Debt Collectors Earn Win on FDCPA Claim for Stale Debt

Debt collectors recently won an important victory in the U.S. Supreme Court, which ruled that filing a stale claim in bankruptcy court does not run afoul of the Fair Debt Collection Practices Act (the “FDCPA”).  Although the Opinion does not affect a debtor’s potential claim for sanctions under frivolous filing rules, it does remove at least one potential avenue for recovery.

In Midland Funding, LLC v. Johnson, Midland filed a claim in the debtor’s Chapter 13 bankruptcy case for unpaid credit card debt Midland had purchased from the original issuer.  However, the credit card in question had not been used for over a decade, and the statute of limitations for overdue debt in Alabama is six years.  The bankruptcy court therefore disallowed the claim, ruling that it was stale and unenforceable.

The debtor then sued Midland, arguing that it violated the FDCPA’s bar against “false, deceptive, or misleading representations,” or using “unfair or unconscionable means” to attempt to collect a debt.  The proof of claim that Midland filed with the bankruptcy allegedly indicated on its face that the statute of limitations had run, which the debtor argued supports a claim under the FDCPA.  Although the trial court had originally dismissed the action, the Eleventh Circuit agreed with the debtor and permitted the suit to proceed.

In overturning the Eleventh Circuit, the Supreme Court began its analysis with the plain language of the Bankruptcy Code.  The Code allows for creditors to file proofs of claim, which is defined as any “right to payment.”  11 U.S.C. § 101(5)(A).  The Court then noted that while the Code allows bankruptcy courts to disallow stale claims, it does not remove them from the definition of “claim” altogether.  Instead, the expiration of the statute of limitations may be raised as an affirmative defense and ruled on by the court accordingly.

The denial of an FDCPA claim for stale debt pursued in bankruptcy is welcome news for debt collectors who process and litigate thousands of low value claims.  Several class actions have been filed in recent years in which debt collectors and their firms are accused of minimal review prior to filing an action or proof of claim.  Some of these cases focus on “gotcha” claims, wherein minor errors are used by debtors to challenge the enforcement of the debt, and seek potentially significant statutory damages.

While Midland Funding eliminates at least one foundation for such claims, it is important to remember that jurisdictions vary on whether sanctions are proper for proofs of claim based on stale debt.  Special attention should therefore be given in those jurisdictions which allow sanctions, despite the Supreme Court’s favorable opinion on FDCPA claims in Midland Funding.