Time-Barred Proof of Claims Violate FDCPA

By:  Garam Choe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Crawford v. LVNV Funding, LLC, the Eleventh Circuit held that the creditor violated the Fair Debt Collection Practices Act (“FDCPA”) by filing a proof of claim to collect a debt that was unenforceable because the statute of limitations had expired.[i] In Crawford, a third-party creditor acquired a debt owed by the debtor from a furniture company.[ii] The last transaction on the account occurred in October 2001.[iii] Accordingly, under Alabama’s three-year statute of limitations, the debt became unenforceable in October 2004.[iv] On February 2, 2008, the debtor filed bankruptcy under chapter 13 of the Bankruptcy Code.[v] The third-party creditor then filed a proof of claim for the time-barred debt during the debtor’s bankruptcy proceeding.[vi] Neither the debtor nor the bankruptcy trustee objected the claim.[vii] Rather, the trustee distributed the pro rata portion of the claim from the plan payments to the creditor.[viii] In May 2012, the debtor commenced an adversary proceeding against the third-party creditor alleging that the third-party creditor filed a proof of claim for a time-barred debt in violation of the FDCPA.[ix] The bankruptcy court dismissed the adversary proceeding in its entirety, and district court affirmed.[x] In affirming the bankruptcy court’s dismissal, the district court found that the third-party creditor did not attempt to collect a debt from the debtor because filing a proof of claim is “merely ‘a request to participate in the distribution of the bankruptcy estate under court control.’”[xi] Furthermore, the district court found that, even if the third-party creditor was attempting to collect the debt, the third-party creditor did not engage in abusive practices.[xii] On appeal, the Eleventh Circuit reversed, holding that the third-party creditor violated the FDCPA by filing a stale claim in the bankruptcy court.[xiii]

Circuit courts are split as to whether the Bankruptcy Code displaces the FDCPA in the bankruptcy context.[xiv] Some Circuits have concluded that the Bankruptcy Code displaces the FDCPA in the bankruptcy context.[xv] The Second Circuit held that the FDCPA is not needed to protect debtors who are already under the protection of the bankruptcy court, and there is no need to supplement the remedies afforded by bankruptcy itself.[xvi] Similarly, the Ninth Circuit held that, in bankruptcy proceedings, the debtor's protection and remedy remain under the Bankruptcy Code rather than the FDCPA.[xvii]  Alternatively, the Third and Seventh Circuits held that the Bankruptcy Code does not preempt the FDCPA.[xviii] The Seventh Circuit held that one federal statute does not preempt another when they address same subject in different ways.[xix] Rather, a federal statute repeals another when there is “an irreconcilable conflict between the statutes or a clearly expressed legislative decision that one replace[s] the other.”[xx] Following the Seventh Circuit’s decision, the Third Circuit held that the Bankruptcy Code does not preclude FDCPA.[xxi] In Crawford, the Eleventh Circuit declined whether the Bankruptcy Code “preempts” the FDCPA because the third-party creditor did not raise that argument.[xxii]

In Crawford, Eleventh Circuit ruled against the creditor based on FDCPA without discussing the preemption issue in this case. The Eleventh Circuit noted that Congress enacted the FDCPA in order “to stop ‘the use of abusive, deceptive, and unfair debt collection practices by many debt collectors.’”[xxiii] In reaching its decision, the Eleventh Circuit stated that the FDCPA regulates the conduct of debt-collectors, which is defined as any person who “regularly collects … debts owed or due or asserted to be owed or due another.”[xxiv] The creditor did not dispute that it was a debt collector and thus subject to the FDCPA.[xxv] The Court referred to the Section 1962(e) of the FDCPA, which “provides that ‘[a] debt collector may not use any false, deceptive or misleading representation or means in connection with the collection of any debt.’”[xxvi] Because Congress did not provide a definition for the terms “unfair” or “unconscionable,” the Court adopted a “least-sophisticated consumer” standard to determine whether the creditor had violated FDCPA.[xxvii] In Crawford, the creditor filed a time-barred proof of claim because “[a]bsent an objection from either the Chapter 13 debtor or the trustee, the time-barred claim is automatically allowed against the debtor pursuant to 11 U.S.C. § 502(a)-(b) and Bankruptcy Rule 3001(f).”[xxviii] Indeed, in Crawford, neither the trustee nor the debtor objected to the claim in the bankruptcy case, and the trustee disbursed the money to the creditor.[xxix] The Eleventh Circuit reasoned that a debt collector’s filing of a time-barred proof of claim, similar to the filing of a stale lawsuit, creates the misleading impression to the debtor that the debt collector can legally enforce the debt.[xxx] Therefore, the Eleventh Circuit found that under the “least-sophisticated consumer” standard, the creditor’s filing of a time-barred claim in debtor’s bankruptcy Chapter 13 case was “unfair,” “unconscionable,” “deceptive,” and “misleading” within the broad scope of the FDCPA.[xxxi]

The Crawford decision allows debtors and their attorneys to receive damages from debt collectors who file time-barred proof of claims. Congress provided consumer debtors with a private right of action, rendering “debt collectors who violate the [FDCPA] liable for actual damages, statutory damages up to $1,000, and reasonable attorney’s fees and costs.”[xxxii] Creditors should be especially careful to not file any time-barred proof of claims in jurisdictions that allow FDCPA claims. Moreover, if the debtor files a bankruptcy proceeding in a jurisdiction where FDCPA claims are allowed, he should review every proof of claim filed in his estate. If a creditor files a time-barred claim, the debtor should object to the claim. Furthermore, the debtor should file an action against the creditor under the FDCPA. Even if the debtor or the trustee failed to object to the time-barred claim and paid off the stale debt, as was the case in Crawford, the debtor should be able to recover under the FDCPA. Alternatively, if the debtor files a bankruptcy proceeding in a jurisdiction where FDCPA claims are unavailable, the debtor should review filed proof of claims and object to any stale claims despite the unavailability of statutory damages and attorney’s fees. Whether or not FDCPA claims are available in a jurisdiction, debtors should be vigilant since creditors may continue to file stale proof of claims because the debt they are able to recover may be more than the damages they pay out in violation of the FDCPA.