Liberal U.S. justices hit debt collector's business practices

Liberal U.S. Supreme Court justices on Tuesday questioned the practices of a firm that buys unpaid consumer debt for pennies on the dollar then seeks to recover it from people in bankruptcy even when barred from doing so by state statutes of limitations.

During arguments in a case involving debt collection company Midland Funding, a subsidiary of California-based Encore Capital Group, liberal justice Sonia Sotomayor said she had "a great deal of difficulty with this business model."

Fellow liberals Elena Kagan and Ruth Bader Ginsburg also posed tough questions to Midland's lawyer, indicating sympathy for an Alabama debtor named Aleida Johnson, who entered bankruptcy in 2014 and sued the company after it sought payment of $1,879 in debt incurred more than a decade earlier.

Alabama law sets a six-year statute of limitations for debt to be collected.

Noting that Midland buys old debt it knows is not legally recoverable because of various state laws preventing collection after a number of years, Sotomayor asked, "Apparently, you collect on millions of dollars of these debts. So is that what you do?"

The company's lawyer, Kannon Shanmugam, said Sotomayor's question was not based on a "valid understanding" of what the company does. Shanmugam said Midland "makes every effort not to purchase time-barred debt," although he conceded that "they're not always correct in their assessments."

The tough questions by the three liberal justices may not doom Midland's chances of winning the case because conservative justices appeared more sympathetic to its legal arguments, as did the court's fourth liberal, Justice Stephen Breyer. The court has four liberals and four conservatives.

Ginsburg also touched upon Midland's business strategy, saying that there would be "no point" in filing claims that it knew to be time-barred "unless there's a chance it will be overlooked" during the bankruptcy proceedings.

Kagan said the law as interpreted by Midland would mean debtors "will pay on things that they shouldn't be paying on."

Breyer seemed concerned about bankruptcy-related issues being litigated in federal court, where fair-debt lawsuits are filed, rather than in bankruptcy court.

"I thought the point of the bankruptcy code was to have bankruptcy matters decided in a bankruptcy court," Breyer said.

Lawyers for debtors have said it is common practice for debt collection companies to attempt to recoup debt that is not legally recoverable under state law unless the creditor actually agrees to pay it.

If the debtor does not object, claims can be made against them when they have entered bankruptcy even if there is no legal basis for the debt to be collected.

Lawyers for the debt collection companies said bankruptcy law allows them to file such claims even when there is no legal mechanism for them to collect.

A ruling is due by the end of June.

(Reporting by Lawrence Hurley; Editing by Will Dunham)