The ARM industry recently received two positive decisions from two separate federal district courts regarding the same issue: whether it is a violation of the Fair Debt Collection Practices Act (FDCPA) to file Proofs of Claim in a Chapter 13 proceeding on time-barred debt. In both cases lawsuits were dismissed by the Court for “failure to state a claim upon which relief may be granted.” Both decisions were filed on April 7, 2015.
The basic facts were similar in both cases. The debtor initiated a Chapter 13 Bankruptcy proceeding. The owners of the debt filed proofs of claim on debts that were outside the applicable statute of limitations. The debtors in both cases then brought actions alleging that the filing of those proofs of claims violated the FDCPA under section 1692 of the Act. The debtors were seeking actual damages, statutory damages, costs and attorneys’ fees. The owners of the debt then filed a Motion to dismiss the actions under Federal Rules of Civil Procedure 12 (b) (6).
Donaldson v. LVNV Funding, LLC, was decided in the Southern District of Indiana; while Torres v. Asset Acceptance, LLC, was decided in the Eastern District of Pennsylvania.
Of particular interest is the fact that both courts declined to follow a contrary position to the Eleventh Circuit’s 2014 decision in Crawford v. LVNV Funding.
Donaldson v. LVNV Funding, LLC
In Donaldson, the debtor had listed two debts owing to LVNV in his bankruptcy schedules and the creditor had filed proofs of claim for the same amounts listed by the debtor in the schedules. The court relied upon Indiana law regarding the status of a debt that is outside the statute of limitations. The court noted that under Indiana law the debt was not extinguished by the statute of limitations; instead, the debt is still owing, but the owner’s remedies were limited.
The court held that the filing of the proof of claim 1) was not “false, deceptive or misleading”, 2) did not mischaracterize the legal status of the debt, 3) was not a “threat” to take action that could not be legally taken, and 4) was not an unconscionable or unfair means to collect the debt.
Finally, the court noted that the statute of limitations was an affirmative defense, and that the debtor had to object to/ raise the defense or it is waived. Donaldson had never objected to the filing of the proofs of claim in the bankruptcy proceeding.
Torres v. Asset Acceptance LLC, LLC
In Torres, and its companion case, Torres v. Cavalry SPV I, LLC, there was a similar fact situation. The only significant difference was that the debtor had not originally listed the debt in the bankruptcy schedules.
The court went into an extensive review of the splits in prior circuit court decisions on the issue of filing proofs of claim on time-barred debt. Still this court held the debtors are adequately protected by Bankruptcy Code protections, that there are alternative Bankruptcy Code remedies to protect a consumer and found that the filing a time-barred proof of claim in bankruptcy court cannot form the basis for an FDCPA claim.