By Gary M. Weiner
and Robert E. Girvan, III
Weiner Law Firm, PC
The Fourth Circuit recently held in Dubois v. Atlas Acquisitions, LLC, No. 15-1945 (4th Cir. August 25,2016) that the filing of a proof of claim based upon a time-barred debt does not violate the Federal Debt Collection Practices Act (FDCPA)(click on the case name to read the opinion).
Congress enacted the FDCPA to prevent debt collectors from using abusive and unfair debt collection practices. Federal courts have consistently held that filing lawsuits or threatening to file lawsuits debts where the statute of limitations has run out is a violation of the FDCPA. However, the Bankruptcy Code in § 502(b)(1) disallows claims, upon objection, of claims that are “unenforceable against the debtor…under any agreement or applicable law.” Therefore, the question becomes whether the filing of a proof of claim on a time-barred debt is a violation of the FDCPA (akin to filing a lawsuit), or whether the Bankruptcy Code provides protection for Debtors for this very type of action. The Fourth Circuit recently held in Dubois v. Atlas Acquisition, LLC, No. 15-1945 (4th Cir. August 25, 2016) that filing proofs of claim based on time-barred debts does not violate the FDCPA.
The above-captioned case involves two debtors in separate Chapter 13 cases with remarkably similar facts, and therefore their appeals were consolidated before the Fourth Circuit. Debtor Kimberly Adkins filed for Chapter 13 bankruptcy on August 29, 2014. Atlas Acquisitions, LLC (“Atlas”) filed two proofs of claim in the case. The first proof of claim showed a debt owed to Atlas of $184.62 on a loan that originated with a payday lender. The proof of claim indicated that the last transaction date on the account was May 19, 2009. The second proof of claim indicated a debt owed to Atlas of $390.00, and the last transaction on that account was on September 10, 2009. Atlas purchased both of these loans from the original lender after the filing of the Chapter 13 petition. It was undisputed by Atlas that both debts were beyond Maryland’s three-year statute of limitations when Atlas purchased those debts from the original lenders and asserted their claims in the debtor’s bankruptcy case. See Md. Code Ann., Cts. & Jud. Proc. § 5-101.
Chaille Dubois filed for Chapter 13 bankruptcy on December 6, 2014. Once again, Atlas filed a proof of claim for $135.00 on a loan that originated with a payday lender. Atlas purchased the loan from Elite Enterprise on January 5, 2015. The proof of claim identified the last transaction on the account as October 18, 2008. In this case, Atlas also conceded here that the debt was beyond Maryland’s statute of limitations for collections.
Debtors Adkins and Dubois both filed adversary complaints in their respective Chapter 13 cases against Atlas, alleging that the filing of time-barred proofs of claim was a violation of the FDCPA. Both debtors sought disallowance of Atlas’ claims as well as damages, attorney’s fees, and costs under the FDCPA. There was no dispute from Atlas that its claims were time-barred under the Maryland statute of limitations for collection, and Atlas stipulated to the disallowance of the claims. As to the remainder of debtors’ allegations, Atlas filed a Motion to Dismiss in both adversary proceedings pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief could be granted (Incorporated into the Bankruptcy Code by Federal Rule of Bankruptcy Procedure 7012(b)). The bankruptcy court granted Atlas’ Motions to Dismiss, and concluded that filing a proof of claim on a time-barred debt does not constitute debt collection activity pursuant to the FDCPA. Both matters were consolidated for appeal, and Debtors appealed directly to the Fourth Circuit pursuant to 28 U.S.C. § 158(d) (2).
Fourth Circuit’s Ruling
The Debtors-Appellants argued on appeal that filing a proof of claim on a time-barred debt in a bankruptcy case violates the FDCPA in the same manner that filing a lawsuit or attempting to collect on a time-barred debt would violate the FDCPA. Atlas answered by arguing: 1) that the filing of a proof of claim is not “collection activity” as defined by the FDCPA; and 2) even if filing a proof of claim were found to be a collection activity, filing a time-barred proof of claim is not a collection activity that would violate the FDCPA because of applicable Bankruptcy Code provisions.
On the question of whether the filing of a proof of claim was a “collection activity” as defined in the FDCPA, the Court considered various arguments from Atlas, including: 1) that treating a proof of claim as an attempt to collect a debt would conflict with the Automatic Stay provisions of the Bankruptcy Code; and 2) a proof of claim is not an attempt to collect a debt because the proof of claim is directed to the Trustee and bankruptcy court, rather than the debtor. The Fourth Circuit found that “precedent and common sense dictate that filing a proof of claim is an attempt to collect a debt.” The Court noted that this result is not in conflict with the automatic stay provisions of the bankruptcy code. The automatic stay applies to collection actions taken outside of the bankruptcy proceeding (quoting Cent. States, Se. & Sw. Areas Pension Fund v. Basic Am. Indus., Inc., 252 F.3d 911, 918 (7th Cir. 2001)). Finally, Atlas argued that a proof of claim is not directed at the Debtor, but instead to the bankruptcy court and Trustee and therefore should not be considered a “collection action.” The court was not persuaded, and found it irrelevant for the purposes of the FDCPA that filing a proof of claim seeks payment from a Debtor’s bankruptcy estate rather than the Debtor personally.
After determining that a “collection activity” occurred in both matters, the analysis shifted to whether that collection activity violated the FDCPA. Debtors-Appellants argued that this practice by creditors, such as Atlas, are an attempt to be paid on debts they know to be time-barred and otherwise uncollectible by hoping that the Trustee or Debtor would not object to the proof of claim, and therefore receive a distribution from the bankruptcy estate. Debtors-Appellants argued that as a threshold matter, a time-barred debt is not a “claim” within the definition listed in 11 U.S.C. § 101(5) of the Bankruptcy Code. However, under 11 U.S.C. § 502 a properly filed proof of claim is considered valid and deemed allowed, unless a party-in-interest timely objects to the claim. Furthermore, the Bankruptcy Code disallows any claim objected if the claim is “unenforceable against the debtor…under any agreement or applicable law.” See 11 U.S.C. § 502(b) (1). Finally, the Court points to Section 558 of the Bankruptcy Code, which grants the Trustee any defenses available to the Debtor, including “statute of limitations.” In addition to the relevant Bankruptcy Code provisions, the Court pointed to various Maryland state statutes that stated a right to payment does not need to be enforceable to be a claim. Therefore, the Court found that the Bankruptcy Code contemplated claims for time-barred debts being filed, but ultimately disallowed.
In deciding against FDCPA liability, the Court considered various other factors. One consideration was that for Chapter 13 debtors, the amount paid into their Chapter 13 Plan is unaffected by the number of claims filed in the case. Most Chapter 13 Plans are calculated based upon disposable income, and therefore the number of claims does not affect that analysis or inflict much (if any) prejudice upon the Debtor. The Court then noted that filing a proof of claim is very different from filing a lawsuit to collect on a time-barred debt, which is clearly actionable under the FDCPA. Namely, the standard proof of claim form requires creditors to state the last transaction and charge-off date, which streamlines the process for a Trustee to spot time-barred debts. Finally, the Court looked at the fact that as opposed to a lawsuit brought against a debtor, a Chapter 13 bankruptcy is a voluntary proceeding initiated by a Debtor. Because of the various Bankruptcy Code provisions mentioned in the above paragraphs, the Court found that Debtors in Chapter 13 have built-in protections against unfair debt collection practices that differentiate the situation from normal debt collection procedures.
Judge Diaz filed a dissent to the majority opinion. Judge Diaz first agreed that a time-barred claim is a “claim” within the context of the Bankruptcy Code. But Judge Diaz sided with the Debtor from a policy standpoint as to the business model Atlas (and other debt collectors) employ. Judge Diaz noted that Atlas buys the debts of people in bankruptcy, and files proofs of claim in those bankruptcies with the hope that the Debtor and Trustee neglect to object to the claims. In the dissent’s view, this practice is misleading and unfair, and exactly the type of practice the FDCPA seeks to protect against.
What it means?
By ruling that the filing of a proof of claim on a time-barred debt does not violate the FDCPA, the Fourth Circuit joins the majority opinion, which includes the Second, Seventh and Eighth Circuits. The Eleventh Circuit is the only court of appeals to hold that a proof of claim on a time-barred debt violates the FDCPA. See In re Crawford, 736 F.3d at 1256-57. Other Circuits, including the Third and Fifth, currently have this issue under appeal. There are currently petitions for writ of certiorari pending before the Supreme Court arising out of cases in the Seventh and Eleventh Circuits, making it likely that the high court will consider this issue.
For now, the majority opinion is that a proof of claim on a time-barred debt is an acceptable practice under the FDCPA. According to most courts, the burden remains on the Debtor and Trustee to review all claims and object to those for which there is a defense, including that they are time-barred. Therefore, Debtors’ Counsel should be diligent in reviewing each proof of claim form for the last transaction and the charged off date listed by a creditor. Otherwise, these time-barred claims will be allowed by the Bankruptcy Court, and the creditor will be in compliance with the FDCPA.