“The law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense … And we see nothing misleading or deceptive in the filing of a proof of claim that, in effect, follows the Code’s similar system.”

Midland Funding, LLC v. Johnson, (May 15, 2017).

Overview

Earlier this week, the U.S. Supreme Court held that a creditor who deliberately files a bankruptcy proof of claim for a time-barred claim does not violate the Fair Debt Collection Practices Act (FDCPA). Midland Funding v. Johnson, No. 16-348, 581 U.S. __ (May 15, 2017) (slip op.). The 5-3 decision authored by Justice Stephen Breyer was met with a blistering dissent by Justice Sonia Sotomayor. While the decision will help unscrupulous debt collectors, it will likely hurt legitimate creditors such as banks.

On May 15, 2017, in the case of Midland Funding, LLC v. Johnson, the U.S. Supreme Court held in a 5-3 decision (Justice Gorsuch did not participate in the opinion) that a debt collector that files a proof of claim on a time-barred debt in a consumer bankruptcy does not violate the Fair Debt Collection Practices Act.

In a recent decision, the Bankruptcy Appellate Panel of the Sixth Circuit (the “Court”) considered the issue of asset “abandonment” in a Chapter 7 case[1]. The Court reversed the bankruptcy court’s decision to allow the Chapter 7 trustee to compromise a claim that the debtor argued the trustee had abandoned.

Background

Katy Industries, Inc., (OTC:KATY) a manufacturer, importer and distributor of commercial cleaning solutions and customer storage products, and 13 of its affiliates, has filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware (Lead Case No. 17-11101 KJC). The petiton lists between $1 and $10 million in assets and between $50 and $100 million in liabilities.

The U.S. Supreme Court’s decision today in Midland Funding, LLC v. Johnson, 581 U.S. ___, No. 16-348, draws attention in passing to a peculiar feature of Wisconsin law on the effect of statutes of limitations.

In a 5-3 decision handed down on May 15, the Supreme Court of the United States held that the federal Fair Debt Collection Practices Act (FDCPA) is not violated when a debt collector files a proof of claim for a debt subject to the bar of an expired limitations period. The decision:

In a May 8, 2017 ruling, the Delaware Bankruptcy Court denied the official committee of unsecured creditors from accessing certain documents withheld from production based on the attorney-client privilege. Despite the purpose underlying the committee’s creation, the court distinguished the role of the committee from that of a bankruptcy trustee and barred the production of privileged documents in the absence of a finding of insolvency. This ruling hampers the ability of a creditor’s committee to root out fraud and potentially recover money for the benefit of the bankruptcy estate.

In a significant ruling impacting commercial real estate lenders in Michigan, the Sixth Circuit Court of Appeals has ruled that an absolute assignment of rents that had been fully perfected (by demanding payment from tenants to the lender and related recording) precludes a debtor from asserting that such rents can be used as cash collateral in bankruptcy. The reasoning is that these rents do not constitute property of the bankruptcy estate. As such, the debtor could not proceed with its Chapter 11 case.

Background