22 Dec Supreme Court To Weigh In On Liability Of Professional Debt Buyers

On Tuesday the U.S. Supreme Court decided it would hear an appeal challenging whether professional debt collectors can face legal liability for seeking to collect on a debt in bankruptcy, knowing the statute of limitations for the debt has expired.

Midland Funding LLC brings the appeal to challenge an Eleventh Circuit decision from May, which decision revived a lawsuit alleging the company violated a federal law by attempting to collect in Chapter 13 bankruptcy upon an individual’s decade-old credit card debt.  The case stands to have important implications for individuals filing bankruptcy, as well as professional debt-buying firms.

In May the Eleventh Circuit determined in a 3-0 ruling that Midland Funding’s decision to file a proof of claim over the credit card debt gave rise to potential liability under the Fair Debt Collection Practices Act or FDCPA.  The FDCPA is a federal law enacted by Congress in 1977 to regulate the debt collection business.  The FDCPA was enacted one year before the modern Bankruptcy Code took effect.

Although the U.S. Bankruptcy Code allows all creditors to file claims in a bankruptcy case, the Eleventh Circuit said that under the FDCPA, professional debt buyers like Midland Funding are required to comply with additional rules that prevent them from filing proofs of claim for claims they know are time-barred.

The underlying case involves Aleida Johnson who filed for Chapter 13 protection in March 2014.  Two months after Ms. Johnson filed for bankruptcy, Midland Funding filed a proof of claim for payment of $1,879 in unpaid credit card debt the company had acquired.  Ms. Johnson’s credit card debt had originated with a company called Fingerhut Credit Advantage, and the last credit card transaction occurred in May 2003, more than a decade prior to her bankruptcy.  Ms. Johnson sued the company under the FDCPA in Alabama, where the statute of limitations for collecting on overdue debt is six years.

A federal judge originally dismissed Ms. Johnson’s lawsuit, finding the U.S. Bankruptcy Code authorizes all creditors to file proofs of claim, including claims that are filed after a statute of limitations has run.  The Eleventh Circuit disagreed, finding the Bankruptcy Code and the FDCPA coexist together.  It was the 11th Circuit’s decision that gave rise to Midland Funding’s appeal to the Supreme Court.

Midland Funding has argued that the Eleventh Circuit’s decision is an outlier and conflicts with other federal appeals courts that have determined FDCPA liability does not arise when a professional debt buyer submits a proof of claim on a debt that is otherwise time-barred.

Johnson’s attorney Daniel Geyser of Stris & Maher LLP said in an email to Law360 that the appeal is important because professional debt collectors “are abusing the bankruptcy process.”  An attorney representing Midland Funding declined to comment to Law360.