TRANSACTIONAL

LITIGATION/CONTROVERSY

June 8, 2017

Bankruptcy Alert

Insolvency at Its Limits: What Management and Creditors of Insolvent LLCs and LPs Should Know About Fiduciary Duties Waivers and Standing, Inside and Outside of Bankruptcy

By Isley M. Gostin, Craig Goldblatt and George W. Shuster, Jr.

The U.S. Supreme Court has held that the filing of a proof of claim in bankruptcy proceedings with respect to time-barred debt is not a “false, deceptive, misleading, unfair, or unconscionable” act within the meaning of the Fair Debt Collection Practices Act (“FDCPA”) when there continues to be a right to repayment after the expiration of the limitations period under applicable state law. The Court’s decision in Midland Funding, LLC v.

This week, the United States Supreme Court issued its decision in Midland Funding, LLC v. Johnson, 581 U.S. ___ (2017), holding that a debt collector does not violate the Fair Debt Collection Practices Act (FDCPA) by filing an “obviously time-barred” proof of claim in a bankruptcy proceeding. This case should stem the tide of FDCPA lawsuits against debt collectors for efforts to collect potentially time-barred debts in bankruptcy proceedings.

In a 5-3 decision written by Justice Stephen G.

Federal appeals courts have been split on whether filing a proof of claim in bankruptcy on old debt, or obligations that have expired under a statute of limitations, violates the Fair Debt Collection Practices Act. In a victory for debt collectors and the debt buying industry, the Supreme Court clarified this issue on May 15, 2017 with its decision in Midland Funding, LLC v. Johnson, No. 16-348.

Twenty years of straight-line growth for e-commerce and online shopping has created fortunes for technology investors, savings for consumers and vast efficiencies for a new and constantly evolving ecosystem of suppliers and supply chains. Traditional brick-and-mortar outlets (and the retail chains that own

them) are struggling to adapt to this new dimension of competition. The

relationship between e-commerce and traditional retail activity seems to have

reached a tipping point in the United States. 

The number of consumer claims filed since the Great Recession has skyrocketed. These claims include alleged violations of an “alphabet soup” of federal and state consumer protection statutes. These statutes allow prevailing plaintiffs to recover some combination of actual damages, statutory damages, and even attorney’s fees. They also present a minimal risk of liability for defense costs if the plaintiff does not prevail, which makes these types of claims enticing for plaintiffs’ attorneys.

This decision is significant to debt collectors and debt buyers who, according to the dissent, “have ‘deluge[d]’ the bankruptcy courts with claims ‘on debts deemed unenforceable under state statutes of limitations.’”

The United States Supreme Court recently held that the submission of a proof of claim in a Chapter 13 bankruptcy case for payment of a time-barred claim did not violate the Fair Debt Collection Practices Act (the “Act”). Overturning the decision of the Eleventh Circuit Court of Appeals, the Court explained that the Bankruptcy Code includes certain safeguards which limit the potential for abuse, and thus, the assertion of a time-barred claim in bankruptcy proceedings did not constitute a practice prohibited under the Act.

On May 15, 2017, the U.S. Supreme Court ruled (5-3) in favor of the debt collection industry, holding that the filing of a proof of claim against a chapter 13 debtor on a debt that cannot be enforced under state law because the statute of limitations on it has expired does not violate the Fair Debt Collection Practices Act (FDCPA), because filing such a proof of claim is not a “false, deceptive, or misleading representation” or an “unfair or unconscionable” means for collecting a debt, as those terms are used in FDCPA.