Argument analysis: Justices appear divided over treatment of stale claims in consumer bankruptcies
Tuesday morning’s argument in Midland Funding v. Johnson was a tale of two benches, with two groups of justices taking remarkably different approaches. As it comes to the justices, the question is whether a debt collector violates the Fair Debt Collection Practices Act by filing a claim in bankruptcy for a debt known to be uncollectible because of a statute of limitations.
Some of the justices found the activity unambiguously reprehensible. Justice Sonia Sotomayor led the way, dominating the argument time of Kannon Shanmugam (appearing on behalf of the debt collector Midland Funding). Early on, she challenged the underlying premise of the collector’s business:
I’m having a great deal of difficulty with this business model. Completely. You buy old, old debts that you know for certain are not within any statute of limitations. You buy them and you call up [debtors] and you say to them “You don’t have to pay me. But out of the goodness of your heart, you should”? Or do you just call them up and say “You owe me money” and you hope that they’ll pay you? And is it the same thing in bankruptcy court? You file a claim and you hope the trustee doesn’t see that it’s out of time? And apparently you collect on millions of dollars of those debts. So is that what you do?
Even more pointedly, Sotomayor hammered home her sense that the practice is ethically dubious. Using a variety of formulations, she questioned Shanmugam on the point relentlessly: “Did you have a good-faith basis to believe the statute of limitations was not applicable?” And later, “What do you do with the Committee Notes that say that everyone who files a proof of claim has an obligation to do a good-faith inquiry as to whether it’s an enforceable obligation or not?” And yet again, “If you were unaware and didn’t properly investigate, have you fulfilled your obligations as a lawyer to the bankruptcy court?”
Sotomayor’s third theme – and you’ve got the right impression if you’re wondering how one justice can leave time for counsel to offer an argument when she presents so much of her own view of the case – emphasized the procedural cost that the collectors’ claims impose on the bankruptcy system even if they are unquestionably meritless:
You’re taking up trustee time, which gets paid by the debtor ultimately and at administrative cost. You are taking up the time of other creditors, because there has to be, when an objection is raised, notice to all the creditors, a hearing date set, all of these procedural steps that are unnecessary because you have no basis to believe that this debt is enforceable.
Though they did not display Sotomayor’s vehemence, Justices Elena Kagan and Ruth Bader Ginsburg seemed to have similar reactions. Kagan’s basic point was a systemic one, that it didn’t seem to her to make any sense to design a process for unenforceable claims:
It seems hard to understand why Congress would want all these unenforceable claims to flow in, because only two things can happen. One is that the trustee will properly filter out those claims; and the other is that the trustee will be swamped and won’t have the time or the energy or the inclination or he’ll make mistakes and some of those claims will be deemed enforceable when in fact they’re not. So why would anybody want these proofs of claim to flood into the bankruptcy system?
For Kagan, that point seemed to lead ineluctably to the conclusion that the Bankruptcy Code should not be read to bar allegations that it is “misleading” under the FDCPA to file a bankruptcy claim known to be barred as untimely:
It’s hard for me to believe that the Code actively invites it, but let’s suppose as it’s written that it allows it. So then you wouldn’t violate the Code by filing these proofs of claim. But why would that also absolve you from liability under other statutes? … You don’t have to do this under the Code. It’s a choice.
Of the three, Ginsburg was the least expansive about her reasoning, but she left no doubt that she thought the activity condemnable, explaining that there seemed to her “no point in making a claim for a debt that’s clearly time barred … except for the chance that it will be overlooked …. And that you will get paid on the assumption that it’s a good claim when, in fact, it isn’t.”
If that were all you knew about the argument, you’d have to mark the case down as an easy victory for Aleida Johnson (the debtor). But with a diminished court of eight justices, one of whom isn’t saying anything in the argument, it takes only a suggestion of discord to cast doubt on the result. And this argument involved a lot more than a suggestion of discord.
Justice Stephen Breyer for the most part seemed ambivalent, commenting to Daniel Geyser (appearing on behalf of the debtor) that “[y]ou have a very good argument. I’m not saying you don’t.” But aside from the kind words, he posed several odd objections to the debtor’s position. For one thing, he was preoccupied with the jurisdictional implications of the matter. Taking Geyser’s position that the FDCPA claim should apply to any affirmative defense omitted by the creditor, he worried that affirmative defenses other than the statute of limitations often “are quite complicated.” Apparently reasoning that defenses of that complexity would end up involving issues beyond the jurisdiction of the bankruptcy court under Stern v. Marshall, Breyer worried that “we’re now going to have the Article III judge [in the district court] … deciding pretty complicated things as matters of bankruptcy law growing out of a bankruptcy case.” Chief Justice John Roberts found that issue particularly problematic, commenting:
[B]ankruptcy is very different. The whole idea is let’s get everything here in one place and deal with it. I think it’s much more significant if you have things spinning out of the bankruptcy estate being adjudicated elsewhere than the fact that you might have it as a general matter in district courts.
Breyer also seized on Geyser’s suggestion that the standard for knowledge would approximate the standard for sanctions under Bankruptcy Rule 9011 (which is quite similar to Federal Rule of Civil Procedure 11). “What’s worrying me is we take a set of cases, which now you’ve narrowed it to that set which is sanctionable under Rule 9011. And you’re saying in addition to the sanctions, the debtor can go in and bring a different case now under the word ‘unfair’ in the debt collection act.” Returning to his concern about duplicative remedies, Breyer noted a few minutes later that the Federal Trade Commission should be able to bring proceedings against large-scale activity: “We then have the FTC that could do such a thing. We have the sanctions in the Bankruptcy Code, and now you want this, too?”
Strangely, that concern did not seem to dissipate even when it became clear from the discussion that sanctions under Rule 9011 are rare in this context because the rule includes a “safe harbor” that prohibits sanctions if the creditor withdraws the claim when it is challenged. Sotomayor seemed particularly frustrated that her colleagues were taking the sanctions issue seriously, as she was driven to interject: “This model is beautiful. You file a claim you know is old. If you get paid, wonderful. If somebody objects, you withdraw it. There’s no sanction that’s possible.”
The third concern Breyer interposed was one of frank disbelief – he seemed really to doubt that the problem is nearly so serious as the rhetoric suggests: “It’s rather surprising to me that there is a company and their business model is to go around buying up debts that can’t be enforced and are worthless and then filing cases hoping that no one will notice. Is that shown in the record? Does somebody admit that’s their business model?” The Chief Justice and Justice Samuel Alito seemed to share that last concern. Alito, for example, repeatedly asked “why do these time-barred claims slip though? Why don’t trustees and attorneys for the debtor automatically object to any claim that is beyond the number of years set out in the statute of limitations?” And in the same vein, Roberts seemed to think it should be easy for trustees to identify and object to obviously time-barred claims: “If it’s obvious on the face, then it ought to be obvious to the other side as well.” Neither seemed satisfied with Sotomayor’s answer that the resources necessary to reject even frivolous claims turn out to be substantial.
How much the concerns of the Chief Justice and Justices Breyer and Alito will weigh when the justices vote on Wednesday is of course hard to say. But if the argument is any guide, there’s a good chance we will see a sharply divided court later this spring when we read opinions in Midland Funding.