Midland Funding v. Johnson

THE BANKRUPTCY CODE

Midland Funding, LLC argues that the Bankruptcy Code provides a right for creditors during bankruptcy proceedings to file a proof of claim for an unextinguished time-barred debt. Midland Funding asserts that the definition of a “claim” in the Bankruptcy Code is broad, as the Code defines a claim as a “right to payment.” Midland funding argues that state law creates a debtor’s obligations. Midland Funding contends that under Alabama Law, it has a right to payment; Midland Funding emphasizes that while the running of the statute of limitations abolishes a judicial remedy, it does not abolish a right to payment.

Moreover, according to Midland Funding, the Bankruptcy Code anticipates the filing of proofs of claim for unextinguished time-barred debts. In support of this assertion, Midland Funding notes that the Code provides rights to payment for claims that are disputed or contingent even though such claims are not enforceable at the time of filing. Midland Funding also points out that the Code says that a debtor can raise and litigate a statute of limitations defense in response to a claim it believes is time-barred. Therefore, Midland Funding claims that the Code invites the filing of proofs of claim for unextinguished time-barred debts. In addition, Midland Funding maintains that allowing such claims further the purpose of the Code by allowing all of a debtor’s creditors to be treated together.

Aleida Johnson, however, counters that the Bankruptcy Code does not create a right for creditors to file claims for time-barred debt. Johnson argues that providing a right to file a losing claim would be illogical. Johnson asserts that to have a right to payment under the Code, the debtor must have a legally enforceable obligation to pay the creditor. While Johnson agrees that Alabama law may preserve the debtor’s obligation, Johnson claims that the obligation it preserves after the statute of limitations runs is merely a moral obligation, not a legally enforceable one. In other words, Johnson argues that debts are not legally enforceable under Alabama law after the statute of limitations expires, though the moral obligation still remains. Thus, Johnson contends that Midland Funding does not have a right to payment and therefore cannot file a proof of claim. Moreover, Johnson counters that time-barred claims are different from disputed and contingent claims because a time-barred claim, unlike disputed and contingent claims, will never become an enforceable obligation.

In addition, Johnson insists that a right to file claims for unextinguished time-barred debt is at odds with the purpose of the Bankruptcy Code. Johnson argues that if trustees are required by law to reject to time-barred claims, it does not make sense for parties to have a right to file such claims. Moreover, Johnson contends that time-barred claims offer no benefits to society and waste party and judicial resources. Johnson asserts that the filing of time-barred claims is at odds with the aim of the claims process as a whole, which Johnson argues is to fairly and efficiently process claims. Johnson notes that Congress chose for all claims to be presumptively valid and enforceable. Thus, Johnson maintains that Congress did not also intend for parties to knowingly file unenforceable and invalid claims. Johnson also states that courts sometimes sanction parties for filing claims that the parties know are time-barred. Johnson counters that it is therefore illogical to consider the filing of time-barred claims as a right.

THE FAIR DEBT COLLECTION PRACTICES ACT (“FDCPA”)

Midland Funding asserts that the Fair Debt Collection Practices Act (“FDCPA”) also permits creditors to file a proof of claim for an unextinguished time-barred debt during a bankruptcy proceeding, as filing a claim for a time-barred debt is neither deceptive nor unfair. First, Midland Funding contends that filing a claim for a time-barred debt is permitted under Section 1692e, which prohibits creditors from using deceptive, false, or misleading “representation or means” while attempting to collect a debt. Midland Funding states that its proof of claim is not misleading and is accurate. Further, Midland Funding maintains that its claim contains all of the information that is required by the Bankruptcy Code, including the date of the account’s last payment and the date of the last transaction of the account’s holder. Midland Funding states that its proof of claim was also accurate in the way it described the debt’s legal status. Midland Funding contends that if the Court does consider from whose perspective a potentially misleading statement should be analyzed, the Court should analyze it from the perspective of an attorney or trustee, neither of whom would be misled by an accurate, time-barred proof of claim.

In addition to not violating 1692e, Midland Funding asserts that filing a proof of claim for an unextinguished time-barred debt also does not violate Section 1692f, which forbids collectors from using “unfair or unconscionable means” while attempting to collect a debt. Midland Funding states that its proof of claim was accurate and honest. Midland Funding maintains that its claim is unlike the type of claims that prompted Congress to enact the FDCPA, such as creating fake legal documents or harassing consumers. Midland Funding also emphasizes that its filing of a time-barred claim has virtually no effect on the debtor; Midland Funding notes that if a time-barred claim is ultimately permitted, it would generally affect other creditors, not the debtor. Moreover, Midland Funding states that there are numerous procedures that protect debtors in a bankruptcy proceeding, which reduce the possibility of coercion from the filing of a time-barred claim.

Johnson, however, contends that the filing of a time-barred claim is both misleading and unfair, in violation of both Section 1692e and Section 1692f. Johnson asserts that Midland Funding violates Section 1692e because it exploits the fact that claims are presumed valid by filing claims it knows are not valid, hence falsely asserting that it is entitled to payment. Though Johnson concedes that Midland Funding’s time-barred claims may be accurate, Johnson contends that the FDCPA prohibits “more than just falsehoods.” Johnson argues that because all claims are entitled to a presumption of validity, the chances that time-barred claims are thoroughly reviewed and objected to are reduced. Johnson notes that bankruptcy courts cannot spend as much time as district courts can on each claim. Further, Johnson counters that Midland Funding’s filing would deceive not only debtors, but also busy trustees and attorneys. Johnson states that if time-barred filings were reviewed thoroughly by an attorney, they would be rejected every single time.

Moreover, Johnson asserts that the filing of a time-barred proof of claim is also unfair and unconscionable under Section 1692f. Johnson claims that Midland Funding’s time-barred claims only succeed when the bankruptcy process malfunctions: that is, when debtors or trustees fail to object to time-barred claims, thus forcing debtors to repay a creditor whose claim is time-barred. Johnson argues that Midland Funding hopes that its claims slip through the supervision of the court by flooding bankruptcy courts with time-barred claims. Johnson also disputes Midland Funding’s claim that filing time-barred claims do not harm debtors. Johnson counters that when a debtor must repay 100% of their debts or when a debtor fails to complete a Chapter 13 bankruptcy plan, that debtor will be harmed significantly by having to pay time-barred claims.

RESOLVING CONFLICT BETWEEN THE FDCPA AND THE BANKRUPTCY CODE

Midland Funding argues that the FDCPA allows creditors to file a proof of claim for a time-barred debt. But, Midland Funding contends that if the FDCPA is ambiguous on the matter, it should not be interpreted to conflict with the Bankruptcy Code, which Midland Funding claims clearly permits the filing of time-barred claims. Midland Funding asserts that courts should attempt to harmonize statutes when they appear contradictory. Furthermore, Midland Funding argues that the FDCPA should not be interpreted to conflict with the Bankruptcy Code because the FDCPA was not created to apply within bankruptcy proceeding, at least in this instance, and because the FDCPA is not a comprehensive scheme, unlike the Code. However, Midland Funding argues in the alternative that if the FDCPA could somehow be interpreted to forbid the filing of a time-barred claim, the Bankruptcy Code prohibits applying the FDCPA to forbid time-barred claims. Midland Funding claims that because the Bankruptcy Code was enacted later, if there is a conflict, the FDCPA must yield to the Code.

Johnson, on the other hand, argues that without a clear congressional intention, both statutes must be considered effective. Johnson states that the FDCPA and the Bankruptcy Code do not conflict, as filing a time-barred proof of claim is prohibited under both. In the alternative, Johnson counters that if the Code somehow permitted the filing of time-barred claims, the Code would not repeal the FDCPA. Johnson asserts that even if the Code permits such filings, it certainly does not require them. Johnson maintains that to repeal the FDCPA, the Code would have had to compel what is prohibited by the FDCPA. Because the Code does not compel the filing of time-barred proofs of claim, Johnson argues it cannot repeal the FDCPA.