The U.S. Court of Appeals for the Seventh Circuit recently held that including a settlement offer in a dunning letter for a time-barred debt could violate the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. (“FDCPA”), regardless of whether the letter actually threatens litigation.
The Court also held that a putative class representative’s rejection of a defendant’s litigation settlement offer that did not fully account for the representative’s interest in the case for purposes of his ability to serve as a class representative did not render his claims moot.
A copy of the opinion is available at: Link to Opinion
The Seventh Circuit consolidated two appeals which raised similar issues as to the circumstances under which a dunning letter for a time-barred debt could allegedly mislead an unsophisticated consumer to believe that the debt is enforceable in court, and thereby violate the FDCPA.
In one case (“Case A”), the debt collector (“Debt Collector A”) purchased a time-barred debt. Debt Collector A sent a dunning letter to the debtor (“Debtor A”) providing, in relevant part, an offer to settle the debt at a reduced amount. The dunning letter did not explicitly threaten litigation. However, the dunning letter also did not provide the age of the debt, and “contained no hint” that the statute of limitations had expired on the debt.
Debtor A responded to the dunning letter within 30 days requesting verification of the debt. Debt Collector A provided further details of the debt, but once again did not inform Debtor A of the advanced age of the debt.
Subsequently, Debtor A filed a suit against Debt Collector A on behalf of himself and a putative class alleging violation of §§ 1692e and 1692f of the FDCPA. The lower court dismissed Debtor A’s class allegations, but also denied Debt Collector A’s motion to dismiss. Debtor A filed a motion to reconsider the dismissal of the class allegations. The district court denied the motion to reconsider, but also granted Debtor A leave to amend his class claims.
Prior to the filing of the amended complaint, Debt Collector A offered Debtor A (1) statutory damages in the amount of $1,000 to satisfy his remaining individual claim under the FDCPA, (2) costs incurred on his individual claim, (3) a reasonable attorney’s fee, and (4) any other reasonable relief determined necessary by the court. Debtor A did not respond to the offer, and instead filed his amended complaint and an amended motion for class certification.
At that point, Debt Collector A moved for dismissal of the entire case pursuant to Fed. R. Civ. P. 12(b)(1), arguing that its settlement offer rendered Debtor A’s individual claim moot thereby making Debtor A an inadequate representative of the proposed class. The lower court granted Debt Collector A’s motion to dismiss for want of jurisdiction.
Debtor A appealed both the finding that the settlement offer mooted the case, and the lower court’s original dismissal of the class claims under the FDCPA.
In the second case before the Seventh Circuit (“Case B”), the debt collector (“Debt Collector B”) sent a dunning letter similar to the one in Case A. The dunning letter contained a settlement offer to the debtor (“Debtor B”) providing an opportunity to resolve the debt for a fraction of the total debt claimed. Just as in Case A, the debt being collected in Case B was time-barred under the applicable statute of limitations, and the dunning letter did not provide indication of the age of the debt and did not state that the debt collector was prohibited from enforcing the debt as time-barred.
Debtor B filed her complaint against Debt Collector B under the FDCPA alleging that Debt Collector B violated the FDCPA by sending a dunning letter on a time-barred debt and including an offer of settlement which, if accepted, would allegedly make the debtor worse off.
Debt Collector B filed a motion to dismiss for failure to state a claim. The lower court denied the motion, and Debt Collector B filed an appeal pursuant to 28 U.S.C. § 1292(b) given the importance of the issues.
On appeal, the Seventh Circuit affirmed the denial of the motion to dismiss in Case B, and reversed and remanded the lower court’s rulings in Case A that Debtor A’s claims were mooted by the settlement offer and dismissing the class claims.
In reaching its opinion, the Seventh Circuit first addressed the mootness issue unique to Case A. The Court noted that, in the Seventh Circuit, a defendants’ settlement offer can render a possible class action moot if it is offered before the plaintiff files a motion for class certification and if the settlement offer gives the plaintiff everything she requested. The Court noted that Debt Collector A’s settlement offer came after the lower court had granted Debtor A leave to file an amended class claim, Debtor A immediately filed an amended complaint and amended motion for class certification, and the settlement offer failed to provide the plaintiff with everything that she requested. The Court emphasized that the settlement offer promised only to give any other “reasonable” relief that the trial court thought necessary which the Seventh Circuit said indicates that Debt Collector A was reserving the right to object to any additional relief that it deemed unnecessary.
Thus, the Seventh Circuit held that Debtor A’s rejection of the settlement offer did not moot his interest in the case for purposes of his ability to serve as a class representative.
Next, the Seventh Circuit addressed the FDCPA issues prevalent in both appeals.
As you may recall, § 1692e of the FDCPA prohibits the use of “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e. Additionally, § 1692f prohibits the debt collectors from using “unfair or unconscionable means to collect or attempt to collect any debt.” 15 U.S.C. § 1692f.
In deciding whether representations made in a dunning letter are misleading under the FDCPA, the Seventh Circuit views the letter through the perspective of an “unsophisticated consumer.” Lox v. CDA, Ltd., 689 F.3d 818, 822 (7th Cir. 2007). It is a question of fact, and dismissal is only appropriate, if “it is apparent from a reading of the letter that not even a significant fraction of the population would be misled by it.” Zemeckis v. Global Credit & Collection Corp., 679 F.3d 632, 636 (7th Cir. 2012). The Court also noted that a letter need not be internally contradictory to be confusing, and that unsophisticated readers may require more explanation.
Applying this rubric, the Seventh Circuit determined that the lower court in Case B was correct in denying Debt Collector B’s motion to dismiss, and that the lower court in Case A incorrectly dismissed the class allegations.
Notably, the Court emphasized that it did not hold that it is automatically improper for a debt collector to seek repayment of time-barred debts. However, the Seventh Circuit held, if the debt collector uses language in its dunning letter that would mislead an unsophisticated consumer into believing that the debt is legally enforceable, regardless of whether the letter actually threatens litigation, the collector has violated the FDCPA.
The Seventh Circuit also determined that it was “plausible that an unsophisticated consumer would believe a letter that offers to ‘settle’ a debt implies that the debt is legally enforceable.”
The Court found that the inclusion of offers to settle only made things worse, not better, since a gullible consumer who made a partial payment would inadvertently have reset the limitations period and made herself vulnerable to a suit on the full amount. In particular, the Court found that the term “settle” or “settlement” could lead an unsophisticated consumer to believe that the debt collector could successfully sue on the debt. As noted by the Court, misrepresenting that the debt is legally enforceable violates § 1692e(2)(A) which specifically prohibits the false representation of the character or legal status of any debt.
Thus, the Court determined that the settlement offers only reinforced the misleading impression that the debt was legally enforceable, and potentially violated the FDCPA.
The Seventh Circuit also commented that its ruling differs from that of the Eighth and Third Circuits. See Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 33 (3d Cir. 2011); Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 771 (8th Cir. 2001). As you may recall, the Eighth and Third Circuits have held that the dunning letters on time-barred debt do not violate the FDCPA if no litigation was actually threatened. However, the Seventh Circuit rejected this interpretation noting that “the plain language of the FDCPA prohibits not only threatening to take actions that the collector cannot take, but also the use of any false, deceptive, or misleading representation, including those about the character or legal status of any debt.” Thus, in the Seventh Circuit’s view, stating that the debt collector could sue on – or even offering to settle -- a time-barred debt could be a false or misleading representation about the legal status of that debt.
Accordingly, the Seventh Circuit, in Case B, affirmed the district court’s denial of the defendant’s motion to dismiss, and in Case A, reversed the dismissal of Debtor A’s claim and remanded for further proceedings consistent with its opinion.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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