Over the past several years, chapter 13 debtors have used the Fair Debt Collection Practices Act (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. 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 so doing, placed the burden of policing stale debt claims squarely on the shoulders of chapter 13 trustees.
In this Essay, the authors question whether this state of affairs is in line with the balance of powers contemplated by the Bankruptcy Code or feasible in light of the realities of bankruptcy practice. The article also explores alternatives to FDCPA litigation that might provide a more viable response to this problem. Finally, the authors consider what the rise and fall of these FDCPA claims might tell about the role private litigation can play in improving access to justice in bankruptcy.
This is an excellent examination of the “arc of stale-claims litigation” which began in the 11th Circuit with Crawford and culminated with the Supreme Court holding in Midland Funding v. Johnson that the FDCPA did not apply to Proofs of Claim filed beyond the applicable state law statute of limitations. It directly recognizes that debt buyers have a tremendous asymmetrical technological advantage and every incentive to file stale Proofs of Claim, where debtors, debtor’s attorneys, Chapter 13 Trustees and the U.S Trustee Program are hobbled by lack of information and burdensome costs from systematically and thoroughly investigating and objecting to claims. The paper also accurately recognizes that only with the sting of potential FDCPA statutory damages and attorney’s fees, were debt buyers beginning to clean up their Proofs of Claim.
One small quibble of a mistake in the article, all too common in academic papers, is that it fails to recognize that in the vast majority of Chapter 13 cases, general unsecured creditors receive little or nothing. This means that the costs, if borne by the Trustee in employing more staff to review claims the commensurate increase in his or her commission, will not reduce the dividend to general unsecured creditors (You cannot get blood from a turnip), but will instead result in higher costs directly paid by the debtor.
This points to the related reason why debtors (and their attorneys) usually have no incentive to object to stale Proofs of Claim, since the disallowance of one claim only increases the dividend to other creditors. Unless there was a 100% dividend or there are substantial nondischargeable claims, i.e. student loans, the debtor is no better off for that objection, even though warranted.
This article does, just as in the Midland Funding opinion itself, gloss over the fact that in Mississippi and Wisconsin, the statute of limitations is not merely a defense against collection but an outright bar. As such, the filing of a Proof of Claim for a state debt in those jurisdictions likely remains an FDCPA violation. This may also be true for Proofs of Claim filed by “debt buyers” under North Carolina law and, effective in California starting in 2019, amendments to the Rosenthal Fair Debt Collections Practices Act provide that “a person shall not bring suit or initiate an arbitration or other legal proceeding to collect the debt.” (Emphasis added.) Lastly, the authors consider many possible solutions including amendment of the Bankruptcy Code to abrogate Midland Funding and make the FDCPA applicable or for the CFPB to define and regulate terms of the FDCPA to apply in bankruptcy. Given the current political climate and the state of the CFPB, the authors are appropriate skeptical that such changes are forthcoming. The authors are, however, to dismissive of the authority of the National Bankruptcy Rules Committee to address this problem. The Bankruptcy Rules Committee created Rule 3002.1(i)(2) which allows that courts can “award other appropriate relief, including reasonable expenses and attorneys’ fees caused by the failure” of mortgage servicers to comply with the rule’s noticing requirements. It is difficult to see how this recognition of sanction power is appropriate under the Rules Enabling Act, but identical sanctions under Rule 3001(c) (3), which governs claims based on open-end or revolving consumer credit agreements. (Rule 3001(c) (2) has identical provisions to Rule 3002.1(i) (2).)