Maryland Legal Alert for Financial Services
FDCPA Concerns for Debt Buyers and Related Impact on Debt Settlement Firms
The Fair Debt Collection Practices Act (“FDCPA”), among other things, bans all false, deceptive, misleading, and unconscionable debt collection practices, including any false representations concerning the “character, amount, or legal status” of a debt. Three recent decisions have held that common debt buyer practices are or could be violations of the FDCPA. The cases involve “out of stat” debts, i.e., those debts for which the appropriate state statute of limitations period has expired. It is crucial for debt buyers to be familiar with these recent holdings in order to avoid FDCPA liability. These rulings may also be of practical significance for debt settlement firms because debt buyers may be less likely to purchase and attempt to settle “out of stat” debts in light of the emerging FDCPA liability concerns, and/or debt buyers that already hold these debts may be even more likely to accept significant discounts to settle them.
For many years, FDCPA challenges to debt buyer collection letters involving “out of stat” debts have been largely unsuccessful. The two primary cases in this area had been: Huertas v. Galaxy Asset Management, 641 F.3d 28 (3d Cir. 2011) and Freyermuth v. Credit Bureau Services, Inc., 248 F.3d 767 (8th Cir. 2001). Both Huertas and Freyermuth involved collection letters for “out of stat” debts and both the 3rd and 8th Circuit Court of Appeals held that debt buyers can seek “voluntary repayment” of a debt that would be legally unenforceable in a state court action (based on a statute of limitations defense). The key in both cases was that litigation was not threatened and both Circuits held that even unsophisticated consumers would not have understood the letters as a threat to sue on the underlying debts. Because there was no threat to bring suit, the debt buyers had not misrepresented the character or legal enforceability of the underlying debts and there was no FDCPA violation.
In early 2013, the Federal Trade Commission (“FTC”) issued a report (The Structure and Practices of the Debt Buyer Industry – available here). The FTC’s report raised concerns about debt buyer practices in connection with “out of stat” debts and noted that: (1) even when a communication does not explicitly threaten litigation, it may “convey or imply” that the debt buyer could sue the debtor if the debt is not paid; and (2) when debt buyers request or accept partial payments for “out of stat” debts, debtors are unlikely to realize that a partial payment may reset the statute of limitations in connection with the entire debt balance. In light of these concerns, the FTC recommended that in situations where a debt buyer knows or should know that a debt is time-barred, it should provide disclosures to the debtor informing that: (1) the debt buyer cannot file suit to collect on the debt, and (2) making a partial payment will revive the debt buyer’s ability to collect the entire debt. New York recently adopted regulations (portions of which become effective on March 3, 2015—available here) requiring similar, but even more expansive disclosures concerning “out of stat” debts.
In the last year, there have been three noteworthy “out of stat” debt cases holding that debt buyers have or may have violated the FDCPA. Two involved collection letters that offered to “settle” the underlying debts and one involved filing a proof of claim in bankruptcy. Below is a summary of each:
SETTLEMENT OFFER IN COLLECTION LETTER CONCERNING “OUT OF STAT” DEBT MAY VIOLATE FDCPA
Buchanan v. Northland Group, Inc., 776 F.3d 393 (6th Cir. 2015)
Full opinion available here.
Northland Group, Inc. (“Northland”) was a debt collector, working on behalf of a debt buyer. Northland sent a collection letter to Esther Buchanan, a Michigan resident, offering to settle a debt with a then-current balance of approximately $4,800 for approximately $1,700. The underlying debt was more than 6 years old – the relevant statute of limitations in Michigan. Northland’s letter did not indicate that the debt was “out of stat,” that a partial payment by Buchanan would restart the statute of limitations, or that Northland would not take action to file suit against Buchanan in connection with the debt. Buchanan argued that the collection letter falsely implied that Northland held a legally enforceable obligation and, therefore, violated the FDCPA. Northland moved to dismiss and, after the trial court granted Northland’s motion, Buchanan appealed.
The 6th Circuit Court of Appeals focused on the FDCPA’s prohibition of the “false representation of … the character, amount, or legal status of any debt” under 15 USC 1692e(2)(A) and held that a factual question existed as to whether a “reasonable unsophisticated consumer” would have been misled by the settlement offer portion of Northland’s letter into thinking that the debt was enforceable in court. Focusing on the term “settlement” and its prevalent use in the context of litigation, the Court reversed and remanded the case back to the trial court for a determination of whether Northland’s letter did in fact misrepresent the legal status of the debt and, therefore, violated the FDCPA.
McMahon v. LVNV Funding, LLC, 744 F.3d 1010 (7th Cir. 2014)
Full opinion available here.
Similar to the 6th Circuit’s Buchanan case, McMahon was a consolidated appeal involving collection letters with settlement offers for “out of stat” debts, one from LVNV Funding, LLC (“LVNV”) to Scott McMahon and one from Capital Management Services LP (“Capital”) to Juanita Delgado. The facts in both underlying actions were similar in that a debt collection letter was sent to each respective debtor concerning a debt that was “out of stat” with an offer to “settle” for significantly less than the balance allegedly owed. LVNV’s letter to McMahon involved a fourteen year old debt of approximately $600, and Capital’s letter to Delgado involved an eight year old debt of approximately $2,400. Neither letter threatened litigation, but neither letter referenced the age of the underlying debts, the fact that partial payments would re-start the statute of limitations period, or that the respective debt buyer would not file suit in connection with the debts. Both McMahon and Delgado instituted class actions alleging FDCPA violations. The District Court for the Northern District of Illinois dismissed McMahon’s class claim, but not his individual claim. However, the District Court for the Southern District of Illinois deemed Delgado’s class claim “plausible” and allowed it to proceed.
On consolidated appeal, the 7th Circuit Court of Appeals focused on the FDCPA’s prohibition against the use of “any false, deceptive, or misleading representation” in connection with the collection of a debt, including a “false representation of the character, amount, or legal status of any debt” under 15 USC 1692e(2)(A). The Court held that unsophisticated consumers could have been misled by the respective collection letters about the enforceability and legal status of the underlying debts because the common usage of the term “settlement” in connection with litigation. Thus, the Court of Appeals held that an unsophisticated consumer could have believed that the debts were legally enforceable and that if they did not accept the settlement offer, the debt buyer would file suit.
FILING PROOF OF CLAIM IN BANKRUPTCY FOR “OUT OF STAT” DEBT VIOLATES FDCPA
Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014)
Full opinion available here.
Stanley Crawford, an Alabama resident, owed slightly more than $2,000 in connection with a furniture purchase. The original creditor charged off the amount owed in 1999 and LVNV Funding, LLC (“LVNV”) acquired the debt in 2001. In 2008, Crawford filed bankruptcy (Chapter 13). During the proceeding, LVNV filed a proof of claim, even though Alabama’s three-year statute of limitations period had expired. Neither Crawford nor the bankruptcy trustee objected to the proof of claim filed by LVNV, and LVNV received payments in connection with its claim for approximately four years. In 2012, Crawford filed an adversary proceeding alleging that LVNV’s action in filing a proof of claim in the bankruptcy proceeding violated the FDCPA because it constituted an unfair, unconscionable, deceptive, or misleading debt collection practice. The Bankruptcy Court twice dismissed Crawford’s adversary proceeding and Crawford appealed to the 11th Circuit.
The 11th Circuit focused on the FDCPA’s prohibition on the use of: (i) any “false, deceptive, or misleading representations or means” in connection with the collection of any debt (under 15 USC 1692e); and (ii) any “unfair or unconscionable means” to collect or attempt to collect any debt (under 15 USC 1692f). LVNV argued that filing a proof of claim is not a debt collection practice subject to the FDCPA, but the 11th Circuit held that the action is a “representation” or “means” to collect a debt subject to FDCPA coverage. The Court determined that the “least-sophisticated consumer” would have been misled and deceived by LVNV’s filing of a proof of claim because it created the misleading impression that the debt was legally enforceable. The 11th Circuit vacated the dismissal and remanded the case to the Bankruptcy Court allowing Crawford’s adversary proceeding to continue.
Debt Buyers – Debt buyers should take steps to identify “out of stat” debts in their portfolios and implement appropriate policies and procedures to document those identification efforts. For those debts identified as “out of stat,” debt buyers should: (i) make sure that any debtor communications include disclosures similar to those recommended by the FTC in its 2013 Report and disclosures required by state laws (such as those in New York); and (ii) avoid filing a proof of claim in any debtor bankruptcy proceedings. Recommended disclosures include notice that: (i) the debt buyer is not going to file suit to recover on the debt; and (ii) a debtor’s a partial payment will revive the debt buyer’s ability to sue in connection with the total debt (Note: New York regulations require additional disclosures, including a statement that filing suit to collect an “out of stat” debt is a violation of the FDCPA).
Debt Settlement Providers – Even when a debt is “out of stat,” a debtor may have an interest in paying something to settle the debt rather than take the position that the debt buyer cannot collect it. This interest may arise out of the debtor’s sense of moral obligation to repay some of what was borrowed and/or an interest in eliminating/minimizing unfavorable credit bureau reporting. The recent FDCPA liability trend may cause many debt buyers to shy away from purchasing any debts that are close to becoming or that are “out of stat,” and, for those debt buyers that continue to purchase or that already have “out of stat” debts in their portfolios, debt settlement providers may find that these debt buyers may be even more interested in settling these debts for significant discounts. Debt settlement providers should examine their client portfolios to identify debts that are likely to be “out of stat” debts. Debt settlement providers should use knowledge of the above cases to assist clients with settling “out of stat” debts for drastically less than other debts.
For additional information about this topic, please contact Christopher Rahl.