FYI: 3rd Cir Holds Statement That Debt Forgiveness "Might" Be Reported to IRS Might Violate FDCPA

The U.S. Court of Appeals for the Third Circuit held that a statement in a letter to the effect that forgiveness of the debt "might" be reported to the Internal Revenue Service ("IRS") may constitute a violation of the federal Fair Debt Collection Practices Act ("FDCPA").

 

In so ruling, the Court reiterated that "even if the language in a letter is true, it can still be deceptive where 'it can be reasonably read to have two or more different meanings, one of which is inaccurate.'" 

 

Accordingly, the Third Circuit reversed the trial court's dismissal of the action and remanded for further proceedings.

 

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

 

The defendant debt collector ("Collector") sent six letters on separate dates to the plaintiffs ("Consumers") attempting to collect various outstanding debts that had been outsourced to the Collector for collection after the Consumers defaulted on them. 

 

Each letter offered to settle the amount of indebtedness for less than the full amount owing, and contained the following language: "We are not obligated to renew this offer.  We will report forgiveness of debt as required by IRS regulations.  Reporting is not required every time a debt is canceled or settled, and might not be required in your case."

 

Since the Department of Treasury only requires an entity or organization to report a discharge of indebtedness of $600 or more to the IRS, and because each of the debts linked to the Consumers was less than $600, the Consumers claimed that the inclusion of the foregoing language was "false, deceptive and misleading" in violation of the FDCPA.

 

The Consumers filed a putative class action complaint on behalf of themselves and others similarly situated asserting violations of the FDCPA.

 

The Collector moved to dismiss on the ground that the Consumers failed to plead a plausible violation of the FDCPA.  The trial court granted the Collector's motion, and the Consumers appealed.

 

On appeal, the Third Circuit first examined the language of section 1692e of the FDCPA, which provides that "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." 

 

The Court explained that whether a collection letter is "false, deceptive, or misleading" under section 1692e is determined from the perspective of the "least sophisticated consumer."  

 

The Consumers argued that the language in the letters presented a false or misleading view of the law, which was designed to intimidate them into paying the outstanding debts listed on the debt collection letters even though the Collector knew that any discharge of the Consumers' debt would not result in a report to the IRS.

 

The Third Circuit agreed, noting that "the reporting requirement under the [IRS] code is wholly inapplicable to the [Consumers'] debts because none of them totaled $600 or more, and IRS regulations clearly state that only discharges of debt of $600 or more 'must' be included on a Form 1099-C and filed with the IRS." 

 

Thus, "[b]y including the reporting language on collection letters addressing debts of less than $600, we believe the least sophisticated debtor might be persuaded into thinking that the discharge of any portion of their debt, regardless of the amount discharged, may be reportable." 

 

The Collector argued that in order to conclude that a consumer would be misled, one would have to read the first sentence in isolation while paying no attention to the qualifying statement that "[r]eporting is not required every time a debt is canceled or settled, and might not be required in your case." 

 

The Third Circuit disagreed, ruling that "even with this qualifying statement, the least sophisticated debtor could be left with the impression that reporting could occur," when "there was no possibility of IRS reporting in light of the fact that the debt was less than $600." 

 

The Collector further argued that the word "might" in the letters should signal to the least sophisticated debtor that only under certain circumstances would reporting occur.

 

The Court again disagreed, noting that for the Consumers, "under no set of circumstances will reporting ever occur."  The Third Circuit pointed to prior rulings that "even if the language in a letter is true, it can still be deceptive where 'it can be reasonably read to have two or more different meanings, one of which is inaccurate.'" 

 

Thus, the Court held that the Consumers "pled sufficient factual allegations that state a plausible claim upon which a court may grant relief under the FDCPA," and therefore remanded the matter for further proceedings in the trial court.

 

 

 

 

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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FYI: 11th Cir Upholds Dismissal and Suggests Sanctions for "Shotgun Pleading"

The U.S. Court of Appeals for the Eleventh Circuit recently rejected an attempt by homeowners to collaterally attack a state court mortgage foreclosure judgment, affirming the trial court's dismissal of an amended complaint with prejudice for failure to state a claim, but on alternative grounds.

 

More specifically, the Court upheld the dismissal on the grounds that, "by attempting to prosecute an incomprehensible pleading to judgment, the plaintiffs obstructed the due administration of justice" in the trial court, and by trying to defend the fatally defective complaint on appeal. The Court also ordered plaintiffs' counsel to show cause why he should not have to pay the defendants' double costs and expenses, including appellate attorney's fees, for filing a frivolous appeal.

 

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

 

One day after the foreclosure sale of their home, the plaintiff homeowners sued their lender, loan servicer, and MERS in state court in Alabama, attempting to assert 14 claims under Alabama and federal law.

 

The complaint was poorly written, making it difficult for each of the defendants to frame their answer. The gist of the complaint was that the servicer improperly declared the plaintiffs in default on their mortgage and stopped accepting their payments without providing an explanation. The plaintiffs sought a declaratory judgment that the plaintiffs were not in default on their loan, prohibiting the foreclosure plus compensatory and punitive damages for the mental anguished caused the allegedly wrongful foreclosure.

 

The defendants removed the case to the federal trial court and moved for a more definite statement under Federal Rule of Civil Procedure 12(e), arguing the complaint was a "shotgun" pleading that lumped all of the factual allegations into each count by incorporation, did not differentiate between the defendants omitted key chronological facts.

 

The trial court granted the motion and gave the plaintiffs 21 days to serve an amended complaint. On the due date, the plaintiff's counsel moved for a 7-day extension of time due to illness, which the magistrate judge granted.

 

Five days after the expiration of the extended deadline, plaintiff's counsel moved for another 7-day extension based on an illness and in the family, which the magistrate judge granted given the defendants' lack of opposition.

 

The plaintiffs timely filed their amended complaint, but it contained only minor changes and suffered from the same basic lack of clarity as before, but was even longer, two additional counts having been added.

 

One of the defendants answered the amended complaint, denying the material allegations and raising failure to state a claim as an affirmative defense. The others moved to dismiss on the same failure to state a claim basis as before.

 

On the due date of the plaintiffs' response, their attorney moved for a 7-day extension because he had been out-of-town for hearings. Because the motion was unopposed, judge granted it.

 

The plaintiffs filed their response to the motion to dismiss and the magistrate judge issued a report recommending dismissal of the amended complaint against the three moving defendants for failure to state a claim.

 

The plaintiffs objected to the magistrate judge's report and recommendation, but just before the judge was set to rule, they moved for leave to file a second amended complaint. Shortly thereafter, the defendant that had answered moved for judgment on the pleadings.

 

The trial court denied the plaintiff's motion to leave to amend, adopted the magistrate judge's report and recommendation, and dismissed the amended complaint with prejudice as to the three moving defendants. The plaintiffs then stipulated to dismissal of the amended complaint against the remaining defendant that had answered. The following day, the trial court entered final judgment, from which the plaintiffs appealed.

 

On appeal, the plaintiffs' counsel continued his tricks, moving six times to extend the deadline to file the initial brief for various reasons. The appellate court granted all six motions, setting a final deadline, which plaintiffs' counsel was unable to meet due to alleged difficulty uploading the brief. The brief was finally filed more than 3 months after it was originally due.

 

The defendants filed their response brief, but plaintiffs' counsel requested four extensions to file the reply brief, all of which were granted, and the reply brief was finally filed.

 

The Eleventh Circuit quickly affirmed the trial court's dismissal, but on different grounds, explaining that "[t]he amended complaint is an incomprehensible shotgun pleading … making it nearly impossible for Defendants and the Court to determine with any certainty which factual allegations give rise to which claims for relief. As such, the Amended Complaint patently violated Federal Rule of Civil Procedure 8, which requires a plaintiff to plead 'a short and plain statement of the claim showing that the pleader is entitled to relief.''

 

The Court went on to reiterate its prior decisions rejecting the "vices" of shotgun pleadings such as additional expense and delay in the administration of justice. "Tolerating such behavior constitutes toleration of obstruction of justice … [which] is why a trial Court retains authority to dismiss a shotgun pleading on that basis alone."

 

The Eleventh Circuit then pointed out that a trial court must give a plaintiff one chance to remedy any noncompliance with Rule 8(a) and the plaintiffs were provided that opportunity. "What matters is function, not form: the key is whether the plaintiff had fair notice of the defects and a meaningful chance to fix them. If that chance is afforded and the plaintiff fails to remedy the defects, the trial court does not abuse its discretion in dismissing the case with prejudice on shotgun pleading grounds."

 

In concluding, the Appellate Court cited Federal Rule of Appellate Procedure 38, which allows the court of appeals to "award just damages and single or double costs to the appellee" if it determines that an appeal is frivolous.

 

Because plaintiffs' counsel was on notice of the Court's precedent regarding shotgun pleadings due to the case law cited in the defendants' motion to dismiss, yet persisted and then added insult to injury by appealing his incomprehensible complaint, the court concluded that "[t]his constitutes an abuse of judicial process, a 'deliberate use of a legal procedure, whether criminal or civil, for a purpose for which it was not designed.'"

 

The Eleventh Circuit affirmed the trial court's judgment, and ordered the plaintiffs' counsel to show cause why he should not have to pay the appellees "double costs and their expenses, including the attorney's fees they incurred in defending these appeals."

 

 

 

 

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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FYI: 8th Cir Holds CAFA Amount In Controversy Includes Future Attorney's Fees Incurred After Removal

The U.S. Court of Appeals for the Eighth Circuit held that the plaintiff could not defeat federal jurisdiction under the Class Action Fairness Act ("CAFA") based on a pre-class certification damages stipulation limiting attorneys' fees to ensure that the amount in controversy remained under CAFA's $5 million jurisdictional limit. 

 

In so ruling, the Eighth Circuit affirmed the trial court's finding that the amount in controversy for jurisdiction under the CAFA includes the amount of future attorneys' fees based on the expected length of the litigation, the risks and complexity involved, and the hourly rates charged.

 

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

 

Following a three year investigation, the National Highway Traffic Safety Administration ("NHTSA") requested that an automobile manufacturer initiate a safety recall of two kinds of SUV vehicles that faced an increased likelihood of dangerous fires in rear crashes.

 

The manufacturer responded by issuing a press release contesting the NHTSA's findings and stated that the vehicles were "safe and not defective."  Two weeks later, the manufacturer issued a second press release announcing that it had agreed with the NHTSA to a limited recall to install a trailer hitch assembly, which it asserted would improve vehicle performance in low speed accidents.

 

A consumer purchased a 2003 SUV from an unrelated third party in August of 2013, two months after the manufacturer's press releases.  The consumer did not see the press releases until months after purchasing the vehicle.

 

In June 2015, the consumer filed a filed a putative class action on behalf of all purchasers of the relevant SUV vehicles in the State of Missouri since June 4, 2013 (the date of the first press release). 

 

The consumer alleged that the manufacturer's statements that the vehicles were "safe" and "not defective" were false and misleading and violated the Missouri Merchandising Practices Act ("MMPA").  The consumer also alleged that the manufacture's proposed trailer hitch assembly did not remove the vehicles' safety defects and suggested that an appropriate remedy required the installation of a "fuel shield/skid plate."

 

The manufacturer removed the case to federal court under CAFA.  As you may recall, "CAFA provides the federal district courts with 'original jurisdiction' to hear a 'class action' if the class has more than 100 members, the parties are minimally diverse, and the 'matter in controversy exceeds the sum or value of $5,000,000.'"  Standard Fire Ins. Co. v. Knowles, 568 U.S. 588, 592 (2013) (quoting 28 U.S.C. § 1332(d)(2), (d)(5)(B)).

 

The consumer sought remand, arguing that CAFA's amount-in-controversy requirement was not satisfied.

 

The trial court determined that by a preponderance of the evidence, the "benefit of the bargain" damages alleged in this case exceeded $5,000,000 dollars if calculated as either the total value of overpayment or diminution in value damages.  The trial court reached this conclusion by finding that 8,127 unique vehicles were potentially within the class and that the average sale price of a relevant vehicle was $6,638.  Based on these facts, the trial court concluded that a reasonable jury could find damages in excess of the CAFA jurisdictional limit.

 

The consumer filed an amended complaint and argued that the court lacked subject matter jurisdiction because Missouri law required "benefit-of-the-bargain" damages to be calculated as the lesser of diminution in value or cost of repair.  Asserting that the proposed fuel shield/skid plate repair could be implemented for as little as $320 a vehicle, the consumer argued the amount in controversy would be far under CAFA§s $5,000,000 jurisdictional limit.

 

The trial court recognized that it had not fully explained the alternative damages under the MMPA, and entered an order clarifying its previous denial of remand. 

 

In the clarifying order, the trial court found that compensatory damages under the consumer's proposed measure of damages could total $3,605,010.  However, the trial court also concluded that the $5,000,000 jurisdictional limit was satisfied when including potential attorneys' fees, which it found could well exceed $1,400,000.  The court further held that a stipulation to limit attorneys' fees to ensure the amount in controversy remained under $5,000,000 did not alter the amount in controversy as a matter of law.

 

The trial court granted summary judgment in favor of the manufacturer, holding that the manufacturer's alleged misrepresentations were not made "in connection with" the consumer's purchase of his SUV.  The court denied the motion to certify the class without prejudice, indicating that the motion could be renewed within thirty days of the order.

 

The consumer appealed, challenging both subject matter jurisdiction under CAFA and the merits resolution of his claims.

 

The Eighth Circuit began its analysis with the stipulation limiting attorneys' fees and how that factored into the trial court's calculation of the amount in controversy. 

 

In analyzing the issue, the Eight Circuit acknowledged that in Rolwing v. Nestle Holdings, Inc., 666 F.3d 1069 (8th Cir. 2012), a prior panel held that a damages stipulation could preclude removal under CAFA .  However, the Eighth Circuit observed that in Standard Fire, the Supreme Court concluded that precertification damages stipulations cannot defeat CAFA-jurisdiction because absent and unbound class members might later enlarge the scope of recovery beyond the stipulated amounts.  Standard Fire, 568 U.S. at 593. 

 

The Eighth Circuit noted that Standard Fire raised serious questions about the continued validity of Rolwing and it found no reason to apply a different rule to a stipulation limiting the amount of attorneys' fees in order to defeat CAFA jurisdiction.  Thus, the Eight Circuit held that the trial court properly included the jurisdictional amount the attorneys' fees that may be awarded.

 

The Eighth Circuit then observed that the trial court made findings on the total cost of repair damages based on the proof submitted by each side, which were an available form of damages under the MMPA.  The trial court also determined that attorneys' fees could exceed $1.4 million based on the expected length of the litigation, the risk and complexity involved in the case, and the hourly rates charged. 

 

In the Eight Circuit's view, the record supported the trial court's finding that the sum of the total repair cost (including labor and parts) of $3,605,010 and potential attorneys' fees would exceed $5,000,000.

 

Further, the Eight Circuit determined that the record supported the trial courts finding that the consumer's purchase had no relationship with the alleged misrepresentation.  Although actual reliance on the seller's misrepresentation by the buyer was not required, the Eighth Circuit agreed with the trial court that evidence of some factual connection between the misrepresentation and the purchase was required. 

 

Accordingly, the Eighth Circuit affirmed the trial court's denial of the motion to remand and grant of summary judgment for the manufacturer.

 

 

 

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

 

 

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.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments