Supreme Court Issues Two Rulings Interpreting FDCPA

Contributed by Tricia S. Baldridge

The Supreme Court recently issued two rulings interpreting various sections of the Fair Debt Collection Practices Act (FDCPA) in favor of creditors and certain debt buyers.  The FDCPA protects debtors from unfair collection practices by debt collectors. Certain actions violate the FDCPA and can subject a debt collector to liability which includes statutory miniumum amounts and attorneys. The Supreme Court recently ruled in 2 cases where they clarified what conduct violates the FDCPA and whether certain individuals and entities are subject to the FDCPA with respect to claims in bankruptcy cases in one case and the applicability of the FDCPA to debt buyers in the other.

  1. Creditors filing claims in consumer bankruptcy for debts barred under a statute of limitations do not violate the FDCPA.

The Supreme Court issued a strongly divided opinion on May 15, 2017 approving the filing of claims in consumer bankruptcies that are time barred under a statute of limitations, Midland Funding, LLC v. Johnson, 137 S.Ct 1407 (2017).  The Court held that the filing of the proofs of claim was not “false, deceptive, or misleading” within meaning of the FDCPA, and that the creditor’s proof of claim was not “unfair” or “unconscionable” under the FDCPA.

Midland Funding, LLC, had filed a proof of claim in a chapter 13 case filed by Aleida Johnson asserting that Johnson owed a credit card debt to Midland for charges made more than ten years prior. The Alabama state statute of limitations limited actions for the recovery of money to six years. Johnson objected to the proof of claim in bankruptcy and Midland’s claim was disallowed since the Bankruptcy Code enables a debtor or trustee to disallow a claim that is not enforceable under applicable state law. See, 11 U.S.C. §502(b)(1).  Johnson later sued Midland, claiming that the filing of an obviously time-barred debt was “false,” “deceptive,” “misleading,” “unconscionable,” and “unfair” within the meaning of the FDCPA. 15 U.S.C. §§ 1692e1692f.   The District Court dismissed that suit, but the Eleventh Circuit Court of Appeals reversed. Midland then sought review  by the U.S. Supreme Court.  Because the lower courts were divided on this issue, the Supreme Court accepted the appeal.

In the Supreme Court Johnson‘s first argument that the word “claim” means an “enforceable claim” was rejected by the Court on the grounds that the word “enforceable” does not appear in the Bankruptcy Code and that the obligation remains a claim for purposes of bankruptcy law. 11 U.S. Code § 502(b)(1).  The Court went on to state that the running of the statute of limitations merely constitutes an affirmative defense that a debtor may assert after a claim is filed. Therefore the Court found nothing misleading or deceptive in filing a proof of claim that follows the Bankruptcy Code’s claim system.  Further, in determining whether a statement is misleading, courts normally consider the legal sophistication of the audience, which in this case would be a Chapter 13 bankruptcy trustee.

Johnson argued that several lower courts have found it improper to enforce time-barred claims by subscribing to the view that a consumer might unwittingly repay a time-barred debt. The Court rejected that argument, holding that those considerations have significantly diminished force in the context of a Chapter 13 bankruptcy because (i) the consumer initiates the bankruptcy proceeding and is therefore not likely to pay a stale claim just to avoid going to court, and (ii) there is a knowledgeable Chapter 13 trustee available to object to these claims.

The U.S. Supreme Court concluded that the “filing of a proof of claim that on its face indicates that the limitations period has run does not fall within the scope of any of the five relevant words of the [FDCPA].” Midland Funding, LLC v. Johnson, 137 S. Ct. 1407, 1411, (2017).  To review the opinion click on this link: https://www.supremecourt.gov/opinions/16pdf/16-348_h315.pdf

  1. The FDCPA does not apply to debt buyers.

In a unanimous opinion authored by newly appointed Justice Gorsuch, on June 12, 2017, the United States Supreme Court held that debt buyers  seeking to collect  debts they had purchased for their own account are not “debt collectors” as defined by the FDCPA.  Henson v. Santander Consumer USA Inc., 137 S.Ct. 1718 (2017).

The FDCPA applies to “debt collectors,” which is defined as anyone who “regularly collects or attempts to collect … debts owed or due … another.” 15 U.S.C. § 1692a(6). However, the recently emerging industry of debt buying has prompted the courts to consider the following question:  what if you purchase a debt and then try to collect for yourself?

Petitioners in the case were a group of individuals who originally obtained auto loans from CitiFinanical Auto and later defaulted on those loans.  Respondent, Santander purchased the defaulted auto loans and began collection efforts.  Petitioners sued alleging that Santander was in violation of the FDCPA. The Court of Appeals for the Fourth Circuit dismissed the action in favor of Santander and the individuals appealed.

In deciding whether Santander’s conduct fell within the FDCPA’s definition, the Supreme Court looked to statutory language defining the term “debt collector” to embrace anyone who “regularly collects or attempts to collect … debts owed or due … another.”

Petitioners presented a linguistic argument that the term “owed” is the past participle of the verb “to owe” and therefore means the statute’s definition of debt collector includes anyone who regularly seeks to collect debts previously owed to another.  Petitioners further argued that Congress would have used the word “owing” if it intended to exempt all present debt owners from its debt collector definitions.  The Court rejected the petitioners’ argument stating, in part:

[B]y its plain terms this language seems to focus our attention on third party collection agents working for a debt owner—not on a debt owner seeking to collect debts for itself. Neither does this language appear to suggest that we should care how a debt owner came to be a debt owner—whether the owner originated the debt or came by it only through a later purchase.

Henson v. Santander Consumer USA Inc., 137 S.Ct. at 1721

The Supreme Court stated that all that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for “another.” Accordingly,  the Court held that a debt purchaser like Santander may indeed collect debts for its own account without triggering the definition of “debt collector” as defined by the FDCPA. To review the opinion click on this link: https://www.supremecourt.gov/opinions/16pdf/16-349_c07d.pdf

This decision overrules the prior cases of McKinney v. Cadleway Properties, Inc., 548 F.3d 496 (7th Cir. 2008) and FTC v. Check Investors, Inc., 502 F.3d 159 (3rd Cir. 2007).

For additional information, contact Tricia Baldridge.