In 2014 the Eleventh Circuit Court of Appeals held that the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C 1692 et seq., is violated when a debt collector files a proof of claim in a Chapter 13 bankruptcy case for a debt subject to an expired limitations period. The decision, Crawford v. LVNV Funding, LLC, inspired a number of lawsuits questioning what had been a common and accepted practice in Chapter 13 cases.
Crawford Broke New Ground
The FDCPA regulates the conduct of “debt collectors,” which it defines under section 1692a(6) as persons who regularly engage in collecting debts owed to others. In some instances, it can apply to creditors collecting their own debts if they do so under a name “which would indicate” a third-party is collecting a debt. Debt collectors can be subject to the FDCPA under section 1692a(5) when they engage in collecting a debt arising from money, property, services, or insurance primarily incurred for personal, family, or household purposes.
Stanley Crawford, an Alabama resident, incurred a $2,037.99 debt with the Heilig-Meyers furniture company. The debt was charged-off by the furniture company in 1999 and purchased by an affiliate of LVNV Funding, LLC in 2001. By 2004, Alabama’s statute of limitations applicable to Crawford’s debt had expired. Crawford filed a Chapter 13 petition in 2008, and LVNV filed a proof of claim soon after for its acquired debt. Four years later, Crawford filed an adversary complaint in the bankruptcy court alleging that LVNV’s proof of claim violated the FDCPA because it was filed after the applicable Alabama limitations period had run. The bankruptcy court followed existing case law and dismissed the complaint, and the district court affirmed the dismissal on appeal.
The Eleventh Circuit reversed. It began its analysis by noting that the FDCPA prohibits the filing of a lawsuit to collect a debt. It found that the filing of a proof of claim is similar because it is an action to collect a debt and implicates the same concerns in preventing consumer harm present in a collection lawsuit; namely, that consumers are unaware of the limitations defense and would "unwittingly acquiesce" to the lawsuit, the passage of time dulls a consumers memory of facts surrounding the circumstances and validity of the debt, and the delay increases the likelihood the consumer will no longer have records concerning the debt. The court held, therefore, that filing such a proof of claim was a false, deceptive, or misleading representation in violation of section 1692e and an unfair or unconscionable means to collect a debt in violation of section 1692f.
Prior to Crawford, most, if not all, decisions that had examined the practice concluded that either the FDCPA was not violated or that it was precluded by the Bankruptcy Code.
Most courts recognized that debts, even those subject to expired limitations periods, are “claims” under bankruptcy law and should be included in a Chapter 13 case. Keeler v. PRA Receivables Management, LLC often is cited for this analysis. These decisions reason that encouraging creditors to participate in Chapter 13 cases furthers the goal of affording consumers a “fresh start.” This is because Chapter 13 discharges only debts that were scheduled by the debtor or otherwise received treatment in a Chapter 13 case, such as a creditor filing a proof of claim. Even though the debts may be subject to an expired limitations period, in many states (such as Alabama), the expiration is only a defense, is not self-executing, and does not divest a court of jurisdiction. Further, the expiration of the limitations period does not extinguish debts, and creditors can continue their collection efforts. The debts are valid “claims” in a Chapter 13 case and, because the Bankruptcy Code permits the filing of proofs of claims for such debts, it is neither unlawful nor deceptive to file such claims. Most decisions, including those from bankruptcy and trial courts within the Eleventh Circuit, have taken this approach.
Another line of cases reasons that the Bankruptcy Code “precludes” the FDCPA; therefore, conduct arising within bankruptcy cases cannot form the basis of an FDCPA claim. This is the view of the Ninth Circuit and, to a large extent, the Second Circuit as well.
Circuits are Rejecting Crawford
Creditors and debt collectors were caught off-guard by Crawford. The FDCPA has a one-year limitations period and, because the practice was widely viewed as lawful, a number of claims had been filed in Chapter 13 cases that suddenly could be deemed a violation of federal law, at least in the Eleventh Circuit. A significant number of lawsuits followed and have since made their way to the Circuit Courts of Appeals.
As of early September 2016, every Circuit Court of Appeals that has addressed the issue since Crawford has rejected its holding. The Fourth (Dubois v. Atlas Acquisitions, LLC), Seventh (Owens v. LVNV Funding LLC), and Eighth (Nelson v. Midland Credit Management Inc) Circuit Courts of Appeals all agreed that time-barred debts that can be lawfully collected under state law are claims, and a creditor’s mere filing of a proof of claim subject to an expired limitations period is not false, deceptive, or misleading. These decisions also point to the existing protections bankruptcy courts provide debtors under both the Bankruptcy Code and Rules, and to the desire to bring all claims that can be asserted against debtors within the bankruptcy process. There are other reasons, however, why Crawford is flawed and poses dangers to both debtors and creditors.
The Chapter 13 Claims Process
Debtors who qualify for Chapter 13 must provide a “plan” by which they propose to pay their debts from their disposable income over three to five years. Under section 1328 of the Bankruptcy Code, at the conclusion of a Chapter 13 plan, the debtor receives a discharge of all debts provided for in the plan as well as claims that were disallowed under section 502 of the Bankruptcy Code. A claim is provided for by a plan if it is “allowed”--that is, some payment will be made on the claim through the Chapter 13 plan. A claim that is disallowed does not receive payment. In either case, under section 502(a), a debt can only be allowed or disallowed if it is first scheduled or listed by the debtor in his or her petition or a proof of claim filed. A claim can be disallowed if it is subject to a state law defense that makes it unenforceable under “applicable law.”
The genesis of the present controversy is that proofs of claim were filed by debt collectors that were subject to the state-law defense of an expired state-law limitations period.
Adverse Impact on the Automatic Stay
A majority of courts hold that the FDCPA is violated when a debt collector files a lawsuit upon a debt subject to an expired limitations period. See Thomas Dominczyk, Collecting Time-Barred Debt: Is it Worth the Risk?, Business Law Today, April 2014. Several advocates of Crawford continue to argue that debts subject to expired state-law limitations periods are not “claims” within the meaning of the Bankruptcy Code because the FDCPA is violated if they are enforced by a collection lawsuit. As the Dubois and Owens opinions point out, however, most statutes of limitation do not extinguish debts, nor does the FDCPA. Unless the statute of limitations also extinguishes the obligation, a creditor still has standing to pursue its claim in state court, subject to the defense of the limitations period, and can continue to collect the debt outside of litigation. The opinions also point out that, in some instances, the bar of an expired limitations period can be removed by a debtor’s payment or agreement.
The weakness of Crawford’s rationale is equating the Chapter 13 claims process with a collection lawsuit. Although both are judicial proceedings, the similarities end there. The cases that have arisen in this area all concern unsecured debts. Unlike a collection lawsuit, the Bankruptcy Code determines the amount an eligible Chapter 13 debtor must pay to his or her unsecured creditors. Often, debtors are required to pay only a fraction of the total of their unsecured debts, which is divided among these creditors on a pro-rata basis. These payments may take up to five years under a Chapter 13 plan.
Advocates of Crawford have argued debts subject to expired state-law limitations periods are not “claims” within the meaning of the Bankruptcy Code and, for the same reasons, debt collectors cannot bring collection lawsuits without violating the FDCPA, and ? if? they do not possess claims for which they can lawfully file a proof of claim. The argument is not persuasive, and no court has accepted the argument that time-barred debts are not “claims” under the Bankruptcy Code. Even the Eleventh Circuit conceded this point earlier this year in Johnson v. Midland Funding, LLC.
In stark contrast to a collection lawsuit, when a debtor initiates a Chapter 13 case, section 362(a)(6) of the Bankruptcy Code imposes an automatic stay upon any activity to collect a “claim against the debtor,” among other things. The stay is effective during the life of the Chapter 13 case, which can be up to five years, regardless of whether the creditor has notice of the case.
Debt collection efforts are not limited to lawsuits. Many debts are simply too small to warrant the cost and expense of litigation, meaning telephone calls and letters often are employed as the primary means of collection. Except for Mississippi and Wisconsin, the expiration of the limitations period does not extinguish a debt, and debt collectors continue to use lawful collection techniques without resorting to litigation techniques. Consumers under the protection of bankruptcy receive relief from these efforts by operation of the automatic stay. If time-barred debts were not “claims” within the meaning of the Bankruptcy Code, a plausible argument could be made that the underlying debts were not subject to the automatic stay (which, under section 362(a)(6), prohibits a creditor from pursuing prepetition “claims”).
Those supporting Crawford contend that the FDCPA provides similar protection under section 1692c(c), but it does not. Section 1692c(c) provides that, once a consumer notifies a debt collector in writing that he or she refuses to pay the debt or to stop its collection communications, the debt collector must cease communications with few exceptions. However, a majority of decisions find section 1692c(c) effective only against communications coming from the debt collector to whom the written notice was addressed, allowing collection communications to resume once a debt is transferred to a different debt collector. Further complicating the process is the requirement for the consumer to send the written notice to each debt collector if he or she desires to cease all collection activity by all debt collectors. The automatic stay of section 362(a) applies to all creditors and becomes effective by the mere filing of the Chapter 13 case, regardless of whether creditors have notice of the case.
Due Process and the Discharge Injunction
Another line of reasoning is that, even if such debts are claims, the Bankruptcy Code does not require creditors to file a proof of claim so they can refrain from doing so, just like they can refrain from filing a lawsuit against a time-barred barred debt. Under this rationale, the FDCPA would make it unlawful for a creditor to participate in the Chapter 13 claims process.
Given that the courts agree time-barred debts are claims, however, prohibiting their filing by debt collectors can result in these debts not being subject to the Chapter 13 discharge injunction. Unlike a no-asset Chapter 7 case, section 1328 of the Bankruptcy Code limits the discharge order to only those debts “provided for in the plan or disallowed under section 502.” Given that most of the proofs of claims filed in Crawford-type cases represent older debts, they often are not scheduled or listed by Chapter 13 debtors and would not be “provided for in the plan or disallowed.” Once the Chapter 13 case was closed, these creditors would be free to restart their collection efforts.
Unlike a state court lawsuit, a Chapter 13 case is a judicial proceeding adverse to a creditor’s interests through the automatic stay and discharge injunction. Even debt collectors subject to the FDCPA still can lawfully collect time-barred debt without resorting to lawsuits; however, bankruptcy courts must also provide creditors with due process, as pointed out in Glenn v. Cavalry Invs. LLC (In re Glenn). There, Judge Timothy Barnes noted that, because the FDCPA did not itself extinguish debt and neither did the applicable Illinois law, the creditor-debt collector still maintained a property right to collect its time-barred debt, which was protected by affording the creditor procedural due process by way of its participation in the Chapter 13 claims process.
Two components are necessary to provide procedural due process: notice and an opportunity to be heard. Because Crawford has made it unlawful for creditor-debt collectors to file proofs of claim against time-barred debts in the Eleventh Circuit, there is a plausible argument that claims subject to the Crawford proof of claim prohibition have not being discharged, even if scheduled by the debtor or a trustee.
The Future of Crawford
Crawford remains a concern for debt collectors and creditors. The issue remains pending before the First, Third, Fifth, and Sixth Circuit Courts of Appeals. On October 11, the U.S. Supreme Court granted a petition for writ of certiorari from the Johnson decision. A decision is expected by June 2017.
Although Crawford was focused on entities whose business is the purchase of defaulted debts, its holding also impacts “true” creditors who are not subject to the FDCPA. These creditors, which include small businesses as well as large financial institutions, often employ debt collectors to file proofs of claim on their behalf, either because they lack the experience or resources to do so themselves. Debt collectors representing these creditors are unlikely to risk the cost and expense of defending an FDCPA lawsuit where there is the slightest possibility a debt may be subject to an expired limitations period. The cost to undertake analysis of the conflicting limitations periods or the potential tolling of limitations periods is too significant to justify the expense. In these instances, creditors and their debt collectors have good reason to refrain from participation in Chapter 13 cases.
As the Ninth Circuit explained in the Walls decision, the Bankruptcy Code contains a “carefully articulated set of rights and remedies” applicable to both debtors and creditors. Crawford did not devote sufficient attention to the implications of restricting creditor participation in the Chapter 13 process and inadvertently opened the door to eroding the substantial protections provided to distressed consumers through Chapter 13.