While the filing of a proof of claim in a consumer’s bankruptcy on a time-barred debt constitutes "debt collection activity" regulated by the Fair Debt Collection Practices Act, the practice does not violate the FDCPA when the applicable state statute of limitations does not extinguish the underlying debt, a majority of the U.S. Court of Appeals for the Fourth Circuit has ruled. Accordingly, because a debt buyer’s proofs of claim, based on debts that were barred by Maryland’s statute of limitations, were permitted under the Bankruptcy Code and did not violate the FDCPA, the Fourth Circuit affirmed the bankruptcy court’s dismissal of the debtors’ FDCPA and related state-law claims (In re Dubois; Dubois v. Atlas Acquisitions LLC, Aug. 25, 2016, Floyd, H.).
Notably, as observed by Judge Albert Diaz in his dissenting opinion, the federal circuits are split on whether certain provisions of the Bankruptcy Code conflict with the FDCPA and whether bankruptcy proofs of claim on time-barred debts violate the FDCPA. Recently, the U.S. Court of Appeals for the Seventh Circuit determined that debt collectors who filed accurate proofs of claim on time-barred debts in consumers’ bankruptcy cases did not engage in false, deceptive, misleading, unfair, or unconscionable debt collection practices, even though the Seventh Circuit had previously ruled that suing on a stale claim would violate the FDCPA. (see Banking and Finance Law Daily, Aug. 11, 2016).
Proofs of claim. Atlas Acquisitions LLC purchased from certain creditors the payday-loan debts of two separate consumers. According to the Fourth Circuit’s opinion, it was undisputed that these debts were beyond Maryland’s statute of limitations when Atlas purchased the debts and filed its respective proofs of claim in the consumers’ Chapter 13 bankruptcy proceedings.
The debt buyer conceded that its bankruptcy claims were based on time-barred debts. However, in seeking to dismiss the consumers’ adversary actions brought against it for alleged violations of the FDCPA, Atlas maintained that filing a proof of claim does not constitute "debt collection activity" under the FDCPA, and that, even if the FDCPA did apply, filing a proof of claim on a time-barred debt did not violate the FDCPA.
FDCPA collection activity. When the bankruptcy court dismissed the FDCPA claims in the adversary actions, the Fourth Circuit agreed to address the appeal. First, contrary to Atlas’s assertion, the Fourth Circuit determined that the filing of a proof of claim in a consumer bankruptcy is "debt collection activity" regulated by the FDCPA (15 U.S.C. §1692e and §1692f).
In reaching its decision, the court emphasized that: (i) the inherent relationship of the parties to the case was one of "debtor and debt collector;" (ii) the "animating purpose" in filing a proof of claim is to obtain payment by "sharing in the distribution of the debtor’s bankruptcy estate;" (iii) even in the absence of an explicit demand for payment, "precedent and common sense" supports the position that a proof of claim is an attempt to collect a debt; (iv) even though a proof of claim is technically paid by the debtor’s estate rather than the debtor personally, that distinction is "irrelevant for purposes of the FDCPA;" and (v) the court’s conclusion did not conflict with the Bankruptcy Code.
No FDCPA violation. Next, the Fourth Circuit determined that the filing in a Chapter 13 bankruptcy of a proof of claim that is beyond the applicable state statute of limitations but does not extinguish the underlying debt does not violate the FDCPA.
Among other things, in examining the applicable provisions and policies of the FDCPA and the Bankruptcy Code, the Fourth Circuit determined that: (i) the Bankruptcy Code defines a "claim" very broadly to include a "right to payment" and to cover "contingent" and "unmatured" debt—including debt that is "not presently enforceable in court;" (ii) under Maryland law, a time-barred debt still constitutes a "right to payment" giving rise to a claim under the Bankruptcy Code; (iii) the Bankruptcy Code provides that time-barred debts are to be disallowed but does not prevent the filing of proofs of claim associated with them; (iv) although the FDCPA generally prohibits filing a lawsuit on a time-barred debt, the bankruptcy context is unique in offering consumer protections—including procedural rules and the presence of a bankruptcy trustee and often counsel; and (v) Bankruptcy Rules require the accurate filing of a proof of claim and the disclosure of the last transaction and charge-off date on a given account.
Dissent. While Judge Diaz agreed with the majority’s opinion that Atlas’s filing of the proofs of claim constituted debt-collection activity under the FDCPA, he could not agree that Atlas’s alleged conduct was consistent with the FDCPA or the Maryland Consumer Debt Collection Act. In his view, "Like filing a lawsuit on time-barred debt, Atlas’s alleged debt-collection activity in this case is precisely the sort of unfair and misleading practice that Congress intended the courts to recognize as a violation."
The case is No. 15-1945.
Attorneys: Morgan W. Fisher and Courtney L. Weiner (Law Offices of Morgan Fisher LLC) for Chaille Dubois. Alan C. Hochheiser (Buckley King, LPA) and Donald S. Maurice, Jr. (Maurice Wutscher, LLP) for Atlas Acquisitions LLC.
Companies: Atlas Acquisitions LLC
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