A recent United States Supreme court decision – Midland Funding v. Johnson – continues a trend to limit the scope of liability under the federal Fair Debt Collection Practices Act (“FDCPA”).

The facts of the case are reasonably straight forward. Midland owned a debt that was uncollectable because the statute of limitations for enforcement had expired. When Johnson filed for bankruptcy protection, Midland filed a proof of claim. This proof of claim was challenged and disallowed because the debt was outside of the limitations period. Johnson then sued Midland alleging a violation of the FDCPA.

The FDCPA prevents debt collectors from engaging in certain false or deceptive collection activities. Johnson asserted that filing a proof of claim in his bankruptcy was false and deceptive because it amounted to representing that the debt was owed when it was actually uncollectable as a matter of state law. The case turned on the definition of “claim” in the Bankruptcy Code.

The Supreme Court, in a 5-3 decision, sided with Midland. In his majority opinion, Justice Breyer holds that filing a proof of claim on a time barred debt is not a false collection attempt. Justice Breyer’s opinion finds that the filing of a claim does not imply the claim is enforceable, but instead only implies that the creditor may have a claim against the bankruptcy estate. The opinion refused to limit the definition of “claim” in the Bankruptcy Code to only include an enforceable claim, noting that the Bankruptcy Code’s definition casts a wider net. Justice Breyer pointed to Congress’s intent in defining the word “claim” in the Bankruptcy Code, which was “to adopt the broadest available definition of claim”, as has been cited in an earlier Supreme Court decision.

This decision has far reaching consequences for holders of consumer debt. If disallowance of a claim could be a predicate act under the FDCPA, then consumer creditors would have faced potential FDCPA liability every time they signed and filed a proof of claim. Claims can be disallowed for many reasons – statute of limitations, disputes with the consumer, or some other technical reason under state law. A contrary decision would have forced consumer creditors to undertake an extensive legal review for every proof of claim they file, as the filing of a proof of claim would be equivalent to a representation to the court (and debtor) that there is no basis for disallowance. The case essentially turned upon who would bear the responsibility for weeding out valid claims from invalid claims. Indeed it is this tension that majority opinion and dissent disagree upon. Justice Breyer’s majority opinion asserts that it is the obligation of debtors in bankruptcy, their attorneys and the Trustees appointed by the court to raise objections and defenses to claims. The dissent raises practical objections to the efficiency of debtor counsel and trustees in culling invalid claims.

If you desire more information on this case or the Fair Debt Collection Practices Act and compliance with the Act, please contact Barry D. Johnson at 214-560-1714 or bjohnson@settlepou.com.