The Eleventh Circuit recently held that a third party debt collector is liable for violating the Fair Debt Collection Practices Act (FDCPA) when it files a proof of claim in a bankruptcy case that is barred by a state statute of limitations. This decision marks the first time that a circuit court has extended the protections of the FDCPA to bankruptcy proofs of claim.
In the case of Crawford v. LVNV Funding, LLC, et al. (In re Crawford), Case No. 13-12389, Opinion (11th Cir. July 10, 2014), the Eleventh Circuit Court of Appeals applied a “least-sophisticated consumer” standard and found that filing a time-barred claim was deceptive, misleading, unconscionable and unfair under FDCPA Sections 1692e and 1692f. Relying on the Seventh Circuit Case of Phillips v. Asset Acceptance, LLC, 736 F.3d 1076 (7th Cir. 2013), the court in Crawford stated that
the FDCPA outlaws ‘stale suits to collect consumer debts’ as unfair because (1) ‘few unsophisticated consumers would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts’ and would therefore ‘unwittingly acquiesce to such lawsuits’;
(2) ‘the passage of time…dulls the consumer’s memory of the circumstances and validity of the debt’; and (3) the delay in suing after the limitations period ‘heightens the probability that [the debtor] will no longer have personal records’ about the debt.
The Eleventh Circuit rejected LVNV’s argument that filing a proof of claim is not a “collection activity,” and held that filing of a proof of claim fell well within the broad prohibitions of Sections 1692e and 1692f as it was a “means” by which to collect a debt.
A violation of the FDCPA includes a statutory fine and an award of attorney fees. Section 1692k of the FDCPA provides that a debt collector may be liable to a person in an amount equal to actual damages; statutory damages of up to $1,000; and the costs of the action, including reasonable attorney’s fees.
It is worth noting that the Eleventh Circuit acknowledged that circuit courts in the Second, Third, Seventh and Ninth Circuits all hold that the Bankruptcy Code preempts the FDCPA in the context of a proof of claim. However, LVNV did not claim that the Bankruptcy Code preempts the FDCPA, so it is unknown whether the case would have been decided differently had this issue been raised.
This case highlights the need for a debtor and his attorney to diligently review all proof of claims that are filed in the bankruptcy case. In Crawford, the debtor filed bankruptcy in 2008 and LVNV filed a timely claim. Only in 2012 did the debtor raise objections that LVNV’s claim was beyond the state statute of limitations – long after LVNV had received distributions during the bankruptcy case.
A statute of limitations defense may be asserted in a bankruptcy case, especially in a Chapter 11 or 13 repayment case. See In re Hess, 404 B.R. 747 (Bankr. S.D.N.Y., 2009). Debts that are outside the statute of limitations may be discovered by the bankruptcy trustee and objected to under Section 1302(b)(3). If not challenged by the trustee, the debtor should motion the bankruptcy court to disallow the debt as time-barred under Section 502(b)(1). Disallowed debts are not paid during the bankruptcy case which may lower the monthly payment to creditors, or could reduce the Chapter 13 debtor’s time in bankruptcy.