In a previous blog, I was asked to write a blog on the recent May 15, 2017 United States Supreme Court decision in Midland Funding, LLC v. Johnson, docket no. 16-348. In a 5-3 vote the Supreme Court reversed a decision by the United States Court of Appeals for the Eleventh Circuit holding that the filing of a time barred proof of claim in a bankruptcy matter was a violation of the Fair Debt Collection Practices Act (“FDCPA”). In a majority opinion written by Justice Breyer, the Supreme Court held that 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 FDCPA.
The Supreme Court stated that “Congress intended [when it adopted the Bankruptcy Code] to adopt the broadest available definition of ‘claim.’” Therefore, while a claim may be unenforceable because it is time barred or stale, it is still a “claim” under the Bankruptcy Code. The Court further stated that the Bankruptcy code does not say that an ‘unenforceable’ claim is not a ‘claim.’”
The Court further wrote that whether a claim is stale or unenforceable due to the expiration of the limitations period is an affirmative defense to be raised by a debtor. The claim while unenforceable still remains a claim which debtor may raise an affirmative defense to.
The Court’s holding I believe minimizes the appearance of debt validation that a filed a proof of claim may have on the least sophisticated consumer. The FDCPA requires any conduct by a creditor be viewed from the perspective of the least sophisticated consumer. In other words, a court’s standard of review is whether an unsophisticated, uninformed, naïve, trusting, possession below average intelligence consumer would find the filing of a time barred proof of claim in bankruptcy matter misleading or deceptive. Blum v. Fisher & Fisher P.C., 961 F. Supp. 1218 (N.D. I.ll. 1997).
The Court addressed this by stating that in “determin[ing] whether a statement is misleading normally requires consideration of the legal sophistication of its audience” and that the “audience in [consumer] bankruptcy cases includes a trustee … likely to understand [the importance of objecting to an untimely claim].”
In other words, because the matter is in bankruptcy and subject to the review of a trustee, the debtor is receiving the benefit of his/her knowledge and therefore can not be mislead as easily.
The problem with that is a trustee will be reviewing claims only within the context of the bankruptcy matter. Unsecured debts are likely to be discharged and the Trustee may pay little attention to the proof of claim. While unlikely, there is a risk that unsophisticated debtor will believe that the acceptance of time barred proof of claim has rendered the claim valid and subject to collection when the debtor is no longer in bankruptcy. The risk is greater should a debtor’s bankruptcy petition be dismissed without debtor receiving a discharge of his debts.
The Supreme Court acknowledge that several lower courts have found it improper to enforce stale claims directly, largely based on the view that “a consumer might unwittingly repay a time-barred debt.” Justice Breyer suggested that because the consumer initiates the bankruptcy proceeding, the consumer is not likely to pay a stale claim just to avoid going to court. Justice Breyer also pointed out again that the “knowledgeable trustee” is a likely source of objections protecting the consumer.
Justice Sonia Sotomayor, joined by Justices Ruth Bader Ginsburg and Elena Kagan, responded with a dissenting opinion. Justice Sotomayor’s dissent was focused on the large market for consumer debt (“trillions of dollars”), and the third party buyers of debt who buy long-stale “debts for pennies on the dollar.”
Having represented many of those same debt buyers, I am all too familiar with their practices. Third party debt buyers purchase debt on a large scale and then forward hundreds of claims to debt collectors and attorneys. The debt collectors/attorneys are looking to collect on the debt with as little effort as possible and hope a debtor will pay the debt after receiving an initial demand. Under the FDCPA, attorneys are considered debt collectors may be prosecuted for violations. Because of this, attorneys usually will normally not take any action on stale claims. However, given the volume of claims, mistakes occur and attorneys may make demands on time barred claims which debtors may assume are valid and pay.
Similarly Justice Sotomayor recognize that the claims have monetary value only because of the possibility the trustee will forget to object to them. As Sotomayor noted in her dissent, the trustees’ trade association filed an amicus brief in support of the debtor, explaining the impractical burden of interposing objections to the flood of stale claims appearing in consumer bankruptcies in recent years.
Third party buyers of debt factor in to their costs the risks of stale claims being acted on by their debt collectors and attorneys. They know they may be sued under the FDCPA but because of the volume of debt they accept the risk.