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11th Circuit Holds that Bankruptcy Code Does Not Preempt FDCPA; Strengthens Circuit Split

On May 24, 2016, the Eleventh Circuit Court of Appeals held Johnson v. Midland Funding, LLC, et al., that the United States Bankruptcy Code did not preclude claims under the Fair Debt Collection Practices Act (FDCPA). 

In Johnson, a consolidated appeal, two separate consumer-debtors filed FDCPA claims based on proofs of claims filed by creditors within pending Chapter 13 bankruptcy actions.  The consumer-debtors argued that because the underlying debts were time-barred and past the applicable statute of limitations, the filing of proofs of claims in pending bankruptcy petitions violated the FDCPA.  In District Court, the creditors argued, inter alia, that the FDCPA and United States Bankruptcy Court were in an irreconcilable conflict as a result of a 2014 Eleventh Circuit decision which held that a proof of claim based upon a subject to a statute of limitations defense violated the FDCPA.  See Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014).  In Crawford, the Court acknowledged that under certain circumstances the bankruptcy code permitted a creditor to file a proof of claim based on a time-barred debt but ultimately held that such actions nonetheless amounted to a violation of the FDCPA.  Of significance, the Crawford Court declined to address the larger issue of whether the bankruptcy code preempted the FDCPA.  

The Johnson Court addressed the preemption issue squarely and held that although creditors could still file stale proofs of claims, those creditors' filings would still be subject to claims under the FDCPA.  The Johnson Court reasoned that no irreconcilable conflict existed among the bankruptcy code and FDCPA and that the two "can be read together in a coherent way."   The Court explained that filing a proof of claim does not automatically create an enforceable obligation and that "where the bankruptcy process is working as intended, a time-barred proof of claim may be filed but will not be paid by the bankruptcy estate" as a result of the role of the bankruptcy trustee.  However, the Court cautioned that creditors that file proofs of claims they know to be time-barred will need to accept the "consequences" of those actions and reiterated that such conduct will create FDCPA liability.  The Eleventh Circuit attempted to temper the impact of its holding by explaining that it should apply only "to a narrow range of actors and claims" that fall within the definition of a debt collector and which do not involve a bona fide error.  

The Johnson holding further emphasizes a growing tension among federal courts involving the FDCPA and bankruptcy code.  The Eleventh Circuit joins the Third and Seventh Circuits in finding that the FDCPA and bankruptcy code are not in conflict; whereas the Second and Ninth Circuits have held that the bankruptcy code does preempt the FDCPA.  The creditors in Johnson have filed a motion to extend their time to seek a rehearing and it appears likely that an en banc review will occur later this year.  Regardless of the outcome, Johnson will likely result in a cert petition to the United States Supreme Court as it presents a clear conflict of law that requires resolution. 

The Court's decision in Johnson can be found here.

  • Partner

    Andrew Sayles defends financial institutions and their service partners in complex litigation and class actions, with a particular emphasis on issues related to consumer financial services regulation. He also advises clients in ...

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