Third Circuit: Warning Debtor that Discharge of Debt May Be Reported to IRS Can Violate the FDCPA

By Stephen J. Shapiro

The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt.”  In Schultz v. Midland Credit Management, Inc., the Third Circuit held that language debt collectors occasionally include in form dunning letters – a notice that the debt collector may be required to report certain discharges of debt to the IRS – can violate the FDCPA in certain circumstances. The Schultz case illustrates the risk debt collectors take when they utilize form collection letters without regard to the particularized facts of a debt.

In Shultz, the plaintiffs defaulted on several debts, each in amounts less than $600.  The debt collector to which the creditor outsourced the debts sent several dunning letters to the plaintiffs offering to accept less than the amount plaintiffs owed to resolve the debt.  Treasury Department regulations require debt collectors to report discharges of debts to the IRS under certain circumstances, but only where the debt discharged exceeds $600.  Each letter that the debt collector sent to the plaintiffs stated:  “We will report forgiveness of debt as required by IRS regulations.  Reporting is not required every time a debt is cancelled or settled, and might not be required in your case.”

The plaintiffs brought a putative class action against the debt collector alleging that, because their debts were less than $600 each, the debt collector’s statement that it might be required to report any debt discharge to the IRS was false and misleading as to the plaintiffs’ debts.  The district court granted the debt collector’s motion to dismiss, holding that the debt collector’s statement that it might be required to report debt discharges to the IRS in some cases, was not misleading.

On appeal, the Third Circuit reversed the trial court and remanded the case for further proceedings.  The Court first observed that a debt collector violates the FDCPA when it makes a “threat to take any action that cannot legally be taken or that is not intended to be taken.”  15 U.S.C. § 1692e(5).  The Court held that the language in the letters could lead a debtor to fear that “the discharge of any portion of their debt, regardless of amount discharged, may be reportable” to the IRS.   Because the language “references an event that would never occur” with respect to the plaintiffs, the Court concluded that the language was misleading and that the plaintiffs had pled a viable claim for violation of the FDCPA.

The Court recognized that many debt collectors use form letters to contact debtors, but cautioned that “convenience does not excuse a potential violation of the FDCPA.”  In light of the Third Circuit’s opinion, debt collectors should consider revising their form letters to specify that IRS regulations do not require them to report discharges of debts less than $600.



Third Circuit: The CFPB may use a CID to obtain information about all aspects of a company’s business.

By Stephen J Shapiro

In order to pursue its Congressional mandate to enforce Federal consumer financial laws, the Consumer Financial Protection Bureau (CFPB) may compel the production of documents or testimony by issuing a civil investigative demand (CID) to anyone the CFPB believes has information relevant to a violation of those laws.  A CID must identify “(1) the nature of the conduct constituting the alleged violation [of the law] and (2) the provision of law applicable to such violation.”  The Third Circuit recently held that the CFPB may use a CID to request information relating to the entirety of a company’s operations, and need not limit its request to information relating to any specific aspect of those operations.

In Consumer Financial Protection Bureau v. Heartland Campus Solutions, ECSI, the CFPB issued a CID to Heartland, a student loan servicer.  The CID explained that the CFPB was investigating “whether student-loan servicers . . . have engaged in unfair, deceptive, or abusive acts or practices . . . or have engaged in conduct that violates the Fair Credit Reporting Act . . . .”  The CID identified the following categories of conduct among those on which the CFPB was focusing:  “processing payments, charging fees, transferring loans, maintaining accounts, and credit reporting.”

Heartland conferred with the CFPB to address its concerns about the scope of the CID, but ultimately refused to comply with the CID.  The CFPB, following the procedure in the statute governing CIDs, filed in the United States District Court for the Western District of Pennsylvania a petition seeking enforcement of the CID.  The district court granted the petition.

On appeal, Heartland conceded that, had the CFPB requested information relating to any single one of the categories of conduct identified in the CID – “processing payments, charging fees, transferring loans, maintaining accounts, and credit reporting” – the CID would have been valid.  However, Heartland argued, because the CID requested information about “‘all component functions of any student loan servicing business, [the CID provided] no notice of what conduct’” the CFPB was investigating and, therefore, was unreasonably broad.  The Third Circuit, in a non-precedential opinion, rejected Heartland’s argument:  “[Heartland’s argument] rests on the flawed assumption that the CFPB could not investigate all of [Heartland’s] conduct.  Nothing prohibits the CFPB from investigating the totality of [a company’s] business activities . . . .”  Therefore, the Third Circuit affirmed the district court’s grant of the CFPB’s petition to enforce the CID.

The Heartland decision suggests that, when negotiating with the CFPB over the scope of a CID, focusing on the particularized burden that responding to the CID would impose may be a more effective strategy than objecting generally to the broad scope of the request.



A TCPA Violation Confers Standing Under Spokeo in the 3rd Circuit

By Stephen A. Fogdall

The United States Court of Appeals for the Third Circuit has concluded that an alleged violation of the Telephone Consumer Protection Act creates a sufficiently concrete injury to give a plaintiff standing to sue under Spokeo, Inc. v. Robbins.

The U.S. Supreme Court held last year in Spokeo that while a violation of a statutory right does not by itself constitute a concrete injury for purposes of Article III standing, Congress nevertheless can by statute elevate an intangible harm “to the status of a legally cognizable injury” where the “intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.”

The Third Circuit applied this principle to the TCPA in Susinno v. Work Out World Inc.  The plaintiff alleged that she received an unsolicited call on her cell phone from a fitness company, and the company left a one minute prerecorded voicemail message when she did not answer.  She was not charged for the call.

The Third Circuit held, first, that that these allegations were sufficient to state a claim for a violation of the TCPA, and second, that the plaintiff had standing to bring the claim under Spokeo.  The court explained that “when one sues under a statute alleging the very injury the statute is intended to prevent, and the injury has a close relationship to a harm traditionally providing a basis for a lawsuit in English and American courts, a concrete injury has been pleaded.”

The court found that both of these requirements were met on the plaintiff’s allegations.  The alleged “nuisance and invasion of privacy” resulting from a single unsolicited cell phone call and prerecorded voicemail message were “the very harm Congress sought to prevent” under the TCPA, and bore a close relationship to claims for invasion of privacy and “intrusion upon seclusion” that traditionally have been protected under the common law.

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.

Third Circuit Predicts Punitive Damages Available Under the Pennsylvania Uniform Fraudulent Transfer Act

By Edward J. Sholinsky

The United States Court of Appeals for the Third Circuit has predicted that the Pennsylvania Supreme Court would hold that punitive damages are available in cases under the Uniform Fraudulent Transfer Act (UFTA).

The court in Klein v. Weidner, reasoned that even though the UFTA does not specifically provide for punitive damages, they are available because the UFTA gives courts “broad authority” to award a “package of remedies” based on a case’s individual circumstances.

In Klein, the plaintiff brought a claim under the UFTA against her ex-husband, his current wife, and his business.  In response to a California judgment awarding the plaintiff spousal and child support, the ex-husband defendant transferred his assets and an interest in his business to his wife to insulate them from the California judgment and the plaintiff.  The district court held that this violated the Act and awarded $548,797.07 in punitive damages.  The defendants appealed.

After affirming the district court’s decision that the defendants violated the UFTA, the Third Circuit addressed the issue of punitive damages.  While the UFTA does not expressly provide that punitive damages are available, it contains three provisions that the court believed pointed to an overall statutory scheme to permit punitive damages.  Specifically, the court considered that the Act contained a “catch-all” provision providing for “any other relief the circumstances may require”; a provision awarding all damages necessary to make the creditor whole; and a provision stating that all remedies available under law and equity are available unless specifically displaced by the UFTA.  The court reasoned that because the remedies under the UFTA are “cumulative,” and punitive damages are available at both law and equity in Pennsylvania, the UFTA permitted punitive damages.   The court also held that under the UFTA it was appropriate to consider the ex-husband’s outrageous conduct in conjunction with the fraudulent transfers—including harassing the plaintiff and threatening her attorney—which supported the district court’s award of punitive damages.

The court distinguished the UFTA from cases where the Pennsylvania Supreme Court has held that punitive damages were not available when not directly provided for in the statute.  Specifically, the court focused on the Pennsylvania Supreme Court’s holding in Hoy v. Angelone that punitive damages were not available under the Pennsylvania Human Relations Act.  The court held that the UFTA differed from the Human Relations Act, because the latter was remedial in nature and required “affirmative action” to remedy discrimination.  The UFTA, however, was at least in part based on common law fraud, under which punitive damages have historically been available.  Thus, the court held that punitive damages could supplement the remedies specifically provided for by the UFTA.

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