Eleventh Circuit holds that filing a proof of claim on a stale debt in bankruptcy violates the FDCPA

Following a trend, the Eleventh Circuit held that a creditor who filed a proof of claim in a Chapter 13 bankruptcy on a debt that it knew to be stale violated the FDCPA. In Crawford v. LVNV Funding, LLC, No. 13-12389(11th Cir, July 2014), neither the debtor nor the trustee objected to the creditor’s stale claim, so it was automatically allowed and the debtor was required to pay the debt as part of the repayment plan. The trustee paid some of the debt but four years later the debtor filed an adversary action claiming that the creditor’s conduct violated the FDCPA. The action was dismissed and upheld on appeal to the district court. On appeal to the Eleventh Circuit, the creditor argued that filing a proof of claim was not debt collection activity regulated by the FDCPA because it was not aimed at the debtor. The court demurred observing that the FDCPA’s reach covers any representation or means used in the collection of a debt. A proof of claim is such an effort to obtain payment by a legal proceeding. The court relied on the nearly uniform case law that a debt collector’s suing or threatening to sue on a time-barred debt violates the FDCPA. It observed that outlawing stale suits to collect consumer debts is not unfair because ‘few unsophisticated consumers would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts’ and would therefore ‘unwittingly acquiesce to such lawsuits’; (2) ‘the passage of time … dulls the consumer’s memory of the circumstances and validity of the debt’; and (3) the delay in suing after the limitations period ‘heightens the probability that [the debtor] will no longer have personal records’ about the debt, citing _Phillips v. Asset Acceptance, LLC_, 736 F.3d 1076 (7th Cir.2013). It found the same purpose to be true in the bankruptcy context. Similar to the filing of a stale lawsuit, a debt collector’s filing of a time-barred proof of claim creates the misleading impression that the debt collector can legally enforce the debt. Given the Bankruptcy Code’s automatic allowance provision, an otherwise unenforceable time-barred debt will be paid from the debtor’s future wages as part of his Chapter 13 repayment plan. Such a distribution of funds necessarily reduces the payments to other legitimate creditors with enforceable claims. Furthermore, filing objections to time-barred claims consumes energy and resources in a debtor’s bankruptcy case, just as filing a limitations defense does in state court. Under the least-sophisticated consumer standard the creditor’s filing of a time-barred proof of claim in a bankruptcy was therefore unfair, unconscionable, deceptive, and misleading.