Within the past year bankruptcy courts and federal courts adjudicating bankruptcy appeals have further developed the law governing claims in bankruptcy which are generally governed by Sections 501 and 502 of Title 11 of the United States Code (the “Bankruptcy Code”) and related Federal Rules of Bankruptcy Procedure. Below is a discussion regarding two distinct cases that discuss the validity and priority of claims in bankruptcy.
Consumer Debt Buyers Beware: Think Before Filing A Proof of Claim
The Eleventh Circuit Court of Appeals held that a Chapter 13 debtor could prosecute an adversary proceeding against a consumer debt buyer for violating the Fair Debt Collections Practices Act (“FDCPA”) based on the creditor filing a proof of claim on debt which was uncollectible under the Alabama statute of limitations. Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014).
It appears the Eleventh Circuit’s decision comes in response to a significant increase in the number of consumer debt buyers “armed with hundreds of delinquent accounts purchased from creditors” who are filing proofs of claims on debts which are unenforceable pursuant to state statutes of limitation.
Factual And Procedural Background
Stanley Crawford, the Chapter 13 debtor and plaintiff in the adversary proceeding (“Crawford”) owed a debt in excess of $2,000 to a furniture company (the “Debt”). In September 2001 the furniture company sold the Debt to an affiliate of LVNV Funding, LLC. Crawford’s last transaction on the account related to the Debt occurred in October 2001. Pursuant to Alabama’s three-year statute of limitations the Debt became unenforceable in both state and federal court in October 2004. Ala. Code Section 6-2-37(1).
In 2008, Crawford sought Chapter 13 bankruptcy protection. LVNV filed a proof of claim in attempt to collect from Crawford’s bankruptcy estate even though the Debt had been unenforceable under the Alabama statute of limitations for over four years.
Neither Crawford nor the Chapter 13 bankruptcy trustee objected to LVNV’s proof of claim. The trustee paid LVNV on the Debt from Crawford’s bankruptcy estate. It was not until four years later, in May 2012, that Crawford objected to LVNV’s claim through an adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure (“FRBP”) 3007(b). Crawford alleged that LVNV routinely filed stale claims and that LVNV violated the FDCPA by attempting to collect the time-barred Debt.
The bankruptcy court dismissed Crawford’s adversary proceeding in its entirety. This decision was affirmed by the district court on appeal and subsequently appealed to the Eleventh Circuit which reversed the lower court’s ruling.
Fair Debt Collections Practices Act And The Least Sophisticated Consumer Test
The FDCPA is a consumer protection statute which prohibits false, deceptive or unfair debt-collection practices. The FDCPA regulates debt-collectors’ conduct. Note that not all creditors are considered “debt-collectors”. The FDCPA defines a debt-collector as one who, “regularly collects . . . debts owed or due or asserted to be owed or due another.”
Congress provided consumer debtors with a private right of action to enforce the FDCPA’s prohibitions. Debt collectors who violate the FDCPA can be liable for actual damages, statutory damages up to $1,000 and reasonable attorney’s fees and costs.
Pursuant to Section 1692e of the FDCPA, “a debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.”
Under Section 1692f, “a debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt.”
The FDCPA does not define “unfair” or “unconscionable”. The Eleventh Circuit has concluded that these terms are vague and ambiguous. As a result of the ambiguity the Eleventh Circuit has adopted a “least-sophisticated consumer” standard to assess whether a debt collector’s conduct is deceptive, misleading, unconscionable or unfair. The test is not whether the particular consumer involved was deceived or mislead. Instead, the threshold is whether the “least sophisticated consumer” would have been.
Eleventh Circuit’s Analysis
The Eleventh Circuit readily concluded that LVNV maintained a practice of filing time-barred proofs of claims because, unless the debtor or trustee objects, the time-barred claim is automatically allowed under 11 U.S.C. Section 502(a)-(b) and FRBP 3001(f). This results in Chapter 13 debtors paying the debt from his or her future wages as part of the Chapter 13 repayment plan, even though the debt is time-barred and unenforceable.
The Eleventh Circuit opined that a debt-collector’s filing of a time-barred proof of claim creates a misleading impression to a bankrupt debtor that the debt collector can legally enforce the debt. On that basis, the “least sophisticated” debtor may fail to object to the claim. In considering the Bankruptcy Code’s automatic allowance provision, in a Chapter 13 case, an otherwise unenforceable and time-barred debt will be paid from the debtor’s future wages as part of the Chapter 13 repayment plan. This necessarily reduces the funds available for legitimate creditors to recover on enforceable claims. Moreover, requiring a debtor to object to time-barred claims consumes a debtor’s resources, similar to filing a limitations defense in state court.
Eleventh Circuit Holding
The Eleventh Circuit, therefore, held that under the “least sophisticated consumer standard”, LVNV’s filing of a proof of claim for a time-barred Debt was unfair, unconscionable, deceptive and misleading under Sections 1692e and 1692f of the FDCPA.
In reaching this conclusion, the Eleventh Circuit expressly avoided the pending circuit split as to whether the Bankruptcy Code preempts the FDCPA. LVNV did not argue preemption. LVNV only argued that its conduct did not fall under the FDCPA, or, alternatively, did not offend the FDCPA’s prohibitions.
International Treaty Thwarts Administrative Claim
The Bankruptcy Court for the Eastern District of Pennsylvania ruled on an issue of first impression. The Bankruptcy Court held that trade creditors who supplied goods to a debtor prior to its bankruptcy filing were not entitled to administrative priority status of their claims under Bankruptcy Code Section 503(b)(9). The Court reasoned that the goods were “received by the debtor” at the time they were placed on the vessels at Chinese ports, which was more than 20 days before the debtor’s bankruptcy filing. As a result, the debts were general unsecured debts. In re World Imports, Ltd., 511 B.R. 738 (Bankr. E.D. Pa. 2014).
Under Bankruptcy Code Section 503(b)(9) trade creditors who supplied the debtor with goods during the 20-day period prior to the debtor’s bankruptcy filing have administrative priority claims. These creditors can assert an administrative claim for “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”
Based on the language in Section 503(b)(9) the date in which the debtor “received” the trade creditor’s goods is imperative. If a debtor is found to have received the goods anytime outside of the 20-day prepetition period, the creditor is only entitled to collect pro rata with other general unsecured creditors.
Factual And Procedural Background
In this case the goods were shipped FOB (Free On Board) to the debtor from Shanghai and Xiamen. The goods were loaded on the vessel at the port of shipment more than 20 days before the debtor’s bankruptcy filing, but the debtor took physical possession of the goods in the United States during this 20-day prepetition period.
The creditors argued before the Bankruptcy Court that, because the Bankruptcy Code does not define the word “receive,” the Court should apply the definition of the term “receipt” found in the Uniform Commercial Code (“UCC”) article regarding the sale of goods. Under the UCC, “receipt” is taking physical possession of the goods. Under this definition, the debtor would have “received” the goods within the 20-day pre-petition period and the trade creditors would have administrative priority claims for the outstanding amounts due and owing.
However, the debtor and the creditors’ committee argued that the UCC’s definition of “receipt” should not apply because the relevant law at issue was international commercial law. Under international law, in a FOB sale, the transfer of the property to the buyer occurred once the goods were put on the ship, not when the buyer subsequently took physical possession of the property. Accordingly, under this theory, the debtor would have “received” the goods when they were first put on the vessels at port in China, before the 20-day prepetition period.
Bankruptcy Court’s Holding and Analysis
The Bankruptcy Court agreed with the debtor and the creditors’ committee and concluded that the debtor “received” the goods when they were placed on the vessels in China. The Bankruptcy Court reasoned that the transactions were governed by the Convention on Contracts for the International Sale of Goods (CISG), not the UCC. Under the CISG the risk of loss or damage passes to the buyer at the time the goods are placed on the vessel at port.
Accordingly, in addressing this issue of first impression, the Bankruptcy Court held that with respect to goods shipped FOB from overseas, the date the debtor “received” the goods is the date when the goods are loaded onto the vessel at the port of shipment, not later when the debtor actually took possession of the goods.
 LVNV Funding, LLC is among a group of affiliates and defendants in the adversary proceeding referred to here as “LVNV”.
 See Simmons v. Roundup Funding, LLC, 622 F.3d 93, 96 (2d Cir. 2010) (bankruptcy Code preempts FDCPA); Walls v. Wells Fargo Bank, N.A. 276 F.3d 502, 510 (9th Cir. 2002) (same); Simon v. FIA Card Ser., N.A., 732 F.3d 259, 271-74 (3d Cir. 2013) (bankruptcy code does not preempt FDCPA); Randolph v. IMBS, Inc., 368 F.3d 726, 730-33 (7th Cir. 2004) (same).
 In re World Imports, Ltd. does not address the 45-day reclamation period under 11 U.S.C. § 546(c). However, this section is helpful for trade creditors to consider if their buyer files for bankruptcy protection. Under this section a seller may reclaim its goods from the bankruptcy debtor if: (1) the seller sold goods to the debtor in the ordinary course of the seller’s business; (2) the debtor received the goods while insolvent within 45 days before debtor’s bankruptcy case was commenced; and (3) the seller demands reclamation of the goods in writing (A) not later than 45 days after the date of the debtor received the goods or (B) not later than 20 days after the debtor’s bankruptcy was commenced, if the 45-day period expires after the debtor’s bankruptcy was commenced.