The 7th Circuit Court of Appeals was divided Wednesday over whether debt collectors violated the Fair Debt Collection Practices Act when they attempted to collect stale debts in Chapter 13 bankruptcy proceedings.
In each of the three consolidated cases before the federal appellate court, the debt collector filed a proof of claim for a time-barred debt in a Chapter 13 bankruptcy proceeding. The debtors in each case successfully objected to the proof of claim and then sued the debt collectors, alleging the act of filing a proof of claim on a stale debt violates sections 1692e and 1692f of the Fair Debt Collection Practices Act.
The district courts in each of the three cases granted the debt collectors’ motions to dismiss.
A claim in bankruptcy can include a stale debt, as the statute of limitations doesn’t extinguish the debt, but merely limits the avenues of collection, the majority of Judges Joel Flaum and William Bauer held. “The Bankruptcy Code contemplates that creditors will file proofs of claim for unenforceable debts – including stale debts – and that the bankruptcy court will disallow those claims upon the debtor’s objection.” Flaum noted that the U.S. Supreme Court has repeatedly recognized that Congress intended for the term “claim” to have the broadest possible definition. Filing such a proof of claim is not inherently misleading or deceptive.
The 7th Circuit, in Phillips v. Asset Acceptance LLC, 736 F.3d 1078, held that filing a state court lawsuit to collect on a stale debt violates the FDCPA. The plaintiffs in the instant case contend that Phillips is applicable for their claims in the bankruptcy context.
Flaum acknowledged the circuit split on the issue of whether filing a proof of claim on a stale debt in bankruptcy is a misleading or deceptive act prohibited by the FDCPA. The majority sided with the 2nd Circuit Court of Appeals, citing its decision in Simmons v. Roundup Funding LLC, 622 F.3d 93, 94 (2d Cir. 2010), in which the 8th Circuit Court of Appeals also rejected a debtor’s request to extend the FDCPA to time-barred proofs of claim.
Flaum wrote the concerns identified in Phillips regarding the deceptive or misleading nature of the conduct are less acute when the proof of claim is filed in bankruptcy as opposed to a lawsuit filed in state of federal court. The proof of claim must inform the debtor of the age and origin of the debt, so the consumer doesn’t have to have a memory of it or records documenting it to file an objection. Also, debtors filing for bankruptcy usually are represented by attorneys who are familiar with the statutes of limitations for various debts.
The majority declined to follow the 11th Circuit Court of Appeals’ approach, which has held that the act of filing the proof of claim created a misleading impression to the debtor that the debt collector can legally enforce the debt.
Chief Judge Diane Wood dissented, writing she would align the 7th Circuit with the 11th Circuit. She would hold that the scheduling of a proof of claim on a debt that is undisputedly no longer collectible through judicial proceedings because the statute of limitations has expired violates the FDCPA.
The consolidated case is Alphonse D. Owens v. LVNV Funding, LLC; Joshua Birtchman v. LVNV Funding LLC, et al., 15-2044, 15-2082, 15-2109