The Third Circuit Limits the “Benign Language” Exception to the FDCPA Without Endorsing It

By Stephen A. Fogdall

Among other things, the Fair Debt Collection Practices Act prohibits a debt collector from using “any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails.” (The debt collector may include, in addition to its address, its business name if the name does not indicate that it is in the business of collecting debts.) Some courts, such as the Fifth and Eighth Circuits, have read into this provision an exception for so-called “benign language,” and have allowed debt collectors to include additional phrases on envelopes such as “priority letter,” “personal and confidential,” or “immediate reply requested.”

In a recent Third Circuit case, Douglas v. Convergent Outsourcing, the debtor’s account number, while not printed on the envelope, was visible on the letter inside through a window. The court had to decide: (1) whether the account number was “on” the envelope when it was merely visible through the window, and (2) whether the account number was “any language or symbol, other than the debt collector’s address,” and thus prohibited by the FDCPA. The Third Circuit answered both questions “yes.”

As to the first question, the Third Circuit reasoned that “[l]ike language printed on the envelope itself, language appearing through a windowed envelope can be seen by anyone handling the mail.” Thus, such language “appears on the face” of the envelope and is therefore “on” it for purposes of the FDCPA.

As to the second question, the Third Circuit rejected the debt collector’s suggestion that the debtor’s account number was “benign language.” The Third Circuit “express[ed] no opinion” on whether the FDCPA in fact allows for such an exception, but held that even if it does, the account number was not “benign.” Rather, the court found, an account number is “a core piece of information pertaining to [the debtor’s] status as a debtor and [the debt collector’s] collection effort.” Because the account number “implicates core privacy concerns, it cannot be deemed benign.” The Third Circuit distinguished the types of language held to be benign by the Fifth and Eighth Circuits on the basis that the language in those cases was not “capable of identifying [the debtor] as a debtor.”

The U.S. Supreme Court has yet to offer guidance in this area. Until it does so, the best practice for debt collectors in the wake of this Third Circuit decision may be to assume that any language that might identify a letter’s recipient as a debtor, and which is in any way visible to a person handling the mail, violates the FDCPA and should be avoided.

Eleventh Circuit Holds That Filing a Time-Barred Proof of Claim in a Bankruptcy Proceeding Violates the FDCPA

By Christian Sheehan

The Fair Debt Collection Practices Act (FDCPA) provides that debt collectors “may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” Nor may a debt collector “use unfair or unconscionable means to collect or attempt to collect any debt.”  In determining whether a debt collector’s conduct was deceptive, misleading, unfair or unconscionable, courts apply a “least-sophisticated consumer” standard.

In Crawford v. LVNV Funding, LLC, the plaintiff owed roughly $2,000 to a furniture company, which assigned the debt to the defendant, LVNV Funding, LLC.  The last transaction on the plaintiff’s account occurred in 2001, and so, under Alabama’s three-year statute of limitations, the debt became unenforceable in 2004.  In 2008, the plaintiff filed a Chapter 13 bankruptcy petition.  During the bankruptcy proceeding, LVNV filed a proof of claim to collect on the time-barred debt.  The plaintiff filed a counterclaim via an adversary proceeding, alleging that LVNV’s conduct violated the FDCPA.

The Eleventh Circuit held that a debt collector engages in deceptive, misleading, unfair, and/or unconscionable conduct (and therefore, violates the FDCPA) when it files a proof of claim in a bankruptcy proceeding to collect a time-barred debt.  The Court reasoned that the “least-sophisticated” debtor may be unaware that the debt is unenforceable, and thus, fail to object (as the plaintiff did in this case).  And if the debtor fails to object, under the Bankruptcy Code, the otherwise unenforceable debt is resurrected and will be paid from the debtor’s future wages, thereby reducing the funds available to satisfy creditors with legitimate and enforceable claims.

Prior to Crawford, several circuits had held that lawsuits to collect time-barred debts violate the FDCPA.  Crawford is significant because it extends the holdings of those cases to the bankruptcy context.

Ninth Circuit addresses TILA tender requirement and RESPA statute of limitations

By Stephen J. Shapiro

Under the Truth in Lending Act (TILA), a borrower may seek to rescind a loan under certain circumstances. The rescission process under TILA is as follows: (1) the borrower notifies his lender that he intends to rescind the loan; (2) the lender returns any security interest to the borrower; and (3) upon return of the security interest, the borrower tenders the loan proceeds to the lender.  The Ninth Circuit recently held that a borrower need not plead that he has tendered the loan proceeds or has the ability to do so in order to state a rescission claim under TILA.

In Merritt v. Countrywide Financial Corp., the plaintiffs obtained a mortgage and took out a home equity line of credit from the defendant lender in connection with a home they purchased.  The plaintiffs alleged that, despite repeated requests, their lender did not send them the loan documentation required by TILA for almost three years. When they finally received the documents, the plaintiffs concluded that they were the victims of “predatory lending” and notified the lender that they were invoking their right to rescind the loan under TILA. When the lender did not respond to the rescission request, plaintiffs sued the lender under TILA, requesting rescission of the loan. The district court dismissed the TILA claim because the plaintiffs had not pled that they tendered the loan proceeds to the lender or had the ability to do so at the time they sought rescission.

On appeal, the Ninth Circuit reversed. The Court acknowledged that, in a prior case, it held that the district courts may require a TILA plaintiff to produce evidence of his ability to tender the loan proceeds in response to a summary judgment motion brought by the lender.  However, the Court held that its prior holding does not extend to motions to dismiss. In other words, if warranted by the circumstances, a borrower may be required to present evidence that he is able to tender to defeat a motion for summary judgment on a TILA claim, but he is not required to plead that he has the ability to tender in order to state a claim under TILA.

The plaintiffs also alleged that the lender violated Section 8 of the Real Estate Settlement Procedures Act (RESPA).  The district court dismissed the claims as time barred because plaintiffs filed their claims after RESPA’s one-year statute of limitations had expired. On appeal, the Court, addressing an issue of first impression in the Ninth Circuit, held that under the appropriate circumstances RESPA’s statute of limitations may be equitably tolled. Because the district court did not address whether the plaintiffs were entitled to equitable tolling, the Court remanded for consideration of that issue.

The Court also remanded, for initial consideration by the district court, another issue of first impression in the Ninth Circuit. Plaintiffs alleged that the defendant violated Section 8(b) of RESPA, which prohibits the “giv[ing] . . . [of] any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service . . . other than for services actually performed.” Plaintiffs alleged that the defendant violated this provision by charging them more for services provided by third parties in connection with the mortgage transaction than defendant paid for those services. The Court noted the split among the Circuits as to whether such allegations – claims that a defendant “marked up” the cost of services provided by third parties – are actionable under Section 8(b) of RESPA. Specifically, the Second and Third Circuits have held that such allegations state a claim under Section 8(b), while the Fourth, Fifth, Seventh and Eighth Circuits have held that they do not.  Because the “complicated issues of statutory interpretation and administrative law” involved in these decisions were not addressed by the district court, the Court remanded the issue for further development.

Third Circuit Holds that Consumers are Not Required to Seek Validation of a Debt before Filing Suit under the FDCPA

By Christian Sheehan

On June 26, 2014, in McLaughlin v. Phelan Hallinan & Schmieg, LLP, the Third Circuit held that a consumer is not required to seek validation of a debt he believes is inaccurately described in a debt collection communication before filing suit under the Fair Debt Collection Practices Act (FDCPA).

The FDCPA provides that if the consumer “notifies the debt collector in writing . . . that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt” and mail a copy to the consumer.  15 U.S.C. § 1692g(a)(4). Although the plaintiff in McLaughlin believed the debt collection communication he received was inaccurate, he did not seek validation of the debt. Instead, he filed suit against the debt collector.  The District Court dismissed the complaint, concluding that the plaintiff could not bring an FDCPA claim without first disputing the debt and seeking validation from the collector.

The Third Circuit reversed, holding that to require the consumer to seek validation of the debt prior to filing suit under the FDCPA would be inconsistent with the text and purpose of the statute.  The Court observed that the FDCPA lists various consequences “if” the consumer disputes a debt, suggesting that the validation provisions are optional, rather than mandatory.  The Court further explained that imposing a validation prerequisite would frustrate the protective purpose of the FDCPA, and immunize misconduct by debt collectors based on a procedural nuance that many consumers would fail to understand. Finally, the Third Circuit downplayed the concern raised by other courts (which held that the validation procedures were mandatory) that the lack of a validation prerequisite would discourage the use of the statute’s validation procedures.  The Court explained that debtors will still have an incentive to utilize the validation procedures in order to facilitate the quick and inexpensive resolution of debt disputes.

Eleventh Circuit Affirms that Waiting Too Long to Raise an Arbitration Agreement’s Delegation Clause Waives the Right to Have the Arbitrator Decide Issues of Arbitrability

By Christopher Reese

The United States Court of Appeals for the Eleventh Circuit recently confirmed that waiting too long to raise an arbitration agreement’s delegation clause waives the right to ask the court to send threshold questions of arbitrability to the arbitrator for resolution.

In Johnson v. KeyBank National Association, David Johnson, a customer of KeyBank, filed a putative class action against KeyBank alleging that the bank violated Washington law by changing the order of posting of debit card transactions to increase the overdraft fees it charged on his account. KeyBank moved to compel arbitration and stay all proceedings, but did not mention the arbitration agreement’s delegation clause.  Johnson opposed, arguing that the arbitration agreement was unconscionable under Washington state law, and the district court agreed, denying the motion to compel arbitration because the arbitration agreement’s class action waiver effectively prohibited individual plaintiffs from filing claims due to the potentially high costs.

The Eleventh Circuit vacated the district court’s order and remanded for further consideration in light of the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion.  On remand, KeyBank filed a renewed motion for arbitration, raising the arbitration agreement’s delegation clause for the first time.  On August 27, 2013, the district court granted KeyBank’s motion to compel arbitration, finding that the delegation clause required the arbitrator to resolve threshold questions of arbitrability.  Johnson appealed.

On appeal, the Eleventh Circuit began by noting that its precedent states that arbitration should not be compelled when the party seeking to compel arbitration has waived that right.  Under that precedent, waiver occurs when the party seeking arbitration substantially participates in litigation to a point inconsistent with an intent to arbitrate and the opposing party suffers prejudice in the form of incurring litigation expenses that arbitration was designed to alleviate.

Here, the Eleventh Circuit noted that KeyBank proceeded for years without raising the delegation clause, giving the impression that it believed the district court should resolve threshold questions of arbitrability.  In addition, the Court held that Johnson undoubtedly suffered prejudice as a result, incurring substantial attorney’s fees in litigating the threshold questions before the district court and on appeal.

The lesson from this case is simple: if a litigant’s arbitration agreement contains a delegation clause and the litigant prefers resolution of threshold questions of arbitrability by the arbitrator, the delegation clause should be raised at the earliest opportunity, usually in the motion to compel arbitration, to avoid any claims of waiver.

If you think you have consent to autodial a cell phone, you may need to think again

By Stephen J. Shapiro

The Telephone Consumer Protection Act (TCPA) prohibits the use of automated dialing systems to call cell phones without the consent of the “called party.” Therefore, creditors often request and receive consent from debtors to autodial their cell phones. A recent case out of the Eleventh Circuit, though, illustrates just how easily a creditor can run afoul of the TCPA, even when it believes it has consent. Specifically, when a debtor who has consented to receive autodialed calls to his cell number surrenders the number and it is assigned to someone else, the creditor can violate the TCPA by autodialing the number, even if the creditor did not know the number was reassigned.

In Breslow v. Wells Fargo Bank, N.A., a creditor attempted to collect a debt by using an automated dialer to call the cell phone number its debtor had provided on an account application.  Unbeknownst to the creditor, the debtor had surrendered the cell phone number and it had been reassigned to the plaintiff sometime after the debtor included it on the account application. The plaintiff, in both her individual capacity and on behalf of her minor child, who was the primary user of the cell phone, sued the creditor for violating the TCPA.

On motions for summary judgment the creditor took the position that the intended recipient of a call – here, the debtor – is the “called party” for purposes of the TCPA. Because it intended to call the debtor and because the debtor had consented to receive such calls, the creditor argued that it had the consent of the “called party” and had not violated the TCPA. The district court rejected this argument, and entered summary judgment in favor of the plaintiffs.

On appeal, the Eleventh Circuit affirmed. After noting that the TCPA does not define “called party” and then examining the act’s legislative history to divine Congress’ intent, the Court held that the term “called party,” as used in the relevant section of the TCPA, “means the subscriber to the cell phone service or user of the cell phone called.” Because neither the plaintiff nor her child – the subscriber and user of the cell phone at the time of the calls at issue – had consented to receive autodialed calls to the number, the Court agreed with the district court’s conclusion that the creditor had violated the TCPA. In reaching this result, the Court adopted the reasoning of the Seventh Circuit, which previously had arrived at the same conclusion. And, although it did not mention it, the Court’s definition of “called party” was similar to, though somewhat broader than, the definition that a different panel of the Eleventh Circuit offered in a decision earlier this year.

The Eleventh Circuit noted in the Breslow opinion that the TCPA, which was enacted in 1991, “may not comport with current cell phone trends.” The Court also pointed out that requiring creditors to confirm the validity of consent previously obtained is a burdensome endeavor that, in any event, may be of limited value given that such “confirmation is good only for that moment in time.” Indeed, the Court noted that “[t]here is no guarantee that the customer will continue to use the cell phone” number, especially after he begins receiving collection calls on it. The Court concluded, though, that these issues must be addressed by Congress, not by the courts.

Reading the Tea Leaves: The Supreme Court Seems Likely to Eliminate the ERISA Presumption of Prudence

By Stephen A. Fogdall

The U.S. Supreme Court heard argument this week in Fifth Third Bancorp v. Dudenhoeffer, the case that will decide whether fiduciaries of employee stock option plans (ESOPs) are presumed to comply with their ERISA duties by continuing to invest in the employer’s stock despite allegations that they know or should know that the stock is overvalued.  Although such a presumption has enjoyed wide acceptance in the federal Courts of Appeals, its days may be numbered.

Fifth Third’s lawyer argued that without the presumption, an ESOP fiduciary would be put in a position either of having to “outsmart the market” by guessing correctly that the stock is overvalued, or, even worse, violating the federal securities laws by divesting the stock on the basis of inside information about the employer.

Several of the Justices responded skeptically. Justice Scalia argued, “You have the same problems” with other types of retirement plans, so “we don’t have to adopt a special law for this.” Justice Sotomayor asked, “What’s wrong with following the law and disclosing that material information to the public and stopping the employees from losing more money in worthless stock?” Justice Kagan argued, “It just sort of defies language to say that a prudent person would retain” an investment in “overvalued stock.” Justice Kennedy suggested that a presumption of prudence would create “sort of a coach class trustee.” Justice Ginsberg was even more direct, stating, “I don’t know where this presumption comes from,” because “there is no presumption written into this statute.”

A few of the Justices seemed more receptive to the presumption of prudence. Chief Justice Roberts noted that “every Court of Appeals has recognized” that “by definition” an ESOP fiduciary acts prudently by investing in the employer’s stock unless “everything is going south and the company’s collapsing.” Then, even more emphatically, he stated, “I don’t understand how you . . . can say that [an ESOP fiduciary] has breached a fiduciary duty of prudence when the people investing in this ought to know what they’re going to get is the company’s stock.” Justice Alito observed that if “stopping purchases in company stock would be a signal that would potentially trigger bankruptcy and liquidation of the company,” that might be in the best interests of ESOP participants “if these participants were simply investors,” but “it might be very much not in their best interests as employees.” In addition, Justice Breyer suggested, “there is no rule of trust or ERISA law that you can breach a duty to a beneficiary by failing to use inside information, period.”

Notwithstanding these sympathetic statements from a minority of Justices, a majority of the Supreme Court (Justices Kennedy, Scalia, Ginsberg, Sotomayor and Kagan) seem prepared to hold that an ESOP fiduciary is not entitled to any presumption of prudence and may even be obligated to depart from the plan’s terms and cease purchasing employer stock, or divest the plan’s holdings in employer stock, if the fiduciary knows or should know, based on insider information, that the stock is overvalued. The Court should issue its decision before the end of the current term in June. We will continue to monitor the case closely.

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