Private Remedies and Access to Justice in a Post-midland World

• Publication year: 2018

Private Remedies and Access to Justice in a Post-Midland World

Kara J. Bruce

Alexandra P.E. Sickler

PRIVATE REMEDIES AND ACCESS TO JUSTICE IN A POST-MIDLAND WORLD

Kara J. Bruce^* Alexandra P.E. Sickler^**

Introduction

Consumer bankruptcy has long been described as a social safety net of last resort, bridging the gaps when other front-line social programs fail.¹ It fills this role by providing consumers with an avenue to reduce the financial impact of setbacks including illness, injury, job loss, or divorce.² Consumer bankruptcy has been separately recognized as a forum for consumers to vindicate substantive rights through private lawsuits.³ Although many scholars have highlighted challenges that consumers face in bringing private suits to address wrongdoing outside of bankruptcy, a variety of factors change the relationship between a debtor and her creditors when a debtor is in bankruptcy.⁴ The dynamics of consumer bankruptcy might make it a particularly effective instrument for the vindication of consumer-protection ends.⁵

In past writings, we have highlighted how systematic creditor non-compliance has undermined foundational bankruptcy policies, affecting debtors' ability to obtain relief from financial distress in bankruptcy.⁶ We have suggested that debtors' unique capacity to vindicate their rights through private lawsuits is key to bridging this enforcement gap and ensuring access to the benefits of the

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bankruptcy forum.⁷ In this Essay, we profile the rise and fall of one such private-litigation device: the use of Fair Debt Collection Practices Act (FDCPA) lawsuits to challenge the practice of filing time-barred debt claims in bankruptcy.⁸

Over the past several years, chapter 13 debtors have used the FDCPA as a tool to challenge debt buyers who file massive numbers of proofs of claim for debt for which the statute of limitations has run.⁹ Spurred by initial success in the Eleventh Circuit, these cases have proliferated across the nation.¹⁰ Yet in Midland Funding v. Johnson, the Supreme Court held that filing a proof of claim for time-barred debt does not violate the FDCPA. This decision put an end to the spate of FDCPA litigation and, in doing so, placed the burden of policing stale debt claims squarely on the shoulders of chapter 13 trustees.¹¹

In this Essay, we question whether this state of affairs is in line with the balance of powers contemplated by the Bankruptcy Code (the Code) or feasible in light of the realities of bankruptcy practice.¹² We also explore alternatives to FDCPA litigation that might provide a more viable response to this problem.¹³ Finally, we consider what stale-claim litigation can tell us about the role of private remedies in improving access to justice.¹⁴ Although the proliferation of stale debt cases was ultimately not successful on the merits, the legal precedents that developed have dramatically increased awareness of debt buyers' stale-claim practices. In so doing, these cases have primed the bankruptcy system to respond. Thus, despite the limited success of FDCPA cases challenging time-barred debt claims, we conclude this wave of litigation likely has improved access to justice in the bankruptcy forum.

This Essay proceeds as follows. In Part I, we describe how creditor under-compliance and overreaching can impair access to justice in consumer bankruptcy cases. We consider generally the role that private litigation might play in addressing this problem. In Part II, we trace the arc of FDCPA litigation described above from its origins in the Eleventh Circuit in Crawford v. LVNV

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Funding, LLC to its end, with the Supreme Court's decision in Midland Funding v. Johnson. We also outline how the bankruptcy system has struggled to address stale debt claims after Midland Funding. In Part III we consider the lessons of this short-lived legal theory on the utility of private litigation as a tool to achieve access to justice in consumer bankruptcy cases.

I. Access to Justice in Consumer Bankruptcy

Bankruptcy plays a fundamental role in our social safety net.¹⁵ When other forms of social protection (such as health insurance, unemployment, and social security) fail, consumer bankruptcy can provide consumers with an avenue to overcome the financial impact of their misfortune.¹⁶ To that end, many scholars have described consumer bankruptcy as a form of social insurance.¹⁷ A consumer's ability to receive a discharge is a dominant feature of consumer bankruptcy's role in the social safety net.¹⁸ At the conclusion of a bankruptcy case, debtors emerge free of both the direct financial effects of misfortune (such as medical bills) as well as other obligations incurred during the period of financial turmoil.¹⁹ Other bankruptcy features, such as the breathing space provided by the automatic stay, the ability to assume or reject executory contracts, and the right to hold some assets exempt from one's creditors, likewise support these ends.²⁰

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The Code and accompanying Bankruptcy Rules provide a sophisticated structure for adjusting a debtor's financial obligations, ensuring the fair and ratable treatment of creditors, and awarding the debtor a fresh financial start. Yet despite its sophistication, the consumer bankruptcy process functions without a great deal of individualized oversight and attention.²¹ Many dimensions of the Code and Rules are designed to function in an automated manner, reflexively moving a debtor toward discharge unless and until a party in interest objects.²² This state of affairs is essential to maintaining a low cost of access to the bankruptcy forum, yet it is premised on the idea that all parties are participating in good faith.

In earlier writings, we have observed that this level of automation provides opportunities for under-compliance and abuse.²³ In particular, some creditors have shirked consumer bankruptcy's procedural requirements in an apparent effort to economize on administrative costs.²⁴ Other creditors have taken advantage of bankruptcy's regulatory gaps to draw more than they are entitled to receive from debtors' estates.²⁵ These actions can undermine foundational bankruptcy principles by, among other things, reducing the recoveries of creditors that have complied with bankruptcy law, causing some debtors to pay more out of pocket than they otherwise would have, or impairing debtors' fresh start after receiving a discharge in bankruptcy.²⁶ More broadly, creditors' lack of compliance can destabilize the bankruptcy system, increasing the relative costs of compliance and perhaps encouraging others to break the rules.

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We have argued elsewhere that debtors in bankruptcy are well suited to address creditor under-compliance and abuse by bringing private lawsuits for damages.²⁷ Private lawsuits can augment bankruptcy's limited enforcement resources, removing burdens from overtaxed case trustees and the U.S. Trustee Program.²⁸ Private suits also permit debtors, who have the best access to information about certain bankruptcy-related wrongdoing, to play a key role in its correction.²⁹ Moreover, private lawsuits are more agile than time-consuming law and rule reform processes, and can more quickly keep pace with lender overreaching.³⁰

Although scholars have recognized that consumers are not always effective proponents of private litigation, a variety of factors suggest that debtors in bankruptcy might be more effective than their non-bankrupt counterparts.³¹ In light of these benefits, we have urged debtors to embrace their abilities to serve as their own advocates and play a more dominant role in policing the bankruptcy process for misconduct.³² The following section explores the use of one such private litigation device.

II. FDCPA Litigation in Bankruptcy from Cra wford to Midland Funding

A. The Problem of Time-Barred Debt Claims

In recent years, bulk debt purchasers have attempted to use the bankruptcy process to collect debts for which the statute of limitations has run.³³ Debt buyers, who buy large portfolios of old debts for mere pennies on the dollar,

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have filed massive numbers of proofs of claim in bankruptcy cases throughout the nation.³⁴ Although this practice does not technically violate the Code or procedural rules, it exploits a weakness in bankruptcy's regulatory structure. Proofs of claim are entitled to prima facie validity.³⁵ As such, unless some party files an objection, claims will be allowed and will receive a portion of any distributions made from a debtor's estate.³⁶

The parties who are most likely to discover a statute of limitations defense—debtors, their attorneys, or case trustees—do not always have the capacity or financial incentive to address time-barred debt claims.³⁷ As discussed in more detail below, trustees often carry very large caseloads and lack information necessary to determining whether the claim is valid.³⁸ Moreover, trustees may lack the financial incentive to object where the costs of objecting outweigh any pecuniary benefit to the estate. Debtors might have better information about the status of a debt, but also may lack the financial incentive to object to claims because the allowance or disallowance of a stale-debt claim will typically not alter their personal outcomes in bankruptcy.³⁹ Indeed, debtors might have strong disincentives to object to stale-debt claims when their attorney's fee agreements do not include that service.⁴⁰ Those debtors who seek bankruptcy relief without the assistance of an attorney rarely (if ever) object to claims filed in their bankruptcy cases.⁴¹ Conversely, debt buyers typically face no penalty for the filing proofs of claim that are later disallowed.

The business practice underlying the collection of time-barred debt capitalizes on these asymmetries, allowing debt buyers to profit in the likely case that some of the thousands of stale claims filed will pass through the bankruptcy

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process.⁴² Although this practice can be...