Third Circuit holds that only “material” representations by a debt collector are actionable under the FDCPA

By Stephen J. Shapiro

Joining a national trend, the United States Court of Appeals for the Third Circuit recently held that a plaintiff must allege more than just a misleading representation to prevail on a claim under the Fair Debt Collections Practices Act (FDCPA). Rather, a plaintiff must allege that the representation at issue was “material” in the sense that it would impact the decision-making process of the least sophisticated debtor.

In Jensen v. Pressler & Pressler, the attorneys for a debt collector, after obtaining a default judgment in a New Jersey state court against a debtor who failed to pay her credit card debt, served the debtor with a subpoena in aid of collection.  Under the New Jersey rules, an attorney may issue a subpoena in the name of the clerk of the New Jersey Superior Court. When the attorneys prepared the subpoena, though, they mistakenly used the name of a person who was not – and never had been – a clerk of the Superior Court.

The debtor brought a putative class action in the United States District Court for the District of New Jersey alleging that the debt collector and its attorneys violated provisions of the FDCPA that prohibit those collecting debts from (a) using false, deceptive, or misleading representations to collect debts from a consumer, and (b) falsely representing that a document used to collect a debt is “authorized, issued or approved by any court …” The district court granted summary judgment in favor of the debt collector and its attorneys on the ground that the misidentification of the clerk was not a material false statement.

On appeal, the Third Circuit affirmed, joining the Fourth, Sixth, Seventh, and Ninth Circuits in holding that only material representations are actionable under the FDCPA.  The Court began by noting that the “least sophisticated debtor” standard governs claims under the FDCPA.  Under that standard, Courts “focus on whether a debt collector’s statement in a communication to a debtor would deceive or mislead the least sophisticated debtor.”  Whether the statement at issue is literally true or false is not determinative.  Rather, “debt collection communications must be assessed from the perspective of the least sophisticated consumer regardless of whether a communication is alleged to be false, misleading, or deceptive.”  Therefore, the Court held, “a false statement is only actionable under the FDCPA if it has the potential to affect the decision-making process of the least sophisticated debtor; in other words, it must be material when viewed through the least sophisticated debtor’s eyes.”

Applying the materiality standard to the facts before it, the Court held that the misidentification of the clerk in the subpoena “could not possibly have affected the least sophisticated debtor’s ‘ability to make intelligent decisions.’”  As for the debtor’s alternate argument – that, by misidentifying the clerk, the defendants violated the FDCPA by falsely representing that the subpoena was authorized by a court – the Third Circuit held that, because attorneys in New Jersey are authorized to act as agents of the clerk when issuing subpoenas, the subpoena was validly issued regardless of the misidentification of the clerk.

* Joshua Won, Temple University School of Law Class of 2017, assisted with the preparation of this post.

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.

CFPB and Third Circuit highlight reporting obligations of furnishers of consumer information

By Monica C. Platt

Consumer credit reporting is coming under increased scrutiny, and furnishers should take care to review their reporting policies. In remarks at the Consumer Advisory Board meeting last month, CFPB Director Richard Cordray announced an increased effort by the CFPB to exercise its authority over large credit reporting companies and “many of their largest furnishers.” Director Cordray pointed to a CFPB report showing that more than 1 in 10 of the complaints submitted to the Bureau since its inception have been related to credit reporting, and 75 percent of these have been regarding incomplete or inaccurate credit reports. Also in February, the Third Circuit issued a decision clarifying that the Higher Education Act of 1965 (HEA) does not exempt a university from compliance with the Fair Credit Reporting Act (FCRA) when it furnishes information related to a consumer’s federal student loans.

In the Third Circuit case, plaintiff alleged that a university negligently and willfully violated FCRA with respect to reporting on a Perkins loan. The plaintiff defaulted on the loan in 1992, but paid the balance in 2011. Subsequently, a negative trade line appeared on his credit report because the university reported the previous delinquency to a consumer reporting agency (CRA), but did not report the date of first delinquency or that the account had ever been placed for collection. When the plaintiff submitted a formal dispute to the CRA, it notified the university, which investigated the dispute through an outside servicer, and then resubmitted substantially the same information to the CRA. After the plaintiff filed a second dispute, the university modified some parts of the report, but still did not report the loan’s history, the date of first delinquency, or the existence of a dispute.

FCRA was enacted to protect consumers from the transmission of inaccurate credit information. Under the Act, CRAs are prohibited from reporting accounts that have been placed for collection or charged to profit and loss more than seven years prior to the report, after which time such events are considered to have “aged off” the credit report. Furnishers providing information related to such an account must notify a CRA of the date the account first became delinquent so that the CRA can calculate when the delinquency ages off.

Under HEA, CRAs are to ignore the aging off provisions when reporting on certain federally backed loans until the loan is paid in full. The university argued that HEA therefore requires universities to omit the date of first delinquency and the collection history when reporting on Perkins loans so that a CRA does not mistakenly allow a loan to age off of the credit report. The court disagreed, finding that universities must provide complete information to a CRA and leave the CRA’s compliance with HEA up to the CRA. The Third Circuit also found that HEA does not indefinitely exempt a loan from aging off because HEA clearly states that once a loan is paid off, it should age off.

In his remarks, Director Cordray stressed the need for furnishers to thoroughly investigate disputes and correct inaccurate information where it exists, chiding furnishers for not fully investigating disputes. In this vein, The Third Circuit found that a furnisher’s post-dispute investigation into a consumer’s complaint must be reasonable under the circumstances, and the factfinder must balance the potential harm from inaccuracy against the burden of safeguarding against inaccuracy. The court noted that even correct information might be inaccurate if there are omissions that create a materially misleading impression.

Lastly, the Third Circuit recognized that a plaintiff has a cause of action if a furnisher fails to note the dispute in later reporting. While private enforcement of the furnisher’s obligations to report a dispute is not available, the continuing failure to report a potentially meritorious dispute violates the requirements for accurate post-dispute reporting of debts, and is privately enforceable.

The Third Circuit’s decision and the CFPB’s recent report highlight the need for all furnishers, including universities, to be aware of the interaction between all applicable laws and the effect on their own reporting obligations. Universities providing federally backed loans as part of their financial aid packages (likely most universities) should review their reporting policies and practices and assess the dispute-resolution procedures of outside contractors to ensure compliance on all levels. Furnishers should also err on the side of providing more information, not less, to a CRA to enable the CRA to comply with its duties. If a university wants to flag for a CRA that a loan is subject to HEA, it may do so, but it should not screen information that it thinks the CRA does not need or cannot report.

Third Circuit advises parties to use plain language when drafting arbitration agreements

By Christopher Reese

The Third Circuit recently affirmed the United States Bankruptcy Court for the District of Delaware’s denial of a motion to compel arbitration in In re Nortel Networks, Inc.  In doing so, the Third Circuit advised parties wishing to arbitrate their disputes to make that intent clear by “reducing agreements to arbitrate to plain language that can be recognized and enforced by courts examining only the text of the agreement,” and to avoid “hid[ing] their intent to [arbitrate their disputes] in the shadows of the text.”

In 2009, the multinational telecommunications firm Nortel Networks declared bankruptcy.  Nortel entities around the world filed petitions in U.S., Canadian, English, and French courts to begin insolvency proceedings.  Nortel’s bankruptcy was quite complicated, since it had “numerous subsidiaries located in multiple jurisdictions,” and “multiple Nortel entities owned the business lines and intellectual property that comprised the global Nortel brand.”  Because the value of Nortel’s assets would diminish over time, a plan to sell Nortel’s assets had to be devised quickly to maximize the return on the sale.

Nortel debtors from around the world entered into an Interim Funding Agreement, which “created a framework for Nortel debtors to sell assets without first agreeing how to allocate the proceeds of any sale among the relevant debtors.”  The Agreement required the debtors that signed it to place the proceeds of any sales of assets into escrow and to negotiate in good faith in an attempt to reach agreement on how to allocate the proceeds.  The Agreement did not contain the words “arbitrators” or “arbitration” or identify any arbitral association.

After the Agreement was approved by the necessary courts, the Nortel debtors held nine auctions, which raised approximately $7.5 billion in proceeds.  The parties then negotiated as required by the Agreement but were unable to agree on a protocol to allocate the proceeds of the auctions.  The U.S. Nortel debtors moved the Bankruptcy Court to resolve disputes about asset allocation.  Nortel debtors from other countries cross-moved to compel arbitration. The Bankruptcy Court denied the cross-motion to compel arbitration and approved a judicial allocation protocol.  An appeal to the Third Circuit followed.

The Third Circuit had little trouble affirming the Bankruptcy Court, finding that the “dispute begins and ends with the text of the Interim Funding Agreement,” “which does not reveal an intent to arbitrate disputes about the allocation of the auction funds.”  Rather, the Third Circuit explained, the language of the Agreement provided only that the debtors “would negotiate the procedure by which to divide the funds.”  Applying New York law on contract arbitration (the Agreement contained a New York choice-of-law clause), the Third Circuit refused to consider any extrinsic evidence suggesting that the parties intended to arbitrate because the Agreement was not ambiguous.

The most interesting part of the Third Circuit’s decision is its admonition that parties wishing to arbitrate disputes take care to “not hide their intent to do so in the shadows of the text.”  The Third Circuit noted that parties may agree to arbitration without using the word “arbitration” in their agreement, but also stated that “the absence of common signal words” makes it more difficult to determine that the parties intended to resolve their disputes in arbitration.  Parties wishing to arbitrate their disputes should heed the advice of the Third Circuit and ensure that their arbitration agreements indicate as clearly as possible their intent to resolve any disputes in arbitration.  Doing so will pull such intent out of the “shadows of the text” and significantly increase the likelihood that a motion to compel arbitration will be granted.

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