FYI: 2nd Cir Holds Providing Only "Current Balance" on Increasing Debt Violates FDCPA

The U.S. Court of Appeals for the Second Circuit recently vacated the dismissal of federal Fair Debt Collection Practices Act (FDCPA) allegations that a debt collector's notice stating the "current balance" of the debt without disclosing that the balance may increase over time due to interest and fees was "misleading" within the meaning of Section 1692e.

 

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

 

The defendant debt collector sent collection notices to the plaintiff debtors notifying them that their accounts were placed for collection. The notices stated the "current balance", but did not disclose that the "current balance" continued to accrue interest and late fees.

 

The plaintiff debtors filed suit alleging that the notices violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 ("FDCPA").  More specifically, the plaintiff debtors claimed that the notice led them to believe that their current balance was static and that payment of that amount would satisfy their debt no matter what date it was paid.  Notably, one plaintiff debtor alleged that her account balance was accruing daily at a rate equivalent to 500% per year.

 

The defendant debt collector's motion to dismiss was granted, even though the district court noted that the courts were divided on the issue.  The plaintiff debtors appealed.

 

As you may recall, 15 U.S.C. § 1692e provides that "[a] debt collector may not use any false, deceptive, or misleading representation or means in the collection of any debt."   On appeal, the Second Circuit noted that the list of practices that fall within the prohibited conduct is not exhaustive and therefore applied two principles of statutory construction previously discussed in Clomon v. Jackson, 988 F.2d 1314 (2d Cir. 1993).

 

In addition, the Second Circuit noted that it would apply the "least sophisticated consumer" standard, explaining that a collection notice could be misleading if it was open to more than one reasonable interpretation, at least one of which is inaccurate.

 

The Court rejected the district court's ruling that the FDCPA requires disclosure only of "the amount of the debt."  The Second Circuit reasoned that § 1692g only concerns disclosures needed to verify a debt, not the more general disclosures intended to prohibit misleading notices under § 1692e, noting that that § 1692e applies to the collection of any debt by a debt collector.

 

The court adopted the Seventh Circuit's "safe harbor approach" in Miller v. Raymer, Padrick, Cobb, Nichols, & Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000), which was intended to address the concern that including information regarding accruing interest and fees in a collection notice could illegally coerce consumers and invite abuse.

 

In Miller, the Seventh Circuit held that the inclusion of the following statement in a debt validation notice under 15 U.S.C. § 1692g would satisfy the duty to clearly state the amount due on an increasing balance debt as a matter of law:

 

As of the date of this letter, you owe $___ [the exact amount due]. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be 

greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For 

further information, write the undersigned or call 1–800– [phone 18 number].

 

However, the Second Circuit declined to require a debt collector to use the "safe harbor approach" in order to comply with § 1692e. 

 

Rather, the Court held that a debt collector will not violate § 1692e if either: ( 1) the collection notice states that the amount of debt will increase over time, or (2) clearly states that the debt collector will accept the amount stated in the notice in full satisfaction of the debt if payment made by a specific date.

 

As the defendant debt collector's notices did not mention the accrual of interest and fees or provide a date by which payment would fully satisfy the debts, the Second Circuit held that the plaintiff debtors stated a claim under the FDCPA.

 

The Second Circuit reasoned that, if in fact interest and fees were accruing daily, the plaintiff debtors would still be liable for additional debt that accumulated before the stated balance in the notices at issue were paid.  In addition, the owner of the debt identified in the notice could sell this additional accrued interest and charges to another party for collection even after payment of the stated balance. 

 

Accordingly, the Second Circuit vacated the district court's dismissal and remanded for further proceedings.

 

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher 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
Email: rwutscher@MauriceWutscher.com

 

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FYI: Colorado Fed Ct Holds Statements or Conduct Directed to Non-Debtor Third Parties May Violate FDCPA

The U.S. District Court for the District of Colorado recently denied a debt collector's motions to dismiss FDCPA allegations that the debt collector's statements made to the borrower's attorney during settlement negotiations and statements made to the state court in court filings constitute a violation of the FDCPA, ruling that "none of the provisions implicated in [the borrower's] claim should be dismissed on the basis that the alleged abusive conduct was communicated to third parties other than the consumer."

 

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

 

The debt collector's employee contacted the borrower trying to collect.  In an underlying state court action to recover the amounts due, the parties discussed a settlement agreement via phone and email.  The parties reached a settlement agreement that did not include a provision releasing the debt collector from future claims. 

 

Subsequent to the parties' agreement, the debt collector sought to add a provision releasing it from all future claims.  The borrower refused, asserting that a final agreement had already been reached.  The state court granted the borrower's motion to enforce the settlement agreement. 

 

Almost a year later, the borrower filed an FDCPA claim, asserting that the debt collector's activities violated the FDCPA.  Specifically, the borrower alleged that the debt collector pursued legal action against her even after the settlement agreement was reached; it refused to accept the borrower's tendered payment in full performance of her obligations under the settlement agreement; it misrepresented to the Court that no settlement agreement had been reached and that the debt was still owed; and, it failed to include in the state court status report that the borrower attempted to pay the settlement agreement amount.

 

The borrower also alleged that the debt collector violated the FDCPA by "falsely informing the police that [the borrower's] counsel had attempted to remove the original note from his office and falsely informing police that [the borrower] had no grounds for asserting her right to retain possession" of the note.  The borrower sought damages, punitive damages, and attorney's fees.

 

As you may recall, to assert a claim under the FDCPA, a borrower must show that 1) s/he is a consumer under the Act; 2) the debt is one for personal, family, or household purposes; 3) the defendant is a debt collector under the Act; and 4) the defendant violated a provision of the FDCPA.

 

Here, the debt collector argued that, in order to meet the first element, the borrower must show that the alleged misrepresentations or threats of arrest or legal action were made to a "consumer." The debt collector argued that, because the alleged communications were made to the borrower's attorney, the state court judge, and to police officers, the borrower could not maintain a claim against the debt collector for any FDCPA violations. Accordingly, the debt collector argued that the sole issue before the Court is "whether an alleged misstatement to an attorney representing a party or to the court is cognizable under the FDCPA."

 

The debt collector relied upon a Tenth Circuit ruling for support.  In Dikeman v. National Educators, a debt collector did not include in communications to the consumer's lawyer a verification disclosing that the debt collector was attempting to collect a debt and that any information obtained would be used for that purpose.  The Court noted in a footnote that a lawyer acting as the representative of a consumer is not a consumer under the FDCPA.  Dikeman v. Nat'l Educators Inc., 81 F.3d 949, 955 n.14 (10th Cir. 1996).  However, in the next footnote, the Court noted that it was limiting its holding to the facts of that case and its specific application to 1692e(11), a provision which is not implicated in the present case.

 

However, the district court here found more instructive a recent ruling by another judge in the U.S. District Court for the District of Colorado.  In Schendzielos v. Silverman, a consumer brought an action against a debt collector for violations of the FDCPA.  The debt collector in the other case brought an action in state court for the amounts owed by the consumer.  Prior to trial, the parties settled, and the consumer agreed to pay the bank a settlement amount.  After the consumer allegedly failed to pay the settlement amount, the debt collector filed a motion for a default judgment against him. 

 

The consumer in Schendzielos alleged that the debt collector made misrepresentations to the court in violation of the FDCPA about the status of the debt, including a failure to mention that the consumer had attempted to pay for the alleged default, and for falsely representing to the court that the consumer was in default.  The debt collector filed a motion to dismiss on the theory that "a false statement violates the FDCPA only if it is made to the consumer . . . [and that] a false statement made to a state court judge is not actionable" under the FDCPA.  Schendzielos v. Silverman, 2015 WL 5964882, at *2 (D. Colo. Oct. 14, 2015).

 

The court in Schendzielos held that the FDCPA prohibits abusive conduct in the name of debt collection, even when the audience for such conduct is someone other than the consumer.  The Schendzielos court noted that "the express purpose of the FDCPA is very broad," and that "no language in [section 1692e] reserves this ban [of abusive conduct] for communications made only to consumers nor is there any express exemption of a debt collector's communications to a judge."  Id. at *3.  The court in Schendzielos further held that section 1692e "should be read to prohibit any deceptive representation if it is made during the process of debt collection without regard for the identity of the audience."  Id.

 

The court in Schendzielos noted that in other sections of the FDCPA, Congress expressly limited its breadth by distinguishing between consumers and third parties as audiences. Id. (noting that section 1692c narrowly confines the audience to consumers only; and 1692b defines the audience as any person other than the consumer). 

 

The Court in this case was further persuaded by the Schendzielos holding that "[g]iven the central role that judges play in debt collection, it would in my view be incongruous to permit debt collectors more latitude solely because they are communicating to a judge. The involvement of a judge does not change the essence of the dynamic: the debt collector is attempting to collect a debt owed by the consumer. In that process, there are many opportunities for abusive practices, which Congress so clearly intended to eliminate."  Id. at *7.  Additionally, the FDCPA is a remedial statute, which "should be construed liberally in favor of the consumer," and "the importance of prohibiting false or deceptive representations does not fade solely because the collector is speaking to the judge and not directly to the consumer."  Id.

 

In this case, the borrower alleged violations of FDCPA provisions 1692d, 1692e(2)(a), 1692e(5), 1692e(8), 1692e(10), and 1692f.  The Court held that section 1692e, 1692d, and 1692f does not include any limitation on the audience of abusive conduct.  Specifically, section 1692d states "[a] debt collector may not engage in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt."  Section 1692f states "[a] debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt."

 

Here, the borrower alleged that the debt collector violated section 1692d by "threatening to — and attempting to — force [the borrower] into a trial on an alleged debt that had already been resolved through a settlement agreement."  She alleged that the debt collector violated section 1692e(2)(a) by portraying the status of the debt as not being settled, and therefore, falsely inflating the amount of debt owed.  She also alleged that the debt collector violated section 1692e(5) by threatening legal action to pursue a debt that was already settled, and by refusing to accept her payment of the settlement amount.  The consumer further alleged that the debt collector violated section 1692e(8) by falsely advising the court that the debt remained subject to collection.  The debtor also alleges that the debt collector violated section 1692e(10) by misrepresenting to the court the status of the negotiations in its state court status report.  Finally, the borrower alleged that the debt collector violated section 1692f by falsely informing the police that her attorney had attempted to remove the original note from the debt collector's office and that she had no right to do so.

 

The U.S. District Court for the District of Colorado here ruled that all of the debt collector's alleged conduct was all in connection with debt collection activity, as the debt allegedly owed by the borrower, which was resolved through a settlement agreement.  The Court held that the borrower's allegations implicated conduct that Congress sought to eliminate "across the entire debt collection landscape," which can necessarily include various audiences other than the consumer herself. 

 

The Court concluded that "[i]In accordance with case law on this matter, and in the interest of liberally construing the FDCPA in favor of the consumer, I find that none of the provisions implicated in [the borrower's] claim should be dismissed on the basis that the alleged abusive conduct was communicated to third parties other than the consumer.

 

Accordingly, the U.S. District Court for the District of Colorado denied the debt collector's Motion to Dismiss.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher 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
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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