Sunday, October 4, 2015

Crawford Proof of Claim Adversary Proceeding Dismissed…Again


For the past year, many involved in the debt buyer industry have closely followed the 11th Circuit’s ruling in Crawford v. LVNV Funding, LLC.   Last week, the bankruptcy court again dismissed the adversary proceeding. Crawford v. LVNV Funding, LLC, Case No. 08-30192-DHW, Adv. Pro. No. 12-030333-DHW (Sep. 29, 2015).   In what can only be called an ironic twist, the adversary proceeding’s FDCPA claim was dismissed because the debtor failed to file the adversary proceeding within the applicable statute of limitations.
To recap the Crawford saga, the debtor filed an adversary proceeding against several debt buyers, alleging that the filing of a time barred proof of claim violated the automatic stay and the FDCPA.  The adversary proceeding was commenced almost four years after the suspect proof of claim was filed.  The debt buyer ultimately withdrew the proof of claim; however, the adversary proceeding proceeded forward.  The Bankruptcy Court granted the debt buyers’ motion to dismiss holding that the filing of a proof of claim, even one on time barred debt, did not constitute a violation of the FDCPA.  The district court agreed and affirmed the bankruptcy court. On appeal, the Eleventh Circuit reversed, holding that the filing of a proof of claim was an attempt to collect a debt and that the filing of a proof of claim for time barred debt violated the FDCPA.  In so holding, the court took issue with the fact that an otherwise uncollectible debt would result in some recovery under the Chapter 13 plan. “Such a distribution of funds to debt collectors with time-barred claims then necessarily reduces the payments to other legitimate creditors with enforceable claims.”  Crawford, 758 F.3d at 1261.   Additionally, the court premised its reversal on the notion that “a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt.”  Id. In April of this year, the Supreme Court refused to grant review of the decision.  Since the Eleventh Circuit’s opinion in Crawford, several copycat claims have been filed in other jurisdictions.  The majority of courts that have addressed the issue have declined to follow the Eleventh Circuit ruling.

On remand from the Eleventh Circuit, the debt buyers filed a second motion to dismiss.  This time, the debt buyers argued that the debtor’s FDCPA claim was itself time barred having been filed outside of the one year statute of limitations provided by the FDCPA.  In opposition to the motion, the debtor argued that the statute of limitations was inapplicable because the adversary proceeding was in effect a compulsory counterclaim to the proof of claim and alternatively, that the adversary proceeding was a claim in recoupment and not subject to the statute of limitations.  The court disagreed noting that there is no relation between claims arising out of debt collection and claims concerning the underlying debt’s validity. Because there is no relation between the claims, “disputing a proof of claim and filing an adversary proceeding regarding a FDCPA claim, do not arise out of the same transaction and occurrence.”  The court treated the concept of recoupment as synonymous with a compulsory counterclaim and likewise rejected the plaintiff’s argument that the statute of limitations was inapplicable.  While neither party’s brief addressed the debtor’s claim that the filing of the time barred proof of claim violated the automatic stay, the court took it up sua sponte.  The court rejected this claim as well stating that “it is clear to the court that the filing of a stale proof of claim does not violate the automatic stay.”  In doing so, the court noted that the automatic stay serves to protect the bankruptcy estate from actions taken by creditors outside the bankruptcy and not legal actions taken within the confines of the bankruptcy.

So is the issue dead?  Since Crawford, a number of courts have harshly criticized the Crawford decision.  See, e.g., Elliott v. Cavalry Invs., 2015 U.S. Dist. LEXIS 2423 (S.D. Ind. Jan. 9, 2015); Donaldson v. LVNV Funding, LLC, 2015 U.S. Dist. LEXIS 45134 (S.D. Ind. Apr. 7, 2015); Torres v. Asset Acceptance, LLC, C.A. 2015 U.S. Dist. LEXIS 45094 (E.D. Pa. Apr. 7, 2015); Torres v. Cavalry SPV I, LLC, 2015 U.S. Dist. LEXIS 45087 (E.D. Pa. Apr. 7, 2015); Owens v. LVNV Funding, LLC, 2015 U.S. Dist. LEXIS 52680 (S.D. Ind. Apr. 21, 2015).   At least one appellate court has also weighed in, taking a more moderate view.  In  Gatewood v. CP Medical, LLC, Case No. 15-6008 (8th Cir. Jul. 10, 2015), the Eighth Circuit held that the FDCPA “simply prohibits false, misleading, deceptive, unfair or unconscionable debt collection practices.  Filing in a bankruptcy court an accurate proof of claim containing all the required information, including the timing of the debt, standing alone, is not a prohibited debt collection practice.” Slip Op. at 10 (emphasis supplied). Two other appellate courts are slated to address the issue. Both the Owens (Seventh Circuit) and Torres (Third Circuit) decisions are currently on appeal and hopefully, will bring more appellate precedence to support the lower courts’ decisions.  Meanwhile, the holding by the bankruptcy court in Crawford makes it clear that even lower courts within the Eleventh Circuit do not think much of the Eleventh Circuit’s opinion.

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