High Court Backs Bids to Collect Outdated Debt in Bankruptcy

(Bloomberg) -- A divided U.S. Supreme Court ruled that debt collectors can use bankruptcy proceedings to try to collect liabilities that are so old the statute of limitations has expired.

Voting 5-3, the court said companies don’t violate the U.S. Fair Debt Collection Practices Act when they file bankruptcy claims on that type of years-old debt. Justice Stephen Breyer joined the court’s conservative wing in the majority.

Critics accused debt collectors of violating the law by filing tens of thousands of outdated claims with bankruptcy courts in the hope that some debtors won’t object.

“The result of decision appears to give creditors a free pass to file stale claims without fearing FDCPA liability,” Andrew Muller, a partner at Stinson Leonard Street LLP, said in an interview. “The flip side is that trustees and debtors’ lawyers may be under increased pressure to more closely review claims to determine whether the claims are subject to a statute of limitations defense,” Muller said.

The ruling is a victory for Encore Capital Group Inc.’s Midland Funding in an Alabama case that started with an effort to collect a $1,900 credit-card debt. The debtor, Aleida Johnson, sued Midland after a bankruptcy judge threw out Midland’s claim.

Midland argued that federal bankruptcy law lets creditors file claims in those proceedings even if the statute of limitations wouldn’t allow a lawsuit.

FDCPA Scope

“Like the majority of Courts of Appeals that have considered the matter, we conclude that Midland’s 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 Fair Debt Collection Practices Act,” Breyer wrote.

Johnson’s lawyers said that, by filing outdated requests, debt collectors are falsely suggesting those claims are valid and enforceable.

Justice Sonia Sotomayor filed a dissenting opinion in which Justices Ruth Bader Ginsburg and Elena Kagan join. Justice Neil Gorsuch, who joined the court after the case was argued in January, didn’t participate in the ruling.

“Professional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy proceedings to collect it, and hoping that no one notices that the debt is too old to be enforced by the courts,” Sotomayor wrote. “ This practice is both ‘“unfair”’ and ’“unconscionable,”’ she added.

“Debt collectors do not file these claims in good faith; they file them hoping and expecting that the bankruptcy system will fail.,” Sotomayor wrote.

Lower courts had been divided on the issue. The Obama administration backed Johnson in the case.

The case is Midland Funding v. Johnson, 16-348.

To contact the reporters on this story: Greg Stohr in Washington at gstohr@bloomberg.net, Dawn McCarty in Wilmington, Delaware at dmccarty@bloomberg.net.

To contact the editors responsible for this story: Kevin Whitelaw at kwhitelaw@bloomberg.net, Laurie Asseo, Joe Sobczyk