Recent Opinions Bring Sharper Focus to the Time Barred Proof of Claim Dilemma

Courts continuing to deal with Crawford copycat claims are bringing a sharper focus to the issue and looking closely at the conflict presented by the FDCPA and Bankruptcy Code.  Three courts who have recently reviewed Crawford claims have dismissed them, concluding in all three cases that the filing of an otherwise accurate time barred proof of claim does not give rise to an FDCPA claim.

 Recapping Crawford v. LVNV Funding LLC.  In Crawford, 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.  Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11^th Cir. 2014).  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.  More recently, the bankruptcy court dismissed the adversary proceeding on remand because the debt failed to file its adversary proceeding within the applicable statute of limitations. Crawford v. LVNV Funding, LLC, Case No. 08-30192-DHW, Adv. Pro. No. 12-030333-DHW (Sep. 29, 2015).   

Left unaddressed by the Crawford parties was whether the Bankruptcy Code’s claim procedures precluded an FDCPA violation. In a footnote which ultimately has had more value than the actual opinion, the Eleventh Circuit declined “to weigh in on a topic the district court artfully dodged whether the Code “preempts” the FDCPA when creditors misbehave in bankruptcy.” Crawford, 758 F.3d at 1262, n.7.  The Crawford decision, therefore, has limited precedential value because the court specifically declined to consider whether the Bankruptcy Code precludes the FDCPA in the bankruptcy context. 

Defendants in the copycat cases spawned by Crawford have taken note and raised preemption as a defense in the overwhelming majority of the cases brought since then.  Three recent opinions reflect the sharper focus being placed on this issue. The issues, as couched by these cases, are twofold: (a) whether the Bankruptcy Code preempts the FDCPA; and (b) whether the Bankruptcy Code’s claim filing, allowance and objection procedures preclude damages under the FDCPA for time barred proofs of claim.  Jenkins v. Midland Credit Management, 2015 Bankr. LEXIS 3143, *5, 538 B.R. 129,  (N.D. Ala. Sept. 17, 2015); see also Martin v. Quantum3 Grp., (N.D. Miss. Oct. 9, 2015); Martel v. LVNV Funding, LLC, 2015 Bankr. LEXIS 3465 (D. Maine Oct. 13, 2015). 

In addressing the issue of wholesale preclusion, each court declined to hold that the Bankruptcy Code preempts the FDCPA.  By the same token, each court concluded that the filing of an otherwise accurate, but time barred proof of claim does not give rise to an FDCPA claim. In reaching their conclusion, all three courts agreed that the issue is more nuanced than a wholesale preemption and instead chose to focus on the more narrow issue.  

Interestingly, the courts came to the conclusion differently.  In so holding, the Martin court noted the narrowness of its decision acknowledging that while it may be possible for the FDCPA to apply within a bankruptcy case, and perhaps to the filing of a proof of claim, it does not prohibit the filing of accurate but time barred claims.  Id. at *14.  The court gave deference to the Bankruptcy claims procedures by noting that the claims procedures were adopted after the FDCPA and where two acts are in irreconcilable conflict, the latter act (the Bankruptcy Code) to the extent of a conflict impliedly repeals the earlier Act (the FDCPA).  Id. at *16.  Similarly, the Jenkins court concluded that the notion that the FDCPA prohibits, and therefore penalizes, a debt collector for attempting to collect a time barred debt by filing a proof of claim simply loses traction when considered in light of the claims -filing, objection, allowance, and disallowance procedures prescribed in Code §§501 and 502 and Rules 3001-3008… [and] the Code’s broad definition of “claim” in §101(5)(A).”  Jenkins at *6.   In also concluding the statutes were not irreconcilably in conflict, the Martel court noted that the FDCPA does not prohibit all debt collection practices – just those that are false, misleading, deceptive, unfair or unconscionable.  The court concluded that the filing of an accurate but time barred proof of claim therefore did not violate the FDCPA.

As courts continue to address these copycat claims, it is becoming abundantly clear that the preemption issue will be viewed narrowly.  The vast majority of courts addressing the issue to date have concluded that the filing of an accurate but time barred proof of claim does not give rise to a viable FDCPA claim.