This morning the Supreme Court of the United States (SCOTUS) issued an opinion in Midland Funding, LLC v. Johnson, overturning an Eleventh Circuit decision that found Midland Funding, LLC (Midland) in violation of the Fair Debt Collection Practices Act (FDCPA) for filing a proof of claim in a Chapter 13 bankruptcy on an out-of-stat debt.

John­son objected to the claim, and the bankruptcy court disallowed it. Johnson then sued Midland, claiming that filing a proof of claim on an obviously time-barred debt was “false,” “deceptive,” “mislead­ing,” “unconscionable,” and “unfair” within the meaning of the FDCPA. The Dis­trict Court held that the Act did not apply and dismissed the suit. The Eleventh Circuit reversed. 

insideARM has provided extensive coverage of this case. On May 25, 2016, we wrote about the Eleventh Circuit decision.  On October 12, 2016 we wrote about the Supreme Court agreeing to hear the case. Finally, on January 3, 2017 we wrote about the Consumer Financial Protection Bureau (CFPB) filing an amicus brief in support of the consumer. 

The Key Holdings 

“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 Fair Debt Collection Practices Act."

a) Midland’s proof of claim was not “false, deceptive, or mislead­ing.” The Bankruptcy Code defines the term “claim” as a “right to payment,” 11 U. S. C. §101(5)(A), and state law usually determines whether a person has such a right, see Travelers Casualty & Surety Co. of America Pacific Gas & Elec. Co., 549 U. S. 443, 450–451. The relevant Alabama law provides that a creditor has the right to payment of a debt even after the limitations period has expired. 

Johnson argues that the word “claim” means “enforceable claim.” But the word “enforceable” does not appear in the Code’s definition, and Johnson’s interpretation is difficult to square with Congress’s in­tent “to adopt the broadest available definition of ‘claim,’ ” Johnson v. Home State Bank, 501 U. S. 78, 83. Other Code provisions are still more difficult to square with Johnson’s interpretation. For example, §502(b)(1) says that if a “claim” is “unenforceable” it will be disal­lowed, not that it is not a “claim.” Other provisions make clear that the running of a limitations period constitutes an affirmative defense that a debtor is to assert after the creditor makes a “claim.” §§502, 558. The law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense, and there is nothing misleading or deceptive in the filing of a proof of claim that follows the Code’s similar system.

b) Several circumstances, taken together, lead to the conclusion that Midland’s proof of claim was not “unfair” or “unconscionable” within the terms of the Fair Debt Collection Practices Act. 

Johnson points out that several lower courts have found or indicat­ed that, in the context of an ordinary civil action to collect a debt, a debt collector’s assertion of a claim known to be time barred is “un­fair.” But those courts rested their conclusions upon their concern that a consumer might unwittingly repay a time-barred debt. Such considerations have significantly diminished force in a Chapter 13 bankruptcy, where the consumer initiates the proceeding; where a knowledgeable trustee is available; where procedural rules more directly guide the evaluation of claims; and where the claims reso­lution process is “generally a more streamlined and less unnerving prospect for a debtor than facing a collection lawsuit.” 

Also unpersuasive is Johnson’s argument that there is no legiti­mate reason for allowing a practice like this one that risks harm to the debtor. The bankruptcy system treats untimeliness as an affirm­ative defense and normally gives the trustee the burden of investigat­ing claims to see if one is stale. And, at least on occasion, the asser­tion of even a stale claim can benefit the debtor. 

More importantly, a change in the simple affirmative-defense ap­proach, carving out an exception, would require defining the excep­tion’s boundaries. Does it apply only where a claim’s staleness ap­pears on the face of the proof of claim? Does it apply to other affirmative defenses or only to the running of the limitations period? Neither the Fair Debt Collection Practices Act nor the Bankruptcy Code indicates that Congress intended an ordinary civil court apply­ing the Act to determine answers to such bankruptcy-related ques­tions. The Act and the Code have different purposes and structural features. The Act seeks to help consumers by preventing consumer bankruptcies in the first place, while the Code creates and maintains the “delicate balance of a debtor’s protections and obligations,” Ko­koszka v. Belford, 417 U. S. 642, 651. Applying the Act in this con­text would upset that “delicate balance.” 

The 5-3 decision was written by Justice Stephen G. Breyer and joined by Chief Justice Roberts, and Justices Kennedy, Thomas, and Alito. Justice Sotomayor filed a dissenting opinion, in which Justices Ginsburg and Kagan joined. Justice Gorsuch took no part in the consideration or decision of the case. 

insideARM Perspective

The Supreme Court opinion is 24 pages long.  It is likely that detailed analysis will be provided by many attorneys over the next several days and weeks. The decision brings resolution to an issue that has been inconsistently decided throughout the U.S. District Court Circuits. The ruling from SCOTUS should provide clarity to the ARM industry and consumers alike.

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