Supreme Court to Resolve Circuit Split Over Filing Bankruptcy Proof of Claim on Time-Barred Debt

Ballard Spahr LLP

The U.S. Supreme Court granted certiorari last week in Midland Funding, LLC v. Aleida Johnson, a decision of the 11th Circuit that held that Midland’s filing of a proof of claim in the plaintiff’s bankruptcy case on a time-barred debt violated the Fair Debt Collection Practices Act (FDCPA).

As noted by the petitioner in Midland, the 11th Circuit’s holding in Midland conflicts with the decisions of the other federal circuits that have addressed the application of the FDCPA to bankruptcy claims filed on time-barred debts. These circuits have held that the filing of a proof of claim that is accurate but based on a time-barred debt is not a violation of the FDCPA or that such an application of the FDCPA is precluded by the Bankruptcy Code. Most recently, the Fourth Circuit joined the majority view in holding that the filing of accurate proofs of claim on time-barred debts did not violate the FDCPA. The plaintiff in the Fourth Circuit joined in Midland’s request for certiorari given the clear and continuing circuit split.

At issue in the Midland appeal are two separate but related questions. The first is whether the filing of an accurate bankruptcy claim—i.e., a claim that a debt is unpaid—can form the basis of a viable FDCPA claim even if, under relevant state law, the statute of limitations has extinguished the creditor’s legal remedy to obtain a civil judgment in state court. As noted in the Midland certiorari petition, all circuits except the 11th have held that even though the state court remedy is time-barred, filing an otherwise accurate bankruptcy claim is not prohibited by the FDCPA.

The second question raised by the Midland appeal is whether the federal Bankruptcy Code precludes an FDCPA action based on the filing of a bankruptcy claim for a time-barred debt. In Midland, the 11th Circuit became the first federal circuit to hold that an FDCPA claim premised upon the filing of a bankruptcy claim for a time-barred debt was not precluded by the Bankruptcy Code. The other federal circuit courts that have addressed this question have held that even if the filing of a proof of claim on a time-barred debt could be the basis for an FDCPA claim, such a claim is inherently at odds with and precluded or displaced by the Bankruptcy Code’s separate claims allowance and objection process. The Midland petition notes that this question is heavily disputed among various lower courts across multiple circuits.

The Supreme Court’s ultimate decision on these two related questions will be closely watched and could greatly impact the bankruptcy claims process.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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