Debt Collectors Beware: Stale Proofs of Claim May Violate the FDCPA and Bankruptcy Law
By: Amy Baker
If you are a debt collector, you are already familiar with the Fair Debt Collection Practices Act (FDCPA) and at least a little familiar with bankruptcy law. In consumer collections, a debt collector must follow the FDCPA in its collection activities. Then, if the debtor files bankruptcy, the debt collector must follow the Bankruptcy Code. Until recently, the two areas of law seemed to operate separately. That may no longer be the case. Debt collectors should now be ready to comply with the FDCPA and the Bankruptcy Code at the same time, at least in regards to filing proofs of claim.
In the two cases discussed below, three debt collectors filed stale proofs of claim in two separate bankruptcies. One debt collector was found to have violated the FDCPA because it filed a stale proof of claim. The other two debt collectors were fined by the court for filing stale proofs of claim. Either way, it is now imperative that debt collectors review the debt and the applicable statute of limitations before filing a claim in a bankruptcy.
In the case of Crawford v. LVNV Funding LLC, the 11th Circuit found that filing a stale proof of claim in a bankruptcy proceeding violated the FDCPA. In Crawford, the creditor filed a claim in the bankruptcy that was time-barred under Alabama’s three-year statute of limitations for collection in state court. The creditor received payments on the claim in the bankruptcy. Four years into the bankruptcy, the debtor brought a counterclaim against the debt collector who filed the claim alleging that the debt collector routinely filed stale claims. The 11th Circuit, applied the “least sophisticated consumer” standard to evaluate whether the collector’s actions were “deceptive, misleading, unconscionable or unfair” under the FDCPA. The debt collector admitted that had it pursued collection in state court, its action would have violated the FDCPA. The Federal circuit and district courts have uniformly held that a debt collector’s threatening to file or filing suit on a time barred debt in state court is a violation of §1692e and §1692f of the FDCPA. The FDCPA outlaws collecting on stale suits for several reasons; “(1) ‘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.”
The Circuit panel found no reason to treat the proof of claim any differently, stating that, “... a debt collector’s filing of a time-barred proof of claim creates a misleading impression to the debtor that the debt collector can legally enforce the debt.” “Filing a proof of claim is the first step in collecting a debt in bankruptcy and is, at the very least, an ‘indirect’ means of collecting a debt, falling with 15 U.S.C. § 1692a(6), 1692e, and 1692f.”
In the case of In re Sekema, Judge Graham in the Northern District of Indiana sanctioned two creditors for filing stale proofs of claim. In Sekema, the Debtor objected to both of the claims as barred by Indiana’s 6-year statute of limitations. The Court then, on its own initiative, issued orders to show cause as to both claimants to consider whether the claims violated Rule 9011(b)(2) of the Federal Rules of Bankruptcy Procedure, due to the failure to conduct a reasonable pre-filing inquiry. Neither creditor appeared for the show cause. According to Rule 9011(b)(2), anyone presenting a particular position to the court has an affirmative obligation to conduct a reasonable investigation into both the law and the facts and that inquiry must lead to the conclusion that the presenter’s position is warranted by existing law or a non-frivolous argument. In other words, in this type of case, the debt collector has an affirmative obligation to look at the facts and the law and to file a proof of claim that is warranted by existing law.
In Sekema, the date of the last transaction on the first proof of claim was May 11, 2001. The date of the last transaction on the second proof of claim was December 27, 1998. The bankruptcy was filed on March 24, 2014. The Court noted that the statute of limitations defense was “blindingly obvious” as to both claims. The Judge then ordered a $1,000 fine payable to the court against each creditor to deter them from similar misconduct in the future.
There is a question before the courts on whether the Bankruptcy Code preempts or displaces the FDCPA. The 11th Circuit in the Crawford case mentioned earlier, did not hear that argument because the creditor did not raise the argument. The court noted the split in the circuits on that issue though. For those circuits holding that the Bankruptcy Code displaces the FDCPA in the bankruptcy context, there wouldn’t be an FDCPA violation. However, the 7th Circuit holds the opposing view that the Bankruptcy Code neither preempts nor repeals the FDCPA. The overlap between the Bankruptcy Code and FDCPA does not preclude the application of either statute. A Petition for Certiorari to the U.S. Supreme Court in the Crawford case remains pending. However, the U.S. District Court for the Southern District of Indiana has held in two recent cases “...that a proof of claim is an attempt to collect a debt, and thus is subject to the FDCPA.” and that “...the FDCPA can apply to time-barred proofs of claim.” It is clear then, at least in Indiana, debt collectors should not be filing stale proofs of claim.
 Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq.
 758 F.3d 1254, 2014 U.S. App. LEXIS 13221 (11th Cir. July 10, 2014)
 Crawford at 1259.
 Id. at 1260.
 Id. at 1261.
 Id. at 1262.
 2015 Bankr. LEXIS 239 (N. Dist. IN 2015)
 Sekema at 2-3.
 Randolph v. IMBS, Inc., 368 F.3d 726, 730-33 (7th Cir. 2004)
 Patrick v. Worldwide Asset Purchasing II, LLC, 2015 U.S. Dist. LEXIS 17725 at 3 (S.D. Ind. Feb. 13, 2015)
 Id. at 4.
 Grandidier v. Quantum3 Group, LLC, 2014 U.S. Dist. LEXIS 169279 at 8 (S.D. Ind. Dec. 8, 2014)
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