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Midland Got It Right (Sort Of)

posted by Adam Levitin

The Supreme Court got it right in Midland Funding LLC v. Johnson, which holds that it is not a violation of the Fair Debt Collection Practices Act to file a proof of claim in a Chapter 13 bankruptcy based on a debt whose statute of limitations has expired.  

I suspect that I might be the only bankruptcy professor whose name doesn't start with the last two letters of the alphabet who isn't outraged by Midland (which gives a nice shout out to our former co-blogger Katie Porter's scholarship!), and I'm going to catch hell for writing this, but one of the great things about tenure is that I can say things like this.  So here goes.  I don't think Midland is a very persuasive opinion; it's not the reasoning I would adopt, but I think it gets the right answer, even if it is uncomfortable as a policy result (it's hard to defend an industry whose economics are dependent upon careless trustees and debtors). 

Here's the reason for my heretical view:  I don't understand the Fair Debt Collection Practices Act as governing debt collection through the courts.  The statute is designed to cover non-judicial debt collection:  harassing dunning calls and the like.  It doesn't expressly exclude judicial debt collection, but it's pretty clearly not meant to address the problems of trying to collect unenforceable debt through the judicial system.  The specifically prohibited practices are all about nonjudicial debt collection.  Indeed, trying to govern judicial debt collection via statute would be tricky, because one has to distinguish between debts that are facially unenforceable and those that aren't, and that line isn't so obvious, even with statutes of limitations (where there can be disagreement on when it runs, tolling, etc.). 

There's no need to despair, however.  Even if the FDCPA doesn't apply to time-barred debts in Chapter 13, nothing prevents courts from applying Rule 9011 sanctions. There's no language in the Midland opinion that would be an obstacle to such sanctions, but they would presumably have to be fact-and-circumstance specific, rather than a blanket rule of time-barred=sanctionable.  And that's actually the point.  There's no need for the FDCPA to extend to judicial debt collection because courts have other tools for policing bad behavior by creditors.  Also, note that the CFPB has statutory authority under its UDAAP power to undertake a debt collection rulemaking that would cover attempts to collect time-barred debt through the courts.

And now a snarky point side point. Midland, like so many SCOTUS opinions, was decided based on specific statutory language. Is it too much to ask, then, for SCOTUS to use language correctly? Justice Sotomayor's dissent states that: "The Court today wrongfully holds that a debt collector that knowingly attempts to collect a time-barred debt in bankruptcy proceedings has violated neither of these prohibitions." (emphasis added).  The Court's holding may well be wrong, but I don't think it's wrongful. This is why I despair of good decisions from a Supreme Court that is obsessively textualist, and insufficiently contextualist. 

Comments are open.  Have at me. 


I understand, at a technical level at least, the point you are making. However, I will offer two counter-observations:

1. A cardinal principle of statutory construction is that a statute should not be interpreted in a way that leads to an absurd result. Under the majority's holding, it would be illegal for the creditor to dun the debtor by phone to collect a time barred debt, and the majority leaves standing numerous rulings that it is also a violation to sue the debtor in state court, but somehow the in-between action of filing a POC is OK?

2. The dissent correctly (in my mind) approaches the question of unfairness/unconscionability (said to be a matter of first impression for the Court) not by looking at a single atomized Chapter 13 POC, but rather at the business model on which trading in time-barred debt is based, which is fundamentally grounded on trying to trip up consumers and shift the burden (and cost) of challenging the debt to them. One can take the position as a matter of policy that the law should not seek to remedy the power imbalance between debt traders and consumers in this situation. There is nothing in the Constitution or in the Bankruptcy Code that requires us to do so. However, as long as the FDCPA remains in effect, we do have a law that is intended to help level the playing field, and it should be applied to serve the purposes for which it was enacted.

You should read the statute, including 15 USC §1692e(15) and 15 USC §1692i. You should also read the SCOTUS opinion Heintz v. Jenkins.

I'd just have to say that it's not careless for Trustee's to not litigate. Though they have a duty to object to claims if a purpose would be served, they cannot represent the Debtor.

Expecting them to be the source of knowledge for the laws of the State where the agreement was reached, whether the contract (which is often not attached) provides another State as choice of law, what impact that has in the State of filing, when the Debtor last paid, whether the Debtor has taken any other action that extends the Statute of Limitations, and knowing what those other actions are in each State/choice of law State etc. is quite a lot.

And Debtors themselves, perhaps underestimating the likelihood of dismissal, often are not concerned either. They're expecting a discharge and generally not paying 100% so to them there's no reason to scrutinize and get their facts straight.

Scott, I teach this statute routinely and don't find either provision you cite very persuasive. 1692e(15) prohibits tricking consumers into thinking that a legal notice isn't one. That's a far cry from regulating judicial debt collection. I think you've got a better claim with 1692i, but it's still hard to look at the FDCPA as a whole and think that the statute is about judicial debt collection.

As far as Heintz v. Jenkins (which I also teach), the conduct at issue was not about the actual judicial proceeding. It was about a side letter urging settlement. To be sure, SCOTUS's rationale for the decision was that (1) linguistically a lawyer is a debt collector because the lawyer is trying to collect money for a third party and (2) Congress amended FDCPA in 1977 to remove an express exemption for attorneys. But that's an argument from a negative implication and the kind of dictionary-based linguistic argument that I think makes the court look ridiculous. (If judging were just about dictionaries, we could automate the judiciary.)

I take all of your points here, but I still think it's hard to see the FDCPA as a statute regulating judicial debt collection.

Adam, nobody suggests that the FDCPA JUST covers litigation but its coverage absolutely includes violations occurring during the litigation process. So says SCOTUS. As you know, since you teach it, the Heintz holding is very explicit: "For these reasons, we agree with the Seventh Circuit that the Act applies to attorneys who "regularly" engage in consumer debt collection activity, even when that activity consists of litigation".

I think you should have begun your piece by stating that the Heintz decision is wrong and why you think so.

I am convinced the unanimous decision in Heintz was correct.

Heintz has an affirmative case for FDCPA coverage and a negative onecabout why contrary arguments are wrong. Most of Heintz is the latter. The affirmative case is really thin. It rest on a not-particularly-helpful dictionary definition and an overbroad interpretation of the 1977 FDCPA amendment. There really aren't strong grounds for the Court's conclusion. A better reading of the amendment is that one isn't per se excluding from being a debt collector by virtue of being an attorney, not that all litigation is debt collection for FDCPA purposes.

Also, remember context of FDCPA in 1974: it's after Fuentes v. Shevin and Snaidach v. Family Finance. Presumably those cases moved a lot of collections out of a quasi-judicial context and to plain old moral suasion. I don't see why the 1977 amendment would change that.

Btw, if you're right, why isn't every failed suit against a consumer (meaning that judgment is gor less than the amount claimed in the pleadings) a violation of 15 USC 1692e(2)(a) or 1692f(1)? These provisions aren't drafted to regulate the practice of law. Just cuz you have a hammer doesn't mean that the problem is a nail.

My interest in this case is rather narrow and off-topic. It's this: when Breyer worries about FDCPA suits on bankruptcy conduct being filed in "an ordinary civil court," why isn't the rejoinder (which Sotomayor makes in part, but only in small part) that not only is there bankruptcy jurisdiction over such suits, but that district courts with ordinary standing reference orders must refer such suits to the bankruptcy court? A Chapter 13 debtor wants to sue a creditor for filing a stale proof of claim. That suit is at least related to his bankruptcy; it augments his estate, post-petition property being property of his estate. Well, maybe that's not enough reason to refer the action; we probably don't think that any diversity suit or federal-question suit a chapter 13 debtor files must go to bankruptcy court. But this suit does more than relate to the bankruptcy case; it probably arises in it. It's about, after all, a proof of claim filed in his case. If that's not enough to make the suit arise in, I don't know what is. (Note that this characterization doesn't depend on a "but for the bankruptcy, no claim" test; rather, an act taken in the bankruptcy forms one of the elements, indeed the critical element, of the claim. In that way it's like bankruptcy malpractice, which all the courts of appeals that have addressed the point say is a core arising-in matter. Though query whether such claims aren't Stern claims.)

Now, you might say, "but wait, aren't bankruptcy courts only referred the district court's 1334 jurisdiction? So if the plaintiff only asserts federal-question jurisdiction, the fact that a suit could have been brought under 1334 doesn't matter." But that's wrong. 157(a) authorizes reference of proceedings that arise under title 11, in a bankruptcy case, or relate to a bankruptcy case - not 1334 jurisdiction over those proceedings. 1334 isn't cross-referenced. Reference orders typically parrot 157(a) and don't refer to 1334. And if the objection I anticipate were right, it follows that a debtor or trustee could bring a 548 fraudulent-transfer action, or a Code-created avoidance action, or sue for stay violations, etc., in district court under 1331, and that merely by not pleading 1334 they escape the reference of all proceedings arising under title 11 and can stay in district court. That seems downright bizarre.

I think this case is even more correct than you give it credit for, Adam, and the main problem with it is its misuse of the term "time-barred." A statute of limitations is not a time bar; it is not a statute of repose, as the the Court's discussion of Alabama law shows. It is an affirmative defense that must be raised or it is waived. As for putting the onus on the debtor, it's already there in a Chapter 13. You have to get your claim review filed and your objections made, or the trustee will start paying on those claims.

Knute's exactly right about the statute of limitations being an affirmative defense. I don't think that really helps in figuring out whether filing a claim based on a stale debt violates the FDCPA. It's one thing if I unwittingly file a claim based on a stale debt and another if I do so willfully and perhaps yet another if I do so negligently. What Knute's point suggests, however, is that filing a claim based on a stale debt should probably not be presumptively a legal violation of any sort (even though one could imagine the claim being enforceable, but also sanctioned).

I think my argument that FDCPA doesn't apply to in-court collection is also bolstered by 15 USC 1692g(d), which provides that "A communication in the form of a formal pleading in a civil action shall not be treated as an initial communication for purposes of [the requirement of sending out a debt validation notice.]"

Adam, you're correct that I don't think filing a stale claim should be an FDCPA violation, and even after listening to Professor Jacoby make her points for the other side at a CLE here in Salt Lake last night, I'm sticking with my position.

First, policy arguments just don't cut it with me. If you think the market in stale debt shows a systemic problem with the collections industry (a position I happen to take), the solution is a statutory amendment, not case by case resolution in a court of limited jurisdiction. For those who think this is already in the relevant statutes, I question how it could work at all under most circumstances, let alone be the preferred remedy (See below.).

Second, a substantive right of action under FDCPA is simply not a preferable remedy to the overwhelming majority of debtors (and I'm actually low-balling that estimate) to procedural remedies under 502, 9011, and the like. If the claim is disallowed, the problem is solved, and if sanctions are awarded, so much the better. That is simpler and cheaper than pursuing any substantive claim in federal or state court, and it avoids having those courts ruling on the validity of claims in the bankruptcy court, which is an invitation for a train wreck.

Further, a substantive right of action would undoubtedly be a recursive claim. Debtor files the case, creditor files the stale claim, debtor or somebody files the FDCPA case. It's tail-chasing. There is a reason one of the elements of malicious prosecution is that the underlying claim being complained of be resolved before the tort claim will lie. Bankruptcy cases can't wait around like that, and fortunately they don't have to, because resolution under 502 and sanctions under 9011 ARE the remedy.

Third, just how would it work? Let's take it chapter by chapter:
Chapter 7: Unless there are sufficient assets to cover the trustee and legitimate creditors completely and any distribution to the stale claimant would go back to the debtor (In the words of Shrek, "Yeah, like THAT'S gonna happen."), the debtor isn't allowed to care. The other creditors will care if the stale creditor is taking money from them, but why they should get an FDCPA claim out of that is, shall we say, problematic. Theoretically a claim could lie with the trustee, but why it would be preferable to 502 and 9011 I don't see.
Chapter 13: Unless it's a 100% plan, the debtor simply doesn't have a dog in the fight; disallowing the stale claim doesn't change the monthly payment. There is simply no way the Chapter 13 trustees can take this on, and even if they did, it would have to be under 502 and 9011 since they don't stand in the debtors' shoes. Other creditors could raise the issue, but again, they would not be entitled to an FDCPA claim.

What about plans that aren't completed, which is the vast majority of them? The debtor is now out in the world with the stale claimant in hot pursuit. BUT, one of three things happened in the BK case: 1) The claim was objected to, and the objection was upheld; 2) the claim was objected to, and the objection was denied; or 3) no objection was filed (and in fact the debtor's claim certification greenlighted it). In the first case, the stale claimant will face res judicata and collateral attack defenses and probable sanctions. In the other two, debtor will be facing res judicata. Either way, the procedural remedies in the BK court will have resolved and disposed of the issue.

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