The Eleventh Circuit Speaks: The Bankruptcy Code Does Not Preempt the FDCPA
As seen in The Cramdown, Summer 2016.
By: Amy Drushal
After a number of decisions from the District Courts in the Eleventh Circuit post-Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1261 (11th Cir. 2014), the Eleventh Circuit has now answered the question that it left open and that has been the subject of much discussion: whether the Bankruptcy Code preempts the Fair Debt Collection Practices Act (“FDCPA”) for time barred proofs of claim. Specifically, in Johnson v. Midland Funding, 2016 U.S. App. LEXIS 9478 (11th Cir. May 24, 2016), the Eleventh Circuit held that the Bankruptcy Code does not preempt the FDCPA for time barred proofs of claims filed by “debt collectors” under the FDCPA in a Chapter 13 bankruptcy proceeding.
In Johnson, the debtor filed a Chapter 13 Bankruptcy Petition. The debt collector creditor filed a proof of claim, which was long past the six-year statute of limitations under Alabama law. In the Johnson decision, the Eleventh Circuit also consolidated the case of Brock v. Resurgent Capital Services, LP, in which the debtor filed a Chapter 13 Bankruptcy Petition, and the debt collection creditor filed a proof of claim, also past the six-year statute of limitations under Alabama law. The debtors filed suit against their respective creditors under the FDCPA, alleging that the creditors’ claims were barred by the statute of limitations and, therefore, were unfair, unconscionable, deceptive, and misleading in violation of the FDCPA.
In Johnson, the District Court read the Bankruptcy Code to affirmatively authorize a creditor to file a proof of claim, including one that is time barred, if the creditor had a “right to payment” that had not been extinguished under state law. The Johnson District Court found an irreconcilable conflict with the FDCPA and held that creditors’ right to file a time barred proof of claim under the Bankruptcy Code precluded debtors from challenging that practice as a violation of the FDCPA in the Chapter 13 Bankruptcy context. In the Brock matter, the The Eleventh Circuit Speaks: The Bankruptcy Code Does Not Preempt the FDCPA District Court granted the creditor’s motion for judgment on the pleadings based upon the same grounds.
On appeal, the debtors argued that the District Courts’ decisions conflicted with Crawford, asserting that the Bankruptcy Code does not preclude their FDCPA claim simply because the claim was made in the context of a Chapter 13 proceeding. The Johnson Court discussed Crawford and then turned to the question it left unanswered, holding that the Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time barred. The Court recognized that the Bankruptcy Code allows creditors to file time barred proof of claims, but explained that, when a particular type of creditor – a debt collector under the FDCPA – files a knowingly time barred claim, the debt collector is vulnerable to a claim under the FDCPA. The Court also recognized that the FDCPA provides a safe harbor for debt collectors who might unintentionally or in good faith file a late proof of claim.
The Eleventh Circuit rejected the District Courts’ finding of an irreconcilable conflict between the FDCPA and the Bankruptcy Code. The Court found that the Bankruptcy Code and the FDCPA can be reconciled because “they provide different protections and reach different actors.” The FDCPA applies to debt collectors where the Bankruptcy Code applies to all creditors. “The Code establishes the ability to file a proof of claim . . . while the FDCPA addresses the later ramifications of filing a claim.”
The Court noted that it reads the “regimes” together as providing “different tiers of sanctions for creditor misbehavior in bankruptcy.” Thus, the Eleventh Circuit concluded that the FDCPA and Bankruptcy Code can co-exist. In further support of its opinion, the Court noted that: (1) no provision in either the FDCPA or the Bankruptcy Code governs the interrelations between the two statutes; and (2) Congress never expressed any clear and manifest intent to repeal the protections of the FDCPA when it enacted the Bankruptcy Code one year later. Because the debtors FDCPA claims were not precluded by the Bankruptcy Code, the District Courts’ orders were reversed and remanded.