Tuesday, September 18, 2012

FYI: 1st Cir Upholds Enforceability of Debt Settlement Agreement by Unlicensed Debt Collector

The United States Court of Appeals for the First Circuit recently held that a borrower's release of all claims against an unlicensed debt collector warranted the dismissal of that borrower's putative class action lawsuit, where the debt collector took no wrongful actions after the borrower executed the release agreement. 
A copy of the opinion is available at http://www.ca1.uscourts.gov/pdf.opinions/11-2274P-01A.pdf.
An unlicensed debt collector instituted a collection action against a borrower.  In 2005, the parties agreed agreed to a settlement agreement that reduced the total amount owed and extended the term of the payments.  The borrower also agreed to a release that barred all actions for claims "remotely attributable or related to" the debt, present and future. 
The borrower performed under the terms of the agreement for several years, but stopped paying when she lost her job.  The debt collector did not contact her at that time, or indeed at any time subsequent to the borrower's execution of the settlement agreement. 
In 2009, the borrowed filed a putative class action against the debt collector. She argued  that the debt collector was engaged in unlawful debt collection and that the release was obtained by fraud and coercion, in violation of Massachusetts law. 
The debt collector removed the matter to federal court, and moved for summary judgment.  The lower court granted the debt collector's motion. The borrower appealed. 
As you may recall, Massachusetts defines a debt collector as "any person who uses an instrumentality of interstate commerce...in any business the principal purpose of which is the collection of a debt, or who regularly collects or attempts to collect, directly or indirectly, a debt owed...to another."  Mass. Gen. Laws ch. 93, Sec. 24. 
The First Circuit began its analysis by noting that it appeared that the debt collector "was neither licensed nor within a statutory exemption" to collect debts at the time it attempted to collect its debt from the borrower.  Therefore, the case turned on whether and to what extent the settlement agreement operated to release the debt collector from the borrower's claims.     
The Court observed that the release might be unenforceable if it was obtained by fraudulent misrepresentation or duress.  However, it noted that "the borrower does not attempt to make any detailed showing along these lines." 
Further, the Court cited case law providing that "one seeking to repudiate an agreement allegedly entered into under duress must promptly complain of the circumstances under which the document was signed."  In re Bos. Shipyard Corp., 886 F.2d 451, 455 (1st Cir. 1989).  Here, however, the borrower executed the settlement agreement in 2005, and did not file her related lawsuit until 2009. 
The borrower argued that she did not know that the collection efforts were unlawful at the time.  The Court found that argument unpersuasive, noting that the release applied to all claims, whether known or unknown. 
Accordingly, the First Circuit rejected the borrower's arguments as to fraud and coercion. 
The First Circuit did acknowledge that the release could be unenforceable as to claims arising after the release.  Therefore, it analyzed whether the debt collector took any action after the release that might give rise to a claim by the borrower.
The only action taken by the debt collector was the receipt of payment, an action that the Court found to be "seemingly not within the Massachusetts statute."  And "although passive receipt might be deemed tainted if prompted by prior unlawful collection efforts," the Court observed that the lynchpin of any such argument would be "the wrongfulness of [the debt collector's] active debt collection activities prior to the 2005 lawsuit." 
Because the First circuit found that the borrower forfeited any such argument when she agreed to the settlement agreement, it held that "it is too late now to resuscitate claims that ultimately depend on the wrongfulness of the original debt collection efforts." 
Accordingly, the First Circuit affirmed the judgment of the lower court. 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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