In Midland Funding, LLC v. Johnson, 137 S.Ct. 1407 (May 15, 2017), the U.S. Supreme Court held that Midland Funding did not violate the Fair Debt Collection Practices Act (FDCPA) by filing a proof of claim in the debtor’s chapter 13 case for a credit card debt on which the statute of limitations “obviously” had expired. If the claim is unenforceable because it is time-barred, the remedy is to object to the claim. What do practitioners in Kentucky need to know about statutes of limitations on credit card debts before filing or objecting to claims?
Which state’s statute of limitations applies? The procedural law of the forum state will determine which state’s statute of limitations applies. In the Midland Funding case, the Supreme Court and all the lower courts applied, without discussion, the forum state’s statute of limitations (Alabama).
However, the choice of law is not as easy to determine in Kentucky. Under Kentucky’s “borrowing statute,” KRS 413.320, if a cause of action arose outside of Kentucky, and if the place where the cause of action accrued has a shorter statute of limitations than Kentucky’s, the shorter statute of limitations from the other jurisdiction must be used.
In Conway v. Portfolio Recovery Associates, LLC, 13 F. Supp. 3d 711 (E.D. Ky. 2014) (Van Tatenhove, J.), the analysis went something like this: The creditor’s right to take action against a Kentucky consumer to collect on a delinquent credit card account arose when the consumer defaulted. The default did not occur until the creditor knew that payments had not been made. That determination could only be made in the creditor’s home state, which was Virginia. The court then compared the statute of limitations in Virginia (3 years) with the limitations period in Kentucky to see which was shorter.
What is the statute of limitations for collecting on a credit card debt in Kentucky? An action based on a written contract entered into before July 15, 2014 is 15 years. An action based on a written contract entered into after that date is 10 years. KRS 413.090; 413.160. But is an action to collect a credit card debt based on a written contract?
There is no definitive answer from Kentucky courts, but two District Court judges have suggested that a credit card agreement is not a written contract unless the consumer has actually signed it. See Fulk v. LVNV Funding LLC, 55 F. Supp. 3d 967 (E.D. Ky. 2014) (Reeves, J.) and Conway above. The limitations period on an unwritten contract is 5 years. KRS 413.120.
When does the limitations period begin to run? A logical starting point might be the charge-off date, but it could begin earlier with the date the last payment was made on the account, or the date of default (when the payment was due but not received). The proof of claim should disclose the charge-off date, the date of last transaction on the account, and the date of last payment.
Be aware that a voluntary payment made on a debt after the cause of action accrued will revive or restart the statute of limitations.
Conclusion? I think it is safe to say that under Kentucky law, the statute of limitations is an affirmative defense and does not extinguish the debt. There is case law suggesting that creditors can still request repayment of a time-barred debt as long as they do not threaten litigation or actually take legal action.
Since the debt is not extinguished and the creditor has a claim under the Bankruptcy Code, the creditor may, according to Midland Funding, lawfully file a proof of claim on the time-barred debt, as long as the relevant information in the claim is disclosed and is not false or misleading. Then it is up to the trustee or the debtor (by counsel) to object to the claim on the grounds it is unenforceable under applicable state law.
However, I honestly cannot say with any measure of confidence when Kentucky’s statute of limitations applies; what the Kentucky statute of limitations is on credit card debt; or when the statute of limitations begins to run. The disclaimer I make about this blog in general is particularly relevant to this post, so let me reiterate:
“. . . These posts represent my thoughts and opinions and do not constitute legal advice, nor should they be considered a substitute for legal research. . . . I reserve the right to change my mind at any time for any reason.”