FLORIDA CONSUMERS CAN SUE DEBT COLLECTORS WHO FILE PROOF OF CLAIMS IN BANKRUPTCY COURT ARISING FROM DEBTS WHICH ARE TIME BARRED BY THE STATUTE OF LIMITATIONS
In Crawford v. LVNV Funding, LLC, the United States Court of Appeals for the Eleventh Circuit had previously decided whether debt collectors may violate the FDCPA by filing a proof of claim seeking payment of a consumer debt which was time barred by the applicable statute of limitations on the date that the consumer filed bankruptcy. The Crawford decision is binding upon the federal bankruptcy and trial courts in Florida, Georgia and Alabama. (Outside the Eleventh Circuit, the courts often reach opposite results for several reasons.)
FACTS OF THE CRAWFORD CASE
Mr. Crawford owed $ 2,037.99 to Heilig-Meyers Furniture Company. Heilig-Meyers charged off Mr. Crawford’s account in 1999, and sold the account to an affiliate of LVNV Funding in September, 2001. The final transaction on the account occurred on October 26, 2001, without any further payments towards the closed out account. The court applied Alabama’s three year statute of limitations to the facts of Mr. Crawford’s account and found that the account became time barred in October, 2004. Mr. Crawford filed Chapter 13 bankruptcy in February, 2008 and LVNV Funding filed a proof of claim seeking payment on the Heilig-Meyers account although the statute of limitations expired four years earlier.
Mr. Crawford filed an adversary proceeding against LVNV Funding alleging that LVNV Funding violated the FDCPA by filing the proof of claim attempting to collect the time barred Heilig-Meyers account. The bankruptcy court dismissed Mr. Crawford’s case and the U.S. District Court affirmed the dismissal after Mr. Crawford appealed.
THE ELEVENTH CIRCUIT ANALYZED THE FDCPA AND THE PROOF OF CLAIM PROCESS
The US Court of Appeals for the Eleventh Circuit began its analysis by reviewing the sections of the FDCPA that Mr. Crawford alleged LVNV violated :
“Section 1692e of the FDCPA provides that ‘[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.’ 15 U.S.C. [Section] 1692e. Section 1692f states that ‘[a] debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt.” Id [Section] 1692f.”
Crawford at 1258. Then, the Circuit Court researched the definitions of “unfair” and “unconscionable” because these terms are not defined in the FDCPA itself :
“Because Congress did not provide a definition for the terms ‘unfair’ or ‘unconscionable,’, this Court has looked to the dictionary for help. ‘The plain meaning of ‘unfair’ is ‘marked by injustice, partiality, or deception.'” LeBlanc v. Unifund CCR Partners, 601 F.3d 1185, 1200 (11th Cir. 2010) (quoting Merriam-Webster Online Dictionary (2010).) Further, “an act or practice is deceptive or unfair if it has the tendency or capacity to deceive.” id. (quotation marks omitted and alterations adopted). We also explained that the “[t]he term ‘unconscionable’ means ‘having no conscience’; ‘unscrupulous’; ‘showing no regard for conscience’; ‘affronting the sense of justice, decency, or reasonableness.'” Id. (quoting Black’s Law Dictionary 1526 (7th ed. 1999)). We have also noted that “[t]he phrase ‘unfair or unconscionable’ is as vague as they come.” Id. (quoting Beler v. Blatt, Hasenmiller, Leibsker & Moore, LLC, 480 F.3d 470, 474 (7th Cir. 2007).”
Crawford, at 1258. The Circuit Court settled on the terms “deceptive”, “misleading”, “unconscionable”, or “unfair” as providing the standards under the FDCPA for the violations alleged. The Circuit Court employed the “least sophisticated consumer” standard in applying these standards to the facts of the case. See Jeter v. Credit Bureau, Inc., 760 F.2d 1168, 1177 (11th Cir. 1985).
WHAT IS A “PROOF OF CLAIM” AND HOW DOES THE CLAIMS PROCESS WORK?
When debtors file bankruptcy under Chapter 7, 11, 12, or 13, the debtors are obligated to list all of their creditors in their schedules. 11 U.S.C. Section 521(a0(1)(A).
The bankruptcy courts send notices to the creditors who are listed in the debtor’s schedules and creditors are given an opportunity to file a proof of claim. See 11 U.S.C. Section 501(a).
The proof of claim form is a brief form which is often completed by computers using auto-populated information. The form for proof of claim does not request the date of last payment or other information which would allow the trustee or debtors’ counsel to efficiently screen the claims assuming that they had the resources to do so.
Unless the trustee or the debtor objects to a proof of claim, even time barred claims are automatically allowed against the debtor pursuant to 11 U.S.C. Section 502(a)-(b) and Bankruptcy Rule Procedure 3001(f). If an objection is timely filed, the bankruptcy court will conduct a hearing to determine the amount and allow the claim unless it falls under one of several exceptions to allowance. On of those exceptions is when the claim is unenforceable against the debtor and the property of the debtor under applicable law. See 11 U.S.C. Section 502(b)(1).
If a claim is allowed, a Chapter 13 debtor must pay the debt from his future income pursuant to the Chapter 13 Plan and Confirmation Order. In bankruptcies where a high percentage of the unsecured claims are paid out, the debtor bears more of the burden to the extent that time barred claims are allowed. In bankruptcies where the pay out to the nonpriority unsecured creditors is rather low, more of the burden is borne by the other unsecured creditors who filed claims for enforceable debts (i.e., debts which were not time barred).
In Mr. Crawford’s Chapter 13 bankruptcy, neither the trustee or the debtor objected to LVNV’s proof of claim on the time barred debt until four years later. The Chapter 13 trustee disbursed some of the debtor’s funds to LVNV.
IN THE ELEVENTH CIRCUIT, FILING A PROOF OF CLAIM IS AN ATTEMPT TO COLLECT A DEBT
LVNV acknowledged that filing a collection lawsuit in state court on the account would likely have violated the FDCPA. It is well established that debt collectors violate the FDCPA if they threaten to file a lawsuit to collect a time barred debt or actually file such a lawsuit. See 15 U.S.C. Section 1692e and 1692f.
The Crawford Court noted that “[s]tatutes of limitations ‘protect defendants and the courts from having to deal with cases in which the search for truth may be seriously impaired by the loss of evidence, whether by death or disappearance of witnesses, fading memories, disappearance of documents, or otherwise.”
R.R. Telegraphers v. Ry. Express Agency, 321 U.S. 342, 349, 64 S.Ct. 582, 586, 88 L.Ed. 788 (1944). The Crawford Court continued by examining the purpose of the statute of limitations in the context of proof of claims :
“The same is true in the bankruptcy context. In bankruptcy, the limitations period provides a bright line for debt collectors and consumer debtors, signifying a time when the debtor’s right to be free of stale [1261 * 1261] claims comes to prevail over a creditor’s right to legally enforce the debt. A Chapter 13 debtor’s memory of a stale debt may have faded and personal records documenting the debt may have vanished, making it difficult for a consumer debtor to defend against a time-barred claim.”
Crawford, at 1268 1269. After comparing the similarities of the purpose the statute of limitations in collection lawsuits and bankruptcy proof of claims allowance, the Eleventh Circuit described some of the harms that debt collectors’ mass filings of proof of claims creates :
“Similar to the filing of a stale lawsuit, a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collect can legally enforce the debt. The ‘least sophisticated’ Chapter 13 debtor may be unaware that a claim is time barred and unenforceable and thus fail to object to such a claim. Given the Bankruptcy Code’s automatic allowance provisions, the otherwise unenforceable time-barred debt will be paid from the debtor’s future wages as part of his Chapter 13 repayment plan. Such a distribution of funds to debt collectors with time-barred proof of claims then necessarily reduces the payments to other legitimate creditors with enforceable claims. Furthermore, filing objections to time-barred claims consumes energy and resources in a debtor’s bankruptcy case, just as filing a limitations defense does in state court.”
Crawford, at 1261. Although the Eleventh Circuit did not rule that filing a proof of claim on a time-barred debt violates the specific provisions of 1692(e) or 1692(f), the Crawford court continued :
“For all of these reasons, under the ‘least-sophisticated consumer standard’ in our binding precedent, LVNV’s filing of a time-barred proof of claim against Crawford in bankruptcy was ‘unfair,’ ‘unconscionable,’ ‘deceptive,’ and ‘misleading’ within the broad scope of [Section] 1692e and [Section]
Crawford, at 1261. The Crawford Court also rejected LVNV’s argument that filing a proof of claim is not an attempt to collect a debt so the FDCPA would not apply :
“The FDCPA does not define the terms ‘collection of a debt’ or ‘to collect a debt’ in [Section] 1692e or 1692f. However, in interpreting ‘to collect a debt’ as used in [Section] 1692(a0(6), the Supreme Court has turned to the dictionary’s definition : ‘To collect a debt or claim is to obtain payment or liquidation of it, either by personal solicitation or legal proceedings.'”
Crawford, at 1269 citing Heintz v. Jenkins, 514 U.S. 291, 294, 115 S.Ct. 1489, 1491, 131 L.Ed.2d 395 (1995) (quoting Black’s Law Dictionary 263 (6th ed. 1990). The Crawford Court held that LVNV’s filing of the proof of claim “fell well within the ambit of a ‘representation’ or ‘means’ used in ‘connection with the collection of any debt.’ It was an effort ‘to obtain payment’ of Crawford’s debt ‘by legal proceeding.'” Crawford, at 1269.
The Crawford Court expressly noted that it was not deciding whether the Bankruptcy Code preempts the FDCPA :
“The Court also declines to weigh in on a topic the district court artfully dodged: Whether the [Bankruptcy] Code ‘preempts’ the FDCPA when creditors misbehave in bankruptcy. Crawford, 2013 WL 1947616, at *2 n.1.”
Crawford, at __, n. 7.
In Crawford, the parties did not address the elephant in the room (preemption) so neither did the District Court. As a result the Circuit Court could not address the preemption issue either. The second difficult phase of the war against out of statute proof of claims was about to heat up.
PUSH BACK AFTER CRAWFORD
The United States Court of Appeals for the Eight Circuit is the only federal appellate court to consider whether to follow Crawford. In Nelson v. Credit Management, Inc., the consumer urged the court :
“… to follow the Eleventh Circuit and extend to bankruptcy claims the rule against actual or threatened litigation on time-barred debts. *** In Crawford, the Eleventh Circuit held that knowingly filing a time-barred proof of claim violated the FDCPA’s prohibitions against unfair, unconscionable, deceptive, or misleading conduct. *** The Crawford court reasoned that the same concerns underlying the rule against litigationg or threatening to litigate time-barred debts — the debtor’s faded memory and lost records, possible ignorance of the statute of limitations, and expenses to contest the stale debt – apply equally to a debt collector filing a claim on a stale debt.”
The Sixth Circuit flatly rejected the consumer’s argument based largely upon public policy. Rather than focusing on the language of the statutes, the Sixth Circuit essentially reasoned that the bankruptcy debtors, the bankruptcy trustees, and even other unsecured creditors should bear the costs of the time-barred proof of claims and, therefore, denied consumer debtors relief under the FDCPA.
The Sixth Circuit began by applying a tortured construction of the least sophisticated consumer standard :
“Crawford, however, ignores the differences between a bankruptcy claim and actual or threatened litigation. In Freyermouth, this court held that a defendant’s FDCPA liability turns on ‘whether an unsophisticated consumer would be harassed, misled or deceived by’ the debt collector’s acts. Freyermouth, 248 F.3d at 771. The bankruptcy process protects against such harassment and deception. Unlike defendants facing a collection lawsuit, a bankruptcy debtor is aided by ‘trustees who owe fiduciary duties to all parties and have a statutory obligation to object to unenforceable claims.’ In re Gatewood, 533 B.R. 905, 909 (8th Cir. B.A.P. 2015); see 11 U.S.C. [Section] 704(a)(5), 1302(b)(1) (outlining trustee’s duties, including objecting ‘to the allowance of any claim that is improper’).”
The unsophisticated consumer would be over his or her head in addressing the statute of limitations issues, choice of law, tolling issues, and other complex factual and legal issues that often arise in analyzing whether a debt is time barred. Furthermore, few consumers know how to object to a proof of claim. So, the Nelson court relies on bankruptcy trustees, who have little knowledge of such law either, to police the flood of time-barred claims? Few debtors’ bankruptcy counsel understand the applicable law either. Few claims were ever objected to. That’s why the “business model” (i.e., scam) is so profitable that large, well funded debt buyers such as LVNV, PRA, RoundUp, Asset Acceptance, buy these time barred debts and wait for the bankruptcy notice to appear on their computer screens.
The Nelson court continues with a “no harm, no foul” attitude :
“Defending a lawsuit to recover a time-barred debt is more burdensome that objecting to a time-barred proof of claim. ‘[T]he Bankruptcy Code provides for a claims resolution process involving an objection and a hearing to assess the amount and validity of the claim… [that] is generally a more streamlined and less unnerving prospect for a debtor than facing a collection lawsuit.’ In re Gatewood, 533 B.R. at 909. Because of proof of claim does not expand the pool of funds available in bankruptcy, debtors have less at stake than a collection defendant. Rather, an unsecured creditor likely shares only ‘pro rata in the distribution of the pool of available funds and see[s] the unpaid portion of its claim discharged.’ Id.”
Nelson, at ____. Sometimes, debtors file bankruptcies where the distribution to unsecured creditors is as high as 100%. Regardless of the payout percentage to the unsecured creditors, legitimate creditors with timely claims suffer dilution of their claims.
Objecting to a time barred proof of claim (including reviewing the payment dates on all of the legitimate claims in order to identify the time barred claims) is burdensome regardless of whether the burden is as great as objecting in a particular bankruptcy case.
If you are a Florida bankruptcy attorney or a pro se debtor who believes you have potential claims arising from time barred proof of claims which were filed within the past 365 days, feel free to contact my office concerning your potential case.