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Court Limits Scope of Midland Funding and Imports State Law Penalties for Bankruptcy Filings

In Midland Funding, LLC v. Johnson, 137 S.Ct. 1407 (2017), the U.S. Supreme Court held that filing a proof of claim for a debt subject to a limitations defense does not violate the FDCPA, at least in the vast majority of states where the statute of limitation does not extinguish the right to payment. One of the arguments in our brief to the Court was that the Bankruptcy Code already includes remedies for out-of-statute claims, rendering any additional penalties under the FDCPA unnecessary and superfluous.

Typically, the remedy is disallowance of the claim if a trustee or debtor chooses to object and invoke the Code’s streamlined claims process.  A recent decision from the Bankruptcy Court for the District of Nevada, however, assessed attorneys’ fees for out-of-statute claims, citing heavily to Justice Sotomayor’s dissent in Midland Funding.

In In re: Antonia Andrade-Garcia, Case No.: 17-15277-ABL (D. Nev. March 31, 2021), the court addressed debtor Antonia Andrade-Garcia’s objections to three claims filed by creditor LVNV Funding, LLC on the basis that they were barred by Nevada’s applicable six-year statute of limitations. In evaluating the objections, the court held that the limitations question “[wasn’t] even close.” LVNV’s own Account Detail forms plainly established that it filed the claims between 7 and 9 years after the applicable statute of limitations expired. And LVNV acknowledged as much in its replies to the objections, stating that it “d[id] not dispute that the [Claims are] time barred.”

The court rejected LVNV’s argument that no attorneys’ fees should be assessed because there was nothing wrongful about its filing of the claims under Midland Funding. The court held that Midland Funding was “readily distinguishable” because Andrade-Garcia’s objections to the Claims and her related request for attorney’s fees did “not rely upon or invoke the FDCPA in any way.” Rather, the objections were “resolved under Nevada state law” because state, not federal, law governs disputes over the validity of a proof of claim, relying on Johnson v. Righetti (In re Johnson), 756 F.2d 738, 740–41 (9th Cir.), cert. denied, 474 U.S. 828 (1985). And under Nevada state law, the court held, attorneys’ fees were available.

The court acknowledged that as a general rule, parties have no right to recover attorney’s fees under the Bankruptcy Code. Nevertheless, it awarded fees under a Nevada state law fee shifting statute, which provides that a court may award attorney’s fees “when the court finds that the claim . . . of the opposing party was brought or maintained without reasonable ground.” NRS 18.010(2)(b). Further, the statute directs Nevada courts to “liberally construe [its provisions] in favor of awarding attorney’s fees in all appropriate situations . . . to punish for and deter frivolous or vexatious claims and defenses because such claims and defenses overburden limited judicial resources, hinder the timely resolution of meritorious claims and increase the costs of engaging in business and providing professional services to the public.” Id. Citing heavily to the dissent in Midland Funding, the court found that “[e]ach of those legislative concerns is implicated by the facts . . . in this case.”

While Midland Funding did not go so far as to say that out-of-statute claims can be filed without consequence, it did recognize that such claims are legitimate, albeit unenforceable. The decision in Andrade-Garcia limits Midland Funding’s application to the FDCPA, but its assessment of state-law penalties beyond those provided for in the Bankruptcy Code has the same effect that the Court seemed to be concerned about if the FDCPA applied to such conduct. If other bankruptcy courts follow suit, the Supreme Court may have to further clarify the scope of relief under the Bankruptcy Code. In the meantime, creditors who continue to file out-of-statute claims should be cognizant that, in some states, that may subject them to penalties.