In Midland Funding, LLC v. Johnson, No. 16-348, 2017 WL 2039159 (U.S. May 15, 2017), the Supreme Court resolved the disagreement among Courts of Appeals as to whether a creditor’s filing of a proof of claim that is clearly barred by the statute of limitations is false, deceptive, misleading, unfair, or unconscionable debt collection within the meaning of the Fair Debt Collection Practices Act (the “FDCPA”). Midland Funding, LLC (“Midland Funding”) filed a proof of claim in Aleida Johnson’s (“Johnson”) Chapter 13 bankruptcy case that stated the last time a charge appeared on Johnson’s account was ten years prior to Johnson’s bankruptcy filing. The applicable statute of limitations under Alabama law is six years. The proof of claim was ultimately disallowed and Johnson subsequently sued Midland Funding for violating the FDCPA.

The Supreme Court sided with the majority of Courts of Appeals that have considered the issue, holding that the filing of a proof of claim that on its face indicates the limitations period has run does not violate the FDCPA.  In determining that such conduct was not “false, deceptive, or misleading” the Court explained that provisions of the Bankruptcy Code make clear that the running of a limitations period constitutes an affirmative defense that the debtor has the burden to assert. See 11 U.S.C. § 558. Additionally, the Court found that such conduct was not “unfair” or “unconscionable” due to the differences between a civil action to collect a debt known to be stale and the filing of a stale proof of claim in the context of a Chapter 13 bankruptcy proceeding. In reaching this conclusion the court focused on the following factors: (1) the debtor initiates the bankruptcy proceeding; (2) a knowledgeable trustee is available who must examine proofs of claim and if appropriate pose an objection; (3) procedural rules more directly guide the evaluation of claims; and (4) the claims resolution process is “generally a more streamlined and less unnerving prospect for a debtor than facing a collection lawsuit.”  Lastly, the Court focused on the different purposes of the FDCPA and the Bankruptcy Code with the former aimed at preventing bankruptcies in the first place and the latter focused on maintaining the delicate balance of a debtor’s protections and obligations.[1]

The implications of the Midland decision are twofold.  First, the holding will likely breathe new life into the lucrative and controversial practice of purchasing debt that has an expired statute of limitations at a fraction of its face value, and then filing a claim in bankruptcy cases in the hope of receiving a distribution.  Second, the Supreme Court made it clear that the burden of reviewing and, if necessary, objecting to proofs of claim lies with Chapter 7 and 13 Trustees.  See 11 U.S.C. § 704(a)(5) (providing that a “Trustee shall – if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper”); see also 11 U.S.C. § 1302(b)(1) (requiring a Chapter 13 Trustee to perform the obligations set forth in Section 704(a)(5)).  While this fact does not come as a surprise to Chapter 7 and Chapter 13 Trustees, the decision may impose added obligations on counsel for debtors to ensure that proofs of claim associated with debts that are beyond the statute of limitations are not paid.  This is because there is a possibility that such a payment may constitute a voluntary payment that would revive the debt and restart the statute of limitations.

[1] An interesting caveat is that the law of forty-eight (48) states is identical to Alabama in the sense that the expiration of a statute of limitations does not eliminate the debt owed by an individual or corporation.  Rather, the expiration of the applicable statute of limitations provides an airtight affirmative defense that can be asserted if collection actions are initiated.  Such laws stand in stark contrast to statutes in Wisconsin and Mississippi that provide the expiration of a statute of limitations eliminates the debt at issue.  See Wis. Stat. § 893.05; Miss. Code. Ann § 15-1-3.  Given the Court’s reliance on the fact that the expiration of a statute of limitations in Alabama only presents an affirmative defense rather than an outright elimination of the underlying debt, there would likely be a different decision if the case had involved the state law of Wisconsin or Mississippi.