Friday, September 30, 2016

FYI: 7th Cir Holds Inclusion of 1692g "Debt Validation" Notice in Complaint Violated FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently reversed the dismissal of a putative class action alleging that the debt collector defendants used misleading language in their state court collection complaints in violation of the federal Fair Debt Collection Practices Act (FDCPA).


In so ruling, the Court held that the debt collector's use of language similar to a notice under 15 U.S.C. § 1692g in its collection complaint was deceptive as a matter of law because it could lead an unsophisticated consumer to believe that the debt would be assumed to valid by the court if not disputed within a time period shorter than provided by the summons.


Joining other federal appellate courts on the issue, the Seventh Circuit also concluded that "pleadings or filings in court can fall within the FDCPA."


A copy of the opinion is available at:  Link to Opinion


Three student loan debtors filed a putative class action alleging that a lawyer, his law firm and a debt collection agency violated section 1692 of the FDCPA by including a misleading and deceptive statement in complaints filed in state court. Specifically, the paragraph in question stated that "the debt referenced in this suit will be assumed to be valid and correct if not disputed in whole or in party within thirty (30) days from the date hereof."


The district court determined that the subject paragraph was not misleading or deceptive as a matter of law, and granted summary judgment in defendant debt collectors' favor. The plaintiffs appealed.


On appeal, the Seventh Circuit began it analysis by addressing the debt collectors' argument that the subject paragraph was not misleading as a matter of law because section 1692e of the FDCPA "does not regulate the content of state court pleadings."


The Court noted that in an earlier 2007 decision, it had "postponed for a future case the question of whether 1692e of the FDCPA covers the process of litigation", but the case at bar squarely presented the issue for resolution.


The Seventh Circuit cited decisions from its sister circuit courts that previously addressed the issue presented and concluded that "pleadings or filings in court can fall within the FDCPA."


Relying on the Supreme Court of the United States's ruling in Heintz v. Jenkins, which held that the FDCPA applies to the litigation activities of lawyers, the Seventh Circuit reasoned that "[n]othing in the broad language in Heintz would support an interpretation that would apply the FDCPA to attorneys whose debt collection activity consisted of litigation, but limit it to only those representations made by those attorneys outside of that litigation."


The Court noted that its conclusion was further supported by Congress' post-Heintz amendment of the FDCA in 1995, which "exempted legal pleadings from a specific provision of the FDCPA [i.e., the so-called mini-Miranda notice under 15 U.S.C. § 1692e(11)], but did not exempt it from the FDCPA as a whole."


The Seventh Circuit held that, "[b]y providing that sub-section 1692e(11) did not apply to a formal pleading made in connection with a legal action, the implication is that 1692e as a whole other than 1692e(11) applies to formal legal pleadings. Otherwise, the amendment would be merely superfluous, exempting formal legal pleadings from one specific requirement in the act even though legal pleadings were not subject to any provisions of the act already."


The Court further reasoned that its interpretation was consistent with the purpose if the FDCA, "to eliminate abusive debt collection practices, to ensure that those debt collectors who abstain from such practices are not competitively disadvantaged, and to promote consistent state action to protect consumers." 


This purpose, the Seventh Circuit held, "would be undermined if the FDCPA was inapplicable to communications that occurred in the context of litigation, particularly in the debt collection area in which judgments are overwhelmingly reached through forfeiture, and thus misleading or deceptive statements are more likely to influence the response of the defendant without ever coming to the attention of the court in any meaningful way."


The Court then turned to whether the district court erred in deciding that the subject paragraph was not misleading as matter of law.  The Seventh Circuit reasoned that because § 1692e specifically prohibits falsely representing "the character amount, or legal status of any debt," and in determining whether a statement is false involves "a fact-bound determination of how an unsophisticated consumer would perceive that statement", dismissal under Rule 12(b)(6) "is appropriate only if there is no set of facts consistent with the pleadings under which the plaintiffs could obtain relief."


Here, the summons in the state court action contained an error, which made the consumer refer to the complaint in order to determine how and when to respond. The subject paragraph, however, stated that the debt would be assumed to be valid if not disputed within 30 days.


The Court reasoned that this was misleading because an unsophisticated consumer would "believe that he had until the date in the summons to file an answer and contest the claim, but that beyond the 30-day period [in the subject paragraph] he could no longer contest the validity or correctness of the debt."  Because the time period for disputing the debt was shorter than the time period to answer the complaint, this "effectively shortened the time period provided in the summons for the consumer to answer." 


The Seventh Circuit held this incongruity "would cause an unsophisticated consumer to believe that beyond that time in [the subject paragraph] for disputing the debt, even if filing an answer, the validity of the debt could no longer be disputed in that answer."


The Court concluded that the subject paragraph "is simply improper in its entirety at this stage of the proceedings, as the failure to dispute the debt will have no impact on the court case. Its presence in the complaint serves no purpose. Its function in the complaint is only to mislead."


Finding that the paragraph at issue was plainly deceptive and misleading to an unsophisticated consumer, the Seventh Circuit held that the trial court erred by reaching the opposite conclusion and reversed and remanded for further proceedings.




Ralph T. Wutscher
Maurice Wutscher LLP
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