The U.S. Court of Appeals for the Seventh Circuit recently concluded, in an appeal of a denial of a motion to certify a class, that suing on a time-barred consumer debt violates the federal Fair Debt Collection Practices Act (FDCPA), and that a debt collector may violate the FDCPA by filing a collection lawsuit even if the consumer is never actually served with the lawsuit.
The Court also held that the district court should have ruled on the dispute between the parties as to the correct statute of limitations period prior to denying the plaintiff's motion to certify a class, as it was both a merits and procedural issue because it determined the composition of the class. The Court also included troubling dicta about attacks on the adequacy of class representatives.
In so ruling, the Seventh Circuit reversed the district court's denial of plaintiff's motion for class certification, and remanded the matter to the district court for further proceedings.
A copy of the Court's opinion is attached.
The case involves a consumer who was sued by a debt collector for a debt arising from the consumer's purchase of natural gas for household use. The consumer responded by bringing a purported class action against the debt collector, alleging the debt collector had initiated its collection action after the statute of limitations in violation of the federal Fair Debt Collection Practices Act. The plaintiff's complaint also contained supplemental claims under Illinois and other states' laws, making similar allegations. The plaintiff sought to have the purported class certified.
According to the data compiled for use in addressing the issue of certification, the class the plaintiff wanted certified had 793 members, of whom 343 resided in Illinois. There was virtually no information about the other potential members. Of the 343 Illinois residents, 290 were sued between four and five years after the claims against them had accrued and 45, including the plaintiff, were sued more than five years after accrual. No information was known about the remaining 8 Illinois putative class members. Of the 45 claimants sued by the debt collector after more than five years, 23 were served and 22 were not.
One of the primary issues was whether Illinois' four-year statute of limitations for suits on sale contracts, 810 ILCS 5/2-725(1), or the five-year statute of limitations for suits on unwritten contracts under 735 ILCS 5/13-205 applied. Although the parties did not raise the issue, the statute of limitations on written contracts is ten years, 735 ILCS 5/13-206, and the natural gas contracts on which the debts were based were written. Both the four and ten year statute of limitations have an exception to contracts governed by section 2-725 of the UCC, which is four years. The district court, however, never addressed the statute of limitations issue in denying class certification.
Instead, district court focused on the plaintiff's status and the lack of a sufficient number of claimants to justify a class action. Because the plaintiff had been sued after five years, the district court concluded that she was not an adequate representative of the entire class because, according to the district court, the plaintiff had little to no incentive to argue for a four year statute of limitations on behalf of the other claimants. The district court then isolated the 45 claimants who, like plaintiff, had been sued after five years.
The district court held that because 22 of those claimants were never served, the class was only composed of 23 claimants, a number too small to justify class certification.
On appeal, the Seventh Circuit found several flaws with the district court's analysis of whether class certification was appropriate for purposes of pursuing claims against the debt collector based on the debt collector's untimely suits against consumers. The Seventh Circuit, citing to a 1987 opinion from a federal court in Alabama, recognized the dangers associated with allowing stale claims to collect debts from consumers.
The Seventh Circuit held that suing on time-barred consumer debts violates the FDCPA, citing to Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 32–33 (3d Cir. 2011), Harvey v. Great Seneca Financial Corp., 453 F.3d 324, 332–33 (6th Cir. 2006), and Herkert v. MRC Receivables Corp., 655 F. Supp. 2d 870, 875–76 (N.D. Ill. 2009).
According to the Seventh Circuit, as with any defendant sued on a stale claim, the passage of time not only dulls the consumers' memory of the circumstances and validity of the debt, but heightens the probability that she will no longer have personal records detailing the status of the debt. Indeed, according to the Seventh Circuit, the unfairness of such conduct is particularly clear in the consumer context where courts have imposed a heightened standard of care – that sufficient to protect the least sophisticated consumer. The Seventh Circuit further noted that, because few unsophisticated consumers would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts, such consumers would unwittingly acquiesce to such lawsuits. And, the Court continued, even if the consumer realizes that she can use time as a defense, she will more than likely still give in rather than fight the lawsuit because she must still expend energy and resources and subject herself to the embarrassment of going into court to present the defense, and this -- the Court noted -- is particularly true in light of the costs of attorneys today.
Next, the Seventh Circuit concluded that the district court erred by determining that the plaintiff was not an adequate representative of the claimants based on her status of being sued after five years.
The Seventh Circuit stated: "To question her adequacy is to be unrealistic about the role of the class represented in a class action suit. The role is nominal. The class representative receives modest compensation for what usually are minimal services in the class action suit. For class action attorneys are the real principals and the class representatives/clients their agents."
The Seventh Circuit went on to state that the district court judge, if not willing to appoint a second class representative for those claimants sued between four and five years after the debt accrued, should have ruled on whether the statute of limitations was four or five years. The debt collector argued that it would have been wrong for the district court to address the statute of limitations issue because it was a merits issue and not one of class action procedure, but the Seventh Circuit disagreed and determined that the statute of limitations was both a merits and procedural issue because it determined the composition of the class.
Having determined that the four year statute of limitation exception under the UCC applied to the purchase of natural gas for household use, the Seventh Circuit finally addressed the district court's exclusion from the class those consumers who the debt collector sued but never served the complaint.
The Seventh Circuit concluded that the district court should not have excluded those claimants. The Seventh Circuit stated: "The debt collector may also use the pending legal action to pressure a debtor to pay back the debt informally, without serving the complaint – precisely the type of unfair practice prohibited by the FDCPA. But even if no debtors were ever harmed by being sued but not served, the district judge would have been wrong to exclude from the class the debtors who were not served. Proof of injury is not required when the only damages sought are statutory."
Accordingly, the Seventh Circuit reversed the district court's denial of class certification and remanded the matter to the district court to determine the proper scope of the class. The Seventh Circuit instructed the district court that the scope need not be limited to Illinois residents or to claims under the FDCPA, and that the district court, if necessary, could create subclasses to address different state law allegations.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Admitted to practice law in Illinois
McGinnis Wutscher Beiramee LLP
CALIFORNIA | FLORIDA | ILLINOIS | INDIANA | WASHINGTON, D. C.
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates are available on the internet, in searchable format, at: