Hays, Potter & Martin, LLP
Peachtree Corners, GA
Following up on the recent post by Steve Sather reporting on the Eighth Circuit’s dismissive rejection of the Eleventh Circuit’s Crawford ruling that filing a time-barred claim in a bankruptcy case violates the FDCPA, we can report that the Eleventh Circuit recently doubled down on its position. Johnson v Midland Funding, LLC, No. 15-11240, 2016 WL 2996372 (11th Cir. 5/24/2016)(the Nelson case, reported on by Steve, mentions this case)
In March 2014, Aledia Johnson filed a Chapter 13 case in the Southern District of Alabama. Midland Funding filed a claim for $1,879.71, to which Johnson objected. On July 11, 2014, the Bankruptcy Court entered its Order granting the objection. Coincidentally, on July 10, the Eleventh Circuit had handed down the decision in Crawford. Entirely not coincidentally, on July 14, 2016, Johnson filed a putative class action asserting that Midland Funding had violated the FDCPA in the Southern District of Alabama, Johnson v Midland Funding, LLC, No.. 14-322-WS-C (N.D. Ala.). Midland Funding, faced with the immovable object that is the Crawford precedent in the Eleventh Circuit moved to dismiss utilizing a new argument - that the FDCPA as applied by Crawford is in irreconcilable conflict with the Bankruptcy Code.
The trial court, in a fairly thorough opinion, agreed. The Eleventh Circuit, however, reversed the trial court and held that there is no irreconcilable conflict that would lead to preemption of the FDCPA by the Bankruptcy Code.
Midland Funding's argument is based upon a rule of statutory construction which holds that when two statutes are in irreconcilable conflict, the newer statute is presumed to have been enacted with knowledge of the conflict and so constitutes an "implied repeal" of the earlier statute. Since the FDCPA was enacted in 1977 and the current Bankruptcy Code dates from 1978, the Code will preempt the FDCPA in the case of a conflict.
The trial court went into a lengthy analysis of whether the right to payment can include legally unenforceable claims, ultimately deciding that the Code authorizes filing such claims. The trial court then turned to the question of whether such a determination makes the Code irreconcilable with the FDCPA, and found that it clearly does. "Here, as long as state law preserves a right to payment after the limitation period expires, the Code authorizes filing a proof of climate on a debt known to be stale, while the Act (as construed by Crawford) prohibits that precise practice." [p. 15]
The Eleventh Circuit acknowledged that time-barred claims may be filed in bankruptcy cases, but did not find an irreconcilable conflict results. The Court pointed out that the FDCPA applies only to debt collectors and not to all creditors, and also observed that the FDCPA only applies to debt collectors who knowingly file a time-barred claim. By defining the universe of effected parties as (1) debt collectors (2) who knowingly file time-barred claims, the Court can then find that the conflict is not irreconcilable because everyone else can file time-barred claims. These two distinctions, the Court concluded, are sufficient to show that the Code authorization to file does not repeal the FDCPA proscription against time-barred claim.
The District Court made the cogent point that a debt collector is barred from exercising a legal right if the FDCPA is going to sanction it for filing a claim. By defining the dispute in terms of the language of the statutes, the Eleventh Circuit has finessed the issue in this case, which is whether Crawford created an irreconcilable conflict by finding that it a per se violation of the FDCPA to file a claim after the limitations period.
Having talked itself into a corner to defend the Crawford decision, the Court then attempted to clarify its reasoning, and succeeded only in demonstrating that it was stuck in the corner. "This result is comparable to a party choosing to file a frivolous lawsuit. There is nothing to stop the filing, but afterwards the filer may face sanctions." [p. 16]. That analogy completely misses the mark, because the under the Code there is nothing frivolous about a time-barred claim; the Court here specifically acknowledged that the claim itself is not frivolous. Instead, the sanction comes not from whether the claim lacks bona fides, but from the Eleventh Circuit's conclusion that debt collectors lack bona fides.
Furthermore, the Court stated that "the requirement for finding a violation is quite stringent - the creditor's behavior must reach the point of 'unconscionability' or 'deception.' " [p. 15]. If that is true, then the question left unanswered is “how can filing a proof of claim which is permitted under the Bankruptcy Code constitute an ‘unconscionable’ or ‘deceptive’ act?” Moreover, if a claim accurately states the information regarding the debt, in what way is the claim "misleading" or "unfair," the usual standard for finding a violation of the FDCPA? The Eleventh Circuit, however, has already answered these questions, in Crawford, where it determined that filing a time-barred claim is a violation per se, which means that the requirement is not stringent at all. And so, while it may be technically true that the FDCPA and Code are not "positively repugnant" as written, the FDCPA as construed by the Eleventh Circuit (which is how the trial court defined the issue) is irreconcilable with the Code when the claimant is a debt collector.
Many of the reported cases applying FDCPA involve such egregious behavior that even as a creditor's attorney I often find myself in sympathy with the debtor-Plaintiff. In this situation, though, the Eleventh Circuit appears to have taken it upon itself to extend a protection to debtors that is neither plainly authorized by the statute nor necessary to prevent abuse by debt collectors. The conflict in the circuits, which is indisputable after the Nelson decision blew a raspberry at the Eleventh Circuit’s Crawford decision, may result in this matter being resolved by the Supreme Court; debt collectors in Florida, Georgia and Alabama are hoping that it will be.