Tuesday, April 21, 2015

Supreme Court Denies Petition for Writ of Certiorari in Bankruptcy Proof of Claim Case

Yesterday, the United States Supreme Court denied the Petition for Writ of Certiorari in LVNV Funding, LLC v. Crawford.  The Court's refusal to hear Crawford leaves a split in the circuits as to whether proofs of claim are subject to the FDCPA.

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 (11th 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 (9th Cir. BAP 2008).
Despite the body of case law, however, the Eleventh Circuit held to the contrary.   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.
Since Crawford, a number of similar actions have been filed throughout the United States.  Of the cases decided thus far, many have been highly critical of the Crawford decision and refused to follow its rationale. See, e.g., Donaldson v. LVNV Funding, LLC, C.A. No. 1:14-cv-01979-LJM-TAB (S.D. Ind. Apr. 7, 2015); Torres v. Asset Acceptance, LLC, C.A. No. 2:14-cv-6542-ER (E.D. Pa. Apr. 7, 2015); Torres v. Cavalry SPV I, LLC, C.A. No. 2:14-cv-5915-ER (E.D. Pa. Apr. 7, 2015).  These courts have been quick to point out the distinctions between the proof of claim process and litigation.  As noted by the Donaldson court,
there is no “threat” in a proof of claim that accurately reflects information about an unsecured debt that that the debtor has listed himself on his schedules.  It is neither a lawsuit nor a threat of a lawsuit; it’s a statement that a debt exists and its amount and there is no prohibition in the Bankruptcy Code against filing a proof of claim on an unsecured, stale debt.  Rather the Bankruptcy Code states that such debts are allowed, unless objected to by any party interest, which clearly includes the trustee or the debtor and should be disallowed if it is unenforceable under applicable law.
Id. at 9. 
In our view, Crawford is an outlier and simply, bad law. The filing of a proof of claim cannot constitute regulated "collection" activity and the Bankruptcy Code provides the proper mechanisms for protecting the debtor.

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