Filing Time-Barred Claims in Bankruptcy Subjects Creditors to FDCPA Sanctions in the Eleventh Circuit (and Maybe the Seventh)

Author: A.J. Webb, Articles Editor, University of Cincinnati Law Review

Another clash between the Fair Debt Collection Practices Act[1] and the Bankruptcy Code[2] is on the horizon. A recent decision by the Eleventh Circuit Court of Appeals might lead to additional liabilities against creditors seeking to collect on debts from consumers who file for bankruptcy. In July, the Eleventh Circuit held that debt collectors are barred from filing proofs of claims in bankruptcy when those claims are based on unenforceable consumer debts under state law.[3] This issue is likely to be addressed by the Seventh Circuit Court of Appeals in a separate proceeding currently underway in the District Court of the Southern District of Indiana.[4] In order to fulfill the policy aims of the FDCPA and protect consumer debtors from abusive and deceptive debt collection practices, the Seventh Circuit should follow suit and adopt the holding of the Eleventh Circuit.

A Debt Over Fifteen Years Old

Stanley Crawford owed $2,037 to the now-defunct Heilig-Meyers furniture company and in 1999 Heilig-Meyers charged the debt off of its records.[5] LVNV Funding, a debt portfolio servicer, acquired the debt from Heilig-Meyers in 2001 and attempted to collect on the debt one time in October 2001.[6] After the interaction between LVNV Funding and Crawford in October 2001, the company never again attempted to collect on the debt.[7] Under the applicable statute of limitations in Alabama, where Crawford resided, LVNV Funding was required to collect on the debt by October 2004.[8] The debt became unenforceable in both state and federal courts three years after it was last due according to Alabama law.[9]

LVNV Files Late Claim, Bankruptcy Court Upholds It

In 2008, Crawford filed for chapter 13 bankruptcy and LVNV Funding filed a proof of claim to collect on the debt it received from Heilig-Meyers, which was then over nine years old and four years past the applicable Alabama statute of limitations.[10] Crawford initiated a proceeding outside of bankruptcy court against LVNV Funding, arguing that it was attempting to collect on a stale claim and that its efforts violated the FDCPA, which prohibits debt collectors from engaging in “the use of abusive, deceptive, and unfair debt collection practices by many debt collectors.”[11] The FDCPA provides a private right of action against debt collectors and allows the debtor to recover actual and statutory damages, as well as reasonable attorney’s fees.[12]

LVNV Funding filed proofs of claim that would otherwise be time-barred because of the Code’s treatment of those claims. Under the Code, a claim is “deemed allowed” unless the debtor or bankruptcy trustee specifically objects to the claim, at which time a hearing will be held to determine the claim’s validity.[13] In other words, the mere filing of a claim in bankruptcy creates a presumption that the claim is valid and that the debtor is required to pay on the debt.

The Bankruptcy Court for the Middle District of Alabama dismissed Crawford’s FDCPA claim, holding that LVNV Funding had not attempted to collect on a debt.[14] On appeal, the district court agreed, finding that the filing of a proof of claim in bankruptcy is “merely ‘a request to participate in the distribution of the bankruptcy estate [and is] not an effort to collect a debt from a debtor.”[15] Furthermore, the court held that LVNV Funding had not violated the FDCPA because the Act only prohibits “abusive, deceptive, and funfair” attempts to collect on a debt, not all debt collection efforts.[16]

Eleventh Circuit: LVNV’s Actions “Unconscionable”

On appeal, the Eleventh Circuit sharply disagreed. The court found that the assertion of a claim in bankruptcy amounts to a “representation” or “means” to collect on a debt under the FDCPA, which is enough to trigger the Act’s prohibitions.[17] According to the court, any attempt to collect from the debtor—whether actual or threatened litigation—is enough to trigger the Act.[18] LVNV Funding’s actions were unfair, unconscionable, deceptive, and misleading because it was attempting to collect on a debt that had long been barred by Alabama’s statute of limitations, causing the debtor to believe that the debt was still valid, due, and payable.[19] Filing time-barred proofs of claim also reduces funds available to creditors with legitimate claims and wastes judicial resources.[20]

The Seventh Circuit may soon consider the same issue due to a recent decision by the District Court for the Southern District of Indiana granting a motion for leave to file an interlocutory appeal.[21] In that case, a debt portfolio servicer filed claims against a debtor that were barred by Indiana’s statute of limitations.[22] The debtor opposed the claims and sought class certification status for similarly affected plaintiffs. The district court judge denied the creditor’s motion to dismiss, and the creditor sought interlocutory review.[23]

The FDCPA Mandates Broad Interpretation

The FDCPA clearly implicates any attempt to collect on a debt, whether actual or threatened. By filing a proof of claim in bankruptcy and seeking to obtain payment for a past debt due by the debtor, the creditor is most certainly attempting to collect on that debt. That the Bankruptcy Code allows a creditor to file a proof of claim is an independent issue from whether or not the creditor has violated the FDCPA. Even though the Code is quite liberal in allowing creditors to file claims and places the onus on the debtor and trustee to object to those claims, the bankruptcy creditor can still be subject to liability under the FDCPA.

While the Eleventh Circuit did not reach the issue, LVNV’s claim in bankruptcy may very well be barred. After a proper objection is rendered by the debtor or the trustee, § 502 of the Bankruptcy Code bars any claim that is “unenforceable against the debtor and the property of the debtor.” LVNV no longer has an enforceable claim against the debtor since Alabama’s statute of limitations bars any collection efforts three years after the debt becomes due. Of course, if the debtor or trustee had failed to object, the debtor would have been required to pay LVNV’s claim, even if it did violate the FDCPA.

Congress enacted the FDCPA to protect debtors from unfair practices that are common of debt portfolio servicers. If the Act is to be given any effect at all, courts must consider all collection efforts by creditors, whether actual or threatened, as an attempt to collect on a debt. This ensures that debtors are not deceived into believing that past debts barred by a statute of limitations are still collectible. It also encourages creditors to stop filing time-barred claims and thereby reduces judicial resources. For these reasons, if and when it is presented with the issue, the Seventh Circuit should adopt the holding of the Eleventh Circuit and use the FDCPA to prevent unfair creditor collection practices.

 

[1] 15 U.S.C.S. § 1692 et seq. [hereinafter FDCPA or Act].

[2] 11 U.S.C.S. § 101 et seq. [hereinafter Code].

[3] Crawford v. LVNV Funding, 758 F.3d 1254 (11th Cir. 2014).

[4] See Patrick v. PYOD, LLC, 2014 WL 4100414 (S.D. Ind. Aug. 20, 2014) (decision by district court); Patrick v. PYOD, LLC, 2014 WL 5343284 (S.D. Ind. Oct. 20, 2014) (granting interlocutory appeal).

[5] Crawford, 758 F.3d at 1257.

[6] Id.

[7] Id.

[8] Id.; See also Ala. Code § 6–2–37(1).

[9] Id.

[10] Crawford, 758 F.3d at 1257.

[11] Id.; 15 U.S.C. § 1692(a).

[12] 15 U.S.C. § 1692k(a).

[13] See 11 U.S.C. §502(a) (claim deemed allowed unless party in interest objects); 11 U.S.C. §502(b) (court will determine validity of the claim if party in interest objects).

[14] In re Crawford, 2008 WL 2783461 at *2 (Bankr. M.D. Ala. July 16, 2008).

[15] Crawford v. LVNV Funding, LLC, 2013 WL 1947616 at *2 (M.D. Ala. May 9, 2013) (quoting In re McMillen, 440 B.R. 907, 912 (N.D. Ga. 2010)).

[16] Crawford, 2013 WL 1947616 at *2.

[17] Crawford, 758 F.3d at 1261.

[18] Id. at 1260; Id. at 1260, n. 6.

[19] Id. at 1260.

[20] Id. at 1261.

[21] See Patrick v. PYOD, LLC, 2014 WL 5343284 (S.D. Ind. Oct. 20, 2014) (granting interlocutory appeal).

[22] Patrick v. PYOD, LLC, 2014 WL 4100414 at *1 (S.D. Ind. Aug. 20, 2014).

[23] Id. at *3.

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