Eastern District of New York Court Holds Debt Collection Letter Stating Settlement May Have Tax Consequences Does Not Violate the Fair Debt Collection Practices Act

By: Jonathan M. Robbin, Diana M. Eng, and Andrea Roberts

In Ceban v. Capital Management Services, L.P., Case No. 17-cv-4554 (E.D.N.Y. Jan. 17, 2018), the District Court held that the statement “[t]his settlement may have tax consequences” in a debt collection letter does not violate the Fair Debt Collection Practices Act (“FDCPA”).

On or about August 6, 2016, Plaintiff, Julian Ceban (“Plaintiff”) received a collection letter from defendant Capital Management Services, L.P. (“Defendant”) concerning his outstanding debt (the “Letter”). The letter stated, in relevant part, that Defendant was “authorized to accept less than the full balance due as settlement” and that Plaintiff could “contact [Defendant] to discuss a potential settlement.” Further, the letter indicated: “This settlement may have tax consequences. If you are uncertain of the tax consequences, consult a tax advisor.”

On August 2, 2017, Plaintiff commenced an action in the District Court for the Eastern District of New York alleging the Letter violated FDCPA Sections 1692d, 1692e, , 1692f and 1692k. Specifically, Plaintiff alleged the tax consequence language in the Letter rendered it false, deceptive and misleading. Defendant moved to dismiss the Complaint on the grounds that Plaintiff lacked standing to commence the action and failed to state a claim.

In granting the Motion to Dismiss the Court held, in part, that the Letter was not false, deceptive or misleading. See Avila v. Riexinger & Assoc’s, LLC, 817 F.3d 72, 75 (2d Cir. 2016) (quoting Clomon v. Jackson, 988 F.2d 131, 1318 (2d Cir. 1993). First, the Court noted, and Plaintiff agreed, the statement in the Letter that “this settlement may have tax consequences” was not false. See e.g. Taylor v. Fin. Recovery Servs., Inc., 252 F. Supp. 3d 344, 353 (S.D.N.Y. 2017). Second, the potential tax consequences language was not deceptive or misleading because Defendant’s “decision to alert Plaintiff to something he should consider without wading into the technicalities of an issue about which it has no expertise is perfectly in keeping with the FDCPA’s goal of enabling the consumer to ‘understand, make informed decisions about, and participate fully and meaningfully in the debt collection process.’” Quoting Tourgeman v. Collings Fin. Servs., Inc., 755 F.3d 1109, 1122 (9th Cir. 2014). The Court distinguished this language from Gammon v. GC Services Ltd. Partnership, 27 F.3d 1254 (7th Cir.1994). Unlike Gammon, where the language implied that the debt collector could use the IRS and state tax authorities to collect delinquent debts, here, the Letter merely mentioned that there may be tax consequences.

Plaintiff further argued that the Letter was misleading because Defendant did not quantify its settlement offer. Specifically, Plaintiff pointed out that if settlement was for less than $600, the creditor would not need to report the debt forgiveness to the IRS and the debtor would not face tax consequences. The Court rejected this argument, explaining that just because the Letter does not offer a specific dollar amount for which the debt collector will settle does not make it per se deceiving. See Golubeva v. GC Servc. Ltd. P’ship, 767 F. Supp. 2d 369, 373 (E.D.N.Y. 2010). In addition, the Court held that even if the statement in the Letter may not apply to certain individuals (i.e. those whose settlement is less than $600), that does not make the Letter deceptive or a lie. Smith v. Weltman, Weinberg & Reis Co., L.P.A., 2017 WL 2345600, at *3 (S.D. Ill. May 30, 2017). Moreover, the statement was not misleading because “even the least sophisticated consumer could not interpret may to mean will. See Remington v. Fin. Recovery Servs., Inc., 2017 WL 104994, at *3 (D. Conn. Mar. 15, 2017). Finally, the $600 threshold is relevant for creditors, not debtors because a debtor may need to report the canceled debt “regardless of the amount” whereas the creditor only needs to report forgiven debt if the canceled debt exceeds $600. Accordingly, the Letter “accurately refers to the possible tax consequences to plaintiff for settling his debt.”

The Eastern District of New York’s decision continues the trend in courts holding that language passively mentioning or advising of possible tax consequences does not violate the FDCPA.  In contrast, collection letters that are either factually incorrect or threaten the use of taxes and tax authority violate the FDCPA.

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