U.S. Supreme Court Hands Collection Industry a Win in Case Supported by ACA International


5/15/2017 9:20:00 PM

The Supreme Court threw out the Eleventh Circuit decision in the Johnson case, holding that filing an out-of-statute proof of claim in bankruptcy does not violate the FDCPA.

CFPBNewsIndustry Advancement Program

Reversing the Eleventh Circuit Court of Appeals decision in Midland Funding, LLC v. Johnson, No. 16-348, the U.S. Supreme Court ruled 5-3 on Monday, May 15, in favor of the credit-and-collection industry. The key issue in Midland Funding was whether a debt collector’s filing of a proof of claim that on its face indicates that the limitations period has run falls within the scope of the Fair Debt Collection Practices Act.  The high court concluded it does not, holding “[t]he filing of a proof of claim that is obviously time barred is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act.” 

On Nov. 21, 2016, ACA International submitted an amicus (friend of the court) brief to the U.S. Supreme Court, urging it to reverse the Eleventh Circuit’s judgment.  In its amicus brief, ACA convincingly argued that filing a bankruptcy proof of claim on an out-of-statute debt does not violate the FDCPA. 

ACA International’s Chief Executive Officer Pat Morris said, “This is an important issue for our industry, and ACA International continues to be involved in the courts to protect our members’ ability to recover rightfully-owed obligations — including debts that remain valid under the law even after the statute of limitations has expired. The economic and social benefit that the credit-and-collection industry provides applies with no less force to time-barred debt, or debt that may be time-barred, than to any other debt. There are often reasons why the debtor wants to resolve an otherwise time-barred debt. If a debt collector cannot work with the debtor on resolving debt that may be time-barred, then both the creditor and the debtor may end up worse off.  When it comes to old debt, the U.S. Supreme Court today recognized that the law should not force debt collectors and debt buyers (and their attorneys) into the Hobson’s choice of either filing a proof of claim and facing liability under the Fair Debt Collection Practices Act, or being excluded from the bankruptcy process in order to avoid such liability.”

Writing for the court’s majority, Justice Stephen Breyer explained that, “[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense.”  Therefore, the court concluded that there is “nothing misleading or deceptive in the filing of a proof of claim” that follows the structural features of the bankruptcy claims resolution process, including the trustee’s objection for a claim’s untimeliness as an affirmative defense.  The court also reasoned that the practice of filing a time-barred claim is not “unfair” or “unconscionable” within the terms of the FDCPA because the procedural mechanisms and protections in a bankruptcy proceeding along with the “simple affirmative defense approach” “make it considerably more likely that an effort to collect upon a stale claim in bankruptcy will be met with resistance, objection, and disallowance,” which “minimize[s] the risk to the debtor.” 

Notably, the court was not persuaded by the Consumer Financial Protection Bureau’s argument in its competing amicus brief that the Federal Rules of Bankruptcy Procedure make the practice of filing time-barred bankruptcy proofs of claim open to sanction, and that sanctionable conduct is unfair conduct.  Similarly, the court refuted the CFPB’s argument that the FDCPA seeks to help consumers by closing “a loophole in the Bankruptcy Code.”  Instead, the court said that the FDCPA and the Bankruptcy Code “have different purposes and structural features,” such that the FDCPA helps consumers “by preventing consumer bankruptcies in the first place.”    

As ACA reported previously, the district court judge in the Southern District of Alabama who considered the issue in the Midland case granted the debt collector’s motion to dismiss, finding the FDCPA and the Bankruptcy Code in “irreconcilable conflict” because the Code allows all creditors to file a proof of claim on any debt, even if that debt is barred by the statute of limitations, whereas the FDCPA prohibits a “debt collector” from “us[ing] any false, deceptive, or misleading representation or means in connection with the collection of any debt,” including attempting to collect a debt that is not “expressly authorized by the agreement creating the debt or permitted by law” (i.e., a debt barred by the statute of limitations.)  The district court found that the later-enacted Bankruptcy Code effectively repealed the conflicting provision under the FDCPA and precluded consumers from challenging the practice of filing time-barred proofs of claim as a violation of the FDCPA in a bankruptcy proceeding.  

The Eleventh Circuit Court of Appeals reversed the district court’s decision.  Affirming its decision in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), the Eleventh Circuit held that debt collectors who file a bankruptcy proof of claim on a debt barred by the statute of limitations are subject to liability under the FDCPA, even though applicable bankruptcy rules permit such filing. 

In addition to filing an amicus brief on the merits with the U.S. Supreme Court in the Johnson appeal, ACA also previously submitted a “friend of the court” brief to the Eleventh Circuit in Johnson to support the debt collector’s position in the case.  ACA has also provided amicus brief support through its Industry Advancement Program in a number of other federal appellate court cases involving this same issue, including:  Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), cert denied, 135 S.Ct. 1844, 191 L.Ed.2d 724 (2015), Johnson v. Midland Funding, LLC and Brock v. Resurgent Capital Services, L.P., 823 F.3d 1334 (11th Cir. 2016), Nelson v. Midland Credit Management, Inc., 823 F.3d 749 (8th Cir 2016), and Martel v. LVNV Funding, LLC, No. 16-1653 (1st Cir., filed Dec. 4, 2015).

Morris told Bloomberg BNA and Law360 Monday, “The credit-and-collection industry has relied on a long and consistent series of judicial opinions, going back at least to the 1990s, under which a debt collector or a debt buyer can participate in the bankruptcy process without running afoul of the Fair Debt Collection Practices Act. Three years ago, the Eleventh Circuit’s holding in Crawford v. LVNV Funding, LLC, called that longstanding and consistent interpretation into question, with results that have confused the credit-and-collection industry, have created an unnecessary conflict between two federal statutes and among the circuit courts of appeals, frustrated the Bankruptcy Code’s purpose of giving debtors a fresh start, and unfairly imposed liability on debt collectors. ACA International is pleased that the Supreme Court has corrected the Eleventh Circuit’s frustrating and confusing error, and has restored the status quo ante that had worked successfully for decades.”

Justice Sonia Sotomayor, joined by Justices Ruth Bader Ginsburg and Elena Kagan, filed a dissenting opinion.  Newly confirmed Justice Neil Gorsuch did not participate in the decision because he was not on the high court bench at the time of oral arguments in January. 

ACA’s efforts to proactively support the credit and collection industry are part of the association’s Industry Advancement Program, and are made possible by funding through ACA’s Industry Advancement Fund. 

If you missed any of the articles previously published in ACA Daily that provided more detailed information about Industry Advancement Program supported cases, like the Midland case, you can always see the archived articles on the Industry Advancement Program website. Watch for updates when decisions are issued in these cases and learn more about new cases supported by the Industry Advancement Program in the future by reading ACA Daily and logging onto the Industry Advancement Program website throughout the year. 

Follow ACA on Twitter @ACAIntl and @acacollector or Facebook for news and event updates. ACA’s LinkedIn Group includes news updates, member discussions, event promotions, jobs and more. Visit the group page and request to join today.

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