Debtor Notices - The Latest FDCPA Entrapment Mechanism for Collection Agencies and Law Firms

Questions to and answers from Joe Messer regarding Debtor Notices and how to deal with them.

 

We’ve heard that notices from debtors are creating real problems for collection agencies and law firms.  Fill us in on what’s happening.

Consumer attorneys are always looking for ways to nab defendants.  Many consumer firms are “mills”, which are looking for a steady diet of lawsuits. Over the years they’ve come up with ways to supply themselves with new claims. Historically consumer firms have given scripts to debtors to try to get collectors to say things which violate the Fair Debt Collection Practices Act (FDCPA).  This has become known as “call baiting”.  For example, the debtor would ask “Could I go to jail if I don’t pay”? “Could I lose my house?” “Will I get sued if I don’t pay?” etc.

The latest trend is written notices, sent on behalf of debtor clients, or prepared by the attorneys and sent by the debtors.  These are the trickier notices since alarms usually go off when attorney letters are received, but not necessarily when letters come from debtors.

 

What types of notices are your clients receiving?

The age old trick is the one liner from a consumer:  “I refuse to pay”.  Or sometimes those words are buried in a long letter with gobble gook text.  The problem with this one is that it triggers Section 1692c, which requires collectors to cease communications.  Section 1692c reads in relevant part:

If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt, except—

(1) to advise the consumer that the debt collector’s further efforts are being terminated;

(2) to notify the consumer that the debt collector or creditor may invoke specified remedies which are ordinarily invoked by such debt collector or creditor; or

(3) where applicable, to notify the consumer that the debt collector or creditor intends to invoke a specified remedy.

This one is a little easier for a collection law firm to respond to because the firm can respond by sending the debtor notice that they intend to file suit, provided they would normally do so on such an account.  The collection law firm should then file suit.  But if they wouldn’t normally do so – say because the debt was too small - it could be risky to take the course of action.

Another letter that we’ve seen (orchestrated by the RC Law Group) comes from the debtor and reads as follows:

To Whom It May Concern:

I dispute the [insert name of law firm] collection account on my credit report that has a balance of $2075.00 and an open date of 4/26/2016 and refuse to pay this account.

This one sets up a § 1692c claim by stating that the debtor refuses to pay the account.  But more importantly if the law firm has reported the account to a credit reporting agency it sets up a possible “false, deceptive or misleading representation” claim under § 1692e(8).  That section reads in relevant part:

A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:

(8) Communicating or threatening to communicate to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.

RC Law Group will then have the debtor check their credit report and file a lawsuit if the law firm hasn’t reported the debt as disputed.  This one is like shooting fish in a barrel. 

There are various variations on this, all available online.  Just Google “letter to stop debt collectors” and you will find one that states in relevant part:

Dear Collector: I am writing to request that you stop calling me. The federal law requires you to cease all communication with me after being notified in writing that I no longer wish to communicate with you (Fair Debt Collection Practices Act [FDCPA] Section 805(c): CEASING COMMUNICATION). I demand that you stop calling me at home, at work, on my cell phone and at any other location.

This one clearly triggers § 1692c, which requires the collector to cease communications.   

But what if it said only “I demand that you stop calling me at work and on my cell phone”, but doesn’t demand that you stop calling them.  Can you call them at home? Yes, if the letter doesn’t contain any other cease and desist language.  What if they don’t have a home number and only a cell phone?  This is dicey.  To be safe I’d stop calling them and file a collection lawsuit.

Buried in another letter is the statement:

“Do not call me at work.”

This could be an attempt to set up a claim under §1692c(a)(3), which states in relevant part:

Without the prior consent of the consumer given directly to the debt collector or the express permission of a court of competent jurisdiction, a debt collector may not communicate with a consumer in connection with the collection of any debt—

(3) at the consumer’s place of employment if the debt collector knows or has reason to know that the consumer’s employer prohibits the consumer from receiving such communication.

Personally I don’t think “Do not call me at work” would trigger liability for a collector who called the debtor’s place of employment.  But a letter which states “I’m not allowed to take personal calls at work. Do not call me at work” would trigger liability under §1692c(a)(3) for a collector who called the debtor’s place of work after receiving such a letter.

Notices triggering liability under §1692c(a)(3) don’t need to be in writing.  Once the collector learns that the debtor’s employer prohibits the debtor from receiving calls at work – however they learn that – the collector will have liability for making such a call.

 

What are Plaintiff’s attorneys trying to achieve?

A constant stream of claims which allows them to make $3,000 to $5,000 or more per hit, with very little effort on their part.

 

Is there a way to spot these notices?

 Centralize your incoming mail and train a smart person who will read all letters thoroughly how to spot trick letters and bring them to the attention of those in your organization who know how to respond to them. There should be at least one back up for this person so the wheels don’t fall all when they are on vacation or out sick.

Try to reduce the various ways debtors can communicate with your organization.  Do you really need a general email?  For some reason faxes are problems.  They end up in “scan files” and don’t roll off the machines like they used to.  So they get missed.  If you are going to keep fax lines your people need to religiously police them for incoming notices.

 

What should our member law firms be doing about them?

Obviously respond appropriately, but share the notices you are regularly receiving with other member firms.  Or maybe let NARCA know about them so they can announce the problem.  It’s not uncommon for one of our clients to receive 15 to 20 identical letters a day.  Obviously these are being orchestrated by a consumer law firm.  Wouldn’t it be nice to have a heads up ahead about these letters ahead of time?  If they were to be announced on a NARCA listserve this might be helpful.

 

What if a law firm misses a notice?  Is there a way to avoid FDCPA liability?

Yes. That’s where the FDCPA’s bona fide error defense comes in.  Under §1692k(c):

A debt collector may not be held liable in any action brought under the FDCPA if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.

 

Have there been any important case law developments in this area?

Yes.  Recently the U.S. District Court for the Eastern District of Virginia ruled in favor of the collector in Keonte Gathers v. CAB Collection Agency, Inc. 3:17-cv-261-HEH. The plaintiff, represented by RC Law Group, had sent the collector a dispute letter and subsequently examined her consumer report and found that the collector hadn’t reported the debt as disputed.   Following Spokeo the Court held that the Plaintiff had failed to allege a concrete injury-in-fact sufficient to confer Article III standing.  The Court dismissed the complaint with leave to re-plead.

Also in Gebhard v. LJ Ross Associates, Inc. (Case No. 15 -2154 U.S. Dist. Ct. New Jersey) the court ruled in favor of a debt collector who received a cease and desist letter at 9:58am, and hadn’t processed the letter before a collector called the debtor at 10:10am that same day.   Obviously this is a unique situation, but a case that may help collectors in similar “close call” situations.

 

Can you give us a road map for trying to avoid these problems?

Limit points of outside contact.

Have good, well trained people respond to letters.

Give them the authority to follow-up to make sure the agency is properly responding.

Implement written, well thought out procedures for processing and reacting to notices so in case a mistake is made the agency can assert the bona fide error defense.

If you are dead in the water don’t waste time.  Settle the case as quickly and inexpensively as possible.  If, however, you should win, don’t pay ransom to settle the lawsuit.  Otherwise you can expect to be sued time and time again on the same type of claim. 

Colorado Fair Debt Collection Practices Act Expands to Cover Debt Buyers

The Colorado Fair Debt Collection Practices Act (FDCPA) has been extended until Sept. 1, 2028, and debt buyers will be classified as collection agencies under Colorado law S.B. 216.

The revised law will apply to debt buyers for consumer debts sold or resold on or after Jan. 1, 2018. Debt buyers, which were previously undefined in the state act, will now be classified as “a person who engages in the business of purchasing delinquent or defaulted debt for collection purposes, whether it collects the debt itself, hires a third party for collection, or hires an attorney for litigation in order to collect the debt.” Debt buyers remain exempt from the act’s bond requirements so long as the debt buyer does not provide third-party collection services.

The law also establishes requirements for any legal actions on purchased debts. A debt collector or collection agency is now required to attach “a copy of the contract, account-holder agreement, or other writing from the original creditor or the consumer evidencing the consumer's agreement to the original debt.” A copy of a redacted itemization of charges must be attached for medical debts.

If no written evidence is available, the debt collector is required to attach to the complaint a copy of the document provided to the consumer while the account was active, demonstrating that the debt was incurred by the consumer or, for a credit card debt, the most recent monthly statement recording a purchase transaction, payment, or balance transfer.

A debt collector or collection agency must also attach a copy of the assignment or other writing establishing that the debt buyer is the owner of the debt, and a complete chain of title for debts that were assigned more than once.

The revised law also requires a plaintiff to file evidence with the court satisfying the state's evidentiary rules. An affidavit is insufficient to meet the new documentation requirements for legal actions. The evidence must establish the amount and nature of the debt, including the original account number and creditor at charge-off; the amount due at charge-off; an itemization of post charge-off interest (if any); the date of the last payment or transaction; and the date the debt was incurred (unless the account is a revolving credit account).

Additionally, the new law clarifies that a two-year statute of limitations applies to administrative actions to enforce liability and a one-year statute applies to private actions by consumers

 

U.S. Supreme Court Declines Time-Barred Debt Appeal

On May 22, 2017, the U.S. Supreme Court declined an appeal by Domick Nelson regarding a dismissed suit against debt collector Midland Funding, LLC.

Nelson filed for Chapter 13 bankruptcy protection in February 2015. The following month Midland filed a proof of claim seeking payment of $751.87 in unpaid credit card debt. The credit card had not been used since November 2006, almost a decade earlier, and was outside the statute of limitations for debt collection in Missouri. Nelson filed a class action suit against Midland in April 2015, accusing it of violating the Fair Debt Collection Practices Act by seeking collection on time-barred debts. The  District Court dismissed the lawsuit that August.

Nelson appealed the decision with the Eight Circuit, but it was affirmed in September of 2016. Nelson then appealed the Eight Circuit’s decision to the Supreme Court, citing a conflict between the consumer protection and bankruptcy law, but the Supreme Court declined to take up the case.

Supreme Court Rules That Filing An Out-Of-Statute Proof Of Claim in a Bankruptcy Case Does Not Violate the FDCPA

Reversing the Eleventh Circuit Court of Appeals decision in Midland Funding, LLC v. Johnson, No. 16-348, the U.S. Supreme Court ruled 5-3 on May 15, 2017, that a debt collector does not violate the FDCPA by filing a proof of claim on a debt that is barred from collection by the statute of limitations. The question in Midland Funding was whether a debt collector’s filing of a proof of claim indicating the limitations period has run out is a prohibited act under the Fair Debt Collection Practices Act.  The high court concluded it is not, holding “[t]he filing of a proof of claim that is obviously time barred is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act.” 

Justice Stephen Breyer, writing for the Court’s majority, explained that, “[t]he law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense.”  Accordingly, the court concluded that there is “nothing misleading or deceptive in the filing of a proof of claim” that follows the structural features of the bankruptcy claims resolution process, including the trustee’s objection for a claim’s untimeliness as an affirmative defense.  The Court also pointed out that the filing a time-barred claim is not “unfair” or “unconscionable” under the FDCPA because the protections in a bankruptcy proceeding serve to minimize risk to debtors.  

Justices Sotomayor, Ginsburg and Kagan, filed a dissenting opinion.  Justice Neil Gorsuch did not participate in the decision because he was not on the Supreme Court when oral arguments were held in January. 

Class Action Lawsuit Against Employment Background Screening Firm Highlights Compliance Concerns for Consumer Reporting Agencies

A recent class action Fair Credit Reporting Act lawsuit filed against the employment screening service firm InfoMart Inc. highlights important compliance concerns for Consumer Reporting Agencies.  The lawsuit is Robert Mills II v. Infomart Inc., filed in the U.S. District Court for the Northern District of West Virginia as case number 3:17-cv-00048.

Defendant Robert Mills claims he was denied a job because of false information provided by pre-employment screening service InfoMart Inc.  Mills says that when he applied for a job in 2015, InfoMart reported a civil judgment that had been entered against him in 2010 when he was on active military duty, but failed to mention in the report that it had been vacated. He further claims InfoMart Inc. also reported a criminal record belonging to a different Robert Mills. 

The FCRA requires consumer reporting agencies to (a) notify job applicants if they report adverse public records to an employer to give the applicant time to correct false information, or (b) maintain strict procedures designed to ensure that the information is always complete and up-to-date.  Mills claims InfoMart did neither of these things.

“Defendant failed to comply with the contemporaneous notice requirement ... because it sent plaintiff no notice when it reported this information,” Mills wrote. “And defendant entirely failed to report the complete up-to-date criminal and civil-judgment records — it did not and systemically does not obtain full personal identifiers with its criminal records and does not obtain up-to-date dispositions for its civil record.”

Mills applied for the job in early 2015, and says he was denied the job soon after InfoMart completed the background check in late April of that year. Mills claims he then wrote to InfoMart in December and asked for his file which is when he found out about the allegedly erroneous information.

Under the FCRA consumer reporting agencies are required to disclose the sources of the information they report.  Mills claims InfoMart failed to comply, acting as if they had gathered the information themselves when in fact it actually was acquired from TransUnion.

Mills alleged “Defendant is aware of its obligations under the FCRA, but chooses not to comply because the costs of compliance would harm its bottom line and impair its business model”. “Discovery will show that defendant routinely fails to reveal its true sources of public-record information, like TransUnion, in its FCRA file disclosures. It makes this choice despite the clearly worded requirement in the FCRA that [consumer reporting agencies] reveal the sources of the information they report.”

This lawsuit points out two compliance issues for consumer reporting agencies:

1.  CRAs who issue reports for employment purposes need to have systems in place to (a) notify job applicants if they report adverse public records to an employer to give the applicant time to correct false information, or (b) maintain strict procedures designed to ensure that the information is always complete and up-to-date.  In our experience the second alternative is problematic since it is can be difficult to establish and prove.

2.  All CRAs need to disclose the sources of the information they report when making file disclosures to consumers. 

For more information or to discuss FCRA compliance issues contact Joe Messer at (312) 334-3440 or jmesser@messerstrickler.com

Supreme Court Justices Struggle With Terms In Case Which Will Decide If Debt Buyers Are Regulated As Debt Collectors Under The FDCPA

On April 18, 2017 the U.S. Supreme Court heard oral arguments in a case that could determine whether banks that purchase defaulted debt are regulated as debt collectors under the Fair Debt Collection Practices Act. The case is Henson et al. v. Santander Consumer USA Inc., case number 16-349, in the Supreme Court of the United States.

Santander was accused in a 2012 class action of violating the FDCPA by misrepresenting its authority to collect the debt, the amount of the debt owed and by communicating directly with consumers it knew were represented by counsel.

Santander moved to dismiss the case on the grounds that it did not qualify as a debt collector under the statutory definition because it had purchased the defaulted debt it was seeking to collect.  The district court agreed. The Fourth Circuit upheld the dismissal, and the consumers filed their petition for a hearing before the Supreme Court soon after. The consumers argue that Santander should be considered a debt collector even though it purchased the defaulted auto loans. Santander argues that because it owns the debts it should be treated as the original creditor and thus be exempt under the FDCPA.  

The FDCPA provides an exemption from its consumer protections, including restrictions on when third-party collectors can contact people to collect on debts, for banks that collect on loans that they issue. The Plaintiffs' attorney argued, however, that a debt buyer is like a debt servicer to whom a debt has been assigned for collection which Congress intended to be treated as a debt collector when it obtained that assignment after the debt was in default.

Justice Samuel Alito was skeptical of this reading of the FDCPA, stating that the statute’s language saying that its protections apply to third-party firms that collect on debt “owed or due another” clearly argued for Santander and similar firms to be exempted.  “You’re really going uphill on that. You need something really strong to overcome that, I would say,” Justice Alito said. 

Justice Elena Kagan, had similar trouble with the Plaintiffs' argument, given the the use of the word “owed” in the statutory exception to classification as a debt collector. “My problem when I think about this word is that I can never get it to mean what you want it to mean, no matter ... how I construct a sentence,” Justice Kagan said.

Chief Justice John Roberts conceded that Congress could not have contemplated the changes that have come to the debt collection industry when it wrote the FDCPA, seeming to indicate that that would be something that he would weigh.  “The industry has evolved in a way that has — has raised these sorts of questions,” he said. “This is not something that Congress was addressing.”

While the Plaintiffs' attorney spent much of his time trying to explain how the debt collection industry has changed, the Defendant's attorney argued that the FDCPA includes an exception for servicers that applies to debt that has not yet defaulted, and that should apply to servicing of loans that were transferred to another owner while in default.

But Justice Kagan had a problem  with that argument, asking: “What happened in between the time when your client serviced the debt and the time when your client purchased the debt that in any way changed its relationship with the borrower such that Congress wouldn’t be concerned any longer with its behavior?” 

We will monitor the Supreme Court's docket and update this blog when the Court issues its decision.  

 

CFPB Sues Ohio Law Firm for Illegal Debt Collection Practices

The Consumer Financial Protection Bureau filed a lawsuit April 17, 2017 against Ohio law firm Weltman Weinberg & Reis Co., LPA for allegedly engaging in illegal debt collection practices in violation of the Fair Debt Collection Practices Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The case is Consumer Financial Protection Bureau v Weltman Weinberg & Reis Co, LPA, case number 1:17-cv-00817, in the U.S. District Court for the Northern District of Ohio.

The CFPB alleged that Weltman sent collection letters and made phone calls falsely implying that lawyers had reviewed a consumer’s account to determine that the debt was actually owed. The letters were sent on firm letterhead that included the phrase “ATTORNEYS AT LAW,” and included Weltman Weinberg & Reis on the signature line along with a detachable slip indicating that payments should be sent directly to the firm. The CFPB argued that these representations gave the false impression that the debt was being reviewed by an attorney, despite the vast majority being created through an automated process. According to CFPB director Richard Cordray, “Debt collectors who misrepresent that a lawyer was involved in reviewing a consumer’s account are implying a level of authority and professional judgement that is just not true.” The CFPB also alleged that this misrepresentation was occurring when Weltman identified itself as a law firm while making collection calls.

Weltman Weinberg & Reis disagree that any of their practices are in violation of the FDCPA or Dodd-Frank. Scott Weltman, the law firm’s managing partner, was quoted in a legal publication as saying that the lawsuit “is the result of our firm’s refusal to be strong-armed into a consent order.” “We are a law firm that is legally allowed, under federal and state law, to provide collection and legal services,” Weltman said in a press release. “We are being truthful with consumers and factually accurate when we use our name and our company’s letterhead for proper debt collection activity.”

The National Creditors Bar Association (“NARCA”) has issued the following statement regarding the CFPB’s lawsuit against the Weltman firm: “The absence of clear rules by the Bureau that align with state bar and judiciary requirements creates inherent conflicts between what we are required to do as attorneys and what the CFPB believes the rules should be. Regulation of the practice of law through enforcement activities ineffectively addresses the improvement of communications between consumers and attorneys”.

At Messer Strickler, Ltd. we agree that the CFPB’s practice of rulemaking through litigation is unreasonable and unfair.  We commend the Weltman firm for taking a stand and defending their collection practices.  Contact Joe Messer with any questions or comments.

Federal District Court in Illinois Applies “Discovery Rule” to FDCPA Claim

On March 27, a Federal District Court in Illinois denied a motion to dismiss a Fair Debt Collection Practices Act (FDCPA) case in which the defendant argued that the lawsuit had been filed after the expiration of the FDCPA's one year statute of limitations.  In the case Skinner v. Midland Funding, LLC (Case No 16-4522, U.S. District Court, ND, IL) the Court held that the “Discovery Rule” applied and that the statute of limitations didn't begin to run until the plaintiff “discovered” the alleged violation, rather than from the date the activity which was alleged to have violated the FDCPA had occurred. A copy of the Memorandum and Order can be found here.

Plaintiff, Lisa Skinner, filed a complaint against Midland Funding, LLC and Midland Credit Management, Inc. on April 21, 2016. Skinner alleged that her debt had been sold to Midland Funding. Between March 2014 and January 2015 Midland charged interest on the debt. Beginning in February 2015, Midland stopped charging interest, but continued to charge for the interest that it had previously applied. Skinner alleged that Midland had violated the FDCPA by charging interest, and that it misrepresented the amount and character of the debt to credit reporting agency Equifax.

Midland argued that Skinner’s claims were barred by the FDCPA's one-year statute of limitations because the interest charges had been appliedin 2014 and early 2015. Skinner responded by arguing that she didn’t discover the FDCPA violations until August 2015, less than a year prior to filing of the suit.

Judge Alonso of the U.S. Court for the Northern District of Illinois found there was no precedent indicating that the discovery rule did not to apply to claims brought under the FDCPA. Judge Alonso found that although there is no explicit evidence of when Skinner became aware of the alleged inaccurate debt reporting, it could be inferred from an August, 2015 credit report that she became aware of the report then. Accordingly Judge Alonso denied the motion to dismiss by Midland Funding, LLC and Midland Credit Management.

Collection Law Firm Which Served Consumer Represented by Attorney Does Not Qualify For FDCPA Bona Fide Error Defense

A Federal District Court ruling on March 24, 2017 barred a debt collection law firm from raising the bona fide error defense when it served legal documents on a consumer whose attorney had not filed a notice of representation with the court.  The case is Holcomb v. Freedman Anselmo Lindberg, LLC (U.S. Dist. Ct. N.D. IL Case # 15 C 1129).  The consumer’s attorney had written a letter informing the debt collection law firm that he represented the consumer; appeared twice in court on behalf of the consumer; and was noted in the debt collection law firm’s notes as the consumer’s attorney. The court held that the debt collection law firm knew the consumer was represented by an attorney and intentionally sent the court filings to the consumer. 

This decision shows how important it is for collectors to have systems in place to flag the accounts of consumers represented by attorneys and to thereafter only communicate with those consumer's attorneys.  For more information or to discuss FDCPA compliance contact Joe Messer at (312) 334-3440 or jmesser@messerstrickler.com 

7th Circuit Rules Collector Misled Consumer About Time Barred Debt

On March 29, 2017, the Seventh Circuit Court of Appeals in Pantoja v. Portfolio Recovery Associates, LLC (case number 15‐1567) affirmed a ruling that debt collector Portfolio Recovery Associates had violated the Fair Debt Collection Practices Act in its efforts to collect an old consumer debt, finding the letter it sent to the debtor failed to clearly communicate that the debt was time barred (i.e., past the statute of limitations). 

In this precedential ruling, the three-judge appellate panel found that the lower court was correct to grant summary judgment in favor of Manuel Pantoja, who sued Portfolio Recovery Associates after receiving a collection letter seeking payment on a 20-year-old debt which Portfolio Recovery had purchased from Capital One.  The FDCPA prohibits collectors of consumer debts from using any “false, deceptive, or misleading representation to collect debts,” including those like the one incurred by Pantoja, which had a statute of limitations for recovery that had long since expired.

In January of 2015 an Illinois district judge ruled that the letter sent by the debt collector was deceptive or misleading because it did not tell Pantoja that the company could not sue on the time‐barred debt, and it didn’t inform the consumer that if he made or agreed to make a partial payment on the debt he could restart the clock on the expired statute of limitations.  The Seventh Circuit panel agreed. 

“This letter is an example of careful and deliberate ambiguity,” the panel ruled. “The carefully crafted language, chosen to obscure from the debtor that the law prohibits the collector from suing to collect this debt or even from threatening to do so, is the sort of misleading tactic the FDCPA prohibits.”  The only reason to use such “carefully ambiguous language,” the panel continued, “is the expectation that at least some unsophisticated debtors will misunderstand and will choose to pay on the ancient, time‐barred debts because they fear the consequences of not doing so.”

The panel also faulted Portfolio Recovery for not making it clear to Pantoja that if he agreed to settle the debt by paying a portion of it off  he would lose the protection of the statute of limitations. "We assume that a few consumer debtors, even if they know the debt can never be collected in a lawsuit, might choose to pay an asserted debt based on a sense of moral obligation," the panel stated. "But we believe the FDCPA prohibits a debt collector from luring debtors away from the shelter of the statute of limitations without providing an unambiguous warning that an unsophisticated consumer would understand."

Although the Seventh Circuit did not prescribe exact language for debt collectors to use when writing such letters, the panel did advise that the language should be "clear, accessible, and unambiguous to the unsophisticated consumer," a standard that it concluded that Portfolio Recovery had not met. 

In his lawsuit, Pantoja alleged that he had applied and was approved for a credit card from Capital One in 1993, but he never activated the account or used it for any purpose. Despite the lack of action, Capital One still assessed annual fees, late fees and activation fees against Pantoja’s account, which Pantoja never knew about and never paid.

Portfolio Recovery Associates purchased the debt from Capital One and unsuccessfully attempted in 1998 to collect the debt by phone. Portfolio Recovery renewed these efforts in April 2013, when it sent a collection letter to Pantoja claiming he owed $1,903.15. The letter, which offered several partial payment options that would settle the debt "for good,"  included the disclosure that "because of the age of your debt, we will not sue you for it and we will not report it to any credit reporting agency."

The debt collector claimed that this disclosure was enough to put Pantoja on notice that his debt had expired and he would not be brought to court. But the Seventh Circuit ruled that the language was deceptive and misleading because "it gives the impression that Portfolio Recovery has only chosen not to sue, not that it is legally barred from doing so." The panel noted that the "carefully worded sentence" appeared to have come from a 2012 consent decree between the Federal Trade Commission and debt collector LVNV Funding. Under this decree Portfolio Recovery was required to say “The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it.”  But while the second sentence was included in Portfolio Recovery's letter, the panel pointed out that the first wasn't, making its disclosure "vaguer" and ultimately misleading. 

The panel ruled: "The reader is left to wonder whether Portfolio has chosen to go easy on this old debt out of the goodness of its heart, or perhaps because it might be difficult to prove the debt, or perhaps for some other reason." 

This decision creates new law for the states covered by the 7th Circuit (i.e., Illinois, Indiana and Wisconsin) and makes clear how important it is for collectors to have a qualified attorney review their collection letters for compliance before putting them to use.  For further information or have your collection letters reviewed contact Joseph Messer of Messer Strickler, Ltd. at (312) 334-3440 or jmesser@messerstrickler.com

Northern District of Illinois Judge Allows Lawsuit Against Vitamin Manufacturer Nature’s Way to Proceed

An Illinois federal judge ruled Tuesday that a class action lawsuit filed against vitamin manufacturer Nature’s Way could proceed. Angel McDonnell alleges that she suffered damages from Nature’s Way misrepresentation of its product as “made in the USA” although the pills contain Vitamin C from primarily foreign sources. The case is McDonnell v. Nature’s Way Products LLC, case number 1:16-cv-05011, in U.S. District Court for the Northern District of Illinois.

District Judge Sara L. Ellis found McDonnell’s claim that she paid a premium for the “made in the USA” label because she is a “patriotic American” was enough to proceed on charges of violations of Illinois’s Consumer Fraud and Deceptive Business Practices Act. Although she did throw out the claim under Illinois’s Uniform Deceptive Trade Practices Act because the law requires proof of continuing harm. This is highly unlikely due to McDonnell now being aware of the alleged misrepresentation by Nature’s Way. Judge Ellis also tossed the claim by McDonnell that Nature’s Way misrepresented other products because she didn’t actually purchase any of those products.

The suit was filed in May after McDonnell says she became aware of the false advertising on Nature Way’s “Alive! Women’s Energy Supplement.” She had purchased the pills in 2013 and 2014, in part because of the “made in the USA” label. The complaint cites a 2015 survey by Consumer Reports that concludes nearly “80 percent of Americans are willing to pay more for American-made goods.” Nature’s Way moved to have the case dismissed in December, arguing that her allegations were overly broad and she suffered no actual damages. Judge Ellis found enough proof was provided by McDonnell, and she has agreed to let the case proceed with a jury trial.

California Fair Employment and Housing Council Rule on the "Consideration of Criminal History in Employment Decisions"

The California Fair Employment and Housing Council (FEHC) has finalized the "Consideration of Criminal History in Employment Decisions" regulation (the "Rule"). The Rule, which is scheduled to take effect on July 1, 2017, will impact employers and consumer reporting agencies. You can review the Rule on the Council's website

The Rule expands items employers are prohibited from considering. Existing prohibitions include:

  • an arrest or detention that did not result in conviction;
  • referral to or participation in a pre-trial or post-trial diversion program;
  • a conviction that has been judicially dismissed or ordered sealed, expunged or statutorily eradicated pursuant to law;
  • arrest, detention, processing, diversion, supervision, adjudication, or court disposition that occurred while a person was subject to the process and jurisdiction of a juvenile court law;
  • any non-felony conviction for possession of marijuana that is older than two years;


The Rule also states that if an employer is considering adverse action, prior to taking final adverse action (i.e. during pre-adverse action) the "employer must give the impacted individual notice of the disqualifying conviction and a reasonable opportunity to present evidence that the information is factually inaccurate." This requires the employer to list the specific criminal conviction(s) that was the disqualifying item(s), differing from the FCRA requirement. This notice is mandated regardless of whether the employer has a bright line assessment, in which there is a specific policy stating that a certain conviction history automatically disqualifies all candidates, or an individualized assessment, in which the employer considers the criminal background of a candidate in concert with all other aspects of the candidate. 

As noted above, the final rule is expected to take effect on July 1. In the meantime, FEHC has scheduled a hearing on March 30 on proposed regulations related to use of criminal background checks in the context of tenant screening.

U.S. Supreme Court To Decide If Debt Buyers Are Considered Debt Collectors Under the FDCPA

Are debt buyers which regularly attempt to collect the debts they purchase after the debts have fallen into default considered “debt collectors” subject to the Fair Debt Collection Practices Act?  On January 13, 2017, the U.S. Supreme Court took an appeal from the Fourth Circuit U.S. Court of Appeals which should answer this question.  The case is Henson v. Santander Consumer USA, Inc., S.C. Case  No. 16-349

Ricky Henson defaulted on a retail installment sale contract secured by a vehicle. A deficiency remained after Henson's creditor repossessed and sold his car and applied the sale proceeds to the balance. The creditor subsequently sold Henson's deficiency to Santander Consumer, USA, Inc., which attempted to collect the deficiency. Henson then sued Santander under the FDCPA. Santander filed a motion to dismiss arguing that it was not a debt collector under the FDCPA because it was collecting the debt on its own behalf, and not on behalf of a third party. Santander argued that because it owned the debt, under the FDCPA it was a "creditor" as opposed to a "debt collector." The U.S. District Court for the District of Maryland agreed with Santander and granted the motion.  Henson appealed.

The Fourth Circuit Court of Appeals Court of Appeals affirmed the district court's decision. The Court first considered the definitions of "creditor" and "debt collector." The Court held that an entity could be considered a "debt collectors" if: (a) the principal purpose of the entity is to collect debts; (2) the entity regularly collects or attempts to collect debts owed or due or asserted to be owed or due to another; and (3) the entity is a creditor that, in the process of collecting its own debts, uses a name other than its own. Henson never alleged that Santander's principal purpose was debt collection. Further, the record established that Santander had used its own name to collect, and therefore was not a creditor collecting under a different name. Accordingly, the Court noted that the only way Santander could be a "debt collector," was if it "regularly collect[ed] debts owed to another."

The court found the material distinction between a "debt collector" and a "creditor" to be whether the entity "regularly collects" on behalf of a third party. The court found Santander to be a creditor as opposed to a debt collector because it was collecting debts on its own behalf, and because its regular business included activities other than debt collection, including origination and non-default servicing activities.   

As a result of this decision the Fourth Circuit joined the appellate courts of the Ninth and Eleventh Circuits. Appellate courts in the Third, Fifth, Sixth, and Seventh Circuits, and the District of Columbia Court of Appeals hold opposing views, having found purchasers of defaulted debts to be "debt collectors" under the FDCPA. The Consumer Financial Protection Bureau and Federal Trade Commission also consider debt buyers are FDCPA regulated "debt collectors."

Hopefully the Supreme Court will resolve this conflict and bring much needed clarity to this area of the law.

7th Circuit Court of Appeals Rule Plaintiffs Fail to State FDCPA Claims Against Law Firms Which Brought Foreclosure Action in Violation of FHA Policy

On February 17, 2017 the 7th Circuit Court of Appeals ruled In Heng v. Heavner, Beyers & Mihlar, (Nos. 16-1668 et al. Cons.) that the District Court had not erred in dismissing for failure to state cause of action plaintiffs' Complaints alleging that two law firms had violated provisions of FDCPA by filing foreclosure actions in state court against plaintiffs under circumstances where the defaulted mortgages were backed by Federal Housing Authority (FHA) and the FHA did not authorized the law firm to bring foreclosure actions and had a policy prohibiting the firms from doing so in circumstances where plaintiffs had suffered financial hardship. Although the plaintiffs argued FDCPA violation occurred because the firms had not obtained the FDA's authorization to bring foreclosure actions, the 7th Circuit found that an FDCPA claim didn’t exist because the applicable FHA regulations did not require FHA authorization prior to bringing the foreclosure actions and did not prohibit the law firms from filing the foreclosure actions.

Messer Strickler Makes the Cover of Collection Advisor Magazine

Messer Strickler is excited to report that it was chosen to grace the January/February 2017 cover of Collection Advisor Magazine. MS was also featured in the “Law Firm Spotlight”, where MS partner, Nicole Strickler, discussed recent trends and compliance concerns in collection litigation.  Check out https://www.collectionadvisor.com/ to view a copy of the issue. And, for more information regarding the article, contact me at nstrickler@messerstrickler.com or by phone at (312) 334-3442

Are Debt Buyers Regulated As Debt Collectors Under the FDCPA? U.S. Supreme Court to Decide

The U.S. Supreme Court on Friday agreed to decide whether firms which buy debt for pennies on the dollar can be held liable in Fair Debt Collection Practices Act lawsuits brought by the debtors they target. The Court agreed to review a lower court's decision to dismiss a consumer class action lawsuit against Santander Consumer USA Holdings Inc (SC.N) over allegations it violated the Fair Debt Collection Practices Act. Debt buyers are a fast-growing segment of the multibillion-dollar debt collection industry. This case could have a major impact on these firms. The decision hinges on the definition of "creditor" and "debt collector" since in general creditors are not subject to the FDCPA.

Four Maryland residents who defaulted on car loans filed a proposed class action lawsuit against Santander in 2012 in federal court alleging violations of the debt collection law, such as misrepresenting debt loads and bypassing debtors' lawyers.  The debts had been sold to Santander, a vehicle-financing and lending company owned in part by a subsidiary of Banco Santander (SAN.MC), the euro zone's second-largest bank by market value.  The 4th U.S. Circuit Court of Appeals in Richmond, Virginia dismissed the lawsuit last March after determining the law applied only to debt collectors, and Santander was a creditor since it purchased the loans.

MS Obtains Unanimous Jury Verdict in Favor of Clients in FDCPA Case

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On April 8, 2015, a jury of seven sitting in the Southern District of California determined that a law firm and its asset purchaser client did not violate the Fair Debt Collection Practices Act, 15 U.S.C. 1692 et seq. (“FDCPA”) by including a request for 10% interest in the prayer for relief of a state court collection complaint.  In Hadsell v. Mandarich Law Group, LLP and CACH, LLC, a consumer filed an FDCPA claim against the two companies alleging a myriad of false claims, including that the companies had disclosed the debt to third parties and failed to abide by a request to cease and desist. After success on motions to dismiss and summary judgment, the case proceeded to a jury trial on one sole issue: whether a request for 10% statutory interest in the prayer for relief of a state court complaint violates the FDCPA where the credit card contract in question provided for an 8.9% interest rate. Like many consumer law claims against law firms, this complaint was spurred from a state court collection action on the debt. In late 2011, Mandarich Law Group, LLP filed a state court complaint on behalf of CACH, LLC to collect on a defaulted Bank of America account.  The state court complaint had two counts, breach of contract and account stated.  In the prayer for relief, the complaint requested that the court find that a 10% interest apply under the account stated theory.

Approximately 30 days after the state court suit was filed, the consumer filed suit in the U.S. District Court for the Southern District of California, claiming that the collection action, among other activity, violated the FDCPA. Plaintiff was represented by the San Diego law firms of Hyde & Swigart and Kazerouni Law Group.

The Plaintiff’s focal point during the jury trial was that the defendants intentionally violated FDCPA § 1692(f) and (f)(1) by requesting 10% interest when they were aware of the 8.9% interest rate that was set by the initial contract between the consumer and creditor.  Defendants argued, in contrast, that there was a valid factual basis to pursue the account stated claim and for the Court to assess 10% interest--- the default rate under the California Code---- based on the final charge-off statement on the account.  Further, Defendants’ argued that asking the state court to decide the question of interest was not an attempt to collect an authorized amount as the court had the legal ability to award it under the facts.  The jury unanimously agreed and found that no violation of the FDCPA occurred.

Lead trial counsel for Defendants was Nicole M. Strickler of MS&S. For more information on this case or any other FDCPA related issues, contact her at nstrickler@messerstrickler.com or at 312-334-3442.

FOURTH CIRCUIT HOLDS DEFAULT STATUS HAS NO BEARING ON DEBT COLLECTOR SHOWING

The Fourth Circuit recently held that a debt’s default status does not automatically qualify a debt purchaser as a “debt collector” subject to the Fair Debt Collection Practices Act (“FDCPA”).  In Henson v. Santander Consumer USA, Inc., four consumers alleged that a purchaser of their defaulted automobile loans violated the FDCPA by engaging in prohibited collection practices.  The district court granted the purchaser’s motion to dismiss on the ground that the complaint did not allege facts showing that the defendant qualified as a “debt collector” under the FDCPA.  The court concluded that the complaint only demonstrated that the defendant was a consumer finance company that was collecting debts on its own behalf as a creditor and that the FDCPA generally does not regulate creditors collecting debts owed themselves.  The Fourth Circuit affirmed. In arguing that the defendant constituted a debt collector, plaintiffs relied heavily on § 1692a(6)(F)(iii) of the FDCPA which excludes from the definition of debt collector “any person collecting or attempting to collect any debt . . . owed or due another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained.”  Plaintiffs maintained that because the provision excludes persons collecting debts not in default, the definition of debt collector must necessarily include persons collecting defaulted debt that they did not originate.  Essentially, plaintiffs argued that the default status of a debt determines whether a purchaser of debt, such as defendant, is a debt collector or a creditor.

The Fourth Circuit disagreed, concluding that the default status of a debt has no bearing on whether a person qualifies as a debt collector under the threshold definition set forth in § 1692a(6).  Such a determination is generally based on whether a person collects debt on behalf of others or for its own account, the main exception being when the “principal purpose” of the person’s business is to collect debt.  Section 1692a(6) defines a debt collector as (1) a person whose principal purpose is to collect debts; (2) a person who regularly collects debts owed to another; or (3) a person who collects its own debts, using a name other than its own.  Because the complaint did not allege that defendant’s principal business was to collect debt, instead alleging that defendant was a consumer finance company, nor allege that defendant was using a name other than its own in collecting the debts, defendant clearly did not fall within the first or third definitions of debt collector.  Moreover, because the debts that defendant was collecting were owed to it and not another, defendant was not a person collecting a debt on behalf of another so as to qualify as a debt collector under the second definition.

For more information on the Fourth Circuit decision or the FDCPA generally, contact Katherine Olson at (312) 334-3444 or kolson@messerstrickler.com.

Second Circuit Adopts FDCPA Least Sophisticated Consumer Safe Harbor Approach Established by the Seventh Circuit

In Avila, et al. v. Riexinger & Associates, LLC, et al., Case No. 15-1584(L), the Second Circuit Court of Appeals applied the least sophisticated consumer standard of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”) to conclude that a consumer cannot be expected to know that a total debt provided in a given statement continues to increase interest or other fees.  The Second Circuit held that when a debt collector issues a notice to a borrower that includes a statement of the complete amount of their debt, the debt collector must either accurately inform the consumer that the amount of the debt stated in the notice will increase over time based upon interest or other fees, or clearly state that the holder of the debt will accept payment of the amount set forth in full satisfaction of the debt if payment is made by a specified date. In Avila, a consumer brought a putative class action against a debt collector for violation of § 1692e of the FDCPA alleging that the practice of disclosing in a collection notice only the “current balance” of the amount owed amounts to “false, deceptive, or misleading” collection practices under the statute.  The consumer alleged that the notice led them to believe that the amount owed was not increasing.  The Second Circuit agreed and held that the least sophisticated consumer could believe that payment in full of the current balance provided in the notice would satisfy the entire debt owed, and that a failure to mention the ongoing accrual of interest and fees was misleading. Further, the Court held that “the FDCPA requires debt collectors, when they notify consumers of their account balance, to disclose that the balance may increase due to interest and fees.”

The Second Circuit also held that Section 1692e requires additional disclosures to ensure that consumers are not misled into thinking that simply paying the “current balance” as listed on the collection notice will always result in full satisfaction of the amount owed. Accordingly, the Second Circuit adopted the “safe harbor” approach established by the Seventh Circuit in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, & Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000).  The “safe harbor” doctrine allows a debt collector to prevent liability under Section 1692e “if the collection notice either accurately informs the consumer that the amount of the debt stated in the letter will increase over time, or clearly states that the holder of the debt will accept payment of the amount set forth in full satisfaction of the debt if payment is made by a specified date.”

Although the Second Circuit declined to establish the exact language of any disclosure that a debt collector must use to sidestep a possible FDCPA violation, the Court expressed that the language proposed in Miller, 214 F.3d, at 876, would certainly qualify a debt collector for treatment under the newly-created safe-harbor.

Debt collection agencies, or those that act as debt collectors, should pay particular attention to the language of Miller that the Second Circuit suggests will satisfy the newly-recognized safe harbor provision. For information on revising statements to consumers to comply with the safe harbor language, or for other information regarding this topic, contact Stephanie Strickler at 312-334-3465 or at sstrickler@messerstrickler.com.