Midland Funding v. Johnson Page 16

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Audio Transcription for Oral Argument - January 17, 2017 in Midland Funding v. Johnson

Sarah E. Harrington:

The way we think --

Stephen G. Breyer:

If that's so, then why not -- what about this.

It's a little complicated as a solution and so I'm pretty nervous.

I don't know that I'd really do this.

But you'd say okay.

The word in the debt collection act is unfair and where it's in bankruptcy, there's a whole system to decide if it's unfair by people who know about it.

So where a bankruptcy court does in fact say that it's unfair and sanctions a party for this unfair behavior.

In that case, it's unfair within the meaning of the debt collection act and in that case, you can go and bring your extra remedy.

Sarah E. Harrington:

So there are two reasons, I think, why that would not work.

The first is, as Justice Sotomayor pointed out, there's a safe haven in Rule 9011, just like there is in Rule 11 since 1993 that allows a creditor to withdraw in offending a proof of claim when it's objected to.

Now, I just want to point out, if a -- if a creditor really has a basis for -- a good-faith basis for believing that its claim is enforceable, it will presumably assert that in response to an objection.

That's not what happened here. But the second is that there is even more reason to be cautious about this in bankruptcy than there is in general civil litigation.

Because by operation of Rule 3001 of the bankruptcy rules and Section 502 of the Code, a proof of claim, when it's failed, makes the underlying claim presumptively valid.

Samuel A. Alito, Jr.:

Do you think this good faith defense is objective or subjective?

Sarah E. Harrington:

We think it's objective -- or it's the same -- it's basically the same.

Samuel A. Alito, Jr.:

It's objective?

Sarah E. Harrington:

It's objective.

All we are doing is saying the same standard that would be applied under Rule 9011 or Rule 11 should be applied here.

Samuel A. Alito, Jr.:

And you said -- take the case of -- this was the third debt collection act. You're just talking about debt collectors.

So -- but let's under bankruptcy, you have a single creditor, a person who owns a sandwich shop has a claim.

It's -- it turns out that it's clearly barred by the statute of limitations, files that claim.

That's sanctionable conduct?

Sarah E. Harrington:

As a practical matter, it probably wouldn't be because they would withdraw.

Samuel A. Alito, Jr.:

As legal matter, it would be under your interpretation.

Sarah E. Harrington:

If they didn't have a good-faith basis for believing that the limitations period didn't apply in that case because of tolling or some other equitable principle --

Samuel A. Alito, Jr.:


They were acting in perfect good faith subjectively, but not objectively.

Sarah E. Harrington:

Well, Rule 9011 requires a lawyer or another party to certify they have done a reasonable investigation and have a good-faith basis for believing that their claims are warranted by existing law.

And so if they haven't done that reasonable investigation or if they have ignored the results of that investigation, which must have been happened here, then they violated Rule 9011 and engaged in unfair and misleading practices.

John G. Roberts, Jr.:

What other affirmative defenses does your theory apply to?