DEALING WITH ZOMBIE DEBT IN BANKRUPTCY: ANOTHER ROAD UNDER RULE 9011

For those bankruptcy practitioners that also file Fair Debt Collection Practice Act claims, the general practice for the Chapter 13 bankruptcy practitioners is to review proof of claims at some point past the claims bar date and then object to proofs of claims for debt that is not enforceable under state law. Upon disallowance pursuant to the statute of limitations, the practitioner would schedule the FDCPA claim on schedule B, and cause a FDCPA case to be filed in District Court. Some pundits have stated that the filing of a proof of claim is itself not subject to the FDCPA. However, the Seventh Circuit’s approach examines whether the FDCPA claim raises a direct conflict with the Bankruptcy Code, or whether both the Bankruptcy Code and the FDCPA can be enforced against the debt collector. McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1020 (7th Cir.2014). This seems to be an uptrending authority. Recently the Sixth Circuit rule upon communications from debt collectors to debtors that offered to settle debt but omitted the fact the debt was unenforceable. Buchanan v. Northland Group, Inc., No. 13-2523 (6th Cir., Jan. 13, 2015). The court also noted that “[a] misrepresentation about the limitations period amounts to a ’straightforward’ violation of [the FDCPA],” citing the Seventh Circuit Court of Appeals decision in McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1020 (7th Cir.2014).

Under § 1692e(5) of the FDCPA, a debt collector violates the FDCPA by threatening “to take any action that cannot legally be taken or that is not intended to be taken.” The presentment of a proof of claim for a stale dated debt in a bankruptcy or an offer of a settlement (without disclosure that the debt was not enforceable to mitigate an implied threat of litigation) of the same violates the FDCPA under the rationale of these cases.

However, a parallel approach was recently suggested in the Bankruptcy Court for the Northern District of Indiana which dealt with stale dated claims under Rule 9011. In Re Sekema, 14-40145 (January 7, 2015). Like the practice above, the practitioner objected to the stale dated claims on the basis of being violative of the Indiana six year statute of limitations. The Court sustained the objection to the proofs of claim. However the court issued a Show Cause Order on its own initiative (“By filing that claim, it appears that [creditors] violated Rule 9011(b)(2) of the Federal Rules of Bankruptcy Procedure because the claim was not warranted by existing law or a non-frivolous argument for its extension and a reasonable pre-filing inquiry would have revealed that lack of merit. See In re Excello Press, Inc., 967 F.2d 1109, 1112-13 (7th Cir. 1992) (Rule 11 requires the filer to investigate any obvious affirmative defenses)”). After consideration, the Sekema court awarded sanctions of $1000 for no-showing a show-cause hearing to explain why filing a time-barred claim did not violate Rule 9011. The sanctions were set using an express reference to the Fair Debt Collection Practices Act.

Steven P. Taylor:   www.bankruptcyoffice.net