Credit portal




11th Circuit: Debt Buyer Violates FDCPA by Filing Proof of Claim in Bankruptcy Case to Collect on Out-Of-Statute Debt

Aug 20, 2014

Decision marks the first time a federal circuit court of appeals has extended the application and scope of the FDCPA to bankruptcy proofs of claim.

In a recent Eleventh Circuit Court of Appeals case, Crawford v. LVNV Funding, LLC, et al. No. 13-12389, 2014 WL 3361226 (11th Cir. July 10, 2014), the court ruled that by filing a proof of claim in a Chapter 13 bankruptcy case on an out-of-statute debt, the debt buyer violated Sections 1692e and 1692f of the Fair Debt Collection Practices Act by using false, deceptive and misleading means in connection with the collection of a debt.

The court determined that “a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt.” The court concluded that the “least sophisticated consumer” may therefore fail to object to the claim, and due to the Bankruptcy Code’s automatic allowance provision, the claim on the otherwise unenforceable debt will be paid out of the debtor’s limited funds, thereby reducing the funds available to satisfy creditors with legitimate and enforceable claims.

In Crawford, a consumer owed approximately $2,000 to a furniture company. The last transaction on the consumer’s account occurred in 2001. The three-year statute of limitations expired on the enforcement of the debt in 2004. A debt buyer purchased the debt from the furniture company. In 2008, the consumer filed a Chapter 13 bankruptcy petition.

During the bankruptcy proceeding, the debt buyer filed a timely proof of claim to participate in the Chapter 13 payment scheme in an effort to collect on the out-of-statute debt. In 2012 and long after the debt buyer had received distributions during the bankruptcy case, the consumer filed an adversary proceeding against the debt buyer alleging that it violated the FDCPA by attempting to enforce an out-of-statute debt.

The U.S. Bankruptcy Court for the Middle District of Alabama granted the debt buyer’s motion to dismiss the FDCPA claim, and the U.S. District Court affirmed the decision. While noting that there was no binding authority on point, the district court determined that the “elephantine body of persuasive authority” weighed in favor of finding that filing a proof of claim in bankruptcy cannot give rise to an FDCPA claim.

The district court explained that filing a proof of claim “does not amount to an effort to collect a debt,” but “even if it did, it is not the sort of abusive practice the FDCPA was enacted to prohibit.” The consumer appealed to the Eleventh Circuit Court of Appeals, where the court ruled in

the consumer’s favor.

The Eleventh Circuit rejected the district court’s reasons for dismissing the FDCPA claim. The court stated that filing a proof of claim is an attempt to collect a debt covered by the FDCPA, which covers direct and indirect collection actions, including collection initiated through legal proceedings. The court noted that courts have “uniformly held” that the comparable act of suing on an out-of-statute debt violates the FDCPA. Had the debt buyer filed or threatened to file suit on a time-barred debt in state court to recover the debt, it would violate Sections 1692e and 1692f of the FDCPA.

The court explained, “That is so because ’the right to be free of stale claims in time comes to prevail over the right to prosecute them.’” The court also noted that, with the passage of time, the debtor’s memory and records of the debt may diminish, “making it difficult for a consumer debtor to defend against the time-barred claim.”

The court reasoned that same philosophy that prevents a debt collector from filing a stale claim in state court prohibits it from filing a proof of claim in a bankruptcy case. The court concluded that the least-sophisticated consumer may not realize that the debt is uncollectable and fail to object to it, in which case it is automatically allowed under the Bankruptcy Code.

Interestingly, the Eleventh Circuit acknowledged that circuit courts in the Second, Third, Seventh and Ninth Circuits all hold that the Bankruptcy Code preempts the FDCPA in the context of a proof of claim.  However, the debt buyer in Crawford did not claim that the Bankruptcy Code preempts the FDCPA. The case may have been decided differently had this issue been raised, which is likely why the debt buyer filed a Petition for Rehearing with the Eleventh Circuit on July 31, 2014.

In the Petition for Rehearing, the debt buyer argues that the Eleventh Circuit panel decision in Crawford is contrary to every reported decision on the issue of whether a claim under the FDCPA can be premised upon filing a proof of claim in accordance with the Bankruptcy Code and, therefore, consideration by the full Eleventh Circuit Court of Appeals is necessary to avoid a split of authority in the federal courts. In the event the Eleventh Circuit denies the debt buyer’s Petition for Rehearing, the circuit split created by the Crawford decision will make things ripe for an appeal to the U.S. Supreme Court.

To read more about the most recent significant judicial decisions involving the Industry, ACA members can access concise summaries of these decisions on ACA’s Industry Advancement Program website.

Category: Bank

Similar articles: