Thursday, August 16, 2018

FYI: 7th Cir Rejects FDCPA Claim That "May" Meant "Will"

The U.S. Court of Appeals for the Seventh Circuit recently concluded that collection letters sent to consumers offering to settle their debt but warning them that the settlement "may have tax consequences" did not violate the federal Fair Debt Collection Practices Act (FDCPA). 

 

The plaintiffs had argued that the letters were false and misleading because they were insolvent and, as such, would not have incurred any tax liability for any discharged debt.  The Seventh Circuit rejected the argument, concluding that the term "may" only meant there could be tax consequences, and it was possible insolvent debtors would become solvent before settling their debt, thus triggering potential tax consequences. 

 

In so ruling, the Seventh Circuit determined the language was literally true and the use of "may" instead of "shall" was not likely to confuse even an unsophisticated consumer.  Accordingly, the Seventh Circuit affirmed the dismissal of the plaintiffs' lawsuits for failure to state a claim. 

 

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

 

The two plaintiffs each received collection letters from different collection law firms.  Each letter offered the plaintiffs the opportunity to settle their debts at a reduced amount.  Both letters also contained language warning the plaintiffs that settling their debt for a reduced amount "may have tax consequences."  Both plaintiffs alleged they were insolvent when they received the letters. 

 

The plaintiffs brought suit, claiming the collections letters were misleading because, as a result of their insolvency, they would not have had to pay taxes on any discharged debt.

 

Both cases were dismissed for failure to state a claim.  The judges concluded that notifying the plaintiffs that a debt settlement "may" have tax consequences is neither false nor misleading.  Both plaintiffs appealed, and the Seventh Circuit consolidated the appeals.  

 

As you may recall, the FDCPA makes it unlawful for a debt collector to use "any false, deceptive, or misleading representation or means in connection with the collection of [a] debt."  See 15 U.S.C. § 1692e.

 

The standard applied in the Seventh Circuit is one of an objective "unsophisticated consumer," where the question becomes "whether a person of modest education and limited commercial savvy would be likely to be deceived" by the debt collector's representation.  The objective test disregards "bizarre" or "idiosyncratic" interpretations of collection letters.  A collection letter can be "literally true" and still be misleading, -- for example, if it "leav[es] the door open" for a "false impression."

 

According to the Court, dismissal on the pleadings for FDCPA claims is proper only in "cases involving statements that plainly, on their face, are not misleading or deceptive."

 

The Seventh Circuit quickly concluded that the statements at issue were literally true.  In general, discharge of a debt is considered taxable income. See 26 U.S.C. § 61(a)(11). There are, however, recognized exceptions where the discharge of a debt is not taxable income, including when the discharge occurs while the taxpayer is insolvent. Id. § 108(a)(1)(B), (d)(3).

 

According to the Court, even assuming plaintiffs were insolvent when they received the letters, the general statement that a settlement "may" have tax consequences was true on its face.

 

The Court acknowledged that a literally true statement may be misleading if it gives a false impression. The plaintiffs argued that the letters gave a false impression because they (i) might trick the consumer into believing they will be reported to the IRS if they do not pay the full amount, and (ii) might lead the consumer to believe they will have tax liability if they settle the debt even if they were insolvent. 

 

As to the first argument, the Seventh Circuit concluded it was a "bizarre" or "idiosyncratic" interpretation of the letter, as the letter made no reference to reporting anything to the IRS.

 

As to plaintiffs' second argument, the Court concluded that even an unsophisticated consumer will not confuse the word "may" to mean "will." The Court held that "the use of the word 'may' signals only that tax consequences are possible in the case of some debtors, not that tax consequences are possible or likely (much less certain) in this particular debtor's circumstances." The Court also reasoned that an insolvent consumer can emerge from insolvency at any time.

 

The Court rejected plaintiffs' argument that the tax consequences warning gave a false impression that debtors should pay their entire debt to avoid tax liability.  "The letters are invitations to settle the debt and are clearly meant to encourage the debtor to take advantage of the discount offered. A rational debtor knows that income taxes are calculated as a percentage of income, and he would likewise understand that even if the discount counts as taxable income, the benefit would still outweigh the cost. That makes it all the more implausible that the tax-consequences warning would dupe a debtor into paying the full debt amount."

 

The Seventh Circuit quickly rejected plaintiffs' reliance on two prior rulings, concluding that they were easily distinguished.  First, in Lox v. CDA, Ltd., 689 F.3d 818 (7th Cir. 2012), the collector sent the consumer a letter threatening to take legal action against the consumer, including seeking attorney's fees.  The contract between the creditor and the consumer, however, did not allow for the recovery of attorney's fees.  As a result, the Seventh Circuit concluded the letter was deceptive because it threatened to take action it was not authorized to do.

 

Similarly, in Gonzales v. Arrow Financial Services, 660 F.3d 1055 (9th Cir. 2011), the collector sent the consumer a letter saying that if the account was being reported to the credit bureaus, the collector was going to report the accounts as settled.  The problem for the collector, however, was that the debts at issue were more than seven years old and obsolete.  As such, the collector could not report the accounts to the credit bureaus.  The Ninth Circuit concluded that even though the conditional language of "if the account was being reported" made the statement literally true, there were no circumstances where they could report the obsolete accounts.  Therefore, according to the Court in Gonzales, the letter was misleading.

 

The Seventh Circuit also distinguished the Lox and Gonzales cases on other grounds.  First, the circumstances in those cases were static -- there were no circumstances under which the collectors could collect attorney's fees or report the obsolete accounts.  Solvency, according to the Court, is fluid, and a consumer can become solvent before settling their debts.  Second, the collectors in this case had no way of knowing whether the plaintiffs were insolvent.  In Lox and Gonzales, on the other hand, the collectors knew, or should have known, that attorney s fees were not permitted and that obsolete accounts could not be reported. 

 

Next, the Seventh Circuit rejected plaintiffs' reliance on several trial court cases that were inapplicable to the facts of this case.  In one of those cases, the collector threatened to take action that, according to plaintiff's complaint, they had no intention of taking.  In the other cases, the collection letters mischaracterized mere possibilities as certainties, which is the exact opposite of what happened here.

 

Finally, the Seventh Circuit rejected the trial court's opinion in Sledge v. Sands, 182 F.R.D. 255 (N.D. Ill. 1998).  In that case, the collection letter stated "under certain circumstances, cancellation or discharge of [a] debt may be considered income by the IRS and state taxing authorities." The district court had concluded that if a majority of debtors that received the letter would not realize income for the discharged debt, then the statement created a misleading impression in violation of the FDCPA. The Seventh Circuit declared the holding unpersuasive, stating that the court's reasoning rested on the faulty assumption that a debtor receiving the letter would (i) ignore the phrase "under certain circumstances" and (ii) misconstrue "may" to mean "will."

 

The Seventh Circuit concluded that the FDCPA claims were properly dismissed because the language at issue was literally true and not misleading, even under the "unsophisticated consumer" standard.  Accordingly, the Seventh Circuit affirmed the trial court's dismissal of plaintiffs' claims.

 

 

 

 

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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Monday, August 13, 2018

FYI: 9th Cir Holds 4-yr Federal "Catch-All" SOL Applies to SCRA Claims

On an issue of first impression, the U.S. Court of Appeals for the Ninth Circuit recently held the federal catchall statute of limitations of four years under 28 U.S.C. § 1658(a) applies to private suits alleging violations of section 303(c) of the federal Servicemembers Credit Relief Act ("SCRA"). 

 

Accordingly, the Ninth Circuit affirmed the dismissal of the plaintiff's complaint as time-barred.

 

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

 

In 2006, the plaintiff ("Plaintiff"), a U.S. Marine, refinanced a mortgage loan on his home in the state of Washington with a loan from the defendant mortgagee ("Mortgagee"). On January 16, 2009, the Mortgagee initiated foreclosure proceedings.  Four months later, on May 18, 2009, the Marines recalled Plaintiff to active service in Iraq.

 

On July 21, 2010, after Plaintiff completed his service in Iraq, the Marines released him from military duty.  Following his release, Plaintiff advised the Mortgagee of his military service and requested an opportunity to refinance his loan.

 

The Mortgagee allegedly ignored his request and proceeded with a foreclosure sale of Plaintiff's home on August 20, 2010.

 

Almost six years after the sale, Plaintiff filed suit in federal district court against the Mortgagee alleging it violated section 303(c) of the SCRA, which at that time prohibited the "sale, foreclosure, or seizure of property" for a breach of a mortgage obligation if "made during, or within nine months after, the period of the servicemember's military service" unless such sale, foreclosure, or seizure occurred by court order or under waiver by the servicemember of his SCRA rights.  50 U.S.C. § 3953(c).

 

The Mortgagee moved to dismiss the complaint as time-barred, arguing that the SCRA does not contain a statute of limitations, and therefore the district court should apply the closest state-law analogue to the SCRA, which the Mortgagee argued was the Washington Consumer Protection Act (four-year limitation period), or the Deeds of Trust Act (two-year limitation period). 

 

In response, Plaintiff argued that the court need not look to a state statute, and that the Uniformed Services Employment and Reemployment Rights Act ("USERRA") was the most analogous.  The USERRA expressly provides that "there shall be no limit on the period for filing" a claim.  Plaintiff argued in the alternative that the court should apply the six-year statute of limitations for breach of contract claims. 

 

In its reply, the Mortgagee argued for the first time that 28 U.S.C. § 1658(a) should apply, which provides a four-year statute of limitations.

 

The trial court granted the Mortgagee's motion to dismiss, applying the four-year statute of limitations contained in the Washington Consumer Protection Act.  The trial court did not comment on the applicability of 28 U.S.C. § 1658(a).  The case was then appealed to the Ninth Circuit. 

 

On appeal, Plaintiff argued that the trial court erred and should have applied the limitations period of either the USERRA or breach of contract claim. The Mortgagee's primary argument on appeal was that the SCRA claim was time-barred under the catchall four-year limitations period of 28 U.S.C. § 1658(a).

 

The Ninth Circuit first noted that "[t]raditionally, when a federal statute creating a right of action did not include a limitations period, courts would apply the limitations period of the 'closest state analogue.'"  However, "in 1990, Congress established – in 28 U.S.C. § 1658(a) – a uniform, catchall limitations period for actions arising under federal statutes enacted after December 1, 1990."  Section 1658(a) provides a four-year limitation period.

 

Notably, a cause of action "'aris[es] under an Act of Congress enacted after' 1990 within the meaning of § 1658(a) if the 'plaintiff's claim against the defendant was made possible by a post-1990 enactment.'"  Further, "[s]uch enactments include amendments to preexisting statutes that create 'new rights of action and corresponding liabilities.'" 

 

The Mortgagee argued that because no private right of action for section 303(c) violations existed until 2010 when the SCRA was amended to add an express private right of action, section 1658(a) applied. 

The Ninth Circuit agreed, stating that "[t]he applicability of § 1658(a) turns on whether the 2010 amendment to the SCRA created a 'new right[] of action and corresponding liabilities' that were not available to servicemembers before 1990.'" 

 

It was undisputed that neither the SCRA nor its predecessors (which dated back to 1918) contained an express private right of action until Congress, in the Veterans' Benefits Act of 2010, added a section to the SCRA providing that servicemembers whose SCRA rights are violated may "obtain any appropriate equitable or declaratory relief . . . [and] recover all other appropriate relief, including monetary damages." 

 

However, Plaintiff argued that despite lack of an express right of action prior to 2010, servicemembers had an implied private right of action under the predecessor to the SCRA before 1990.

 

The Ninth Circuit disagreed, noting that "[n]o federal appeals court, including this Court, has ever held that these acts created a private right of action before 2010, and several district courts in this circuit and elsewhere that addressed this question have come to difference conclusions about the various sections of the SCRA."  

 

Accordingly, the Ninth Circuit held that Plaintiff's "complaint arises under an Act of Congress enacted after 1990 and is thus governed – and barred – by the four-year limitations period in 28 U.S.C. § 1658(a)."

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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.


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