Crawford: whether a creditor’s right to file a proof of claim under the Bankruptcy Code prevents the debtor from suing under the FDCPA if the creditor files proof of a claim on which the statute of limitations has run. Although Crawford also involved an FDCPA claim against a bankruptcy creditor trying to collect a stale debt, the courts there had “dodged” the question whether “the Bankruptcy Code displaces the FDCPA in the bankruptcy context.” Crawford, 758 F.3d at 1262 n.7. And Johnson answered that question with a definitive “no.”

The Eleventh Circuit thus widened a split in which the Second Circuit has held, to the contrary, that “filing a proof of claim in bankruptcy court cannot form the basis for an FDCPA claim.” Simmons v. Roundup Funding, LLC, 622 F.3d 93, 96 (2d Cir. 2010). The circuits are similarly divided on whether the Bankruptcy Code implicitly repealed or superseded the FDCPA on other issues. Compare Simon v. FIA Card Servs., N.A., 732 F.3d 259, 274 (3d Cir. 2013) (“When, as here, FDCPA claims arise from communications a debt collector sends a bankruptcy debtor in a pending bankruptcy proceeding, . . . there is no categorical preclusion of the FDCPA claims.”), and Randolph v. IMBS, Inc., 368 F.3d 726, 731 (7th Cir. 2004) (“It would be better to recognize that the statutes overlap, each with coverage that the other lacks—the Code covers all persons, not just debt collectors, and all activities in bankruptcy; the FDCPA covers all activities by debt collectors, not just those affecting debtors in bankruptcy. Overlapping statutes do not repeal one another by implication; as long as people can comply with both, then courts can enforce both.”), with Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 510 (9th Cir. 2002) (“Nothing in either Act persuades us that Congress intended to allow debtors to bypass the Code’s remedial scheme when it enacted the FDCPA. While the FDCPA’s purpose is to avoid bankruptcy, if bankruptcy nevertheless occurs, the debtor’s protection and remedy remain under the Bankruptcy Code.”).

The rationale in Johnson and Crawford was that filing proof of a stale claim in bankruptcy should be treated no differently from filing a stale lawsuit—which “[f]ederal circuit and district courts have uniformly held . . . violates” the FDCPA by misleading unsophisticated consumers about the debt’s enforceability. Crawford, 758 F.3d at 1259. Other courts have criticized this rationale, see, e.g., In re Perkins, 533 B.R. 242, 260-62 (Bankr. W.D. Mich. 2015), and the U.S. Supreme Court may ultimately have to settle the debate.

Posted by Lee Peifer.

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