A sharply divided Supreme Court yesterday held that debt collectors do not violate the Fair Debt Collection Practices Act when they file in a bankruptcy proceeding a claim for a debt that has become uncollectible because the statute of limitations has expired. Writing for a 5-3 majority (the case was argued before Justice Neil Gorsuch arrived), Justice Stephen Breyer disposed of Midland Funding, LLC, v. Johnson in a short and antiseptic opinion. Explaining that the statute punishes conduct by debt collectors that is “false,” “deceptive,” “misleading,” “unconscionable” or “unfair,” the court’s opinion first explained why filing stale claims is not false, deceptive or misleading, and then why it is not unconscionable or unfair.
On the first point, the court essentially concluded that it is not misleading to file a time-barred claim in a bankruptcy proceeding because that obligation remains a “claim” for purposes of bankruptcy law. The opinion noted the court’s repeated statements that “Congress intended [when it adopted the Bankruptcy Code] to adopt the broadest available definition of ‘claim.’” It also emphasized that the statutory text directly recognizes the possibility that an obligation would be a “claim” even if it were unenforceable; specifically, the statute “says that, if a ‘claim’ is ‘unenforceable,’ it will be disallowed. It does not say that an ‘unenforceable’ claim is not a ‘claim.’”
The court went on to explain that “[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense.” Against that historic practice, “we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code’s similar system.” Adding one last point, the court emphasized that “determin[ing] whether a statement is misleading normally requires consideration of the legal sophistication of its audience” and that the “audience in [consumer] bankruptcy cases includes a trustee … likely to understand [the importance of objecting to an untimely claim].”
The court acknowledged that it is “a closer question” whether filing a stale claim is unfair or unconscionable, but had no trouble disposing of that issue as well. The opinion noted that several lower courts have found it improper to enforce stale claims directly (by filing suit on them), largely based on the view that “a consumer might unwittingly repay a time-barred debt.” But for Breyer, those considerations should “have significantly diminished force in the context of a Chapter 13 bankruptcy.” The opinion made two main points. First, Breyer suggested that because the “consumer initiates [the bankruptcy] proceeding, … the consumer is not likely to pay a stale claim just to avoid going to court.” Second, the opinion pointed again to the “knowledgeable trustee” as a likely source of objections protecting the consumer.
Breyer closed with a structural point, describing the Bankruptcy Code as embodying a “delicate balance of a debtor’s protections and obligations” that would be “upset” by application of the FDCPA to create such a “new significant bankruptcy-related remedy” without any “language in the Code providing for it.” By “requir[ing] creditors … to investigate the merits of an affirmative defense (typically the debtor’s job to assert and prove),” the “upshot could well be added complexity, changes in settlement incentives, and a shift from the debtor to the creditor [of] the obligation to investigate the staleness of a claim.”
The opinion prompted a scorching dissent from Justice Sonia Sotomayor, joined by Justices Ruth Bader Ginsburg and Elena Kagan. Longer than the majority’s opinion, Sotomayor’s dissent summarized the immense market for consumer debt (“trillions of dollars”), and the recent rise of large-scale debt buyers who buy long-stale “debts for pennies on the dollar.” Noting that the Federal Trade Commission and the Consumer Financial Protection Bureau have pursued debt buyers (including the buyer involved in this case) with claims that their litigation of stale claims is “unfair” under the FTCPA, Sotomayor concluded that the [d]ebt collectors’ efforts to entrap consumers … have no place in honest business practice.” She ridiculed the court’s claim that routine trustee objections to these claims can be expected to limit their value, pointing out that the claims have monetary value only because of the possibility the trustee will forget to object to them. She closed with a rhetorical flourish: “It takes only the common sense to conclude that one should not be able to profit from the inadvertent inattention of others. It is said that the law should not be a trap for the unwary. Today’s decision sets just such a trap.”
The court’s high praise of the bankruptcy trustees is notable, though arguably a bit unrealistic. As Sotomayor noted in her dissent, the trustees’ trade association filed an amicus brief in support of the debtor, explaining the impractical burden of interposing objections to the flood of stale claims appearing in consumer bankruptcies in recent years. I have the strong sense that trustees as a group would have been happier with a little less laudatory description and a little more appreciation of the constrained resource setting in which they operate. As Justice Sotomayor noted, they’ll have to hope now for relief from Congress because they won’t be getting it from the courts.