Statute of Limitations

4th Cir. Holds No FDCPA Violation For Filing Proof of Claim on Time-Barred Debt

In Dubois v. Atlas Acquisitions, LLC, a majority panel of the Fourth Circuit recently held that, while the filing of a proof of claim in a borrower’s bankruptcy proceeding constitutes “debt collection”, filing a proof of claim in a Chapter 13 bankruptcy based upon a time-barred debt does not violate the FDCPA or state collection laws so long as the statute of limitations itself does not extinguish the debt.  The Court noted that under Maryland law, the statute of limitations does not extinguish the debt itself, but merely bars the remedy. 

Consequently, the Fourth Circuit rejected the Eleventh Circuit’s holding in Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259-60 & n.6 (11th Cir. 2014), noting that the “[t]he Eleventh Circuit in Crawford is the only court of appeals to hold that filing a proof of claim on a time-barred debt in a Chapter 13 proceeding violates the FDCPA.”

A copy of the opinion can be found here

 Discussion

At the outset, the Court determined that filing a proof of claim is debt collection activity subject to the FDCPA.  The Court explained that “[d]etermining whether a communication constitutes an attempt to collect a debt is a ‘commonsense inquiry’ that evaluates the ‘nature of the parties’ relationship,’ the ‘[objective] purpose and context of the communication[],’ and whether the communication includes a demand for payment.”  Op. at 9 (citations omitted).

In the bankruptcy context, the “only relationship between [the parties] [is] that of a debtor and debt collector. . . . [and] the ‘animating purpose’ in filing a proof of claim is to obtain payment by sharing in the distribution of the debtor’s bankruptcy estate.” Op. at 9-10.  Consequently, “[p]recedent and common sense dictate that filing a proof of claim is an attempt to collect a debt.  The absence of an explicit demand for payment does not alter that conclusion, . . . nor does the fact that the bankruptcy court may ultimately disallow the claim.” Op. at 10.

Nevertheless, in an explicit departure from the Eleventh Circuit’s holding in Crawford, the Court determined that filing a proof of claim based on a debt that is beyond the applicable statute of limitations does not violate the FDCPA. 

To that end, the Court considered whether a time-barred debt fell within the definition of a claim in the bankruptcy context.   The Court observed that “while the Bankruptcy Code provides that time-barred debts are to be disallowed, see, e.g., 11 U.S.C § 558, the Code nowhere suggests that such debts are not to be filed in the first place.”  Op. at 16.  Rather, recent amendments to Rule 3001 suggest that “the Code contemplates that untimely debts will be filed as claims but ultimately disallowed.”  Op. at 16-17.  As such, they fall within the definition of a claim within the bankruptcy context.

Further, the Court determined that excluding time-barred debts from the scope of bankruptcy “claims” would frustrate the Code’s intended effect to define the scope of a claim as broadly as possible, and provide the debtor the broadest possible relief.  The Court also observed that under applicable Maryland law, the statute of limitations does not extinguish the debt, but merely bars the remedy.  Accordingly, the Court concluded that “when the statute of limitations does not extinguish debts, a time-barred debt falls within the Bankruptcy Code’s broad definition of a claim.”  Op. at 17.

Moreover, the Court noted a unique consideration in the bankruptcy context: “if a bankruptcy proceeds as contemplated by the Code, a claim based on a time-barred debt will be objected to by the trustee, disallowed, and ultimately discharged, thereby stopping the creditor from engaging in any further collection activity.”  Op. at 18.  Alternatively, “[i]f the debt is unscheduled and no proof of claim is filed, the debt continues to exist and the debt collector may lawfully pursue collection activity apart from filing a lawsuit.”  Op. at 19. 

The Court rejected the borrower’s claim that trustees and creditors fail to object to time-barred debts, noting that “for most Chapter 13 debtors, the amount they pay into their bankruptcy plans is unaffected by the number of unsecured claims that are filed.”  Op. at 20.  “As additional claims are filed, unsecured creditors receive a smaller share of available funds but the total amount paid by most Chapter 13 debtors remains unchanged.  Thus, from the perspective of most Chapter 13 debtors, it may in fact be preferable for a time-barred claim to be filed even if it is not objected to, as the debtor will likely pay the same total amount to creditors and the debt can be discharged.”  Op. at 20-21 (emphasis in original).

Moreover, the Court noted various other considerations that differentiate filing a proof of claim on a time-barred debt from filing a lawsuit to collect such debt.  Op. at 21-23.  Consequently, the majority concluded that “filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the FDCPA when the statute of limitations does not extinguish the debt.”  Op. at 23.  Accordingly, the Court affirmed the dismissal of the Debtor’s FDCPA and state law collection claims.