Supreme Court Hears Oral Argument in Midland Funding v. Johnson

The U.S. Supreme Court heard oral argument Tuesday in Midland Funding v. Johnson. A primary issue before the Court is whether the federal Fair Debt Collection Practices Act is violated by the filing in a Chapter 13 bankruptcy case of a proof of claim representing a debt subject to an expired limitations period. The case originated from the Eleventh Circuit Court of Appeals, which along with its earlier decision in Crawford v. LVNV, held the FDCPA is violated in those instances. Every other Circuit Court of Appeals has since found otherwise.

The oral argument indicated that at least six justices appear to share the same concerns as the other Circuit Courts of Appeals that ultimately led to the uniform rejection of Crawford and Midland outside the Eleventh Circuit. Whether these expressions carry over into the opinion is far from certain.

A copy of the oral argument is available at: Link to Oral Argument.

Claims and ‘Enforceable’ Claims

Justice Sotomayor devoted many of her questions to whether these claims are “enforceable.” The Eleventh Circuit correctly held that debts subject to the defense of an expired limitations period are still claims within the Bankruptcy Code. The argument supporting FDCPA liability is that an expired limitations period renders a debt “unenforceable,” making it false, deceptive or unfair for a creditor to participate in a Chapter 13 case through a proof of claim. The few remarks from Justice Ginsberg echoed these sentiments.

In the first instance, as Justice Kennedy noted, the defense can be waived if not asserted, allowing a judgment to be entered. As Chief Justice Roberts pointed out, tolling may also permit judicial enforcement.

Justices Kagan, Breyer, Alito and Chief Justice Roberts posed a series of questions testing the scope of the consumer’s enforceability argument. The questioning displayed a concern that if Johnson’s position was adopted, it would not be solely limited to the defense of a limitations period, but other defenses as well, yielding unintended consequences.

The Consumer Financial Protection Bureau and Federal Trade Commission also participated in oral argument in support of the consumer. The regulators’ attorney agreed that the consumer’s position could be construed to prohibit creditor participation in Chapter 13 cases unless the creditor had a good-faith basis to believe the limitations period had not expired. Justice Breyer, on several occasions, expressed concern that these are exactly the types of issues that bankruptcy courts are tasked to resolve as part of the claims process.

CFPB, FTC Concede Filing Such Claims Not Unfair or Misleading

Under questioning from Justice Kagan, the government’s counsel conceded that if the filing of such claims were permitted by the Bankruptcy Code (as all Courts of Appeals have found), the conduct would not be unfair or misleading.

Justice Kagan asked the government’s attorney, “[I]f one looked at the Code and said, well, it seems as though these kinds of claims, although unenforceable, can be filed, if that was your view of the Code, what do you think follows from that?”

Sarah Harrington, arguing for the government responded, “So then I think it would not be unfair and it would not misleading…” Ms. Harrington went on to add that it becomes “unfair” when the creditor seeks payment of the claim.

Why Are These Claims Allowed in the First Place?

Several justices queried Midland’s attorney as to why creditors are allowed to file such claims in the first place. Midland’s counsel noted that they are permitted by the Bankruptcy Code.

Justice Sotomayor expressed dislike for the creditor’s “business model” and posed a series of questions to Midland’s counsel premised on the mistaken understanding that the FDCPA bars the collection of such debts.

In all but a handful of states, the expiration of the limitations period does not bar a collection lawsuit. As several justices noted, the limitations defense can be tolled or even waived by the consumer. Even when the limitations period has run, the debts remain collectible outside of litigation through telephone calls and letters.

Many, but not all, consumer advocates have lent support to affirming the Eleventh Circuit’s decision, which would prohibit creditor participation in many Chapter 13 cases. But this is at odds with the Chapter 13 claims process as the Fourth Circuit found in Dubois v. Atlas Acquisitions. Consumers sometimes forget to schedule some debts in their Chapter 13 petitions. These unscheduled debts are not discharged and can continued to be collected following the close of a successful Chapter 13 case for the simple reason that if the creditor did not have notice or an opportunity to be heard in the case, it would be denied its due process by the Chapter 13 discharge.

As the Fourth Circuit concluded, “Clearly, then, when a time-barred debt is not scheduled the optimal scenario is for a claim to be filed and for the Bankruptcy Code to operate as written.” The risk of an FDCPA lawsuit would incentivize creditors against participation in Chapter 13 cases.

Decision Expected by June 30, Perhaps Earlier

The Court is likely to issue its decision before June 30. The case has taken a fast track from certification to argument and it is possible a decision could come earlier. Maurice Wutscher LLP filed an amicus curiae brief in this case on behalf of DBA International, Inc.

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Donald Maurice provides counsel to the financial services industry, successfully litigating matters in the state and federal courts in individual and class actions. He has successfully argued before the Third, Fourth and Eighth Circuit U.S. Courts of Appeals, and has represented the financial services industry before several courts including as counsel for amicus curiae before the United States Supreme Court. He counsels clients in regulatory actions before the CFPB, and other federal and state regulators and in the development and testing of debt collection compliance systems. Don is peer-rated AV by Martindale-Hubbell, the worldwide guide to lawyers. In addition to being a frequent speaker and author on consumer financial services law, he serves as legal counsel to DBA International and as chair of the ABA's Bankruptcy and Debt Collection Subcommittee. He serves on the governing Board of Regents of the American College of Consumer Financial Services Lawyers and on the Governing Committee of the Conference on Consumer Finance Law .