Month: May 2017

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Supreme Court rules filing claim for a time barred debt in bankruptcy cases does not fall within the scope of the Fair Debt Collection Practices Act

By a 5-3 vote, the United States Supreme Court in the case of Midland Funding, LLC, v. Aleida Johnson held that filing a claim for a debt that was past the applicable statute of limitations was not a violation of the provisions of the Fair Debt Collection Practices Act.  After Johnson filed bankruptcy, Midland filed a proof of claim on a debt that was past the statute of limitations of 6 years.   Johnson claimed the filing of this proof of claim was prohibited by the provisions of the Fair Debt Collection Practices Act.    Under this statute, a debt collector is prohibited from asserting any “false, deceptive, or misleading representation,” or using any “unfair or unconscionable means” to collect, or attempt to collect, a debt.  The question presented in this case was whether attempting to collect a debt that was well past the statute of limitations could be considered false, deceptive, misleading, or otherwise carried out by unfair or unconscionable means.

Justice Breyer delivered the opinion of the Court and noted that a claim under the Bankruptcy Code is simply a right to payment and state law generally will determine if a person in fact has this right.  Justice Breyer further noted in many states, creditors may still have the right to payment even when the applicable statute of limitations has expired.   In fact, many states provide that the when the statute of limitations has expired, this extinguishes the remedies the creditor may employ to collect the debt but does not extinguish the right to payment.

In this case, Johnson argued that “claim” under the Bankruptcy Code means “enforceable claim’.  However, Justice Breyer noted the word ‘enforceable” does not appear in the Bankruptcy Code and the term ‘claim” should enjoy a broad interpretation.  Further, any claim that is unenforceable will be disallowed under the Bankruptcy Code.  Time barred claims are also subject to being defeated by the raising of an affirmative defense under the Bankruptcy Code.  The bankruptcy trustee also has a role in objecting to claims that should be disallowed to help protect the rights of the bankruptcy debtor.

In conclusion, the Court opined that Congress intended the Fair Debt Collection Practices Act and the Bankruptcy Code serve different purposes and thus have different structural features and scopes.   Congress passed the Fair Debt Collection Practices Act to help consumers and possibly avoid filing bankruptcy at all.   The Bankruptcy Code, on the other hand, was to create and maintain what the Court has characterized the “delicate balance of a debtor’s protections and obligations”.    Consequently, the Court refused to implicate the provisions of the Fair Debt Collection Practices Act to close the loopholes Johnson believed existed under the Bankruptcy Code.