Fourth and Seventh Circuits Peer Down from the Ivory Tower on FDCPA Issue

Posted by NCBRC - August 26, 2016

The Seventh and Fourth Circuits have joined the fantasy world in which the debtor, the trustee or the court stand as gatekeepers against debt collectors determined to sneak an collectible debt into the debtor’s chapter 13 plan. Owens v. LVNV Funding, LLC., Nos. 15‐2044, 15‐2082, 15‐2109 (7th Cir. Aug. 10, 2016); Dubois v. Atlas Acquisitions, LLC. No. (4th Cir. Aug. 25, 2016). In both cases the voice of reason was represented by a dissenting opinion.

The court in Owens held that while a debt collector who files suit outside bankruptcy to collect on a stale debt violates the FDCPA, within bankruptcy, that same stale debt may be the basis for a proof of claim without violating the FDCPA. The rationale for the disparate treatment of debt collectors within and outside bankruptcy is that: 1) bankruptcy permits a broad range of claims to be filed by creditors, 2) bankruptcy offers its own protections not available to debtors outside bankruptcy, and 3) the statute of limitations cuts off the right to sue but does not vitiate the cause of action itself. The court reasoned in part: “It would be strange to interpret ‘claim’ as excluding legally unenforceable obligations when two of the enumerated examples—‘contingent’ and ‘unmatured claims— afford the creditor no collection right under state law when the claim is filed with the bankruptcy court.”

The dissent, written by Chief Judge Wood, took issue with the majority’s reasoning that a “claim” in bankruptcy is broad enough to encompass a stale debt where the Code specifically includes in the definition contingent and unmatured claims. The Chief Judge noted a glaring difference between contingent or unmatured  claims which may, at some point, be legally enforceable, and claims that are legally unenforceable and will never become enforceable. Chief Judge Wood explained: “There is no event that could come to pass that could create an enforceable legal obligation for the debtor to pay up—at least no contingency that does not fall within the group of sharp or fraudulent practices that . . . are barred by the FDCPA. It is true that certain actions by the debtor can re‐start the statute of limitations after it has run, but the debtor will not take those steps unless she is snookered into thinking that the debt is still legally enforceable. . . . We should not distort the meaning of the word ‘contingent’ to include the possibility of the debt collector’s successfully tricking the debtor into paying.”

Furthermore, the Chief Judge went on, while the definition of “claim” is broad, it is not without boundaries. Bankruptcy Rule 9011 requires that a creditor filing a proof of claim certify that “to the best of that person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, … the claims … are warranted by existing law[,] …  and] the allegations and other factual contentions have evidentiary support … .”

The Chief Judge took a closer look at Phillips v. Asset Acceptance, LLC, 736 F.3d 1076 (7th Cir. 2013), which noted that debtors may feel a moral obligation to repay a debt that is otherwise uncollectible, conceding that if the debt collector made it clear in the claim that the only basis for repayment would be the debtor’s internal motivation to make good on the debt, the deceit necessary to sustain a FDCPA claim would likely be absent. The dissent rejected, however, the majority’s distinction between a debt collector’s misleading filing of a lawsuit in non-bankruptcy context, and its misleading filing of a claim in bankruptcy. To the unsophisticated debtor the two fora are the same and the debt collector’s conduct is identical.

The dissenting opinion ended with a reminder to the majority to descend from its ivory tower in which debtors are “usually” represented by counsel and the trustees offer further protection against unscrupulous debt collectors. The dissent pointed out that there were 1,748 pro se debtors in the bankruptcy court for the Northern District of Illinois in one year, most of whom were there because they were, unsurprisingly, unsophisticated in financial and legal matters.

Owens 7th Cir. opinion Aug 2016

The majority in Dubois v. Atlas Acquisitions, LLC, No. 15-1945 (4th Cir. Aug. 25, 2016), relied on reasoning similar to that expressed in Owens. In doing so, it paid lip service to the fact that: “Congress enacted the FDCPA to eliminate abusive debt collection practices and to ensure that debt collectors who refrain from such practices are not competitively disadvantaged. 15 U.S.C. § 1692(a), (e),” then proceeded to ignore the fact that its decision would not only not discourage abusive debt collection practices, but encourage them as a viable avenue to otherwise unattainable relief.

While acknowledging that “[p]recedent and common sense dictate that filing a proof of claim is an attempt to collect a debt,” the Dubois court, like the Owens court, relied on a broad reading of the definition of “claim” in bankruptcy. It found that the Maryland statute of limitations does not eliminate the right to payment of the debt but merely denies access to a legal remedy. The court distinguished between filing a lawsuit to collect a time-barred debt, and filing a proof of claim for that same debt, concluding that the Code contemplates the filing of stale claims which will  (if all goes well) be disallowed.

In a particularly obtuse footnote, the majority says: “Appellants suggest that ‘by filing proofs of claim on time-barred debt, Atlas is trying to trick debtors into unwittingly reviving the statute [of limitations].’ Appellants’ Reply Br. 4. Regardless of whether this is Atlas’s intent, it is difficult to see how a creditor’s filing a proof of claim would constitute acknowledgement of the debt by the debtor . . .” One could argue that, in fact, it is very easy to see how filing a claim leads to “acknowledgement” of the debt given the fact that proofs of claim enjoy a presumption of allowability that must be affirmatively objected to by the debtor, trustee or party in interest. Simply by doing nothing, the debt is revived, at least in bankruptcy.

In what could hardly be considered financially responsible logic, the Fourth Circuit found that the problem of debt collectors successfully slipping stale claims through the cracks should be dealt with not by prohibiting such claims, but by allocating more resources to improve policing of the bankruptcy process.

Finally, the court leans out of its ivory tower to view the top of the debtor’s head and conclude that it is really doing the debtor a favor. Where an additional claim against the estate may not result in increased contributions by the debtor, having the stale claim included in the bankruptcy will result in that claim being included in the discharge (assuming, of course, that the debtor successfully completes the plan).

Judge Diaz’s dissenting opinion describes the situation thus: “So Atlas plays the odds, representing itself as entitled to part of the debtors’ estates. If someone notices the claims and objects, as happened here, Atlas grins sheepishly—‘You caught me!’—and admits that the claim is meritless. But if the claim slips through, Atlas uses the bankruptcy court to garner a payoff on unenforceable debts.”

To Judge Diaz, the same considerations that make filing a lawsuit on a time-barred debt violative of the FDCPA apply in the bankruptcy context. The unsophisticated debtor will not realize the debt is unenforceable when he sees it presented in court as a presumptively valid claim, and the passage of time within which the debt came to be stale, reduces memory of the facts surrounding it. Trustees, on the other hand, have a disincentive to examine each proof of claim for affirmative defenses as doing so is often time-prohibitive. As Judge Diaz points out, if no stale claims slipped through the cracks, Atlas and other debt collectors would not continue to file them. By continuing to file such claims debt collectors knowingly “exploit[] a weakness in the bankruptcy system.”

The dissent further noted that, while the majority did not address the issue, the Bankruptcy Code does not preclude application of the FDCPA. The dissent agreed with the Third, Seventh, and Eleventh Circuits (albeit not necessarily in the same posture) that because a debt collector can comply with both the Code and the FDCPA, one does not preclude the other.

The dissents in both these cases implicitly or explicitly recognize the fallacy of the majorities’ rulings. Surely the practical result of these decisions is that debt collectors will not only have no disincentive to file time-barred claims but will, in fact, be incentivized to do so, as the more such claims they file the more likely it is that some will slip by. Even if all goes according to plan, the result will further stretch the already limited judicial resources of time and money. For better or worse, it may be that the split in the circuits will be resolved in Supreme Court review.

Dubois 4th Cir. opinion Aug 2016


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