United States Supreme Court Bankruptcy Update

The United States Supreme Court granted certiorari and decided three bankruptcy cases this year that all bankruptcy practitioners should be aware of.

Czyzewski v. Jevic Holding Corp.

On March 22, 2017, the United States Supreme Court rendered a crucial and fundamental decision that significantly affects the ability of parties to a Chapter 11 bankruptcy case to deviate from the priority distribution scheme set forth in Bankruptcy Code 11 U.S.C. §507. In Czyzewski v. Jevic Holding Corp., the Supreme Court held that Bankruptcy Courts may not approve structured dismissals that provide distributions to creditors that circumvent the priority rules in the Bankruptcy Code for plans without the consent of the affected creditors.¹

Historically, structured dismissals have been utilized by bankruptcy practitioners to resolve Chapter 11 cases that would otherwise need to be dismissed or converted to Chapter 7. They do not require disclosure, voting or consent by affected creditors, or the substantive and procedural findings by the Bankruptcy Court that are otherwise required to confirm a Chapter 11 Plan.

Prior to the case reaching the Supreme Court, the Third Circuit in In Re Jevic Holding Corp., upheld a structured dismissal previously approved by the Bankruptcy Court for the District of Delaware, despite the fact that it violated the priority rules regarding plans by allowing distributions to general unsecured creditors, but not all higher-priority creditors.²

The aggrieved party in Jevic was a group of truck drivers who were entitled to priority claim wages based upon violations of the Worker Adjustment and Retraining Notification (WARN)Act.³  Because their claim was a priority claim under the Bankruptcy Code, they would ordinarily have been entitled to distributions before general unsecured creditors.⁴ The structured dismissal ultimately approved by the Third Circuit did not provide for any payment to the truck drivers, although junior general unsecured creditors, who did not enjoy the same priority status as the WARN claimants, received a distribution from the structured dismissal.⁵

The Supreme Court granted certiorari because there was a split among the Federal Circuit Courts as to whether structured dismissals may circumvent the priority scheme in the Bankruptcy Code.⁶ In Jevic, the Supreme Court held that structured dismissals must adhere to the priority standards in the Bankruptcy Code, relying on the fact that there was no indication that Congress, in enacting the Bankruptcy Code, intended such a departure.⁷ Furthermore, the Supreme Court held that Congress did not authorize even a “rare case” exception to allow the Bankruptcy Courts to disregard the priority scheme for any reason, regardless of the circumstances.⁸

Midland Funding, LLC v. Johnson

On May 15, 2017, the Supreme Court reconciled a dispute among the Federal Circuit Courts as to whether a debt collector’s filing of a Proof of Claim for a debt that is time-barred by the statute of limitations governing the collection of debts constitutes a deceptive, false, unconscionable or unfair act to collect a debt prohibited under the Fair Debt Collection Practices Act, (FDCPA). ⁹ The 5-3 decision rendered in Midland Funding, LLC v. Johnson, held that it does not. ¹⁰

Prior to the case reaching the Supreme Court, the Eleventh Circuit in Johnson v. Midland Funding, LLC, held that filing a claim for a time-barred debt violates the FDCPA, which strictly prohibits a debt collector from engaging in false, deceptive, or misleading representations, acts, or using any “unfair or unconscionable means” to collect a debt. ¹¹ The case involved a consumer debtor who filed for relief under Chapter 13 of the Bankruptcy Code. Two months later, a debt collector filed a proof of claim asserting that the debtor owed a debt that accrued more than ten years prior to the debtor filing the bankruptcy case, which was barred under the relevant statute of limitations in the debtor’s state.¹² Subsequently, the debtor filed a lawsuit against the debt collector seeking damages for a violation under the FDCPA.¹³

The Supreme Court’s decision in Midland Funding, LLC was two-fold, distinguishing between “false, deceptive or misleading representations” and “unfair or unconscionable means” as defined under the FDCPA. Under either category, the debt collector’s actions were not found to violate the FDCPA.

The Supreme Court rejected the debtor’s argument that the claim was “false” because it was unenforceable under the statute of limitations, holding that a proof of claim filed even after the relevant statute of limitations has run “does not fall within the scope of any of the relevant words of the FDCPA.”¹⁴ The Supreme Court emphasized that the laws in many jurisdictions provide that debts are not extinguished after the statute of limitations has expired, notwithstanding that the statute of limitations is always available as an affirmative defense.¹⁵ The Supreme Court pointed out that in the context of a Chapter 13 case, additional protections for debtors exist because the trustee may examine the proofs of claim and file objections where appropriate based on the statute of limitations.¹⁶

With regard to collection by “unfair or unconscionable means,” the Supreme Court similarly rejected the Debtor’s argument that asserting a time-barred claim is “unfair” or “unconscionable.”¹⁷ The Supreme Court established that there is a difference between civil actions, where there are concerns that unsophisticated consumers may pay time-barred debts, and bankruptcy claims, where a trustee is appointed to oversee and administer the case, and that greater protections therefore exist.¹⁸

The Supreme Court pointed out that the FDCPA and Bankruptcy Code possess “different purposes and structural features,” and thus, invoking the FDCPA in this case would “upset that ‘delicate balance,’” permitting a new remedy that is not otherwise provided for in the language of the Bankruptcy Code.¹⁹

It should be pointed out that the dissent, written by Justice Sotomayor, argued that many debt collectors knowingly file proofs of claims for debts that are otherwise time-barred by expired statues of limitations, knowing it is unlikely that trustees or debtors will investigate and realize these statutes of limitation have run.

Henson v. Santander Consumer USA Inc.

One month after issuing Midland Funding, LLC, the Supreme Court decided another matter involving the FDCPA. In Henson v. Santander Consumer USA, Inc, the Supreme Court unanimously held that one who purchases a defaulted debt and then seeks to collect the debt which it now owns is not a “debt collector,” and thus is not subject to the FDCPA. ²⁰ This was the first Supreme Court opinion authored by Justice Gorsuch since his appointment to the bench.

In this case, Santander purchased defaulted auto loans from a bank. The District Court and Fourth Circuit held that Santander did not fall within the definition of a “debt collector,” which is defined as anyone who “regularly collects or attempts to collect…debts owed or due another.”²¹ As a result, Santander was not subject to the regulations and remedies that are afforded to consumers under the FDCPA.²²

The Supreme Court analyzed the “plain language” of the statute, finding that it “focuses on third party collection agents working for a debt owner – not a debt owner seeking to collect debts for itself”.²³ The question of how the owner of the debt came to own the debt in question is therefore not relevant. Based upon its interpretation of the plain language of the FDCPA, the Court established that “[a]ll that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.’”²⁴

1 137 S.Ct. 973 (2017).
2 787 F.3d 173 (2015).
3 Id. at 175-177.
4 Id.
5 Id at 175-179.
6 137 S.Ct. at 978.
7 Id.
8 Id. at 986-987.
9 15 USC §1692.
10 137 S.Ct. 1407 (2017).
11 823 F.3d 1334 (2016).
12 Id. at 1411
13 Id.
14 Midland Funding LLC, 137 S.Ct. at 1411-1412.
15 Id.
16 Id.
17 Id. at 1413.
18 Id. at 1413-1414.
19 Id. at 1414-1415.
20 137 S.Ct. 1718
21 Henson v. Santander Consumer USC, Inc., 817 F.3d 131, 133-134 (2016); see 15 USC §1692(a)(6).
22 Id.
23 Henson, 137 S.Ct. at 1721.
24 Id. at 1722.

Reprinted with permission by the Nassau County Bar Association.