Stephen W. Sather
Barron & Newburger, P.C.
The Bankruptcy Code protects debtors from their creditors. The Supreme Court has stated that “(t)he principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’” Marrama v. Citizens Bank, 549 U.S. 365, 367 (2007).
The Fair Debt Collection Practices Act (“FDCPA”) has seeks to protect consumers from abusive debt collectors. As explained in one recent opinion:
The FDCPA was enacted "with the aim of eliminating abusive practices in the debt collection industry." This legislation and its history "emphasize the intent of Congress to address the previously common and severe problem of abusive debt collection practices and to protect unsophisticated consumers from unscrupulous debt collection tactics." The FDCPA "focuses on regulating interactions between 'debt collectors' and 'consumers.'" (internal citations omitted).
Cohen v. Ditech Financial, LLC, 2017 U.S. Dist. LEXIS 43443 (E.D. N.Y. 3/24/17) at *5-6.
While both the FDCPA and the Bankruptcy Code address the relationship between debtors and creditors, their focus is different. On the one hand, the FDCPA aims to punish debt collectors for actions which violate its terms. On the other hand, a bankruptcy petition initiates an action by the debtor against his creditors for relief from his debts. In return for gaining the benefit of the automatic stay and the discharge, the debtor is required to make full disclosure of his assets and liabilities and to either surrender non-exempt property or make payments into a plan. Bankruptcy also differs from debt collection in that it is a process which takes place under the supervision of a judge and in most cases by a trustee. Generally the debtor is also represented by counsel.
Three Approaches to Reconciling FDCPA and Bankruptcy
Given that the FDCPA and bankruptcy overlap in purpose but not procedure, how should they interact? Courts have arguably developed three different approaches.
One extreme holds that bankruptcy law displaces the FDCPA such that a violation of the Bankruptcy Code may only be remedied under the Bankruptcy Code and never under FDCPA. Walls v. Wells Fargo Bank, N.A.., 276 F.3d 502 (9th Cir. 2002). In that case the Court stated:
To permit a simultaneous claim under the FDCPA would allow through the back door what Walls cannot accomplish through the front door -- a private right of action. This would circumvent the remedial scheme of the Code under which Congress struck a balance between the interests of debtors and creditors by permitting (and limiting) debtors' remedies for violating the discharge injunction to contempt. "[A] mere browse through the complex, detailed, and comprehensive provisions of the lengthy Bankruptcy Code … demonstrates Congress's intent to create a whole system under federal control which is designed to bring together and adjust all of the rights and duties of creditors and embarrassed debtors alike." 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. Because Walls's remedy for violation of § 524 no matter how cast lies in the Bankruptcy Code, her simultaneous FDCPA claim is precluded. (internal citations omitted).
Walls, at 510-11. Walls has not been widely followed outside of the Ninth Circuit.
At the other extreme is Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014) which held that filing a proof of claim on a time-barred debt violated the FDCPA. Crawford held that filing a stale proof of claim was similar to filing suit on a debt that was beyond the statute of limitations.
Similar to the filing of a stale lawsuit, a debt collector's filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt. The "least sophisticated" Chapter 13 debtor may be unaware that a claim is time barred and unenforceable and thus fail to object to such a claim. Given the Bankruptcy Code's automatic allowance provision, the otherwise unenforceable time-barred debt will be paid from the debtor's future wages as part of his Chapter 13 repayment plan. Such a distribution of funds to debt collectors with time-barred claims then necessarily reduces the payments to other legitimate creditors with enforceable claims. Furthermore, filing objections to time-barred claims consumes energy and resources in a debtor's bankruptcy case, just as filing a limitations defense does in state court. For all of these reasons, under the "least-sophisticated consumer standard" in our binding precedent, LVNV's filing of a time-barred proof of claim against Crawford in bankruptcy was "unfair," "unconscionable," "deceptive," and "misleading" within the broad scope of §1692e and §1692f.
Crawford, at 1261. Although several lower courts have followed Crawford, at least four other circuits have rejected it. Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2nd Cir. 2010); Dubios v. Atlas Acquisitions LLC (In re Dubois), 2016 U.S. App. LEXIS 15682 (4th Cir. Aug. 25, 2016); Owens v. LVNV Funding, LLC, 2016 U.S. App. LEXIS 14706 (7th Cir. Aug. 10, 2016); Nelson v. Midland Credit Mgmt., 2016 U.S. App. LEXIS 1268 (8th Cir. July 11, 2016).
A third line of cases allows FDCPA claims based on bankruptcy-related collection efforts in at least some circumstances.
- The Second Circuit has adopted a bright-line rule that actions taken during the pendency of a bankruptcy case cannot give rise to a violation of the FCDPA, Simmons v. Roundup Funding, supra, while actions taken subsequent to bankruptcy, such as violation of the discharge, may be pursued under FDCPA, Garfield v. Ocwen Loan Servicing, LLC, 811 F.3d 86 (2nd Cir. 2016).
- The Seventh Circuit has held that the Bankruptcy Code does not implicitly repeal the FDCPA so that actions which violated the automatic stay and the discharge might be actionable under the FDCPA. Randolph v. IMBS, Inc., 368 F.3d 727 (7th Cir. 2004). However, the Seventh Circuit is one of the circuits that have found that filing a time-barred claim is not a violation of the FDCPA.
- The Third Circuit has looked to whether the provisions of the FDCPA conflict with those of the Bankruptcy Code. Thus, where including the “mini-Miranda” warning on a subpoena for a Rule 2004 examination would be inconsistent with the Bankruptcy Code, the court affirmed dismissal of the claim. However, it allowed other claims related to the subpoena to proceed. Simon v. FIA Card Services, N.A., 732 F.3d 259 (3rd Cir. 2013).
- There are also multiple lower courts decisions that have allowed FDCPA claims to proceed where the conduct violating the Bankruptcy Code involved an attempt to collect money from the debtor. Examples include Eide v. Colltech, Inc., 987 F.Supp.2d 951 (D. Minn. 2013); Kline v. Mortgage Electronic Security Systems, 659 F. Supp.2d 940 (S.D. Ohio 2009); Drnavich v. Cavalry Portfolio Services, LLC, 2005 U.S. Dist. LEXIS 38686 (D. Minn. 2005); Trevino v. HSBC Mortgage Services (In re Trevino), 535 B.R. 110 (Bankr. S.D. Tex. 2015); Eastman v. Baker Recovery Services (In re Eastman), 512 B.R. 832 (Bankr. W.D. Tex. 2009). These cases involve attempts to collect amounts that could not legally be collected as part of a mortgage claim in a bankruptcy case or attempts to collect a debt that was discharged or subject to the automatic stay.
The common theme between both the circuit court cases and lower court cases that have allowed pursuit of an FDCPA claim based on actions taken in violation of bankruptcy law is that they involved a direct action to collect a debt from the debtor. On the other hand, the Crawford type cases involved filing a proof of claim to recover from the estate which could indirectly have an impact on the debtor.
Midland Funding, LLC v. Johnson
The Supreme Court should answer at least some of the questions concerning the intersection of the FDCPA and the Bankruptcy Code this term. In Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016), cert. granted, 2016 U.S. LEXIS 6274 (2016), two chapter 13 debtors sued two creditors that had filed proofs of claim on debts that were beyond the statute of limitations. The U.S. District Court dismissed the case, finding that the FDCPA and the Bankruptcy Code were in irreconcilable conflict, adopting the Ninth Circuit’s view. The Eleventh Circuit reversed, finding that the two statutes could both be given effect.
The Supreme Court granted certiorari on the following questions:
1. Whether the filing of an accurate proof of claim for an unextinguished time-barred debt in a bankruptcy proceeding violates the Fair Debt Collection Practices Act.
2. Whether the Bankruptcy Code, which governs the filing of proofs of claim in bankruptcy, precludes the application of the Fair Debt Collection Practices Act to the filing of an accurate proof of claim for an unextinguished time-barred debt.
The issues on which the Supreme Court granted certiorari correlate to the two most extreme positions on the intersection between the Bankruptcy Code and the FDCPA, namely the holding in Walls v. Wells Fargo that actions taken in bankruptcy can never violate FDCPA and the holding in Crawford v. LVNV Funding that the FDCPA is generally applicable in bankruptcy cases.
The Midland Funding Oral Argument
The case was argued to the Supreme Court on January 17, 2017 and has not been decided as of the date this paper was completed. Typically, FDCPA cases have not been resolved on ideological fault lines. Heintz v. Jenkins, 514 U.S. 291 (1995) was a unanimous decision, while Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, L.P.A., 559 U.S. 573 (2010) was a 7-2 decision with Justices Sotomayor and Scalia on the same side. If oral argument is a preview of how the decision will come out, Johnson v. Midland may be an exception to this trend.
Justices Sotomayor, Ginsberg and Kagan pressed against Midland’s position with Justice Sotomayor taking the most aggressive tack. They asserted that Midland had a practice of intentionally buying and filing stale claims, a fact that Midland’s counsel repeatedly had to point out was not in the record. Justice Sotomayor expressed skepticism about the debt buying industry in general, stating:
I'm sorry. I'm having a great deal of difficulty with this business model. Completely. You buy old, old debts that you know for certainty are not within any statute of limitations. You buy them and you call up creditors and you say to them, you don't have to pay me. But out of the goodness of your heart, you should? Or do you just call them up and say, you owe me money, and you hope that they'll pay you. And is it the same thing in bankruptcy court? You filed a claim and you hope the trustee doesn't see that it's out of time? And apparently, you collect on millions of dollars of these debts. So is that what you do?
She also pressed Midland’s counsel on whether the creditor had a good faith belief that the statute of limitations was not applicable. She also stated that Midland had collected $800 million on stale claims.
When Justice Alito asked why trustees would not simply object to all claims that appeared beyond the statute of limitations, Justice Sotomayor jumped in and argued that this would be a waste of time.
I'm sorry. You're taking up trustee time, which gets paid by the debtor ultimately and at administrative cost. You are taking up the time of other creditors, because there has to be, when an objection is raised, notice to all the creditors, a hearing date set, all of these procedural steps that are unnecessary because you have no basis to believe that this debt is enforceable.
Justice Kagan also pushed back on the assertion that the Bankruptcy Code invites filing claims that might be unenforceable.
Could you just --you know, just from a commonsense basis, it seems hard to understand why Congress would want all these unenforceable proofs of claim to flow in, because only two things can happen. One is that the trustee will properly filter out those claims; and the other is that the trustee will be swamped and won't have the time or the energy or the inclination or he'll make mistakes, and some of those claims will be deemed enforceable when, in fact, they're not. So why would anybody want these proofs of claim to flood into the bankruptcy system?
Justice Ginsberg suggested that there would be no point in filing a claim that was time-barred except in the hope that it would be overlooked and would be paid.
When it was time for the debtor to argue, the Chief Justice, Justice Breyer, Justice Kennedy and Justice Alito were the hardest questioners, although Justice Breyer was clearly the most active.
Justice Breyer raised the specter that allowing FDCPA claims to be brought based on claims filed in bankruptcy would undermine the authority of bankruptcy judges. He stated:
Now, I thought the point of the Bankruptcy Code was to have bankruptcy matters decided in a bankruptcy court and not in an ordinary Article III court. So how do you reconcile what you are arguing with the basic point of bankruptcy?
The Chief Justice returned to this theme when the government argued as amicus curiae.
Well, bankruptcy is very different. The whole idea is let's get everything here in one place and --and deal with it, you know, and different priorities and all of that. I think it's much more significant if you have things spinning out of the bankruptcy estate being adjudicated elsewhere than the fact that you might have it as a general matter in --in district courts.
When the debtor’s lawyer suggested that only “legitimate” disputes should be decided in bankruptcy court Justice Breyer hit back.
MR. GEYSER: Your Honor, I think the point of the Bankruptcy Code is to have legitimate genuine disputes resolved in the Bankruptcy Code.
JUSTICE BREYER: Really? Really. How interesting. Then what do they argue about? In -in --I mean, are there cases in bankruptcy court where one side says, I have a legitimate dispute and the other side says, no, you don't? Is that unheard of in bankruptcy court?
Justice Breyer returned to this theme again, telling counsel that it was “worrying” him and asking to have his concerns allayed.
The Chief Justice also asked a series of questions about whether the application of the statute of limitations was really that obvious, asking “is there some way we know that there wasn't a tolling argument that could be raised in this case?”
I mean, their argument is that that's exactly how bankruptcy works. Here we have a claim, and if there is an objection to it, it shifts to the other side. It seems to me that you're putting a burden on them to research the claim before asserting it in bankruptcy.
Justice Kennedy asked a series of questions about whether the statute of limitations was a defense which could be waived and why only two states provided that expiration of the statute of limitations extinguished the debt. He also said that this issue was “the trouble I'm having in this case.”
Justice Alito pushed back when debtor’s counsel suggested that there was a big cost to filing objections to claims. He asked “I can’t believe you couldn’t . . . have a computer program that does this automatically.” However, he also expressed concerns with both sides’ positions stating:
I find this is a very difficult case because if --if your description of Midland's business model is correct, it doesn't seem to me that it has much, if any, social utility.
On the other hand, I have real a problem with your --with fitting your argument into the concept of an affirmative defense. I thought an affirmative defense was a rule of law that may allow the defendant to prevail if the defendant asserts the defense. But you want to switch --you're switching that over to the side of the plaintiff or the person filing the claim. It seems inconsistent with the whole idea of an affirmative defense.
Finally, Justice Kennedy suggested that he might have concerns about the entire notion that suing on time-barred debt should be actionable. He stated:
It's a little hard for -to imagine how to write a opinion to say that the law is a trap for the unwary. But that's --that's in effect what you want us to say.
There were two important areas that were covered lightly or not at all in oral argument. The Crawford case followed the logic that filing suit on a time-barred debt violates the FDCPA and that filing a proof of claim is just like filing suit. While there was discussion about whether it would be difficult for trustees to object to claims and whether a ruling for the debtor would invite satellite litigation in Article III courts, there was very little discussion about the distinction between a collections lawsuit initiated by a creditor and filing a proof of claim in a bankruptcy proceeding initiated by the debtor. There was also no discussion that I noticed about whether filing a proof of claim is a request to receive a distribution from a common fund as opposed to an action to collect from a consumer debtor. These were both points stressed in NARCA’s amicus brief submitted by Barron & Newburger.
Most of the argument was focused on the either/or notion that FDCPA should never apply in bankruptcy or that it should always apply. There was no focus on whether specific actions taken by a creditor in bankruptcy having a direct impact upon a consumer debtor could be actionable under the FDCPA. This is consistent with the all or nothing nature of the questions on which certiorari was granted. However, by focusing on whether FDCPA should ever apply in bankruptcy, the Court could feel compelled to hold that it always applies in bankruptcy. In my view, filing a proof of claim is part of the administrative system of bankruptcy and is simply not comparable to filing suit. However, there are other abusive practices that occur in bankruptcy court that more closely resemble debt collection activities and to which FDCPA might legitimately apply.
Trying to predict how the Supreme Court will rule on a case based on oral argument is fraught with peril. Often the Justices are trying out arguments to see where they go. However, based solely on the tone of the questioning, Justices Sotomayor, Kagan and Ginsberg seem likely to favor the debtor while Chief Justice Roberts and Justice Breyer seem likely to favor Midland. Justices Kennedy and Alito seemed to be leaning in that direction as well. As is typical, Justice Thomas did not speak at all.
 While some parties use the word preempt, this is inaccurate, since one federal statute cannot preempt another federal statute.
 Because Simmons pre-dates Crawford, it did not reject it. However, its rationale is consistent with the cases that have gone against Crawford.
 The Third Circuit subsequently affirmed a take nothing summary judgment finding that the subpoenas were not misleading even though they did not contain the text of Fed.R.Civ.P. 45(d) and (e). Simon v. FIA Card Services, N.A., 639 Fed. Appx. 885 (3rd Cir. 2016).