Time-barred proofs of claim issue now before SCOTUS

January 9, 2017

The U.S. Supreme Court recently agreed to review a ruling from the 11th U.S. Circuit Court of Appeals in Johnson v. Midland Funding LLC — viewed as one of the most vastly unpopular rulings on the issue of whether or not the filing of a time-barred proof of claim in a debtor’s bankruptcy action violates the federal Fair Debt Collection Practices Act.

This is the second time the 11th Circuit has gotten this issue wrong, says Coleman Braun of Maurice Wutscher LLP.

(Westlaw users: Click here for the full article and here  for the latest from Consumer Financial Services Law Report.)

Its prior ruling in Crawford v. LVNV Funding was the impetus for a resounding wave of litigation which unnecessarily cost the debt buying industry untold sums.

The grant of certiorari by the Supreme Court recognizes the split between the circuits on this issue, with the 4th, 7th, and 8th Circuits correctly deciding that the mere filing of a proof of claim that accurately represents the nature of the debt — even when the debt is time-barred —does not violate the FDCPA.

Braun notes these majority opinions recognize the fundamental right to payment of the creditors regardless of whether or not the debt is time-barred. The courts further reasoned that under the Bankruptcy Code, a “claim” includes time barred debts because time barred debts are not extinguished and still constitute a right to payment irrespective as to whether or not the creditor has a cause of action to collect.

As recognized by the 4th, 7th, and 8th Circuits, the fact that collection of a debt is barred by the applicable statute of limitations does nothing to affect the creditor’s right to that payment, and instead, it merely provides the debtor with a defense to litigation on its collection. Notably, Braun says, the defense can be waived by the debtor in a number of ways including by voluntary partial payment which would restart the time period clock.

The ability for the statute of limitations to be waived by the debtor is crucial to an understanding as to why the 11th Circuit’s rulings on the issue have generated such an uproar, Braun observes.

Under the regime enforced by the 11th Circuit, owners of time-barred debts will be effectively barred from participation in bankruptcy, and as a result those debts will never be discharged. And without a discharge, the debtor does not receive the “fresh start” intended by the Bankruptcy Code.

Instead, Braun says, these rights to payment will remain outstanding after the debtor receives a bankruptcy discharge, and the holders of these debts will be able to continue their attempts to collect while remaining within the boundaries of the FDCPA.

If the debtor happens to make a payment on that debt, the debt owner is free to file its collection action.

Braun hopes Supreme Court review will provide a logical ruling premised in both the language and spirit of the Bankruptcy Code.