In Midland Funding, LCC v. Johnson, issued May 15, 2017, the Court held that a creditor does not violate the Fair Debt Collection Practices Act (FDCPA) when it files a proof of claim in a Chapter 13 case after the applicable statute of limitations period for that debt has passed. The decision establishes that filing the time-barred proof of claim does not qualify as a false, deceptive, misleading, unconscionable or unfair practice under the FDCPA.
The Court’s Reasoning
Initially, the Court noted that the law of many states provides that a creditor has a right to payment of a debt even after the expiration of the limitations period. While the expiration of the limitations period renders a claim unenforceable, a proof of claim on a stale debt is not false, deceptive or misleading because the bankruptcy code does not limit “claims” to “enforceable claims.” Moreover, the Court noted that generally, a debtor must assert the statute of limitations in a lawsuit or the defense is waived.
The Court distinguished a Chapter 13 bankruptcy proceeding from a collection lawsuit, noting that in a lawsuit, a debtor may unknowingly pay a stale debt to his or her disadvantage. However, in a bankruptcy proceeding, the debtor initiates the proceeding and has the benefit of established procedures and is guided by a knowledgeable bankruptcy trustee. These protections reduce risk to the debtor and decrease the likelihood that the debtor will unknowingly pay a stale debt.
The Court also suggested that a debtor may actually benefit when a creditor asserts a stale claim in bankruptcy, since the debt will be discharged and erased from the debtor’s later credit reports.
Finally, the Court emphasized that to find a violation of the FDCPA under these circumstances would upset the “delicate balance” that the Court attempts to maintain between the bankruptcy code and the FDCPA, particularly in terms of the obligations placed upon creditors and debtors in bankruptcy.
Impact and Implications for Creditors and Debtors
The Supreme Court’s decision may provide peace of mind to certain businesses, particularly those that buy older debt from others. Debtors and trustees must remain vigilant in evaluating proofs of claim to ensure that no claims are barred by the statute of limitations.
The Court’s decision is limited to Chapter 13 bankruptcies and does not affect other collection activities aimed at stale debts. Several lower courts have held that seeking to enforce stale debts outside of bankruptcy is an unfair practice under the FDCPA.
If you have questions about this case, contact Elisabeth Von Eitzen at 616.752.2418 (Grand Rapids), 269.276.8118 (Kalamazoo) or evoneitzen@wnj.com, Emily Rucker at 616.752.2764 or erucker@wnj.com or your attorney at Warner Norcross & Judd.
