Bankruptcy

• Publication year: 2017

Bankruptcy

John T. Laney III

Nicholas J. Garcia

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Bankruptcy

by Honorable John T. Laney, III^* and Nicholas J. Garcia^**

I. Introduction

This Article is a review of select bankruptcy opinions issued in 2016 by the United States Court of Appeals for the Eleventh Circuit.¹ The selected bankruptcy opinions surveyed and summarized by the Authors involve the following bankruptcy topics: Stale Debt Collection, the Dischargeability of Debts, Exemptions, Contempt, Judicial Estoppel, and the Rules of Procedure. During 2016, the Eleventh Circuit addressed some "exceptionally important" issues arising in consumer bankruptcy cases and created a circuit split requiring resolution by the United States Supreme Court.²

II. Stale Debt Collection

In the last three years, the Eleventh Circuit has taken a minority position on an issue that tests the relationship between the Fair Debt Collections Practices Act (FDCPA)³ and section 501(a) of the Bankruptcy

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Code.⁴ Under the FDCPA, "debt collectors"⁵ are prohibited from using "unfair or unconscionable means to collect or attempt to collect any debt."⁶ Specifically, the FDCPA prohibits debt collectors from collecting any amount of debt unless there is an agreement creating the amount of debt or the collection of the amount of debt is permitted by law.⁷ Furthermore, debt collectors violate the FDCPA if their conduct in connection with collecting a debt is "false, deceptive, or misleading."⁸ Under § 501(a), "[a] creditor . . . . may file a proof of claim" in a bankruptcy case for a debt owed to it by the debtor.⁹ As pointed out by the Eleventh Circuit in Crawford v. LVNV Funding, LLC,¹⁰ "[a] deluge has swept through U.S. [Bankruptcy courts of late."¹¹ That deluge is caused by the business practice of "Stale Debt Collection." Debt collectors buy unpaid, time-barred debts¹² for pennies on the dollar and try to collect those debts in bankruptcy court by filing proofs of claim in debtors' bankruptcy cases.¹³ The idea is that neither the Chapter 13 Trustee nor the debtor will object to some of these claims due to the claims being time-barred, and these claims will be allowed and paid out in bankruptcy cases.¹⁴ Because the debt collectors purchased the debts for so little, the allowance of just a few claims makes the business profitable.¹⁵ The issue that arises is whether their filing of proofs of claims to collect stale debts in Chapter

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13 bankruptcy cases violates the FDCPA.¹⁶ In Crawford, the Eleventh Circuit answered that question in the affirmative;¹⁷ however, the United States Court of Appeals for the Eighth, Seventh, Fourth, and Second Circuits have held that filing a proof of claim on a time-barred debt does not violate the FDCPA.¹⁸

In Johnson v. Midland Funding, LLC,¹⁹ the Eleventh Circuit answered a question that the Crawford panel left open: whether § 501 "preempts" the FDCPA so as to preclude an FDCPA claim when creditors misbehave in bankruptcy by filing proofs of claim for stale debts.²⁰ The facts in the two cases considered in Johnson were typical of these debt collector cases.²¹ In the titled case, Midland Funding, LLC (Midland) filed a proof of claim for $1,879.71 in the debtor's Chapter 13 bankruptcy case in the United States Bankruptcy Court for the Southern District of Alabama. Midland's business practice consisted of purchasing unpaid, overdue debts from creditors. Midland was trying to collect on debts originally owed to Fingerhut Credit Advantage, with the last transaction on the account occurring over ten years prior to the debtor's filing for bankruptcy.²² In Alabama, the statute of limitations to collect on an overdue debt is six years.²³ In the other case considered, Resurgent Capital Services, L.P. (Resurgent) filed a proof of claim for $4,155.40. Resurgent's business practice was different from Midland's in that Resurgent was a

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"manager and servicer" of consumer debt portfolios who attempted to collect debts on behalf of "credit[or] grantors and debt buyers."²⁴ In this case, Resurgent attempted to collect a debt on behalf of LVNV Funding, LLC who, like Midland, is a purchaser of unpaid debts. The debt originated with Washington Mutual Bank, N.A., and the last transaction on the account occurred over six years prior to the debtor filing for Chapter 13 relief.²⁵ The debtors each brought an FDCPA claim against their respective debt collectors, alleging that the claims were barred by the statute of limitations and thus were "unfair, unconscionable, deceptive, and misleading."²⁶

The United States District Court for the Southern District of Alabama ruled in favor of the debt collectors.²⁷ The court determined that the Eleventh Circuit's ruling in Crawford put the Bankruptcy Code and the FDCPA in "irreconcilable conflict" because § 501 allows creditors to file proofs of claim for time-barred debts if a creditor has a "right to payment" under applicable state law while the FDCPA prohibits such conduct.²⁸ Applying the doctrine of implied repeal,²⁹ the district court held that the debt collectors' rights to file proofs of claims for time-barred debts under § 501 precluded debtors from suing debt collectors under the FDCPA for such conduct in Chapter 13 bankruptcy cases.³⁰

The Eleventh Circuit reversed the district court and held that "[t]he Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time-barred."³¹ The court focused on the applicability of the FDCPA in reaching its conclusion.³² It is true that the language of § 501 allows all creditors to file proofs of claims on time-barred debts.³³ Additionally, the fact that the claims are unenforceable because of states' statutes of limitations does not prevent claimants from asserting such

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claims.³⁴ However, the right to file claims for time-barred debts does not protect the claimants "from all consequences of filing these claims."³⁵ The court noted that debt collectors are a particular type of creditor susceptible to civil liability under the FDCPA for certain conduct exhibited while attempting to collect debts.³⁶ The FDCPA does not apply to all creditors filing claims under § 501.³⁷ The debt collector must knowingly file the time-barred claim for the debt collector to be liable for a FDCPA violation.³⁸ Therefore, the FDCPA has "a narrow range of actors and claims" to which it applies.³⁹

The Eleventh Circuit also addressed the district court's application of the doctrine of implied repeal.⁴⁰ The court determined that the Bankruptcy Code and the FDCPA were not in irreconcilable conflict as to warrant the later-enacted Bankruptcy Code impliedly repealing the earlier-enacted FDCPA.⁴¹ The court noted that irreconcilable conflict is present where there is "positive repugnancy" between the two statutes "because two statutes can typically coexist if they simply contain 'different requirements and protections.'"⁴² For the court to infer statutory repeal, the later statute must expressly contradict the earlier statute, or the implied repeal of the earlier statute must be absolutely necessary to give the later enacted statute any effect.⁴³ The Eleventh Circuit determined that there was no such positive repugnancy between § 501 and the FDCPA.⁴⁴ It rea-

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soned that the statutes could coexist because they differ in purpose, provide different protections, and reach different actors.⁴⁵ A creditor may file a proof of claim under the Bankruptcy Code.⁴⁶ However, if the claimant-creditor is a debt collector and the claim is for a time-barred debt, they are susceptible to liability under the FDCPA.⁴⁷ With no irreconcilable conflict between the statutes, the debtors' FDCPA claims were not precluded by the Bankruptcy Code, and their cases were remanded to the district court.⁴⁸

In Nelson v. Midland Credit Management, Inc.,⁴⁹ the United States Court of Appeals for the Eighth Circuit held that the FDCPA is not violated by a debt collector's filing of a proof of claim on a time-barred debt.⁵⁰ The debtor argued that the Eighth Circuit should follow the Eleventh Circuit to extend the FDCPA to proofs of claims filed in bankruptcy cases.⁵¹ The court rejected such an extension of the FDCPA.⁵² The court reasoned that the Eleventh Circuit "ignore[d] the differences between a bankruptcy claim and actual or threatened litigation."⁵³ The FDCPA protects the unsophisticated debtor from being harassed, misled, or deceived by the debt collector.⁵⁴ Such protections are necessary to protect a non-bankruptcy debtor in a collection lawsuit. However, such protections are not necessary for the bankruptcy debtor "aided by 'trustees who owe fiduciary duties to all parties and have a statutory obligation to object to

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unenforceable claims.'"⁵⁵ The bankruptcy process itself protects bankruptcy debtors.⁵⁶

In Dubois v. Atlas Acquisitions LLC (In re Dubois),⁵⁷ the United States Court of Appeals for the Fourth Circuit held that a creditor does not violate the FDCPA by filing a proof of claim on time-barred debt when the statute of limitations does not extinguish the debt.⁵⁸ Similar to the reasoning of the Eighth Circuit, the Fourth Circuit noted that the Bankruptcy Code allows the trustee to object to such a claim.⁵⁹ The court stated that it "appreciate[d] the harm that [could] be wrought if time-barred claims go unnoticed" by the trustee or the debtor.⁶⁰ However, the Fourth Circuit did not believe the solution was to impose FDCPA liability "that would categorically bar the filing of such claims."⁶¹

In Owens v. LVNV Funding, LLC,⁶² the United States Court of Appeals for the Seventh Circuit held that "a proof of claim on a time-barred debt does not purport to be anything other than a claim subject to dispute in the bankruptcy case," and "[f]iling such a proof of claim is not inherently misleading or deceptive."⁶³ The Seventh Circuit recognized its split, as well as the Eighth Circuit's split, with the...