Bankruptcy Court Holds Unscheduled Claim Is Not Discharged

West Valley Medical Partners, LLC v. Menaker (In re Menaker), __B.R.__, No. 1:13-BK-13562-MB, 2019 WL 3064875 (Bankr. C.D. Cal. July 8, 2019).

The defendant-debtors leased commercial property form the plaintiff creditor prior to their bankruptcy filing.  They vacated the premises more than three years before the end of the lease term and then filed a voluntary chapter 13 petition.  They did not schedule the plaintiff’s claim or give it notice of the bankruptcy filing or the deadline to file a claim.  Their plan was confirmed and did not include any payments to plaintiff.  Plaintiff filed a complaint for breach of the lease in state court.  The defendants thereafter amended their schedules to add plaintiff as an unsecured creditor.  The defendant-debtors obtained their discharge and the case was closed.  The plaintiff moved to reopen the case to obtain a determination that its claim was not dischargeable under section 523(a)(3)(A) of the Bankruptcy Code.

Section 523(a)(3)(A) provides that a claim is not dischargeable if it is “neither listed nor scheduled … in time to permit . . . timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing.”

The court overruled the debtors’ equitable arguments, allegations of actual knowledge, and their laches defense.  Based on a plain reading and application of the statute, the court ruled in favor of the plaintiffs, holding the claim nondischargeable under section 523(a)(3)(A).

Bankruptcy Court Rules that Federal Energy Regulatory Commission Does Not Have Concurrent Jurisdiction Over Rejection of Power Purchase Agreements

PG&E Corp. v. Fed. Energy Reg. Comm’n (In re PG&E Corp.), No. AP 19-03003, 2019 WL 2491247 (Bankr. N.D. Cal. June 7, 2019).

The debtors filed an adversary proceeding seeking a judgment enjoining the Federal Energy Regulatory Commission from impacting the debtors’ ability to reject power purchase agreements and related relief.

Shortly after the debtors announced their intent to file for bankruptcy protection, power purchase agreement counterparties filed administrative proceedings with the Federal Energy Regulatory Commission seeking a ruling that FERC must approve rejection of a PPA.  On Janaury 25 and 28, 2019, FERC ruled that it has concurrent jurisdiction with the bankruptcy court to consider rejection of PPAs.  On January 29, 2019, the debtors filed their voluntary bankruptcy petitions.  On the petition date, the debtor aslo filed an adversray proceeding for decalaratory and injunctive relief barring FERC from impacting the debtors’ ability to reject PPAs.  In its detailed analysis, the bankruptcy court stated unequivocally that there is no concurrent jurisdiction between FERC and the bankruptcy court with respect to rejection of executory contracts.  Pursuant to 28 U.S.C. §§ 157(b)(2) and 1334(a), the bankruptcy court has the exclusive authority and jurisdiction over the rejection of executory contracts under section 365 of the Bankruptcy Code, including PPAs.

Criminal Conviction Evidenced a Lack of Good Faith in Student Loan Dischargeability Action

In re Hurley, 601 B.R. 529 (B.A.P. 9th Cir. 2019).

The debtor incurred student loan debt while studying for his law degree and L.L.M. in taxation.  In 2009 he was hired as a revenue agent for the IRS.  In 2016, he was criminally convicted for receiving a bribe in his role as an IRS agent.  He was sentenced to 30 months in prison followed by three years of supervised release.  He was disbarred.  Upon his release from prison, the debtor lived in a halfway house in Seattle.

After his conviction, the debtor filed a chapter 7 petition.  The debtor had approximately $256,000 in student loan debt.  He filed a complaint, from prison, seeking to discharge his student loan debt.  He argued that, under section 523(a)(8) of the Bankruptcy Code, the debt should be discharged because it imposed an undue hardship.  The debtor claimed that because of his conviction, incarceration, and disbarment, he would be unable to regain employment at his previous level, and would therefore be unable to pay his debt.  He was 45 years old with a three-year-old child, but did not claim to have medical or other conditions preventing him from working.  The defendants (the government and lender) filed a motion for summary judgment. The defendants’ motion for summary judgment was granted based on a finding that the debtor did not establish that he made a good faith effort to repay the loans.

The debtor appealed to the Bankruptcy Appellate Panel.  The BAP affirmed.  Under section 523(a)(8) of the Bankruptcy Code, a student loan is not dischargeable unless the debtor establishes that repaying the debt would “impose an undue hardship on the debtor and the debtor’s dependents.”  The Ninth Circuit has adopted the three-pronged Brunner test to determine whether a debtor has established undue hardship: (1) that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself and dependents if forced to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and (3) the debtor has made good faith efforts to repay the loans. Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752, 756 (S.D.N.Y. 1985), aff’d, 831 F.2d 395, 396 (2d Cir. 1987) (adopted by United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1111-12 (9th Cir. 1998)).

The BAP agreed with the bankruptcy court’s finding that the debtor’s criminal conduct was not a factor beyond his reasonable control, and the bankruptcy court did not err by taking it into consideration.  However, the BAP was careful to avoid setting a “bright-line rule that a debtor with a criminal conviction can never establish good faith.”  The BAP and the trial court noted that the debtor did make reasonable efforts to repay the debts, but that the balance of factors still weighed against the requisite finding of good faith.

Supreme Court Sets Standard for Civil Contempt for Violation of Discharge Order

Taggart v. Lorenzen, 139 S. Ct. 175 (2019).

The Supreme Court held that a court may hold a creditor in civil contempt for violating a discharge order if there is “no fair ground of doubt” as to whether the order barred the creditor’s conduct.  That is, there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.

The debtor was a defendant in state court litigation prior to his chapter 7 bankruptcy filing.  The debtor obtained a discharge in his bankruptcy case.  Thereafter, the state court entered judgment against the debtor and the creditor-plaintiff applied to the state court for attorneys’ fees incurred after the debtor-defendant filed his bankruptcy petition.  The state court found that the debtor had “returned to the fray” after the bankruptcy filing, justifying an award of postpetition attorneys’ fees under the Ninth Circuit precedent of In re Ybarra, 424 F.3d 1018 (9th Cir. 2005).

The debtor sought a bankruptcy court order barring the creditor from collecting postpetition attorneys’ fees and holding the creditor in civil contempt.  The bankruptcy court denied the debtor’s request, finding, like the state court, that the debtor returned to the state court “fray.”  The district court reversed and remanded.  On remand, the bankruptcy court applied a standard likened to “strict liability.”  It found that civil contempt sanctions were appropriate because the creditor was “aware of the discharge” order and “intended its actions which violated” it.  The creditor appealed.  The BAP vacated the sanctions and the Ninth Circuit affirmed the BAP.  The Ninth Circuit held that “a ‘creditor’s good faith belief’ that the discharge order ‘does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.’”

The Court began its analysis with two applicable Bankruptcy Code provisions.  Section 524(a)(2) states that a discharge order serves as an “injunction against the commencement or continuation of an action” among other things.  Section 105(a) authorizes the court to “issue and order…necessary or appropriate to carry out the provisions” of the Bankruptcy Code.  The Court explained that its “conclusion rests on a longstanding interpretive principle: When a statutory term is ‘obviously transplanted from another legal source’ it ‘brings the old soil with it.’”  Here, the “‘old soil’ includes the ‘potent weapon’ of civil contempt.”  Such power is limited by the “traditional standards in equity practice.”  In nonbankruptcy cases, civil contempt is not employed when there is a “fair ground of doubt as to the wrongfulness” of conduct.  This requires application of an objective reasonableness standard.  The Ninth Circuit erred when it applied a subjective standard for civil contempt.  The judgment was thus reversed and the case remanded.

 

Family Law and Bankruptcy—Dischargeability of Debts Assigned to Spouse in Marriage Settlement Agreement

In re Carrion, __ B.R. __  (B.A.P. 9th Cir. May 31, 2019).  During marriage, the debtor borrowed $21,894 from the U.S. Department of Education to pay tuition for his son’s college education.  His wife later filed a petition for dissolution of marriage and, around the same time, they filed a joint chapter 7 petition.  In their marriage settlement agreement, husband and wife both agreed to be liable for half of the education loan.  Husband later filed a lawsuit against the department of education asserting that the educational loan was void because wife obtained it through identity theft.  The bankruptcy court rejected the identity theft argument and ruled that the husband’s one half of the educational loan was nondischargeable under 11 U.S.C § 523(a)(8).  The Department appealed to the Bankruptcy Appellate Panel for the Ninth Circuit, arguing that the full amount of the educational loan was nondischargeable.  The BAP agreed with the Department and reversed.  The BAP reasoned based on Cal. Fam. Code § 916(a)(1), which provides that after division of community property: “[t]he separate property owned by a married person at the time of the division and the property received by the person in the division is liable for a debt incurred by the person before or during marriage and the person is personally liable for the debt, whether or not the debt was assigned for payment by the person’s spouse in the division.”  The marriage settlement agreement did not eliminate the debtor husband’s liability to the creditor.  The entire debt was owed by the husband.

Bankruptcy Case Involving Marijuana Related Business

Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019). The U.S. Trustee argued that a chapter 11 plan was “proposed by …means forbidden by law” because one of five debtors’ income was from lease of its real property to a marijuana grower.  Debtors and property were located in Washington state in which marijuana is legal.  Leasing property to a marijuana grower is illegal under federal law.  The debtors proposed a plan providing for payment of their creditors’ claims in full and, in turn, creditors fully supported the plan.  The U.S. Trustee objected to confirmation because it asserted that the plan was “proposed by…means forbidden by law,” thus not satisfying the requirement of 11 U.S.C. § 1129(a)(3).  The bankruptcy court overruled the objection and confirmed the plan, and the district court affirmed.  On appeal, the Ninth Circuit affirmed, holding that 1129(a)(3) requires that the debtor comply with the law in how it proposes the plan, not that the terms of the plan comply with nonbankruptcy law in all respects.  This case suggests that, while the bankruptcy courts may generally still be inaccessible to most marijuana businesses, there may be some marijuana “adjacent” businesses that can benefit from bankruptcy relief.

Some Lessons Learned from In re Pacific 9 Transportation, Inc.

In 2018, Danning, Gill, Diamond & Kollitz, LLP, concluded its representation of the Official Committee of Unsecured Creditors appointed in In re Pacific 9 Transportation, Inc., Bankr. Case No. 2:16-bk-15447-WB (Bankr. C.D. Cal.). The case presented a number of interesting issues that continue to plague trucking companies operating out of Los Angeles ports.

The debtor was an intermodal trucking company engaged in the transport of shipping containers from the Ports of Los Angeles and Long Beach to nearby destinations. Prior to bankruptcy, all of the debtor’s truck drivers were hired as “owner operators,” paid as independent contractors, rather than as employees. Like many other trucking companies in the last several years, the debtor was sued by former workers for violations of California employment laws, particularly for the misclassification of its employees as independent contractors and violations of wage and hour laws. A class action and numerous individual actions were filed against the debtor. Dozens of individual employees obtained, or were on track to obtain, labor commissioner awards and judgments against the debtor. Although the debtor attempted to settle with the class action plaintiff, the number of potential class members who opted out of the class made a class action resolution infeasible. Faced with tens of millions of dollars in liabilities, the debtor filed a chapter 11 bankruptcy petition.

A creditors’ committee was quickly formed and shortly thereafter the committee selected DGDK as its general counsel. The committee was comprised of truck drivers in varying positions, including the class action plaintiff, individual plaintiffs who had already obtained awards against the debtor, and those whose claims were still in progress. The committee acted swiftly to investigate the debtor’s business and financial affairs.

The committee actively participated in the case to ensure not only that the debtor complied with its duties under the Bankruptcy Code, but that it also engaged in lawful employment practices under California law. During the case, the debtor started to transition from its prior “owner operator” business model to a business model reliant on employee drivers. The transition was not easy. Among other things: consistent with its prior employment model, the debtor did not own very many trucks; there was a shortage of qualified truck drivers; and ironically, despite the fact that some former employees were suing the debtor for not treating them as employees, the debtor reported that many current drivers were reluctant to change to employee status and preferred to be treated as independent contractors. Making matters worse, the debtor was at a competitive disadvantage against competitors that continued to use the independent contractor model. Moreover, negative publicity from the labor disputes resulted in a loss of business and revenue necessary to fund a successful reorganization.

The committee initially opposed a plan that insufficiently addressed the debtor’s legal problems and did not provide adequate payment to its creditors. However, after extensive negotiations with the debtor and among the creditor constituents, the committee and the debtor succeeded in jointly confirming a plan of reorganization that resulted in payment of millions of dollars to the debtor’s creditors. The plan became effective in January 2018.

A few observations regarding the committee’s efforts to achieve a chapter 11 plan that was in the best interests of creditors:

  • Before the bankruptcy, the truck drivers comprising the committee successfully litigated their employee misclassification claims against the debtor. However, after bankruptcy, the committee members were necessarily focused on maximizing financial recoveries to all creditors. The debtor indicated that converting to an employee-based model would be difficult and costly, suggesting there may be a misalignment between the committee members’ economic and adjudicated interests. Ultimately, however, the debtor needed to convert its business model to confirm a feasible plan and to successfully reorganize. The committee vigorously encouraged that process, which proved effective for all parties.
  • Outside of bankruptcy, creditors often compete for a debtor’s assets. Bankruptcy is intended to stop the “race to the courthouse.” In bankruptcy, unsecured creditors share in the same pool of funds. Thus, it is in the best interest of all creditors to maximize the debtor’s assets and, thereby, the overall distribution to creditors. Here, through the committee, the creditors united to achieve a maximum recovery and, at the same time, negotiated among themselves for a mutually agreeable distribution among differently situated truck driver creditors—class action members versus individually represented plaintiffs. This approach ensured a fair outcome with a substantial dividend to all creditors.

When Spouses Acquire Real Property and Take Title as Joint Tenants, Is It Really Community Property? The Ninth Circuit Seeks Guidance from the California Supreme Court

Family Code § 760 provides that “[e]xcept as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in [California] is community property.” This statute codifies a presumption that property acquired by a spouse during marriage is community property.

Family Code §§ 850-853 allow spouses to “transmute” community property to separate property of either spouse. The requirements for a transmutation are strictly enforced. Among other things, a transmutation of real property “is not valid unless made in writing by an express declaration that is made in, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.”

California’s Evidence Code contains a series of presumptions which dictate which party has the initial burden of providing evidence or proving certain facts. A presumption affecting the burden of proof is not evidence; it simply reflects a policy decision made by the Legislature, “such as the policy in favor of . . . the stability of titles to property.” Evidence Code § 662 provides that “[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title.” This is commonly referred to as the “title presumption.”

When spouses purchase a home in California, they usually don’t give much thought to how title should be held. Historically, spouses have taken title as joint tenants so that, when one spouse dies, the ownership interest of the deceased spouse automatically transfers to the surviving spouse. This “right of survivorship” is convenient because it avoids the need for a probate.

What most people don’t realize is that when two people take title as joint tenants, each person separately owns a one-half interest in the property. In fact, each person has the right to transfer his or her one-half interest to a third party without the other joint tenant’s approval or consent. Obviously, this is not what most spouses intend when they buy their family home.

This has been an issue for decades. In 1965, California’s Legislature observed that “husbands and wives take property in joint tenancy without legal counsel but primarily because deeds prepared by real estate brokers, escrow companies and by title companies are usually presented to the parties in joint tenancy form. The result is that they don’t know what joint tenancy is, that they think it is community property, and then find out upon death or divorce that they didn’t have what they thought they had all along and instead have something else which isn’t what they had intended.”

The Legislature expressly addressed this issue in the context of divorce and legal separation. Today, Family Code § 2581 provides that “[f]or the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in . . . joint tenancy . . . or as community property, is presumed to be community property. This presumption . . . may be rebutted by . . . [a] clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property.” It may also be rebutted by proof that the parties “made a written agreement that the property is separate property.” The Law Revision Commission comments state that “[t]he community property presumptions created by [§ 2581] are applicable only in dissolution and legal separation proceedings.”

Family Code §§ 760 and 850-853, and Evidence Code § 662, present some difficult questions when spouses acquire real property as joint tenants. Family Code § 2581 eliminates some of those questions in the context of divorce and legal separation proceedings. However, they continue to arise in bankruptcy cases when one spouse files for bankruptcy.

1.
Subto
Does the “title presumption” in Evidence Code § 662 rebut the “community presumption” in Family Code § 760? If the answer is yes, each spouse should be presumed to separately own a one-half interest. If this presumption cannot be rebutted by “clear and convincing proof,” a bankruptcy trustee will be able to sell only the debtor’s one-half interest to generate funds to pay creditors. (The other half of the net sale proceeds will be paid to the non-debtor spouse.)
2.
Subto
If the “title presumption” does not rebut the “community presumption,” does the act of taking title as joint tenants transmute the property from community property to separate property? If the answer is yes, each spouse owns a one-half interest and, again, a bankruptcy trustee will be able to sell only the debtor’s one-half interest.
3.
Subto
If the “title presumption” does not rebut the “community presumption,” and if the act of taking title as joint tenants does not transmute the property from community property to separate property, what’s the point of Family Code § 2581? At least as to real property that spouses acquire as joint tenants, is that section superfluous?

In 2003, although it did not cite to Evidence Code § 662, the Ninth Circuit answered “Yes” to the first question. In re Summers, 332 F.3d 1240 (9th Cir. 2003). First, relying on California appellate court and lower federal court decisions, the Ninth Circuit concluded that the community presumption is rebutted when spouses acquire real property from a third party as joint tenants. Second, the court held that California’s transmutation statutes do not apply to transactions in which spouses acquire property from third parties.

The second holding of Summers was expressly rejected by the California Supreme Court in Marriage of Valli, 58 Cal.4th 1396 (2014). In that case, a husband used community property funds to purchase an insurance policy on his life, naming his wife as the policy’s owner and beneficiary. Later, in divorce proceedings, the husband asserted that the policy was community property. The court agreed, because the husband had not made, joined in, consented to, or accepted a written, express declaration that the character or ownership of the insurance policy was being changed from community property to the wife’s separate property.

In bankruptcy cases, Valli reopened the door previously shut by Summers. Not only did the California Supreme Court reject Summers’ second holding, it expressly stated that the title presumption “does not apply when it conflicts with the transmutation statutes.” This latter statement was expanded on by Justice Chin in a concurrence in which he stated that the title presumption “plays no role” in an action between spouses in which the community presumption controls.

That brings us to In re Brace.

Clifford and Ahn Brace were married in 1972. In the late 1970s, they purchased a home in Redlands and a rental property in San Bernardino. They took title to each property as “husband and wife as joint tenants.”

In 2011, Mr. Brace filed for bankruptcy. After some preliminary legal issues were resolved, the bankruptcy court needed to decide whether the bankruptcy estate owned 100%, or just 50%, of each property. In 2015, the bankruptcy court entered a judgment determining that the properties were community property and, therefore, entirely property of the bankruptcy estate. The Ninth Circuit’s Bankruptcy Appellate Panel affirmed, and the matter was appealed further to the Ninth Circuit Court of Appeals.

On November 8, 2018, the Court of Appeals certified a question to the Supreme Court of California. Although the California court is not bound by the Ninth Circuit’s formulation of the question, the question is as follows:

Does the form of title presumption set forth in section 662 of the Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?

If it accepts the question, the California Supreme Court’s answer will have a significant impact on cases in which only one spouse files for bankruptcy. In many such cases, the answer will determine whether creditors receive anything at all.

Non-Filing Spouses, Homestead Exemptions, and Voidable Transactions

The California Bankruptcy Journal has published an article by Michael G. D’Alba entitled “Non-Filing Spouses, Homestead Exemptions, and Voidable Transactions” (Volume 34, 2017, Number 2). A copy of the article may be obtained by emailing Mr. D’Alba at mdalba@dgdk.com.

California is a community property state, and Mr. D’Alba examines issues which arise when non-debtor spouses try to claim homestead exemptions in community property.

Mr. D’Alba discusses issues that arise when a spouse relocates from the marital residence, files for bankruptcy, and then fails to claim a homestead exemption in the martial residence.  Meanwhile, the non-debtor spouse continues to reside in the former marital residence.  The following issues, at a minimum, require prompt analysis on the part of the non-filing spouse, creditors, and the bankruptcy trustee:

  • If the debtor spouse has filed a list of exemptions, how does it affect the non-filing spouse’s rights?
  • Are there time periods in which the non-debtor spouse must act to assert his or her rights, and what are those time periods?
  • May the non-debtor spouse file a list of exemptions in the debtor spouse’s bankruptcy case?

Mr. D’Alba also examines what happens when one spouse transfers property to the other and files a bankruptcy case in which that transfer is avoided by the trustee as a fraudulent conveyance.  While there is an established prohibition of the debtor spouse claiming an exemption in the now-recovered property, can the transferee spouse claim a homestead exemption?  If so, what would be the basis to claim the exemption, and are there grounds to object?

The matrimonial law and bankruptcy law fields are complicated by themselves, but when they intersect there are particularly difficult questions which may arise.  Specialists in this area may be necessary, and Mr. D’Alba’s article provides a guide to some of the main issues requiring discussion.

Return to Michael G. D’Alba, Associate

Supreme Court Holds that the Fair Debt Collection Practices Act Does Not Impose Liability on a Creditor Who Files a Proof of Claim to Collect a Time-Barred Debt

In September, we wrote that a major question ripe for Supreme Court consideration was whether a creditor can be held liable under the Fair Debt Collection Practices Act (“FDCPA”) when it files a proof of claim in a bankruptcy case to collect a time-barred debt.  On May 15, 2017, in a 5-3 decision, the Supreme Court ruled in favor of debt collectors.  Midland Funding, LLC v. Johnson, ___ U.S. ___ (2017).

In or before mid-2003, Aledia Johnson (“Johnson”) took out credit with Fingerhut Credit Advantage.  Johnson’s last payment was made in May 2003, and the debt was “charged off” in January 2004.  The debt appears to have been sold a few times, and ultimately was owned by Midland Funding, LLC (“Midland”) — one of the nation’s largest buyers of unpaid debt.

In March 2014, Johnson filed a chapter 13 bankruptcy petition in Alabama.  Midland filed a proof of claim for $1,879.71, even though any suit to recover the debt would have been time-barred under Alabama’s 6-year statute of limitations.  Johnson objected to the claim, Midland did not contest the objection, and the bankruptcy court disallowed the claim.

Johnson then filed a lawsuit against Midland, seeking actual damages, statutory damages, attorneys’ fees and costs for violating the FDCPA.  The district court dismissed the lawsuit, but the 11th Circuit reversed.

The Supreme Court concluded that Midland’s filing of a proof of claim to recover a time-barred debt did not violate the FDCPA.  Among other things, the Court noted that in most states (including Alabama) creditors have the right to payment of a debt even after the limitations period has expired.  There are procedural rules which allow for a streamlined evaluation of claims in bankruptcy cases, and the Bankruptcy Code preserves the estate’s ability to raise affirmative defenses such as statutes of limitations.  Also, in chapter 7 and 13 cases there are relatively sophisticated trustees who examine proofs of claims and, where appropriate, pose objections.  Thus, in the Court’s estimation, Midland’s assertion of a time-barred claim was not “false, deceptive, or misleading,” “unfair” or “unconscionable.”

Justice Sotomayor filed a dissent, joined by Justices Ginsburg and Kagan.  In their view, the practice of filing claims in bankruptcy proceedings in the hope that no one notices that the debt is time-barred is both “unfair” and “unconscionable.”  The FDCPA was enacted to, among other things, beat back debt collectors’ practice of filing lawsuits to collect time-barred debts.  But that has not entirely halted the behavior; indeed, in 2015 Midland and its parent company entered into a consent decree with the Government prohibiting them from filing suit to collect time-barred debts and ordering them to pay $34 million in restitution.  Now, debt buyers have shifted their focus to bankruptcy cases, where they file time-barred proofs of claims in the hope that nobody notices that they are too old to be enforced.  In the dissenting justices’ view, these claims are not filed in good faith; indeed, they are filed in the hope and with the expectation that the bankruptcy system will fail.  Thus, they conclude, the practice of filing time-barred claims violates the FDCPA.

The majority places great trust in the bankruptcy system to weed out time-barred claims.  However, for small claims such as Midland’s claim in Johnson’s bankruptcy case (less than $2,000), debtors usually have little incentive to object and the cost to trustees and creditors of doing so is often prohibitive — even when it seems clear that the claim is time-barred and the claimant will not contest the objection.  And of course, whether a claim is time-barred is usually not clear from the face of the proof of claim.  If the Court had ruled in favor of Johnson, its ruling would have had a significant impact on debt collectors by making them responsible for ensuring that they don’t file time-barred claims.  Instead, absent a Congressional adjustment to the FDCPA or the Bankruptcy Code, its ruling will allow debt collectors to file, and sometimes get paid on, stale claims without fear of liability under the FDCPA.