Taking On Debt Buyers in Bankruptcy Court and Beyond

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In 2013, Alabama bankruptcy attorney Nick Wooten became fed up with debt buyers routinely filing time-barred proofs of claim in his consumer bankruptcy cases – thus requiring that he go through the claims objection process repeatedly and in his view unnecessarily. He decided to take a stand and filed an adversary case against one of the country’s largest debt buyers, LVNV Funding, LLC (LVNV), alleging that the filing of a claim in a debtor’s Chapter 13 bankruptcy case, which was barred by the applicable state statute of limitations, constituted a violation of the Fair Debt Collection Practices Act (FDCPA). 15 U.S.C. § 1692, et seq. Nick lost his argument in the bankruptcy court and again in the district court. Undeterred, Nick took his case to the Eleventh Circuit Court of Appeals. There he won.

In Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), the Eleventh Circuit concluded that LVNV’s “filing of the proof of claim fell well within the ambit of a ‘representation’ or ‘means’ used in ‘connection with the collection of any debt’” and that such action “violated the FDCPA’s plain language”. 758 F.3d at 1262 -1263. In reaching this result, the court first observed:

A deluge has swept through U.S. bankruptcy courts of late. Consumer debt buyers — armed with hundreds of delinquent accounts purchased from creditors — are filing proofs of claim on debts deemed unenforceable under state statutes of limitations. Id. at 1256.

The motivation for debt buyers filing such claims is not difficult to surmise. Claims filed in Chapter 13 bankruptcy cases are automatically allowed and are paid a distribution unless an objection is sustained. Often, these claims are small and go unnoticed and thus are paid, or the motivation of debtor’s counsel or a Chapter 13 trustee to object is simply not there. Yet, repeated thousands of times in cases filed throughout the country, the practice generates substantial revenue for what is otherwise an uncollectible debt. In short, its free money and it has become a routine business practice for large debt buyers.

The Crawford court found that LVNV was a debt collector and that its action in filing a proof of claim constituted debt collection within the meaning of FDCPA. Employing a “leastsophisticated consumer” standard the court determined that LVNV’s filing of a time barred claim would be unfair, unconscionable, deceiving or misleading. Id. at 1261. The court analogized the filing of a proof of claim with the filing of a lawsuit and concluded that the later was clearly an FDCPA violation when the claim was filed outside of the applicable statute of limitations in a non-bankruptcy forum. Id. at 1260.

On April 20, 2015, the U.S. Supreme Court denied LVNV’s petition for writ of certiorari. Significantly, LVNV raised for the first time in its petition its most potent argument – namely that the Bankruptcy Code preempts the FDCPA and provides the sole process for adjudicating claims in bankruptcy. It is unclear why these arguments were not raised in the lower courts and may have been a reason the Supreme Court did not take the case on. Now, this is the central argument made by debt buyers in post- Crawford cases. The courts are now split on the issue, although this author would dare say that the trend favors viability of FDCPA liability for the filing of time-barred claims.

This division is exemplified in Johnson v. Midland Funding, LLC, No. 1:14-cv-00322-WS-C, Doc. #28 (S.D. Ala. March 24, 2015). The Alabama federal district court found that the code and the FDCPA were in conflict on the issue and that the code prevails.

In Johnson, the district court questioned whether the “tension” between the code and the FDCPA precludes the plaintiff ’s FDCPA claim, an issue not considered by the Eleventh Circuit in Crawford. The court found an irreconcilable conflict between the code and the FDCPA because, according to Crawford, while a creditor could file a proof of claim on a time-barred debt under the code, they could not do so under the FDCPA. Thus, the court in Johnson found that the FDCPA negated the code which requires the FDCPA to give way to the code.

The Seventh Circuit best addresses this argument. In a series of rulings, the Seventh Circuit held that the Bankruptcy Code does not preclude recovery for violations of the FDCPA Randolph v. IMBS, Inc 368 F.3d 726 (7th Cir. 2004), that the filing of a civil suit to collect time barred debt is a violation of the FDCPA, Phillips v. Asset Acceptance Corp, 736 F.3d 1076 (7th Cir. 2013), and that 15 U.S.C.S. § 1692e(2)(A) specifically prohibits the false representation of the character or legal status of any debt, that whether a debt is legally enforceable is a central fact about the character and legal status of that debt and that a misrepresentation about that fact violates the FDCPA. McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1012 (7th Cir. 2014).

Courts are ruling on either side of the issue almost daily. For a complete list of the cases, please contact me.   Marc Dann 

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