Courts usually frown on efforts to mislead fellow judges.
Even the legal profession says there are limits on how far a lawyer can go in pleading a client’s case. According to the American Bar Association, attorneys owe a duty of “candor toward a tribunal.” In other words, not only are lawyers forbidden from making false statements of fact, they are also forbidden from failing to correct false statements of fact made by their client or a witness. Winning by deception is out of bounds.
So it was surprising when the U.S. Supreme Court recently ruled that debt collectors can present their claims in bankruptcy court even when they know that the debt they seek to collect is legally unenforceable because the statute of limitations has lapsed. Debtors and bankruptcy trustees can still get such claims thrown out, but the burden is on the debtor to notice that the debt is “stale.”
In a 5-3 decision, the Supreme Court ruled in favor of Midland Funding. (Justice Neil Gorsuch did not take part in the case, which was argued before he joined the court.) Midland filed a claim for about $1,900 in the bankruptcy proceedings of an Alabama debtor named Aleida Johnson. After Johnson cited the state’s six-year statute of limitations, which had long since run out, the bankruptcy court rejected Midland’s claim. Johnson then sued Midland on the grounds that the very proof of claim Midland submitted to the court demonstrated knowledge that the statute of limitations had run out, and that filing anyway violated the federal Fair Debt Collection Practices Act.
Johnson’s situation is not unusual. According to a 2013 Federal Trade Commission report cited by The Wall Street Journal, expired debt makes up about 30 percent of the more than $100 billion in debt purchased by collection agencies. Each state sets its own statute of limitations on debt collection, though a period between three and six years is most common. While courts typically cannot enforce payment of stale debts, most states allow creditors to continue pursuing these payments. It is up to the consumers to educate themselves and push back.
Justice Stephen Breyer, who wrote the majority opinion, noted that various lower courts have found that the attempt to collect on a debt while knowing it has passed the statute of limitations is “unfair” under the Fair Debt Collection Practices Act. Yet Breyer argued that a court-appointed bankruptcy trustee is more likely to know that claims may be unenforceable and that he or she can get such claims dismissed. Finding in Johnson’s favor would upset the “delicate balance” of bankruptcy proceedings, he wrote.
In her dissent, Justice Sonia Sotomayor did not mince words. “Debt collectors do not file these claims in good faith; they file them hoping and expecting that the bankruptcy system will fail,” she wrote. Sotomayor, whose dissent was joined by Justices Ruth Bader Ginsburg and Elena Kagan, suggested that the majority’s “rosy portrait” of bankruptcy proceedings was unrealistic, and that if debt collectors did not see profit in trying to slip stale claims past consumers and trustees, they would not continue to do so.
The immediate result of the high court’s ruling is that creditors with legitimate, enforceable rights will receive less in bankruptcy settlements to the extent that those whose claims are invalid manage to get away with the “mum’s-the-word” approach. The Supreme Court’s decision does not create any additional resources to pay bankruptcy claims; it merely expands the pool of eligible claimants to include an industry that has made big business of buying defaulted and legally dead debt for pennies on the dollar and then trying to trick, slick and cajole payments that nobody is obligated to make.
The Fair Debt Collection Practices Act already outlaws “false, deceptive or misleading” representations. In the Supreme Court majority’s crabbed reading of the statute, this language means the owner of a time-barred debt cannot lie to the court outright and affirm that the debt is valid when, in fact, it isn’t. Observers like you and me might think that the mere act of filing such a claim knowing it to be unenforceable would count as a deceptive or misleading act. But the high court’s majority invoked its own version of the golden rule: Silence is golden, and might even get you some gold.
This is a nonsensical reading of a fairly clear statute. If the justices need a little help with their reading comprehension, Congress ought to do its best to oblige. An amendment to the statute specifically prohibiting presentation of stale debt to bankruptcy court would be an excellent approach. Barring that, the courts themselves could amend their rules to require bankruptcy claimants to affirm, on penalty of perjury, a good-faith belief that their claims are valid and legally enforceable.
Meanwhile, the American Bar Association could encourage its state affiliates and the courts that administer legal ethics proceedings to put some substance behind the profession’s duty-of-candor rule, by exposing lawyers who file time-barred bankruptcy claims to public disciplinary action. Lawyers are licensed on the state level, and states are free to set a higher standard of professional conduct than the Supreme Court seems to demand. Setting such a standard would be a sensible way to mitigate some of the harm done by this wrongheaded decision.