Monday, May 15, 2017

FDCPA - bankruptcy - proof of claim - old credit card debt

Midland Funding LLC v. Johnson – U.S. Supreme Court – May 15, 2017

Petitioner Midland Funding filed a proof of claim in respondent Johnson’s Chapter 13 bankruptcy case, asserting that Johnson owed Midland credit-card debt and noting that the last time any charge appeared on Johnson’s account was more than 10 years ago. The relevant statute of limitations under Alabama law is six years.

Johnson objected to the claim, and the Bankruptcy Court disallowed it. Johnson then sued Midland, claiming that its filing a proof of claim on an obviously time-barred debt was “false,” “deceptive,” “misleading,” “unconscionable,” and “unfair” within the meaning of the Fair Debt Collection Practices Act, 15 U. S. C. §§1692e, 1692f. The District Court held that the Act did not apply and dismissed the suit. The Eleventh Circuit reversed.

Held: The 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. Pp. 2–10.

(a) Midland’s proof of claim was not “false, deceptive, or misleading.” The Bankruptcy Code defines the term “claim” as a “right to payment,” 11 U. S. C. §101(5)(A), and state law usually determines whether a person has such a right, see Travelers Casualty & Surety Co. of America v. Pacific Gas & Elec. Co., 549 U. S. 443, 450–451. The relevant Alabama law provides that a creditor has the right to payment of a debt even after the limitations period has expired.

Johnson argues that the word “claim” means “enforceable claim.” But the word “enforceable” does not appear in the Code’s definition, and Johnson’s interpretation is difficult to square with Congress’s intent “to adopt the broadest available definition of ‘claim,’ ” . . . .Other Code provisions are still more difficult to square with Johnson’s interpretation.   For example, §502(b)(1) says that if a “claim” is “unenforceable” it will be disallowed, not that it is not a “claim.”   Other provisions make clear that the running of a limitations period constitutes an affirmative defense that a debtor is to assert after the creditor makes a “claim.” §§502, 558. The law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense, and there is nothing misleading or deceptive in the filing of a proof of claim that follows the Code’s similar system.

Indeed, to determine whether a statement is misleading normally “requires consideration of the legal sophistication of its audience,” . . . . .which in a Chapter 13 bankruptcy includes a trustee who is likely to understand that a proof of claim is a statement by the creditor that he or she has a right to payment that is subject to disallowance, including disallowance based on untimeliness. Pp. 2–5.

(b) Several circumstances, taken together, lead to the conclusion that Midland’s proof of claim was not “unfair” or “unconscionable” within the terms of the Fair Debt Collection Practices Act.

Johnson points out that several lower courts have found or indicated that, in the context of an ordinary civil action to collect a debt, a debt collector’s assertion of a claim known to be time barred is “unfair.” But those courts rested their conclusions upon their concern that a consumer might unwittingly repay a time-barred debt. Such considerations have significantly diminished force in a Chapter 13 bankruptcy, where the consumer initiates the proceeding, see §§301, 303(a); where a knowledgeable trustee is available, see §1302(a); where procedural rules more directly guide the evaluation of claims, see Fed. Rule Bkrtcy. Proc. 3001(c)(3)(A); and where the claims resolution process is “generally a more streamlined and less unnerving prospect for a debtor than facing a collection lawsuit,” . . . . .

Also unpersuasive is Johnson’s argument that there is no legitimate reason for allowing a practice like this one that risks harm to the debtor. The bankruptcy system treats untimeliness as an affirmative defense and normally gives the trustee the burden of investigating claims to see if one is stale. And, at least on occasion, the assertion of even a stale claim can benefit the debtor.

More importantly, a change in the simple affirmative-defense approach, carving out an exception, would require defining the exception’s boundaries. Does it apply only where a claim’s staleness appears on the face of the proof of claim? Does it apply to other affirmative defenses or only to the running of the limitations period? Neither the Fair Debt Collection Practices Act nor the Bankruptcy Code indicates that Congress intended an ordinary civil court applying the Act to determine answers to such bankruptcy-related questions. The Act and the Code have different purposes and structural features. The Act seeks to help consumers by preventing consumer bankruptcies in the first place, while the Code creates and maintains the “delicate balance of a debtor’s protections and obligations”. . . .. Applying the Act in this context would upset that “delicate balance.”

Contrary to the argument of the United States, the promulgation of Bankruptcy Rule 9011 did not resolve this issue. Pp. 5–10. 823 F. 3d 1334, reversed.

BREYER, J., delivered the opinion of the Court, in which ROBERTS, C. J., and KENNEDY, THOMAS, and ALITO, JJ., joined. SOTOMAYOR, J., filed a dissenting opinion, in which GINSBURG and KAGAN, JJ., joined. GORSUCH, J., took no part in the consideration or decision of the case.