The Supreme Court Issues Significant FDCPA Decisions

Written by: Attorney Christopher M. Candon & Joseph M. Harris

In this past term, the United States Supreme Court took action on several cases that may significantly shape bankruptcy and/or insolvency law.  In a few short months, the Supreme Court issued a much-anticipated decision that ended the practice of non-consensual structured dismissals (Czyzeweski v. Jevic, 137 S. Ct. 973 (2017)), suggested that bankruptcy venue may be too broad (Bristol-Myers Squibb v. Superior Court of California, 137 S. Ct. 1773 (2017)) and granted certiorari to address the Circuit split on the “Safe Harbor” for settlement payments and transfers in connection with securities contracts (certiorari granted in FTI Consulting Inc. v. Merit Management Group LP, 830 F.3d 690 (7th Cir. July 28, 2016)).  Additionally, the Supreme Court handed down two significant rulings concerning the Fair Debt Collection Practices Act (FDCPA) (15 USC 1692 et seq.) that will influence the application of that law: Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (2017) and Henson et al. v. Santander Consumer USA Inc., 137 S. Ct. 1718 (2017).


The FDCPA prohibits a debt collector from using a “false, deceptive, or misleading representation or means in connection with the collection of any debt” and prohibits a debt collector from using “unfair or unconscionable means to collect or attempt to collect any debt.”  15 U.S.C. §§ 1692e, 1692f.

The FDCPA applies only to the collection of debt incurred by a consumer primarily for personal, family, or household purposes.  It does not apply to the collection of corporate debt or debt owed for business or agricultural purposes.

The FDCPA defines a debt collector as any person who regularly collects, or attempts to collect, consumer debts for another person or institution or uses some name other than its own when collecting its own consumer debts.

The Supreme Court Decisions

On May 15, 2017, the Court issued the decision Midland Funding, LLC. v. Johnson.  The Midland case stems from Aleida Johnson’s personal Chapter 13 Bankruptcy proceeding.  In that case, Midland—a company that purchases and collects distressed debt—filed a proof of claim claiming Johnson owed $1,879.71 in credit card debt.  Midland’s claim also noted that no charge appeared on Johnson’s account within the past ten years—far outside Alabama’s relevant six-year statute of limitations.  Johnson objected to the claim, Midland did not respond, and the Bankruptcy Court disallowed the claim.

Johnson then sued Midland, alleging that Midland’s claim violated the FDCPA.  The District Court found Midland’s actions did not fall within the bounds of the FDCPA.  The Eleventh Circuit reversed.  The Supreme Court granted certiorari to consider whether Midland’s conduct—filing a claim in a Chapter 13 proceeding, that on its face falls outside the relevant statute of limitations—constitutes “false,” “deceptive,” “misleading,” “unconscionable,” or “unfair” conduct within the meaning of the FDCPA.

The majority, in an opinion delivered by Justice Breyer, found that it did not.  Under Alabama law, after the statute of limitations period expired, a creditor has the right to payment of a debt, but cannot enforce collection through law.  Rather, once the statute of limitations has expired, should a creditor seek to enforce the claim through legal proceedings, a debtor may assert the expiration of the statute of limitations as an affirmative defense.  Therefore, the majority concluded that Midland’s claim on Johnson’s credit card debt was indeed a “claim” within the meaning of the Bankruptcy Code, and it was “reasonably clear that Midland’s proof of claim was not ‘false, deceptive, or misleading.’”

The majority also did not believe that Midland’s conduct was either “unconscionable” or “unfair.”  Despite precedent in a civil context indicating asserting a time-barred claim is “unfair,” the majority believed in a bankruptcy proceeding—where the consumer initiates the proceeding, a trustee is available, and different procedural rules apply—“unfairness,” and the resultant harm to the consumer, was less of a concern.  Furthermore, the allowance of time-barred claims was not “unconscionable” because the filing and disallowance of the claim “discharges” the debt, meaning that debt will not remain on the debtor’s future credit reports.

In a dissent, Justice Sotomayor, joined by Justices Ginsburg and Kagan, disagreed.  In their view, when debt collectors file stale claims in bankruptcy proceedings, they are hoping that the bankruptcy system will fail and that claims that otherwise would be barred by statute of limitations are incorporated in Chapter 13 plan for payment.  Such conduct, in their opinion, is not good-faith conduct, and qualifies as “unfair” and “unconscionable” under the FDCPA.

The Midland Funding decision should end FDCPA lawsuits for time-barred claims in bankruptcy cases.  It leaves open, however, the related question of whether debt collectors can be liable under the FDCPA for filing lawsuits to collect time-barred debt.  The Court noted that several lower courts have found that filing suit for a time-barred claim is “unfair,” and assumed “for argument’s sake” that these lower courts were correct.  But the Court added that it “has not decided” and “does not now decide” that FDCPA issue.

On June 12, 2017, the Supreme Court did decide another FDCPA matter.  In Henson v. Santander, Santander—a large financial institution—did not issue the plaintiff’s debt, but rather purchased defaulted loans from CitiFinancial Auto and then sought to collect in ways the petitioners alleged violated the FDCPA.  A Circuit split had emerged regarding the correct characterization of whether parties like Santander qualify as “debt collectors” under the FDCPA.  The Fourth Circuit, following the Ninth and Eleventh Circuits, agreed with the district court’s finding that Santander was not a debt collector subject to the FDCPA, while the Third, Fifth, Sixth, Seventh, and D.C. circuits had adopted the opposite view.

In Justice Gorsuch’s first written opinion as a member of the Supreme Court, the Court unanimously ruled that companies may collect debts that it purchased for its own account, like Santander, without violating the FDCPA.  At issue was the FDCPA’s definition of “debt collector.”  The statute defines the term to cover anyone who “regularly collects or attempts to collect … debts owed or due … another.”

“Everyone agrees that the term embraces the repo man — someone hired by a creditor to collect an outstanding debt,” remarked Justice Gorsuch.  “But what if you purchase a debt and then try to collect it for yourself — does that make you a ‘debt collector’ too?”  The parties agreed that those who seek to collect for themselves loans they originated do not qualify as debt collectors.  Thus, the narrow issue taken up by the Court was how to “classify individuals or entities who regularly purchase debts for their own account.  Does the [FDCPA] treat the debt purchaser in that scenario more like the repo man or the loan originator?”

The Court ruled with Santander and the Fourth, Ninth, and Eleventh Circuits.  The Court held that the FDCPA does not “care how a debt owner came to be a debt owner—whether the owner originated the debt or came by it only through a later purchase.  All that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.'”

Whether the FDCPA should be applied more broadly, to all businesses attempting to collect debts, regardless of ownership, the Court said that was a matter for Congress, not the Court, to resolve.  The petitioners asserted that the FDCPA was intended by Congress to cover debt purchasers, like Santander, but the legislators simply did not foresee the industry when the FDCPA was enacted in 1978.  The Court dismissed the argument as “a lot of speculation.”

In the end, reasonable people can disagree with how Congress balanced the various social costs and benefits in this area.  We have no difficulty imagining, for example, a statute that applies the Act’s demands to anyone collecting any debts, anyone collecting debts originated by another, or to some other class of persons still. . . Constant competition between constable and quarry, regulator and regulated, can come as no surprise in our changing world.  But neither should the proper role of the judiciary in that process—to apply, not amend, the work of the People’s representatives.

Importantly, the decision does not foreclose future litigation on the “debt collector” issue.  The FDCPA also defines a debt collector as a person whose business has as its principal purpose the “collection of any debts.”  Because this was not raised in the certiorari petition, the Court declined to decide whether Santander would meet this alternative definition.  With this significant issue unresolved, businesses that purchase and collect debt may still be found subject to the FDCPA.

Sheehan Phinney is honored to have been named the 2016 Business of the Year for Business Services by Business NH Magazine.

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