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Owens v. LVNV Funding LLC

United States Court of Appeals, Seventh Circuit

August 10, 2016

Alphonse D. Owens, Plain tiff-Appellant,
LVNV Funding, LLC, Defendant-Appellee. Tia Robinson, Plaintiff-Appellant,
eCast Settlement Corp., et al., Defendants-Appellees. Joshua Birtchman, Plaintiff-Appellant,
LVNV Funding, LLC, et al, Defendants-Appellees.

          Argued June 1, 2016

Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:14-cv-02083, 1:14-cv-00713 - Jane E. Magnus-Stinson, Judge.

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:14-cv-08277 - Manish S. Shah, Judge.

          Before Wood, Chief Judge, and Bauer and Flaum, Circuit Judges.


         In each of these consolidated cases, a debt collector filed a proof of claim, defined as "a written statement setting forth a creditor's claim, " Fed.R.Bankr.P. 3001(a), for a time-barred debt in a Chapter 13 bankruptcy proceeding. After successfully objecting to the proof of claim, the debtor sued the debt collector in federal court, alleging that the act of filing a proof of claim on a stale debt violates §§ 1692e and 1692f of the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 et seq. ("FDCPA"). In each case, the district court granted the defendant debt collector's motion to dismiss. For the reasons that follow, we affirm those decisions.

         I. Background

         The three consolidated cases currently before us are similar in material respects. In each case, a debtor filed for bankruptcy under Chapter 13 of the Bankruptcy Code.[1] The debtor was represented by counsel throughout the proceedings. In addition, a trustee was assigned to the case.

         During the bankruptcy proceedings, a debt collector submitted a proof of claim for a "stale" debt, or a debt for which the statute of limitations had expired.[2] The debt collector was not the original creditor, but instead a professional debt buyer who had purchased the stale obligation at a fraction of the debt's face value. As required by Federal Rule of Bankruptcy Procedure 3001, the proof of claim filed by the debt collector accurately noted the origin of the debt, the date of the last payment on the debt, and the date of the last transaction.

         Realizing that the debt was time-barred and thus subject to an affirmative defense, the debtor objected to the claim, which was disallowed and eventually discharged. Shortly thereafter, the debtor brought a separate suit in federal court against the debt collector, alleging that the act of filing a proof of claim on a time-barred debt constituted a false, deceptive, misleading, unfair, or unconscionable means of collecting a debt in violation of §§ 1692e and 1692f of the FDCPA.

         In each case, the district court granted defendant's motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Two of the decisions-Owens and Birtchman-involved the same defendant and were decided on the same day by the same district court judge. In those decisions, the district court rejected the argument that the act of filing a proof of claim was deceptive or unfair, noting that the defendant was entitled to do so under the Bankruptcy Code. The district court also observed that defendant's proof of claim was complete, accurate, and provided the date of the final payment; as such, the court concluded that the proof of claim was not false or misleading.

         In Robinson, the district court likewise dismissed the plaintiff's complaint under Rule 12(b)(6), holding that filing a proof of claim on a time-barred debt was not a deceptive, false, or misleading debt collection practice. The plaintiff then filed an amended complaint in which she added additional allegations under the FDCPA. The district court dismissed the amended complaint as well, holding that the confirmation of plaintiff's bankruptcy plan barred her FDCPA claims under the doctrine of res judicata. The plaintiffs in all three cases appeal.

         II. Discussion

         Plaintiffs contend that the district courts erred by granting defendants' motions to dismiss. They maintain that filing a proof of claim on a stale debt misleads the debtor about the legal status of the debt and thus violates the FDCPA's prohibition against false, deceptive, misleading, unfair, and unconscionable debt collection practices.[3] Their argument has two components. First, plaintiffs allege that the act of filing a proof of claim on a time-barred debt is inherently misleading because "claim" is defined to include only legally enforceable obligations. In other words, plaintiffs contend that because the claim process in bankruptcy is reserved for enforceable obligations, filing a proof of claim on a stale debt falsely cloaks the underlying obligation with an air of legitimacy. Second, plaintiffs contend that filing a stale proof of claim is deceptive because, in practice, the debtor and his attorney sometimes fail to object to the claim, allowing the debt collector to collect on an unenforceable obligation. Plaintiffs rely on our case law holding that the FDCPA prohibits creditors from filing lawsuits to collect on stale debts. Phillips v. Asset Acceptance, LLC, 736 F.3d 1076, 1079 (7th Cir. 2013). They allege that the rationale for this holding also applies in the bankruptcy context.

         We review a dismissal under Rule 12(b)(6) de novo, accepting well-pleaded allegations in the complaint as true and drawing all reasonable inferences in the light most favorable to the plaintiffs. Parish v. City of Elkhart, 614 F.3d 677, 679 (7th Cir. 2010).

         A. Definition of "Claim"

         As an initial matter, we disagree with plaintiffs' assertion that the term "claim" includes only legally enforceable obligations, and that filing a proof of claim on a stale debt is therefore per se illegal under the FDCPA. The Bankruptcy Code broadly defines a "claim" as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured[.]" 11 U.S.C. § 101(5)(A). It would be strange to interpret "claim" as excluding legally unenforceable obligations when two of the enumerated examples-"contingent" and "unmatured" claims- afford the creditor no collection right under state law when the claim is filed with the bankruptcy court.[4] See, e.g., In re Chi., Milwaukee, St. Paul & Vac. R.R. Co., 6 F.3d 1184, 1192 (7th Cir. 1993) (noting that contingent claims exist even before a cause of action has accrued).

         Moreover, a "claim" is defined as a right to payment. § 101(5)(A). In most jurisdictions, including Illinois and Indiana, the expiration of the statute of limitations period does not extinguish the underlying debt. See Mascot Oil Co. v. United States, 42 F.2d 309, 311 (Ct. CI. 1930), aff'd, 282 U.S. 434 (1931) ("[T]he statute of limitations or other bar against a remedy for the collection of a debt does not extinguish the liability therefor."); Donaldson v. LVNV Funding, LLC, 97 F.Supp.3d 1033, 1039 (S.D. Ind. 2015) ("It is true that [the creditor] cannot file a lawsuit, but it is the law in Indiana that the debt is still owed. The statute of limitations does not extinguish the debt, it merely limits avenues of collection."); Fleming v. Yeazel, 40 N.E.2d 507, 508 (111. 1942) ("[T]he statute of limitations controls the remedy for recovery of the debt, but the debt remains the same as before, excepting that the remedy for enforcement is gone." (citation omitted)). In other words, a time-barred debt is still a debt, even if the creditor cannot file a collection suit. See Pearl-Phil GMT (Far E.) Ltd. v. Caldor Corp., 266 B.R. 575, 581 (S.D.N.Y. 2001) ("Thus, under the Code, a right to payment need not be currently enforceable in order to constitute a claim."). We have also held that the fact that the statute of limitations has run does not mean that all avenues of collection are prohibited. See McMahon v. LVNV Funding, 744 F.3d 1010, 1020 (7th Cir. 2014) (holding that it is not "automatically improper for a debt collector to seek re-payment of time-barred debts" so long as the debt collector does not use deceptive practices). Implicit in this holding is the understanding that a creditor with a stale debt retains some right to payment, even if recourse is only grounded in the debtor's moral obligation to pay. Id. (observing that "some people might consider full debt re-payment a moral obligation, even though the legal remedy for the debt has been extinguished").

         Therefore, a "claim" in bankruptcy is "more extensive than the existence of a cause of action that entitles an entity to bring suit." In re Keeler, 440 B.R. 354, 362 (Bankr. E.D. Pa. 2009) (citing In re Remington Rand Corp., 836 F.2d 825, 831-32 (3d Cir. 1988)); In re Grossman's, 607 F.3d 114, 121 (3d Cir. 2010) (holding that a "claim" can exist in bankruptcy notwithstanding an inability to commence an action under state law at the time of filing). Further support for this interpretation comes from the claim allowance process set forth in the Bankruptcy Code, which has been described as a "sifting process." Gardner v. New Jersey, 329 U.S. 565, 573 (1947); see also Travelers Cas. & Sur. Co. of Am. v. Vac. Gas & Elec. Co., 549 U.S. 443, 449 (2007) (describing the claim allowance process). Once a debtor files for bankruptcy, a bankruptcy estate is created that consists of "all legal or equitable interests of the debtor ... ." 11 U.S.C. §§ 541(a)(1); 1306(b). A creditor who wishes to collect on a debt may file a proof of claim, or "a written statement setting forth a creditor's claim." Fed.R.Bankr.P. 3001(a); Travelers, 549 U.S. at 449 ("When a debtor declares bankruptcy, each of its creditors is entitled to file a proof of claim ... ."). A proof of claim "constitute[s] prima facie evidence of the validity and the amount of the claim, "[5] but not all claims are entitled to payment. Fed.R.Bankr.P. 3001(f). Importantly, the bankruptcy court must, upon an objection by a party in interest, disallow any claim that "is unenforceable against the debtor ... under any agreement or applicable law[.]" 11 U.S.C. § 502(b)(1). Furthermore, the Code specifically enumerates statutes of limitation as one means of proving the unenforceability of a claim. § 558; see also In re Keeler, 440 B.R. at 360 ("Therefore, if as of the date of the debtor's bankruptcy filing a creditor's claim was barred by the applicable statute of limitations, then the claim must be disallowed upon objection by a party in interest.").

         Thus, the Bankruptcy Code contemplates that creditors will file proofs of claim for unenforceable debts-including stale debts-and that the bankruptcy court will disallow those claims upon the debtor's objection. Indeed, filing a proof of claim allows the debt to be processed in the bankruptcy proceeding, which is intended to be all-encompassing. In re Am. Reserve Corp., 840 F.2d 487, 489 (7th Cir. 1988) ("The principal function of bankruptcy law is to determine and implement in a single collective proceeding the entitlements of all concerned."); In re Glenn, 542 B.R. 833, 841 (Bankr. N.D. 111. 2016) ("Above all, bankruptcy is a collective process, designed to gather together the assets and debts of the debtor and to effect an equitable distribution of those assets on account of the debts. The more participation there is; the better this process works." (citing Levit v. Ingersoll Rand Fin. Corp., 874 F.2d 1186, 1194 (7th Cir. 1989)); 1 Norton Bankr. L. & Prac. 3d § 3:9 (2016) ("A fundamental principle of the bankruptcy process is the collective treatment of all of a debtor's creditors at one time."). In fact, sometimes even Chapter 13 debtors-such as plaintiff Owens-list stale debts in the schedule of unsecured debts that they file with the bankruptcy court. This is because debts that are not brought to the bankruptcy court's attention (either by the debtor or by the creditor who files a proof of claim) will not be discharged, see 11 U.S.C. § 1328(a), and a debt that is not discharged remains collectible, although the avenues for collection are limited. See McMahon, 744 F.3d at 1020.[6]

         It is true that debtors may fail to object to a proof of claim for a stale debt. When that occurs, the debt becomes part of the confirmed bankruptcy plan and the debtor is required to pay a portion of it. To reduce the risk of this outcome, creditors are required to include details about the status and origin of the debt on the proof of claim form. Fed.R.Bankr.P. 3001(c)(3). The most recent revision to the Federal Rules of Bankruptcy Procedure explains:

Because a claim [based on consumer credit debts] may have been sold one or more times prior to the debtor's bankruptcy, the debtor may not recognize the name of the person filing the proof of claim. Disclosure of the information required [under Rule 3001(c)(3)] will assist the debtor in associating the claim with a known ...

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