Solicitor General Supports the Debtor in Midland Funding on FDCPA Violation

June 15, 2017

The Supreme Court will hear oral argument on Jan. 17 in Midland Funding LLC v. Johnson. On behalf of the U.S. Trustee Program and the Consumer Financial Protection Bureau, the Solicitor General filed an amicus brief urging the justices to resolve the circuit splits by ruling that (1) the later-adopted Bankruptcy Code did not in part impliedly repeal the federal Fair Debt Collection Practices Act, or FDCPA, and (2) filing a proof of claim based on a time-barred debt violates the FDCPA.

Like the debtor who prevailed in the Eleventh Circuit, the government’s lawyer in the Supreme Court is arguing that debt collectors file stale claims in bankruptcy cases in “a calculated effort to exploit the imperfections of the [Bankruptcy] Code’s disallowance process.” Since trustees often lack resources to object to claims and debtors’ lawyers’ retainers sometimes do not cover claim objections, a predictable number of otherwise time-barred claims will slip through the cracks, allowing debt collectors to make a profit because they pay only pennies for stale claims.

The government relies on decisions by several courts of appeals that find a violation of Rule 11 of the Federal Rules of Civil Procedure if a plaintiff outside of bankruptcy files a lawsuit when there is an “obvious” affirmative defense. If filing a time-barred suit can trigger sanctions under Rule 11, the government says that filing a stale claim in bankruptcy by the same token “violates the FDCPA if the plaintiff is a ‘debt collector.’”

The government’s partial reliance on Rule 11 may be risky because the Supreme Court itself has yet to decide whether Rule 11 is violated by filing suit if there is an iron-clad affirmative defense, like the statute of limitations.

Debt collectors rely on the concept that statutes of limitations only give rise to affirmative defenses that can be waived and do not void underlying obligations. They read Section 501 of the Bankruptcy Code as inviting the filing of stale claims, thus carving out an exception to the FDCPA when a debt is being collected through bankruptcy.

In response, the government says that Section 501 is not the whole story, because Section 502(b) allows a claim unless it “is unenforceable against the debtor.” The government cited the admission in the debt collector’s own brief that a stale claim will be disallowed.

Therefore, the government says that “[n]othing in the Code suggests that a creditor may legitimately submit a proof of claim that it knows is subject to disallowance.” Similarly, the government interprets the Bankruptcy Code to say that Congress was not “more solicitous of time-barred claims in the bankruptcy context.”

The government also relies on Rule 11 and its bankruptcy counterpart, Bankruptcy Rule 9011, for the proposition that an FDCPA violation exists even if the Supreme Court applies the “competent attorney” standard rather than the “unsophisticated consumer” rule.

Also taking the debtor’s side, G. Eric Brunstad Jr. filed an amicus brief arguing that the language of the Bankruptcy Code and the FDCPA require upholding the Eleventh Circuit. Brunstad believes that interpreting the Bankruptcy Code to invite the filing of stale claims “would improperly apply a limitation to the [FDCPA] that simply does not exist.” Brunstad argued Stern v. Marshall on the winning side.

Like the government and the debtor, Brunstad said that filing a claim in bankruptcy is “permissive, not mandatory.” He said “there is nothing in the language of Section 501 that negates application of the FDCPA to debt collectors who file proofs of claim.”

For Brunstad, the “relevant inquiry” is “whether a debt collector’s conduct is misleading or deceptive, not whether other potential safeguards are in place to further combat abuses,” such as a trustee’s duty to object to claims.

In that regard, Bankruptcy Rule 3001(c)(3)(A) requires disclosure of the last activity date, thus alerting a trustee or a debtor to the existence of a statute of limitations defense. Assuming proofs of stale claims contain disclosures required by Rule 3001, debt collectors believe that their claims are neither misleading nor deceptive.

Brunstad’s brief concludes with a thorough discussion of implied repeal, concluding that the later adoption of the Bankruptcy Code did not impliedly repeal the FDCPA with respect to claims in bankruptcy.

There were nine amicus briefs filed, five supporting the debt collector and four on behalf of the debtor. To read the Supreme Court’s docket and briefs by the parties and the amiciclick here. To read another ABI discussion of Midland Funding and the circuit splits, click here.

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