Legal Experts Praise SCOTUS Decision In FDCPA Case

Lawyers praised the decision issued yesterday by the Supreme Court of the United States ruling in favor of a debt buyer who was being sued for allegedly violating the Fair Debt Collection Practices Act.

The debt buyer, Midland Funding, was accused of violating the FDCPA because it submitted a bankruptcy claim on a time-barred debt during an individual’s bankruptcy filing. The individual, Aleida Johnson, sued Midland saying that the company violated the FDCPA by acting in a “false,” “deceptive,” and “misleading,” because the statute of limitations on collecting the debt had expired four years prior.

A District Court had sided with Midland. On appeal, the Eleventh Circuit Court of Appeals sided with the plaintiff. Other appeals courts had not seen it the same way, creating a split at the appellate level, which was enough reason for the Supreme Court to decide to hear the case.

“What this decision does is provide a defense to businesses that have been filing bankruptcy claims on time-barred debts,” said Manny Newburger, one of the founders of the firm Barron & Newburger. The ruling “does not extend to litigation on time-barred debts. However, it opens the door to a possible defense in FDCPA claims that are based upon the filing of suits on stale debts.”

Had Midland not filed a proof of claim during the plaintiff’s bankruptcy process, it would have waived its right to try and collect on the debt — an $1,879 credit card bill — in the future.

“Here, there was no intersection between the FDCPA and the bankruptcy code,” sad Joann Needleman, a partner at the law firm of Clark Hill and leader of the firm’s Consumer Financial Services Regulatory & Compliance Practice Group. “Midland made no misrepresentation about the statute of limitations or otherwise make any other false statement in the proof of claim.”

Justices Stephen Breyer, John Roberts, Anthony Kennedy, and Samuel Alito ruled in favor of Midland. Justices Elena Kagan, Sonia Sotomayor, and Ruth Bader Ginsburg ruled in favor of the plaintiff.

In her dissent, Justice Sotomayor admonished the collections and debt buying industries, saying that filing a claim on a time-barred debt during the bankruptcy process is the same as trying to sue an individual for a time-barred debt, a practice that has been ruled to be a violation of the FDCPA. Because enforcing the statute of limitations is an affirmative defense — meaning individuals must object to a claim on a time-barred debt in order to not have it included in a bankruptcy process — debt collectors and debt buyers are taking advantage of unsophisticated consumers who do not know the law, Justice Sotomayor wrote.

Debt collectors do not file these claims in good faith; they file them hoping and expecting that the bankruptcy system will fail. Such a practice is “unfair” and “unconscionable” in violation of the FDCPA.

Writing for the majority, Justice Breyer indicated that the FDCPA and the Bankruptcy Code must be treated separately and put the burden on the bankruptcy trustee to notice whether debts are time-barred or not. The Bankruptcy Code defines a claim as a “right to payment,” and does not mention anything about whether that right is enforceable or not, Justice Breyer wrote.

Like the majority of Courts of Appeals that have considered the matter, we conclude that Midland’s filing of a proof of claim that on its face indicates that the limitations period has run does not fall within the scope of any of the five relevant words of the Fair Debt Collection Practices Act. We believe it reasonably clear that Midland’s proof of claim was not “false, deceptive, or misleading.” Midland’s proof of claim falls within the Bankruptcy Code’s definition of the term “claim.”

“There was no scheme,” Needleman said. “There was no attempt to pull the wool over anyone’s eyes.

“It’s just a shame that the industry had to spend so much money to get here.”

Download a copy of the ruling here. 

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