11th Circuit seeks to stop flood of bogus bankruptcy claims

July 31, 2014

empty pockets image: bankruptcy or debt settlement?Buyers of consumer debt are flooding the dockets of Chapter 13 bankruptcy courts with claims for debts that are unenforceable under state law.

If no one objects, then the claim gets paid through the debtor’s confirmed plan.  If the debtor objects, then the weight of authority says the debtor’s remedies are limited to those provided under the Bankruptcy Code — denial of the claim, and the possibility of penalties imposed by the bankruptcy court for abusing the system.

Now, the 11th U.S. Circuit Court of Appeals has ruled that the Fair Debt Collection Practices Act applies to the filing of proofs of claim.

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If the filing of a lawsuit to collect a stale claim violates the FDCPA, then so does the filing of a proof of claim, the appellate court concluded in Crawford v. LVNV Funding LLC et al., 2014 WL 3361226 (11th Cir. July 10, 2014).

The 11th Circuit is the first Court of Appeals to unequivocally state that the FDCPA applies in bankruptcy cases at all, let alone to proofs of claim.

Four circuits had previously considered the issue of the FDCPA’s application in bankruptcy courts. Two of them — the 9th Circuit in Walls v. Wells Fargo Bank N.A., 276 F.3d 502 (9th Cir. 2002), and the 2d Circuit in Simmons v. Roundup Funding LLC, 622 F.3d 93 (2d Cir. 2010) — concluded that application of the FDCPA is precluded by the Bankruptcy Code.

The other two — the 7th Circuit in Randolph v. IMBS Inc., 368 F.3d 726 (7th Cir. 2004), and   the 3d Circuit in Simon v. FIA Card Services N.A. et al., 732 F.3d 259 (3d Cir. 2013) — concluded that the overlap between the two federal laws can be reconciled.

The 11th Circuit stated that the FDCPA regulates the conduct of debt collectors, and there was no question that LVNV was a debt collector under the Act.  The FDCPA prohibits debt collectors from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” It also prohibits debt collectors from using “unfair or unconscionable means to collect or attempt to collect any debt.”

In Phillips v. Asset Acceptance LLC, 736 F.3d 1076 (7th Cir. 2013), the 7th Circuit ruled that a debt collector’s filing of a time-barred lawsuit to recover a debt violated the FDCPA. The 7th Circuit found that such actions are “unfair” under the FDCPA because:

  • “Few unsophisticated consumers would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts” and would therefore “unwittingly acquiesce to such lawsuits;”
  • “The passage of time … dulls the consumer’s memory of the circumstances and validity of the debt;” and
  • The delay in suing after the limitations period “heightens the probability that [the debtor] will no longer have personal records” about the debt.

All three of these points are equally true about the filing of proofs of claim for stale debts, the 11th Circuit said.

The court rejected LVNV’s argument that the filing of a proof of claim is not a collection activity, noting that the broad prohibitions of 15 U.S.C. § 1692(f) apply to a debt collector’s use of “unfair or unconscionable means to collect or attempt to collect any debt.”

The 11th Circuit concluded that “LVNV’s conduct — filing and trying to enforce in court a claim known to be time-barred — would be unfair, unconscionable, deceiving, or misleading towards the least-sophisticated consumer.”