The Tension Between the Fdcpa and the Bankruptcy Code: Who's First?*

• Publication year: 2016
• Citation: Vol. 20 No. 01

The Tension between the FDCPA and the Bankruptcy Code: Who's First?*

by David C. Farmer

The issues discussed in this article are (1) does a time-barred proof of claim violate either the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (the "FDCPA" or the "Act") or the Bankruptcy Code, 11 U.S.C. § 101 et seq. (the "Code") and (2) does a bankruptcy court have jurisdiction to rule on FDCPA claims?

Interplay between FDCPA and Code.

What of the interplay between the Act and the Code, 11 U.S.C. § 101, et seq.? Two closely related issues have generated some differences among the circuits: is a time-barred proof of claim ("POC") a violation of the FDCPA or the Code, and does the Code preempt the FDCPA?

TIME-BARRED PROOF OF CLAIM The Eleventh Circuit

Crawford v. LVNV Funding, LLC, 758 F3d 1254 (11^th Cir. 2014), cert. denied, —U.S.—, WL 246891 (Apr. 20, 2015), held that filing a POC to collect a time-barred debt in a Chapter 13 bankruptcy violated the FDCPA §§ 1692e and 1692f, by using false, deceptive and misleading means in connection with the collection of a debt.

Crawford filed for Chapter 13 in 2008. After the petition date and well after the applicable state statute of limitations expired, the debt buyer LVNV purchased a $2,037 debt that Crawford owed to a furniture store and that had been charged off in 1999. The last transaction on the consumer's account occurred in 2001.

The three-year statute of limitations expired on the enforcement of the debt in 2004. During the bankruptcy proceeding, LVNV filed a timely POC to participate in the Chapter 13 payment scheme in an effort to collect on the out-of-statute debt. In 2012, and long after LVNV had received distributions during the bankruptcy case, the consumer filed an adversary proceeding against LVNV, alleging that it violated the FDCPA by attempting to enforce an out-of-statute debt. Lower courts dismissed Crawford's complaint, but the Eleventh Circuit held that LVNV's claim on the money was too old under the FDCPA.

The Chapter 13 trustee actually paid LVNV's claim; but in 2012, Crawford filed an objection, saying the claim was unenforceable.

The bankruptcy court for the middle district of Alabama granted LVNV's motion to dismiss the FDCPA claim, and the district court affirmed. While noting that there was no binding authority on point, the district court determined that the "elephantine body of persuasive authority" weighed in favor of finding that filing a POC in bankruptcy cannot give rise to an FDCPA claim: "Absent an objection from either the Chapter 13 debtor or the trustee, the time-barred claim is automatically allowed against the debtor. ... As a result, the debtor must then pay the debt from his future wages as part of the Chapter 13 repayment plan, notwithstanding that the debt is time-barred and unenforceable in court. That is what happened in this case." The district court explained that filing a POC "does not amount to an effort to collect a debt," but "even if it did, it is not the sort of abusive practice the FDCPA was enacted to prohibit." The consumer appealed to the Eleventh Circuit, where the court ruled in the consumer's favor.

The Eleventh Circuit disagreed, stating that unsophisticated consumers would not anticipate or be able to defend effectively against the filing of a time-barred claim and that circuit precedent combined with the broad language of the Act made it applicable in this case.

The court relied on a Seventh Circuit opinion saying that "the FDCPA outlaws 'stale suits to collect consumer debts' as unfair because 'few unsophisticated consumers would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts' and would therefore 'unwittingly acquiesce to such lawsuits.'"

In a bankruptcy context, the Eleventh Circuit said, the limitations period indicates "a time when the debtor's right to be free of stale claims comes to prevail over a creditor's right to legally enforce the debt." LVNV argued that its filing of the claim was not a "collection activity," but the Eleventh Circuit said it was a means to collect a debt.

The court also said it was not barred by the automatic stay, which prohibits debt collection outside the bankruptcy proceeding but does not prohibit the filing of a POC.

The court rejected the district court's reasons for dismissing the FDCPA claim and stated that filing a POC is an attempt to collect a debt covered by the FDCPA, which covers direct and indirect collection actions, including collection initiated through legal proceedings. The court noted that courts have "uniformly held" that the comparable act of suing on an out-of-statute debt violates the FDCPA. Had LVNV filed or threatened to file suit on a time-barred debt in state court to recover the debt, it would violate §§ 1692e and 1692f of the FDCPA.

The court explained: "That is so because 'the right to be free of stale claims in time comes to prevail over the right to prosecute them.'" The court also noted that, with the passage of time, the debtor's memory and records of the debt may diminish, "making it difficult for a consumer debtor to defend against the time-barred claim."

The court reasoned that same philosophy that prevents a debt collector from...