Bankruptcy and FDCPA: Crawford v. LVNV Funding is Not Likely to Be the End of the Story

In July of 2014, the Eleventh Circuit expanded the reach of the FDCPA to proofs of claim. Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11^th Cir. 2014).  Prior to the Crawford decision, the overwhelming majority of courts had resoundingly held that proofs of claim were not subject to the FDCPA.  As stated by one court in rejecting the notion that FDCPA claims could arise from proofs of claim, “there is strong and ample authority for the proposition that a creditor’s filing of a claim in a bankruptcy proceeding, even if the claim is prescribed by applicable state law, is not an unlawful debt collection practice actionable under the FDCPA…This court…is “convinced that the Code and Rules are up to the task of compensating a debtor for any damages or costs occasioned by, and to punish and deter, those who would abuse the bankruptcy claims process, such that an objection to claim and motion for sanctions, if warranted, will typically be the appropriate measures to take in cases involving stale claims by debt buyers.””  Jenkins v. Genesis Fin. Solutions, LLC, 456 B.R. 236 (E.D.N.C. Bankr. 2011) quoting B-Real, LLC v. Chaussee, 399 B.R.  225, 241 (9^th Cir. BAP 2008).

All of that was thrown into doubt in July 2014 when the Eleventh Circuit published its decision in Crawford.  In Crawford, the debtor commenced an adversary proceeding against a debt buyer, alleging that the filing of a time barred proof of claim violated the automatic stay and the FDCPA.  The debt buyer ultimately withdrew the proof of claim; however, the adversary proceeding proceeded forward.  The Bankruptcy Court granted LVNV’s 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 affirmed. 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 seemed to take 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.

Is that the end of the story?  Most definitely not.  Too much shouldn’t be read into Crawford.  Crawford appears to be hampered by the limitations of the issues presented to the court.  For example, neither the district court nor the court of appeals addressed the issue of whether the Bankruptcy Code preempts the FDCPA, presumably because it was not raised by the defendant in its defense of the adversary proceeding.  Crawford at footnote 7.  Additionally, in recent weeks, a number of decisions from other courts have suggested that they will not blindly follow Crawford.

In Elliott v. Cavalry Investments, the Southern District of Indiana addressed the many open ended questions left by Crawford.  Elliott v. Cavalry Invs., 2015 U.S. Dist. LEXIS 2423 (S.D. Ind. Jan. 9, 2015).  While the Elliott court denied the creditor’s motion to dismiss an adversary proceeding based upon the allegation that the proof of claim was time barred, it was quick to point out that its decision should not be read too broadly. In fact, the court stated that “the Court cannot say as a matter of law that the Elliotts’ Complaint fails to state a claim.  Nor is the court finding that the allegations categorically establish an FDCPA violation.”  Elliott, at *6. In fact, the court proceeded to set forth the reasons the filing of a proof of claim may not necessarily be considered a violation of the FDCPA.  The court noted that there are significant differences between a lawsuit initiated to collect on a time barred debt and a proof of claim filed on a time barred debt.  Most significantly, in the bankruptcy context, there are procedures in place to object to proofs of claim and the presence of a trustee who is tasked with examining and objecting to proofs of claim which are unenforceable.  The court also noted the distinction between debt that is unenforceable and debt that is nonexistent.  But see, Grandidier v. Quantum 3 Group, LLC, 2014 U,S, Dist. LEXIS 169279 (S.D. Ind. Dec. 8 2014) (where the court held that the FDCPA can apply to time barred proofs of claim and denied defendant’s motion to dismiss).

Recently, back in the Eleventh Circuit, defense counsel have been taking a different approach with some initial success.  In Walker v. LVNV Funding, LLC, 2014 U.S. Dist. LEXIS 178661 (N.D. Ala. Dec, 31, 2014) defendant counsel moved to withdraw the reference from the bankruptcy court, contending that the Bankruptcy Code preempts the FDCPA where creditors misbehave in the bankruptcy context.  The court determined that because the courts of the Eleventh Circuit were split on that issue, the issue would require substantial and material consideration of the FDCPA in order to resolve the claims, and granted to motion to withdraw the reference.  See also Williams v. LVNV Funding, LLC, 2014 U.S. Dist. LEXIS 178659 (N.D. Ala. Dec, 31, 2014).  Likewise in the Eleventh Circuit, the bankruptcy courts have made it clear that any adversary proceedings bringing FDCPA claims based upon time barred proofs of claim actions must be brought within the one year statute of limitations provided in 15 U.S.C. 1692k.  Gurganus v. Recovery Mgmt. Sys. Corp., 2015 Bankr. LEXIS 3 (N.D. Ala. Jan. 5, 2015).

While Crawford could have huge implications, too much shouldn’t be read into the decision just yet.  Practitioners should be mindful that it left unaddressed the question of whether the Bankruptcy Code preempts the FDCPA and there is a split in the circuits as to this issue.  Further, the holding in Crawford does not take into account the fundamental differences and implications between a proof of claim and a lawsuit to collect a debt.  “Debtors in bankruptcy proceedings do not need protection from abusive collection methods that are covered under the FDCPA because the claims process is highly regulated and court controlled.” See Jenkins, 456 B.R. at 240.  The recent withdrawal of references that have occurred in the Eleventh Circuit suggest there is more to come on this issue.