The U.S. Court of Appeals for the Third Circuit recently held that estimates of attorney's fees and costs included in a statement to the borrower as components of the amount of the debt owed, without clarification that these amounts were estimates, constituted a misrepresentation in violation of the federal Fair Debt Collection Practices Act (FDCPA).
The Third Circuit also rejected the debt collector’s argument that its notice did not constitute “debt collection” activity under the FDCPA. In addition, the Court affirmed the district court's imposition of sanctions against the defendant law firm debt collector, where the defendant law firm did not comply with the district court's order to produce its invoices in discovery.
A copy of the opinion is available at: http://www2.ca3.uscourts.gov/opinarch/132015p.pdf
Due to an error on the original mortgagee's part, a borrower (Borrower) fell behind on his mortgage payments, and in 2010, the mortgagee referred the account to a foreclosure law firm (Law Firm). The Law Firm sent Borrower a debt validation or “1692g” notice to Borrower, which Borrower alleged contained an incorrect statement of the amounts owed.
Borrower did not seek verification of the debt in response to the Law Firm’s notice. Instead, Borrower filed a putative class action complaint alleging that the Law Firm violated the FDCPA by, among other things, falsely representing that it had performed legal services and incurred certain recoverable costs and expenses on or before the date of the letter. Borrower alleged the letter violated the FDCPA because the Law Firm had not actually performed the related services or incurred the fees or costs as of the date it sent the letter.
The district court dismissed Borrower’s complaint, holding that Borrower could not bring suit without first disputing the validity of the debt pursuant to the FDCPA’s validation procedures as set forth in 15 U.S.C. § 1692g. The district court also held that the fees in the letter were estimates and held that “estimating the amount of attorneys’ fees in an itemized debt collection notice does not violate the FDCPA.”
The Third Circuit reversed, holding that the letter claimed to set forth “the amount of debt” and did not mention estimates. The Court noted that if the Law Firm “wanted to convey that the amounts in the Letter were estimates, then it could have said so.” Applying the FDCPA’s “least sophisticated debtor” standard, the Third Circuit held that the including of estimated fees letter constituted a misrepresentation in violation of the FDCPA.
In addition, the Third Circuit rejected the Law Firm’s argument that a debt collector cannot incur liability as a matter of law where the debt collector complied with the debt validation procedure set forth in the FDCPA, and the consumer does not seek to validate the debt before filing suit.
The Third Circuit noted that the relevant statutory language indicates that disputing a debt is optional, and that failure to dispute a debt cannot be construed as an admission of liability. Accordingly, the Court held that “a consumer is not required to seek validation of a debt he or she believes is inaccurately described in a debt communication as a prerequisite to filing suit under § 1692e.”
The Court also rejected the Law Firm’s argument that its debt validation or “1692g” notice was not debt collection activity under the FDCPA. The Law Firm argued that its letter did not
constitute “debt collection activity” subject to the FDCPA because it “made no demand for payment, contained no suggestion that [Borrower] settle the underlying debt, nor enter into a payment plan.”
However, citing its prior ruling in Simon v. FIA Card Servs., N.A., 732 F.3d 259, 265 (3d Cir. 2013), the Third Circuit reiterated that a communication need not contain an explicit demand for payment to constitute debt collection activity. The Court found that “[i]t is reasonable to infer that an entity that identifies itself as a debt collector, lays out the amount of the debt, and
explains how to obtain current payoff quotes has engaged in a communication related to collecting a debt,” and therefore that the Law Firm’s notice “constitutes debt collection activity under the FDCPA and misrepresentations contained therein may provide a basis for relief.”
Additionally, the Third Circuit affirmed the district court's imposition of sanctions against the Law Firm related to the Law Firm's refusal to produce its invoices pursuant to Borrower's proper discovery request. The Law Firm objected to the request, arguing that the information sought was not likely to lead to the discovery of admissible evidence, but the district court granted the Borrower's motion to strike the objection, and ordered the Law Firm to produce the requested invoices. Despite the court’s order, the Law Firm did not produce its invoices until attaching them to its summary judgment reply brief. Based on that conduct, the Third Circuit held that the district court properly imposed sanctions on the Law Firm in the amount of $15,050.50.
Accordingly, the Third Circuit reversed the district court's dismissal of the Borrower's FDCPA claims, and affirmed the district court's imposition of sanctions against the Law Firm.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: RWutscher@mwbllp.com
Admitted to practice law in Illinois
McGinnis Wutscher Beiramee LLP
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