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From Banking and Finance Law Daily, May 15, 2017

Debt collection law not applied to stale debt bankruptcy claim

By Andrew A. Turner, J.D.

A debt collector’s filing of a time-barred proof of claim in a consumer bankruptcy proceeding is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act, according to the U.S. Supreme Court. Refusing to apply precedent from ordinary civil suits, the Court said that concerns of a consumer unwittingly repaying a time-barred debt have diminished force in a Chapter 13 bankruptcy (Midland Funding, LLC v. Johnson, May 15, 2017, Breyer, J.).

After the bankruptcy court dismissed the debt collector’s claim for credit-card debt because the six-year Alabama statute of limitations had passed, the consumer sought damages for a violation of the Fair Debt Collection Practices Act.

Bankruptcy Code "claim" definition. Under the Bankruptcy Code, the running of a limitations period is an affirmative defense to an unenforceable claim. This led the Court to reject the argument that the proof of claim fell outside of the Code’s definition of the term "claim."

Differences between bankruptcy and debt collection. The Court noted several differences between bankruptcy proceedings and a civil action to collect a debt. A Chapter 13 bankruptcy is initiated by the consumer, a knowledgeable trustee has the responsibility for investigating claims, and procedural rules guide the claims evaluation process, making payment of a stale claim less likely. The consumer may even benefit from the disallowance of a stale claim resulting in removal of the debt from a credit report. The Court was also concerned that a change in approach would require courts to define the boundaries of a new exception to the normal Bankruptcy Code process.

The Court was troubled by the prospect of creating a new bankruptcy-related remedy involving administrative and procedural complexities, with the duty to investigate the staleness of a claim shifted to the creditor, that would disturb the “delicate balance” of protections and obligations provided by the Code. Lastly, contrary to the argument of the United States, the Court did not believe that Bankruptcy Rule 9011 resolved this issue.

Dissenting opinion. Saying that professional debt collectors have built a business out of attempting to collect stale debt in bankruptcy proceedings, a dissenting opinion argued that the practice is "unfair" and "unconscionable." The dissent viewed this as a "trap for the unwary," based on the hope "that no one notices that the debt is too old to be enforced by the courts."

Justice Breyer authored the majority opinion, in which Chief Justice Roberts and Justices Kennedy, Thomas, and Alito joined. Justice Sotomayor filed a dissenting opinion, in which Justices Ginsburg and Kagan joined. Justice Gorsuch did not participate.

The case is No. 16-348.

Attorneys: Kannon K. Shanmugam (Williams & Connolly LLP) for Midland Funding, LLC. Daniel L. Geyser (Stris & Maher, LLP) for Aleida Johnson.

Companies: Midland Funding, LLC

MainStory: TopStory DebtCollection SupremeCtNews

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