Midland Funding, LLC v. Johnson: Fair Debt Collections and Statutes of Limitations

May 30, 2017

Midland Funding, LLC v. Johnson, 581 U.S. ___ (2017) (Breyer, J.).
Response by David Levine and Thomas Kearns
Geo. Wash. L. Rev. On the Docket (Oct. Term 2016)
Slip Opinion | SCOTUSblog

Midland Funding, LLC v. Johnson: Fair Debt Collections and Statutes of Limitations

On May 15, 2017, the Supreme Court resolved a circuit court split as to whether the Fair Debt Collections Practices Act (“FDCPA”), 15 U.S.C. §§ 1692 et seq. is violated when debt collectors file claims in consumer bankruptcy cases barred by the statute of limitations. The FDCPA, enacted in 1978 to curb unfair debt collection practices, prohibits debt collectors from using “any false, deceptive, or misleading representation or means” or “unfair or unconscionable means” to collect or attempt to collect any consumer debt.¹ In Midland Funding, LLC v. Johnson,² the Court held that debt collectors who file “obviously time barred” claims in Chapter 13 bankruptcy cases do not thereby perform a prohibited debt collection practice within the meaning of the FDCPA.³ Justice Stephen Breyer, writing for a 5-3 majority of the Court, based the decision primarily on the Bankruptcy Code’s broad definition of a “claim”,⁴ as well as the claims resolution procedures typically used in bankruptcy cases. While the Court’s decision removes the specter of liability under the FDCPA for debt buyers seeking to collect stale debts in Chapter 13 cases, this holding could increase the number of such claims asserted, which, in turn, may increase the burden on Chapter 13 standing trustees and debtors in prosecuting claims objections.

The vast majority of individuals file for bankruptcy under either Chapter 13 or Chapter 7 of the Bankruptcy Code.⁵ In a Chapter 13 case, individuals develop a plan to repay all or part of their pre-bankruptcy debts in installment payments over three to five years with post-bankruptcy earnings.⁶ Debtors receive a discharge from most unsecured debts after completing all payments under the court-confirmed plan.⁷ What makes Chapter 13 attractive to many debtors is that, among other aspects, it offers individuals the opportunity to save their homes from foreclosure and cure delinquent mortgage payments over time. Chapter 13 debtors may also restructure certain secured debts and extend them over the life of the plan, compensate their bankruptcy counsel through the plan as a priority expense, and retain certain non-exempt assets and “pay” for them over the term of the plan. Chapter 13 also allows debtors to make one monthly payment to a Chapter 13 trustee who then distributes payments to creditors.⁸ In contrast, all of a Chapter 7 debtor’s non-exempt assets, if any,⁹ are liquidated by the case trustee and paid to creditors, but in return the debtor receives a discharge from eligible debts quickly—usually within only a few months after the bankruptcy filing.¹⁰

The facts of the underlying bankruptcy case that gave rise to the Midland decision are relatively straightforward. In 2014, Aleida Johnson filed a Chapter 13 petition in the Southern District of Alabama.¹¹ More than ten years before filing for bankruptcy, Ms. Johnson incurred a debt to Fingerhut Credit Advantage (“Fingerhut”). The applicable statute of limitations for a creditor to sue on this debt expired well before Ms. Johnson filed for bankruptcy.¹² Nevertheless, Midland Funding, a debt buyer, purchased Ms. Johnson’s debt to Fingerhut and filed a proof of claim in her bankruptcy case, seeking payment of $1,879.71.¹³ After the bankruptcy court disallowed Midland’s claim, Ms. Johnson filed an action against Midland for violating the FDCPA.¹⁴ The District Court dismissed the action, but the Court of Appeals for the Eleventh Circuit reversed, holding that a debt collector “may be liable under the FDCPA for ‘misleading’ or ‘unfair’ practices when it files a proof of claim on a debt that it knows to be time-barred, and in doing so ‘creates the misleading impression to the debtor that the debt collector can legally enforce the debt.’”¹⁵

While the amount of the underlying debt in Ms. Johnson’s bankruptcy case was relatively small, consumer debt collection is a lucrative and growing industry in the United States. In Midland, the Court noted that the Nation’s 6,000 debt collection agencies earned over $13 billion in revenue last year.¹⁶ Many debt collectors simply purchase debts from creditors outright, often at a significant discount because of the potential uncollectable nature of the accounts, and keep for themselves revenues on the accounts they collect. The Court also noted that debt buyers hold hundreds of billions of dollars in consumer debt, and according to a 2009 Federal Trade Commission study, nine of the leading debt buyers purchased over $140 billion of debt in just a three-year period.¹⁷ Accounts that are stale enough to exceed the limitation period for collections purposes are sold at the steepest discount, since those claims may be unenforceable as a matter of law in a state collection suit. Nevertheless, in her dissenting opinion, Justice Sonia Sotomayor noted that debt buyers may “pursue stale debt” outside of bankruptcy to “entrap debtors into forfeiting their time defenses altogether.”¹⁸

In examining the issue, the Court first determined whether the mere filing of a proof of claim on a time-barred debt was a “false, deceptive, or misleading” practice under the FDCPA.¹⁹ The Court noted that the Bankruptcy Code defines the term “claim” extremely broadly to include any asserted right to payment under applicable state law, whether disputed, contingent, or unliquidated.²⁰ Under that definition, the Court found that even debts that are unenforceable because the statute of limitations period has expired are still claims.²¹ In addition, the Bankruptcy Code and Federal Rules of Bankruptcy Procedure establish a “system” for reviewing and disallowing claims.²² Under that system, the Chapter 13 trustee administering the case has a statutory duty to examine and, where appropriate, object to proofs of claim, and may raise expiration of a limitations period as an affirmative defense.²³ The Court noted that under the FDCPA, determination of whether a statement is misleading “requires consideration of the legal sophistication of its audience.”²⁴ Under that standard, the Court concluded that a Chapter 13 trustee would not be misled or deceived by an obviously time-barred claim.²⁵

Next, the Court addressed whether the assertion of an obviously time-barred claim is “unfair” or “unconscionable” under the FDCPA, noting that it was a “closer question.”²⁶ Again rejecting Ms. Johnson’s argument, the Court relied on the significant difference between civil suits, where courts have found that the assertion of time-barred claims is unfair to the debtor, and Chapter 13 cases, where a knowledgeable case trustee and protective procedural bankruptcy rules processes ensure “a more streamlined and less unnerving prospect for a debtor than facing a collection lawsuit.”²⁷ The Court also rejected Ms. Johnson’s argument that the practice risks harm to debtors, and that no legitimate reason exists for allowing the practice, noting that (1) the bankruptcy system treats untimeliness as an affirmative defense, (2) the Chapter 13 trustee normally bears the burden of investigating claims and objecting to claims that are stale, (3) protections available in Chapter 13 minimize the risk to the debtor, and (4) filing stale claims can actually benefit debtors because filing and disallowance of a claim ultimately discharges the debt under 11 U.S.C. § 1328(a).²⁸

The Midland decision may impact consumer bankruptcy cases in at least two ways. First, debt buyers operating in Chapter 13 bankruptcy cases will no longer have to worry about defending FDCPA actions for filing time-barred claims, provided they file a proof of claim that makes clear the claim being asserted is stale.²⁹ It could be that more of these types of claims will be filed, including for debts even older than the debt at issue in Midland, but that remains to be seen. If indeed there is a “deluge” of those types of claims (as Justice Sotomayor’s dissenting opinion forecasts), bankruptcy courts could be required to spend more time analyzing stale claims, and some could slip through the cracks and get paid, ultimately driving up the value of stale debt. Second, Chapter 13 trustees and debtors (or more likely their counsel) will bear the burden of objecting to those claims. In some courts, unsecured creditors may also object to stale claims,³⁰ because to the extent stale claims are allowed and paid it may reduce distribution to other unsecured creditors in traditional Chapter 13 “pot” plans where creditors are paid pro rata based on the size of their claim.

The ruling also has some clear limitations. As the dissent notes, the majority opinion did not find that the Bankruptcy Code altogether displaces the FDCPA, leaving it with no role to play in bankruptcy proceedings.³¹ Just what role the FDCPA may play in bankruptcy, however, remains unclear. In addition, the Court’s holding was limited to “obviously time-barred” claims, such as the claim filed by Midland in Ms. Johnson’s bankruptcy case.³² That claim, which clearly stated the age of the debt, was sufficiently detailed to provide the debtor and the trustee with enough information to discern that the debt was barred by the applicable statute of limitations. The Court took no position, however, on whether a debt collector violates the FDCPA by filing a proof of claim in a bankruptcy case for a debt that is not “obviously” time-barred. Nor did the Court take a position on whether filing suit outside of bankruptcy to collect a debt a creditor knows is time-barred violates the FDCPA. The dissent pointed out that to date all of the lower courts that have faced this question have decided that such a lawsuit violates the FDCPA.³³

The Court was careful to confine its opinion to Chapter 13 bankruptcy proceedings like the one filed by Ms. Johnson. One unanswered question is whether the decision is applicable in Chapter 7 cases. While Chapter 7 and Chapter 13 are different in key respects, the claims filing and resolution processes in both chapters are similar, which may promote application of Midland to Chapter 7 cases.

In addition, some of the concerns raised by Justice Sotomayor’s dissenting opinion about the impact of stale claims on debtors and the bankruptcy system may be mitigated if Midland applies in the Chapter 7 context. First, Chapter 7 cases may not be inundated by stale claims. In nine out of ten Chapter 7 cases creditors are not required to file claims because there are no non-exempt assets to liquidate and no money to distribute to creditors.³⁴ In the remaining Chapter 7 cases that will distribute funds to creditors, trustees have a duty to “examine proofs of claim and object to the allowance of any claim that is improper” and can be compensated from the assets of the bankruptcy estate to prosecute those claim objections.³⁵ Second, the possible harm to Chapter 13 debtors who fail to complete their plans and potentially resuscitate stale claims may not arise for Chapter 7 debtors, who are not required to complete a repayment plan before they receive a discharge. In fact, the discharge of debts under Chapter 7 is largely disconnected from the process of liquidating and paying claims.

David Levine is an Adjunct Professor at George Washington University Law School, where he teaches consumer bankruptcy law. He is also a senior attorney at the Administrative Office of the U.S. Courts. Previously, as a senior attorney at the Executive Office for U.S. Trustees in the Department of Justice, Mr. Levine developed civil enforcement policies relating to consumer bankruptcy filers, and served as faculty at the National Advocacy Center on bankruptcy law and litigation procedures. Before joining the Department of Justice, Mr. Levine was in private practice in California, specializing in corporate bankruptcy matters and business related litigation, and served as a law clerk to two bankruptcy judges. The views expressed in this article are solely those of the authors.

Thomas Kearns is an Adjunct Professor at George Washington University Law School, where he teaches consumer bankruptcy law. He has been the Chief Deputy Clerk for the U.S. Bankruptcy Court for the District of Maryland since 2016. Previously, Mr. Kearns worked for the Executive Office for U.S. Trustees in the Department of Justice, first as Trial Attorney in the Office of General Counsel, then as Deputy Assistant Director and finally as the Assistant Director for the Office of Planning and Evaluation. Among other things, at the Office of Planning and Evaluation Mr. Kearns was responsible for statistical analysis, data integrity, and reporting on performance and enforcement efforts; training managers, attorneys and support personnel at the National Bankruptcy Training Institute; handling press inquiries and public relations; and managing debtor audits. Before joining the Department of Justice, Mr. Kearns was in private practice in Colorado for 12 years, focusing on bankruptcy matters and civil litigation, and he served as law clerk to Bankruptcy Judge E. Stephen Derby (D. Md.). The views expressed in this article are solely those of the authors.

1. 15 U.S.C. §§ 1692e, f (2012).
2. No. 16-348, slip op. (U.S. May 15, 2017).
3. See id. at 10.
4. Id. at 2¬5.
5. In 2016, 770,846 nonbusiness bankruptcy cases were filed in the United States. Of that total, 475,332 (61%) were filed under Chapter 7, and 294,396 (38%) were filed under Chapter 13. See United States Courts, Table F-2, U.S. Bankruptcy Court–Business and Nonbusiness Cases Commenced, by Chapter of the Bankruptcy Code, During the 12-Month Period Ending December 31, 2016, http://www.uscourts.gov/sites/default/files/data_tables/bf_f2_1231.2016.pdf.
6. See 11 U.S.C. §§ 1321 (2010) (requiring Chapter 13 debtors to file a plan); 1322 (2012)
   (prescribing the contents of the plan); 1325 (2010) (prescribing the requirements for court approval or “confirmation” of the plan).
7. See 11 U.S.C. § 1328 (2011) (describing the timing and effect of the Chapter 13 discharge).
8. See 11 U.S.C. § 1326 (2005) (requiring debtors to make plan payments to the Chapter 13 trustee and directing the trustee to make payments to creditors under the plan).
9. While Chapter 7 cases constitute about two-thirds of all bankruptcy filings by individuals, in over 90 percent of those cases no assets are administered and no money returned to creditors. See Ed Flynn, Chapter 7 Asset Cases and Trustee Compensation, 33 Am. Bankr. Inst. J. 48, 49 (June 2014).
10. Given the more complex nature of Chapter 13 compared to Chapter 7, successfully navigating and completing a Chapter 13 case is much more difficult than successfully completing a Chapter 7 case. See Henry E. Hildebrand III, A Response to a Pretend Solution, 90 Tex. L. Rev. 1, 4 (2011).
11. See Midland slip op. at 1.
12. See id. at 2.
13. See id.
14. See id.
15. Johnson v. Midland Funding, LLC, 823 F.3d 1334, 1337 (11th Cir. 2016) (quoting Crawford v. LVNV Funding, LLC, 538 F.3d 1254, 1261 (11th Cir. 2014)).
16. See id.
17. See id.
18. Midland, slip op. at 6¬7 (Sotomayor, J., dissenting).
19. See id. at 3.
20. See id.; see also 11 U.S.C. § 101(5)(A) (2012) (defining the term “claim” to mean a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured . . . .”).
21. See Midland, slip op. at 4 (Sotomayor, J., dissenting).
22. See id.
23. See id. at 4¬5.
24. Id. at 5.
25. See id.
26. Id.
27. See id. at 6.
28. See id. at 6¬8.
29. As discussed below, the Court’s holding was limited to “obviously time-barred” claims.
30. In a majority of courts, unsecured creditors may lack standing to object to the allowance of stale claims “because of a body of case law favoring orderly case administration above the rights of interested creditors.” Philip W. Allogramento III & Sydney J. Darling, Want to Make a Stand? You May Not Have Standing, 34 Am. Bankr. Inst. J. 20 (August 2015). In those jurisdictions, creditors may have standing “only after the [C]hapter 7 trustee refuses to object, notwithstanding a request by the creditor, and the court grants leave to object to that party.” Id.
31. See Midland, slip op. at 8 (Sotomayor, J., dissenting).
32. See id. slip op. at 10.
33. See id. at 6 (Sotomayor, J., dissenting).
34. See supra, note 9.
35. See 11 U.S.C. §§ 326(a) (2012); 327(a) (2013); 330(a) (2012); 704(a)(5) (2011).

Recommended Citation David Levine & Thomas Kearns, Response, Midland Funding, LLC v. Johnson: Fair Debt Collections and Statutes of Limitations, Geo. Wash. L. Rev. On the Docket (May 30, 2017), http://www.gwlr.org/midland-funding.