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.

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.

In a TCPA case, Eleventh Circuit addresses who may give consent, how consent may be revoked and whether a charge is required

By Stephen J. Shapiro

The Telephone Consumer Protection Act (TCPA) provides, in relevant part, that “[i]t shall be unlawful for any person . . . to make any call (other than a call made . . . with the prior express consent of the called party) using any automatic telephone dialing system . . . to any telephone number assigned to a . . . cellular telephone service . . . or any service for which the called party is charged for the call.”

In a recent decision, the Eleventh Circuit held that:  (i) the “called party” who must give consent is the current subscriber of the cellular phone line; (ii) a person who shares a cellular phone plan with the subscriber may or may not, depending on the circumstances, have authority to give the consent envisioned by the TCPA; (iii) a “called party” may revoke consent orally; and (iv) a “called party” need not prove that he or she was charged for the calls at issue in order to prevail on a claim under the TCPA.

In Osorio v. State Farm Bank, F.S.B., Clara Betancourt provided the cellular phone number of her partner, Fredy Osorio, on a credit card application. When Betancourt later became delinquent on her credit card payments, a debt collector hired by the defendant creditor made more than 300 autodialed calls to Osorio. Osorio sued the creditor under the TCPA, alleging that he had not provided consent for the creditor to call his cellular phone and, even if he had, he later orally revoked that consent during telephone calls with the debt collector. The district court granted summary judgment in favor of the creditor, holding that Betancourt had consented to the calls when she provided the telephone number on her application and that Osorio’s alleged revocation was not effective as a matter of law because it was not in writing.

On appeal, the Eleventh Circuit reversed. On the issue of consent, because the TCPA permits calls to cellular telephone numbers “with the prior express consent of the called party,” the Court first addressed who qualifies as the “called party.” The Court held that the phrase “called party” means the current subscriber of the cellular phone line. Therefore, the Court concluded, the creditor had to establish that Osorio consented to the calls in order to avail itself of the TCPA’s consent exception. Because the parties had presented conflicting evidence as to whether Betancourt was authorized to consent to the calls on behalf of Osorio and, if so, whether she had in fact done so, the Court held that the issue of consent had to be resolved by a jury and that summary judgment was not appropriate. In so ruling, the Court rejected the creditor’s argument that Betancourt, as a matter of law, had authority to consent to calls to the cellular phone of anyone in her household.

On the issue of whether revocation of consent may be communicated orally or only in writing, the Court noted that, although the Fair Debt Collection Practices Act (FDCPA) requires a debtor who no longer wishes to be contacted by a debt collector to notify the debt collector in writing, the TCPA does not contain equivalent language. The Court “presume[d] from the TCPA’s silence regarding the means of providing consent that Congress sought to incorporate ‘the common law concept of consent.’” Explaining that the common law concept of consent “generally allow[s] oral revocation,” the Court held that a “called party” may orally revoke consent for purposes of the TCPA. Since the parties disputed whether Osorio orally revoked any consent Betancourt may have given to call the cellular phone, the Court held that summary judgment on the issue of revocation of consent was not appropriate.

Finally, the creditor argued that, because the TCPA prohibits calls “to any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call,” a plaintiff must prove that he was charged for the calls at issue in order to prevail under the TCPA. The Court rejected this argument, holding that, as a matter of statutory construction, “the phrase ‘for which the called party is charged for the call’ modifies only ‘any service’ and not the other terms” in the provision such as “cellular telephone service.”

Seventh Circuit Addresses When Offer of Settlement Can Moot Class Representative’s Interest; Holds That Dunning Letter Offering to “Settle” an Unenforceable Debt Violates FDCPA

By Theresa E. Loscalzo

In McMahon v. LVNV Funding LLC, and Delgado v. Capital Management Services, LP, two separate appeals consolidated for purposes of an opinion, the Seventh Circuit Court of Appeals addressed both the circumstances under which (a) a defense proffered settlement can pick off a party plaintiff in a class action, thereby mooting the claims; and (b) dunning letters seeking to collect time-barred debts may violate the Fair Debt Collection Practices Act (FDCPA).

In McMahon, the defendant debt collector sent a letter to plaintiff setting forth the name of the creditor from whom the debt was purchased, the amount of the debt and an offer to settle the debt for about 50 percent of the amount of the debt. The letter did not contain any information concerning when the original debt was incurred, a detail that would have alerted a consumer or his lawyer to the fact that there was, in the court’s words, “an iron-clad defense under the statute of limitations.”  Similarly, in Delgado, the defendant debt collector sent a letter to plaintiff seeking to collect an old debt.  The letter contained an offer to settle the outstanding debt but did not contain any information concerning when the original debt was incurred.

Both McMahon and Delgado filed individual and putative class action claims alleging that the debt collectors violated the FDCPA by including “settlement offers” in collection letters for time-barred debts.

Relevant Procedural Background. In McMahon, the defendant filed a motion to dismiss, and McMahon filed a motion for class certification.  The district court granted the defendant’s motion to dismiss the class allegations but on reconsideration, granted McMahon leave to amend the class allegations.  Hours after the district court granted leave to re-plead, defendant made an offer to settle plaintiff’s individual claim by paying statutory damages, costs incurred, a reasonable attorney’s fee, and “any other reasonable relief” if the court concluded more was necessary.  Plaintiff ignored the offer, and filed an amended class complaint and amended motion for certification.   Defendant moved to dismiss, arguing that its settlement offer rendered McMahon’s individual claim moot, which made him an inappropriate class representative.   Holding that the offer to pay McMahon everything he would be entitled to recover under the statute mooted his claim, the district court dismissed the case for lack of an Article III case or controversy.

In Delgado, the defendant filed a motion to dismiss, which the district court denied, holding that when “collecting on a time-barred debt a debt collector must inform the consumer that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would revive the collector’s ability to sue and collect the balance.”  Defendant moved for interlocutory appeal, which motion was granted.

Mootness. Reversing the McMahon district court, the Seventh Circuit first addressed the issue of whether the settlement offer proffered in McMahon mooted plaintiff’s claims, and held that an offer to pay a plaintiff everything requested can render a putative class action moot only if the settlement is proposed before the plaintiff files a motion for class certification.  Because the time to re-plead his class allegations and move to certify had yet to run at the time of the settlement offer, McMahon retained an on-going personal economic stake in the substantive controversy and, therefore, could represent the putative class.

FDCPA. The Court then turned to an analysis of the circumstances under which a dunning letter for an unenforceable time-barred debt could violate the FDCPA.  Affirming the denial of the motion to dismiss in Delgado, the Court noted that Section 1692e(2)(A) of the FDCPA specifically prohibits the false representation of the character or legal status of any debt, and  squarely held that a debt collector violates the FDCPA if it uses language that would mislead an unsophisticated consumer into believing that a debt is legally enforceable, regardless of whether the letter actually threatens litigation (as the Third Circuit and Eighth Circuit require).   The Court noted that where dunning letters contain offers of settlement, as here, it exacerbates the potential impact on the consumer because by making a partial payment in response to such a letter, the consumer could unwittingly reset the statute of limitations on the entire debt and thereby revive what had been a legally unenforceable claim.

Joining a split among the circuits, the Fourth Circuit holds that the FDCPA permits debtors to dispute debts orally

By Stephen J. Shapiro

The Fair Debt Collection Practices Act (FDCPA), in § 1692g(a)(3), requires a debt collector to send a consumer from whom it is attempting to collect a debt a notice.  Among other things, the notice must state that “unless the consumer, within 30 days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector.”  The Fourth Circuit, joining a conflict among the circuits, recently held that a consumer may dispute a debt orally, and, therefore, a notice that purports to require a consumer to dispute a debt in writing violates the FDCPA.

In Clark v. Absolute Collection Service, Inc., after plaintiffs did not pay a debt they owed to a health care facility, the facility engaged the defendant debt collector to collect the debt.  The debt collector sent the plaintiffs a notice that stated that “ALL PORTIONS OF THIS CLAIM SHALL BE ASSUMED VALID UNLESS DISPUTED IN WRITING WITHIN THIRTY (30) DAYS.”  Plaintiffs, on behalf of a putative class of debtors who received such notices, sued the debt collector alleging that, because the FDCPA did not require them to dispute the debt in writing, the debt collector violated the FDCPA by sending them a notice stating otherwise.  The debt collector moved to dismiss, arguing that § 1692g(a)(3) of the FDCPA contained an “inherent” requirement that debtors dispute debts in writing.  The district court agreed and dismissed the case.

On appeal, the Fourth Circuit vacated the decision and remanded the case for further proceedings.  The Court first noted that § 1692g(a)(3) on its face does not require debtors to dispute debts in writing and declined the defendant’s invitation “to read into [§ 1692g(a)(3)] words that are not there.”  The Court noted that other sections of the FDCPA explicitly require written communications, which suggests, under standard principles of statutory construction, that Congress intended to omit such a requirement from § 1692g(a)(3).

The Court also rejected the defendant’s argument that a reading of § 1692g(a)(3) that permits consumers to dispute debts orally would be absurd and inconsistent because debtors who do not dispute debts in writing waive protections afforded them by other provisions of the FDCPA.  The Court noted that, although consumers who give oral notice of a dispute would not be entitled to invoke some of the FDCPA’s protections, those consumers would not sacrifice all of the protections in the statute.  Therefore, the Court concluded, permitting debtors to dispute a debt orally would not lead to an absurd result.

In conclusion, the Court held that “[S]ection 1692g(a)(3) permits consumers to dispute the validity of a debt orally, and it does not impose a writing requirement.”  The Court noted that its holding departed from a contrary decision by the Third Circuit, but comported with decisions by the Second Circuit and the Ninth Circuit.

Creditors can be found liable for violating the FDCPA when they use third party debt collectors that do not make bona fide attempts to collect debts

By Stephen J. Shapiro

Last week the Second Circuit held that: (1) a creditor can face liability under the Fair Debt Collection Practices Act (FDCPA) when a third party it hires to contact debtors does not make bona fide attempts to collect the debt but rather acts as a mere conduit between the creditor and debtor; and (2) the assignee of a debt is not a “creditor” for purposes of the Truth in Lending Act (TILA).

The plaintiffs in Vincent v. The Money Store were several homeowners who took out mortgage loans, each from a different lender. Each mortgage was assigned to The Money Store, and each plaintiff thereafter defaulted on his or her mortgage.

The Money Store had an arrangement with a law firm, Moss Codilis, pursuant to which the firm would mail breach notices to borrowers who had defaulted. The Money Store provided Moss Codilis with spreadsheets containing contact information for the borrowers in default, and Moss Codilis would send each borrower a virtually identical letter stating that The Money Store had retained Moss Codilis to collect a debt. However, after sending the letters, Moss Codilis rarely played any further role in collecting the debts, and if The Money Store brought collection actions against the borrowers, other firms would handle those actions. The Money Store initially paid Moss Codilis $50 for each letter, but later reduced the payment to $35 per letter. During a five-year period, Moss Codilis sent almost 89,000 of these letters. Testimony suggested that the The Money Store used Moss Codilis to send default letters on the theory that a letter on law firm letterhead was more likely to catch the attention of the defaulted borrowers.

After receiving letters from Moss Codilis, plaintiffs brought a putative class action against The Money Store, arguing that, by having Moss Codilis send the letters, The Money Store violated the FDCPA. Plaintiffs also argued that The Money Store violated TILA by charging them unauthorized fees, which created credit balances on their accounts, and then refusing to refund those credit balances. The district court granted summary judgment to The Money Store on both claims.

On appeal, the Second Circuit first addressed the FDCPA claim. The Court noted that the FDCPA applies only to “debt collectors,” and that creditors such as The Money Store, as a general rule, do not qualify as debt collectors. However, the FDCPA includes within its definition of debt collector “any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts.” The Court held that:

[W]hen determining whether a representation to a debtor indicates that a third party is collecting or attempting to collect a creditor’s debts, the appropriate inquiry is whether the third party is making bona fide attempts to collect the debts of the creditor or whether it is merely operating as a “conduit” for a collection process that the creditor controls.

Because the record contained evidence from which a jury could find that Moss Codilis made no attempts to collect the debts and was merely acting as a “conduit” for The Money Store, the Court reversed the district court’s grant of summary judgment in favor of The Money Store on the FDCPA count, and remanded that claim for further proceedings.

On the TILA claim, the Court acknowledged that TILA requires “creditors” to refund credit balances on their borrowers’ accounts, but pointed out that an entity only qualifies as a “creditor” for purposes of TILA if the debt at issue was “initially payable” to that entity. The Money Store was not such an entity. Rather, other lenders originated the loans to the plaintiffs and The Money Store only later acquired the loans. Therefore, the Court held, The Money Store was not a “creditor” as that term is defined in TILA, and, as such, TILA did not require it to refund credit balances. In so ruling, the Court rejected the plaintiffs’ argument that the entity that receives the first payment on a loan is a “creditor” for purposes of TILA, regardless of whether that entity originated the loan.

Although it affirmed the dismissal of plaintiffs’ TILA claim, the Court questioned whether Congress intended the result that the statutory language mandated. The Court pointed out that TILA requires loan originators to refund credit balances on borrowers’ accounts, but exempts any entity other than the originating lender from that requirement. In light of the fact that many originators assign their mortgage loans to others, the narrow definition of “creditor” exempts a significant number of loans from the protections afforded by TILA. The Court surmised that this result may have been the unintended consequence of amendments Congress made to TILA, and “note[d] th[e] discrepancy . . . for the benefit of Congress and the Federal Reserve.”

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