Knowing When to Walk Away
In 2014, the Eleventh Circuit Court of Appeals released its highly-controversial opinion in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), becoming the first circuit to rule that a debt collector violates the FDCPA when it files a proof of claim in a bankruptcy case on a time-barred debt. The collection industry sought to have Crawford reversed by the Supreme Court, but the petition for a writ of certiorari was denied last April. Last week, the Eleventh Circuit doubled down on Crawford in Johnson v. Midland Funding, 2016 U.S. App. LEXIS 9478 (11th Cir. May 24, 2016).
The Johnson plaintiffs both claimed that the debt-collector defendants violated the FDCPA by filing proofs of claim on time-barred debt which, under Crawford, would have been unlawful. However, the district court refused to follow Crawford and dismissed the lawsuits, reasoning that Crawford created an irreconcilable conflict between the FDCPA and the Bankruptcy Code (which permits time-barred proofs of claim). The district court applied the doctrine of implied repeal to hold that a creditor's right to file a time-barred claim under the Code precluded debtors from challenging that practice as a violation of the FDCPA in the Chapter 13 context.
The Eleventh Circuit reversed, concluding that "[a]lthough the Code certainly allows all creditors to file proofs of claim in bankruptcy cases, the Code does not at the same time protect those creditors from all liability. A particular subset of creditors â debt collectors â may be liable under the FDCPA for bankruptcy filings they know to be time-barred."
The Eleventh Circuit has given debtors the opportunity to trick creditors. The debtor, Judy Brock, scheduled the alleged time-barred obligation to the creditor. See In re Brock, Case No. 14-01200 (Bankr. S.D. Ala. 2014), Schedule D. The debt had been sold to the debt collector who responded by filing a proof of claim (Claim 7-1). The claim listed the last transaction date as January 16, 2008. Brock objected to the claim based on lack of supporting documentation but made no mention of the claim being time-barred [Dkt. No. 36]. The bankruptcy court sustained the objection on negative notice. By scheduling the debt, the debtor asked how much she owed. The claimant filed its ministerial proof of claim which was disallowed. And then the debtor sued for an alleged FDCPA violation.
While Johnson characterizes itself as resolving the last open issue for stale proofs of claim in bankruptcy, there remain many more questions. By scheduling the debt, does a debtor consent to the creditor/debt collector filing a proof of claim? The debtor invited the claimant to the party only to pull the chair out from underneath it. Further, does the scheduling the debt revitalize the claim even if the statute of limitations has passed? And who owns the alleged FDCPA violation? In a Chapter 13 case, would this post-petition asset inure to the benefit of the other creditors? If the debtor amends its schedules to include the FDCPA claim and values that claim, is that valuation binding? Brock amended her Schedules B & C with a valuation of the potential lawsuit of $1.00. If this was an FDCPA violation, it comes with a statutory penalty of $1,000.00. Has the debtor perjured herself with this false valuation? When the debtor objects to the claim based on lack of supporting documentation, is the statute of limitations issue waived?
The underlying bankruptcy case shows how the system is designed to work. Debtors schedule all assets and claims to put the world on notice. Parties who may have a claim a very broad definition under the Bankruptcy Code file it with the court. The debtor raises objections to any claims which are disputed. And the court makes a determination as to the validity of the claim. Claim administration is one area of the bankruptcy court's power which is not subject to a Stern challenge. And the claim administration process worked for Brock. But the Eleventh Circuit has created this unnecessary wrinkle in smooth case administration by permitting a cause of action for filing a purported stale claim.
Unfortunately for debt collectors doing business in the Eleventh Circuit (Alabama, Florida and Georgia)âand maybe the Northern District of Indiana, it appears Crawford and Johnson are here to stay. Luckily for those elsewhere, some lower courts have refused to adopt Crawford, leading to Johnson-like challenges in other federal appellate courts. The result could be a circuit split that ultimately winds up before the Supreme Court.