Category Archives: Debt Collection

ELEVENTH CIRCUIT COURT OF APPEALS CLARIFIES THE MEANING OF “DEBT COLLECTOR” UNDER THE FDCPA

Posted on by
Reply

By: Diana M. Eng and Joshua B. Alper

In Davidson v. Capital One Bank (USA), N.A., No. 14-14200 (11th Cir. Aug. 21, 2015), the Eleventh Circuit Court of Appeals held that, for purposes of the FDCPA, a person does not qualify as a “debt collector” if the person fails to satisfy the statutory definition even though the “debt on which [the person] seek[s] to collect was in default at the time they acquired it.” Id. slip op. at 12. In essence, plaintiffs cannot use other sections of the FDCPA in an attempt to enlarge the statutory definition.

Section 1692a(6) defines the term “debt collector” as “(1) any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or (2) who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” Id. at 7–8 (quoting § 1692a(6)). The first definition of “debt collector” has been denoted as the “principal purpose” definition while the latter is often termed the “regular collection” definition. Significantly, Section 1692a(6)(A)–(F) contains a list of persons that Congress intended to exclude from the application of the FDCPA. Id. at 8. Among those excluded categories are “any person collecting or attempting to collect any debt owed or due or asserted to be owed or due to another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.” Id. (quoting § 1692a(6)(F)(iii)).

In Davidson, HSBC commenced a state court action against Davidson to collect on a past due credit card account that was used for “personal, family or household purposes.” Id. at 3. During the pendency of the state court proceeding, the parties executed a settlement agreement where Mr. Davidson agreed to pay HSBC $500.00. Id. However, after Mr. Davidson failed to pay the agreed amount, the court entered a judgment in favor of HSBC. Id. Subsequently, Capital One acquired a significant portfolio of HSBC’s United States-based credit card accounts, many of which were previously delinquent, including Davidson’s account. Id. In an attempt to collect the debt now owed to Capital One, it commenced its own lawsuit against Mr. Davidson to collect on the past due account that was previously the subject of litigation between HSBC and Davidson. Id. Upon being sued for a second time involving the same account, Davidson commenced a putative class action in the District Court for the Northern District of Georgia against Capital One, alleging that Capital One’s state court action violated the FDCPA. Id. at 4.

Based on certain events that occurred in the District Court action, Davidson filed an Amended Complaint. Id. The Amended Complaint alleged that Capital One “regularly acquires delinquent and defaulted consumer debts that were originally owed to others and has attempted to collect such delinquent or defaulted debt in the regular course of its business, using the mails and telephone system.” Id. at 15. Capital One moved to dismiss the Amended Complaint and argued that the Plaintiff failed to “plausibly allege that Capital One was a ‘debt collector’ for purposes of the FDCPA, and [as such, the Amended Complaint should be dismissed because] only debt collectors are subject to liability under the” FDCPA. Id. at 4. Specifically, Capital One argued that the debt at issue was owed to it and not to another, which is a requirement under the “regular collection” definition. Id. In response, Davidson asserted that [c]ompanies that regularly purchase and collect defaulted consumer debts . . . are regulated by the” FDCPA. Id. at 5. The District Court agreed with Capital One and granted its motion to dismiss, stating that Davidson failed to satisfy either the “principal purpose” or “regular collection” definitions. Id.

In affirming the District Court, the Eleventh Circuit held that a bank (or any person or entity) does not qualify as a “debt collector,” unless a plaintiff plausibly alleges the defendant’s purported collection activities satisfy the “principal purpose” or “regular collection” definitions, “even where the consumer’s debt was in default at the time the bank acquired it.” Id. at 2 (emphasis added). Davidson argued that whether Capital One qualified as a “debt collector” depended on the default status of the debt on the date of acquisition, which, in turn, would lead to the conclusion that a person was either a “creditor” or a “debt collector”. Id. at 8. In support of this argument, Davidson relied on the exclusionary language contained in section 1692a(6)(F)(iii). Davidson reasoned that if the debtor was in default on the date the debt was acquired, the exclusionary language exempted the person or entity from the statutory definition of “debt collector,” and, by default, the person or entity would be a “creditor.” Id. at 9. By contrast, Davidson asserted that where the debt was already in default on the acquisition date, the exception did not apply, and the party was a “debt collector” governed by the FDCPA. Id.

In rejecting Davidson’s arguments, the Eleventh Circuit relied on the plain and unambiguous meaning of “debt collector” set forth in section 1692a(6) and the standards contained therein. Id. at 11. Otherwise, Davidson’s interpretation would result in a strained reading of the statutory framework. Id. As a result, the Eleventh Circuit rejected Davidson’s attempt “to bring entities that do not otherwise meet the definition of ‘debt collector’ within the ambit of the FDCPA” solely due to the default status of the debt on the date it was acquired. Id. at 11–12. Critically, the Eleventh Circuit cautioned that the language contained in section 1692a(6)(F)(iii) “is an exclusion; it is not a trap door.” Id. at 12.

Since the Amended Complaint did not plausibly allege the “principal purpose” or the “regular collection” definitions, the Eleventh Circuit affirmed the District Court’s decision. Specifically, the Amended Complaint only alleged that some part of Capital One’s business was devoted to debt collection. Id. at 16. Based on the “principal purpose” definition, such allegations are insufficient to state a claim. Id. Likewise, the “regular collection” definition requires that the person or entity collect a debt “owed or due another at the time of collection” and not “debts originally owed or due another” and now owed to a subsequent entity by virtue of an acquisition. Id. at 16–17 (emphasis in original). Since Capital One’s conduct only concerned collection efforts related to a debt Davidson owed to Capital One, and not to another party, the Amended Complaint failed to plausibly state facts that would entitle Davidson to relief under the regular collection definition. Id. Consequently, the Eleventh Circuit affirmed the District Court’s dismissal of the Amended Complaint. Id. at 18.

In light of this decision, entities that engage in debt collection activities can be reassured that there are limits on the application of the FDCPA. Not all collection activity is governed by the statutory framework. This decision deals a significant blow to plaintiffs who have been attempting to expand the reach of the FDCPA. Davidson also confirms that the plain meaning doctrine is strictly enforced and courts should not allow litigants to enlarge a statute’s intended application or purpose. Entities that engage in debt collection activities should be mindful of this decision if faced with FDCPA claims.

Pennsylvania Federal Court Holds that Envelope with Visible Bar Code That Could Be Scanned To Reveal Consumer’s Account Number May Violate the FDCPA

Posted on by
Reply

By Diana Eng and Joe Patry

In Kostik v. ARS National Services, 3:14-cv-02466, an opinion issued July 22, 2015, the United States District Court for the Middle District of Pennsylvania refused to enter judgment on the pleadings on a complaint where the sole allegation is that the debt collector violated the federal Fair Debt Collection Practices Act (“FDCPA”) because it had sent a letter with the consumer’s account number embedded in a bar code.

The court noted that the bar code was not physically printed on the envelope, but was visible through a clear plastic envelope window on the front of the envelope that exposed the letter’s return address.  When scanned, the bar code would reveal the borrower’s account number.  Because smart phones have apps to easily read “QR” (“quick response”) bar codes, the court reasoned that having the bar code visible by scanning made the account visible to the general public, which could make the consumer a victim of identity theft.

The debt collector argued that the bar code was a benign symbol, which would be exempt from FDCPA liability.  Further, it noted that anyone who scanned the consumer’s mail would be violating federal criminal statutes that prevent unauthorized access to items placed in the U.S. mail and that the FDCPA does not cover illegal actions by unrelated third parties.  In addition to federal criminal statutes, the debt collector noted that the Domestic Mail Manual specifically prohibits postal employees from reading or disclosing the contents of any items placed in the mail.

The court rejected these arguments, relying on prior cases that found that an envelope which had a printed account number on the outside of the envelope or an account number within the viewing area of clear plastic envelope windows violated the FDCPA.  (These cases are Douglass v. Convergent Outsourcing,765 F.3d 299 (3d Cir. 2014),  and Styer v. Prof’l Med. Mgmt., 2015 U.S. Dist. LEXIS 92349 (M.D. Pa. July 15, 2015).)

The Court reasoned that disclosing an account number raises privacy concerns for the consumer and is not benign because it could be used by a third party to harm the consumer.  Consequently, while leaving open the possibility that the barcode disclosure could ultimately be shown to be benign at a later stage in the case, the court found that the borrower’s complaint was sufficient to survive a motion for judgment on the pleadings.

In light of this decision, and as discussed in a prior post discussing the Douglass case, entities collecting consumer debt should avoid the use of QR codes on envelopes or within the viewing area of clear plastic envelope windows.  Revealing such information on envelopes or through clear plastic envelope windows may expose debt collectors to liability under the FDCPA.

Third Circuit Clarifies FDCPA Restrictions on Third-Party Communication

Posted on by
Reply

By: Joshua A. Huber

In Evankavitch v. Green Tree Servicing, LLC, the Third Circuit considered, as a matter of first impression, which party bears the burden with respect to alleged improper third-party communications under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. (“FDCPA”). Evankavitch v. Green Tree Servicing, LLC, —F.3d—, 2015 WL 4174441, at *1 (3d Cir. Jul. 13, 2015). Put differently, the Court was asked to determine whether the debt collector must prove that allegedly improper third-party communications fall within § 1692b’s exception, or whether it is incumbent on the debtor to disprove the applicability of that exception as an element of his claim.   Id.

Under the FDCPA, a debt collector is liable to a consumer for contacting third parties in pursuit of that consumer’s debt unless the communication falls under a statutory exception. One such exception permits communication with a third party “for the purpose of acquiring location information about the consumer” but, even then, prohibits more than one such contact “unless the debt collector reasonably believes that the earlier response of such person is erroneous or incomplete and that such person now has correct or complete location information.” 15 U.S.C. § 1692b.

The Third Circuit ultimately determined that the burden falls on the debt collector. Evankavitch, 2015 WL 4174441, at *10. Noting the “‘longstanding convention’ that a party seeking shelter in an exception . . . has the burden to prove it,” the Court held that Green Tree was required to prove that any alleged third party communications were only for purposes of obtaining location information about Evankavitch and therefore within the narrow exception to the FDCPA’s general prohibition on communications with third parties. Id. at *5.

New York Adopts More Stringent Debt Collection Regulations

Posted on by
Reply

By:  Diana M. Eng and Jennifer L. Neuner

The New York State Department of Financial Services recently issued new regulations requiring debt collectors to provide additional disclosures to consumers. The new regulations (see 23 NYCRR § 1) are intended to provide protections beyond what is currently required by the Fair Debt Collection Practices Act (“FDCPA”). These new debt collection regulations will become effective in March 2015, except that provisions regarding required disclosures for charged-off debt[1] and substantiation of a charged-off debt[2] will become effective in August 2015.[3]

Required Initial Disclosures

The regulations require enhanced initial disclosures when a new debt collector first contacts an alleged debtor. The newly mandated disclosures include specific notices that are not formally required by the FDCPA. Specifically, pursuant to 23 NYCRR § 1.2, the debt collector must, within 5 days of the initial communication with the consumer, provide “clear and conspicuous written notification” that 1) debt collectors are prohibited from engaging in “abusive, deceptive, and unfair debt collection efforts” under the FDCPA; and 2) a written statement that if a creditor or debt collector receives a money judgment against the consumer in court, state and federal laws may prevent certain types of income from being taken to pay the debt, including, among others, social security, public assistance, unemployment and disability benefits, pensions and veterans’ benefits.

Similarly, with respect to debts that have been charged-off, the debt collector must, within 5 days of the initial communication with the consumer, provide a “clear and conspicuous” written notification about the debt, including 1) the name of the original creditor; and 2) an itemized accounting of the charged-off debt, including the amount owed as of charge-off, total amount paid on the debt since the charge-off and the total post charge-off interest, charges and fees. 23 NYCRR § 1.2(b).

Required Disclosures Regarding Collection of So-called “Zombie Debts”

The regulations also require disclosures regarding the collection of debts for which the statute of limitations has already expired. 23 NYCRR § 1.3. Further, the debt collector must maintain reasonable procedures to determine the applicable statute of limitations of a debt and to determine whether the statute of limitations has expired. The FDCPA does not contain such requirements.

Under the New York regulation, if a debt collector “knows or has reason to know” that the statute of limitations for a debt may have expired, the debt collector must provide a “clear and conspicuous” notification to the consumer that 1) the debt collector believes that the statute of limitations may be expired; 2) suing on a debt for which the statute of limitations has expired is a violation of the FDCPA, and, if the consumer is sued, the consumer may present evidence to the court that the statute of limitations has run; 3) the consumer is not required to provide the debt collector with an admission of any kind that the debt is still owed, or to waive the statute of limitations; and 4) a partial payment of the debt, or other admission that the debt is owed, may restart the statute of limitations. 23 NYCRR § 1.3(a)-(b). Further, the regulation provides specific language that would comply with the notice requirement.

Requirements Regarding “Substantiation” of the Debt

The regulations also contain important changes regarding a debt collector’s obligations when a consumer disputes the validity of a charged-off debt. 23 NYCRR § 1.4. Currently, under the FDCPA, consumers must dispute the debt in writing and request verification of the debt within 30 days of the first collection attempt. See 15 U.S.C. § 1692g. Under the new New York regulations, consumers may request “substantiation” of the debt at any time during the collections process, and may do so orally. Once a request is received, the debt collector must provide the consumer written substantiation of a charged-off debt within 60 days of receiving the request. 23 NYCRR § 1.4(b). The debt collector must also cease collection until written substantiation has been provided to the consumer. The regulation further lists the various forms of documentation required to substantiate the debt.

In addition, the New York regulation includes a document retention requirement related to a request for substantiation of a charged-off debt under 23 NYCRR § 1.4. 23 NYCRR § 1.4(d). Specifically, debt collectors must retain evidence of the consumer’s request for substantiation and all documents provided in response to such request until the charged-off debt is discharged, sold or transferred.[4]

Requirements for Agreements to Settle a Debt

The regulations also include procedures for documenting any agreement between the consumer and the debt collector to satisfy or otherwise settle the debt. 23 NYCRR § 1.5. The FDCPA does not regulate communications from a debt collector regarding settlement. Under the new regulations, a debt collector must, within 5 business days of agreeing to a debt payment schedule or other agreement to settle the debt, provide the consumer with 1) written confirmation of the debt payment schedule or agreement, including all material terms and conditions relating to the agreement; and 2) a notice stating that if a creditor or debt collector receives a money judgment against the consumer in court, state and federal laws prevent certain types of income from being taken to satisfy the debt.[5] The debt collector is also required to provide the consumer with 1) an accounting of the debt on at least a quarterly basis while the consumer is making scheduled payments; and 2) a written confirmation of the satisfaction of the debt, along with the name of the original creditor and the account number, within 20 days of receipt of the final payment.[6] 23 NYCRR § 1.5.

Debt collection companies that operate in New York should review their current policies and take steps to comply with the new regulations in advance of the 2015 effective dates. Specifically, debt collectors should ensure that initial disclosures satisfy the new regulations, that disclosures inform consumers regarding the potential expiration of the statute of limitations and that procedures are in place to substantiate the debt upon a debtor’s request.

[1] 23 NYCRR § 1.2(b).
[2] 23 NYCRR § 1.4.
[3] 23 NYCRR § 1.7.
[4] Debt collectors who transfer a charged-off debt should consult the CFPB rules regarding mortgage servicing transfers to the extent applicable.
[5] This notice provision is identical to the statement required in the initial disclosures (23 NYCRR § 1.2) noted above.
[6] 23 NYCRR § 1.6 provides that, after mailing the initial disclosures required by Section § 1.2, a debt collector and consumer may communicate via email, if the consumer voluntarily provides an email address and consents to receiving email correspondence regarding a specific debt.

Third Circuit Holds that Envelope Revealing Consumer’s Account Number Violates the FDCPA

Posted on by
1

By:      Daniel A. Cozzi and Diana M. Eng

The Third Circuit Court of Appeals recently held that an envelope revealing a consumer’s account number through a clear plastic window constitutes a violation of the Fair Debt Collection Practices Act (“FDCPA”). In doing so, the Third Circuit reversed the District Court of the Eastern District of Pennsylvania’s holding that the disclosure of a consumer’s account number is not a “benign” disclosure and thus constitutes a violation of § 1692f(8) of the FDCPA.

In Douglas v. Convergent, the Third Circuit addressed the issue of whether “the disclosure of a consumer’s account number on the face of a debt collector’s envelope violates § 1692f(8) of the Fair Debt Collection Practices Act.” Douglass v. Convergent Outsourcing, No. 13-3588, 2014 WL 4235570 (3d Cir. Aug. 28, 2014); 15 U.S.C. § 1692 et seq.

The FDCPA prohibits debt collectors from using “unfair or unconscionable means to collect or attempt to collect any debt.” 15 U.S.C. § 1692f. Further, Section 1692f(8) specifically limits the language that debt collectors may place on envelopes sent to consumers:

Using any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails or by telegram, except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business. (Emphasis added).

On May 16, 2011, Plaintiff/Appellant Courtney Douglass (“Plaintiff” or “Douglass”) received a debt collection letter from Convergent Outsourcing (“Convergent”) regarding the collection of a debt that Douglass allegedly owed to T-Mobile USA. The name Convergent, followed by Convergent’s account number for the alleged debt were visible on the letter, and through the clear plastic window of the envelope. In addition, the “quick response” (“QR”) code, which, when scanned, reveals the name Convergent, the account number and the monetary amount of Douglass’s alleged debt, was also visible through the envelope window.[1]

Douglass filed a lawsuit in the United Stated District Court for the Eastern District of Pennsylvania, alleging that Convergent violated the FDCPA by including a QR code and account number in a location visible through the clear plastic window of a collection letter sent to Douglass. Convergent moved for summary judgment, arguing that displaying such information in the window of the envelope was benign. The District Court granted summary judgment in favor of Defendant Convergent under a “benign language” exception. Douglass v. Convergent Outsourcing, 963 F. Supp. 2d 440 (E.D. Pa., 2013). The “benign language” exception to Section 1692f(8) is a judicially created exception to Section 1692f(8), which allows a court to forgive a technical violation of Section 1692f(8) if the violation is benign in nature. The District Court reasoned that although Convergent may have technically violated § 1692f(8), a strict interpretation of the statute would contradict Congress’ true intent.

To reach this conclusion, the District Court cited to Waldron v. Professional Medical Management, which held that a literal application of § 1692(8) “would produce absurd results.” No. 12-1863, 2013 WL 978933 (E.D. Pa., March 13, 2013). The District Court and the Waldron court relied on similar applications of the “benign language” exception to Section 1692f(8) in the Fifth Circuit, Eighth Circuit, District of Connecticut and the Central District of California.[2] Ultimately, the District Court held that “the mere presence of an account number does not show that the communication is related to a debt collection and “[i]t also could not reasonably be said to ‘humiliate, threaten, or manipulate’ the debtor.” Douglass v. Convergent Outsourcing, 963 F. Supp. 2d at 446. Further, the District Court found that “[s]ince the ‘random series of letters and numbers’ revealed through the QR code does not ‘clearly refer to a debt,’ or ‘tend to humiliate, threaten, or manipulate’” the consumer, Convergent did not violate the FDCPA. Id. at 448. Accordingly, the District Court granted summary judgment in favor of Convergent.

Douglass appealed the order granting summary judgment. On appeal, Douglass argued that an unambiguous reading of § 1692(8) explicitly bars the disclosure of account numbers. Douglass v. Convergent Outsourcing, 13-3588, 2014 WL 4235570 (3d Cir. Aug. 28, 2014). Convergent maintained that a plain reading of § 1692(8) would lead to absurd results and thus its disclosure of Douglass’ account number is allowed under a “benign language” exception. Id. at *3. In response, Douglass argued that, even if a “benign language” exception applies, the disclosure of an account number is never benign. Id.

The Third Circuit found that “the plain language of § 1692f(8) does not permit Convergent’s envelope to display an account number” but declined to evaluate whether Section 1692f(8) allows for a “benign language” exception. Instead, the Third Circuit determined that a debt collector’s account number is never benign. Id. at *4. Specifically, the Third Circuit held that “[t]he account number is a core piece of information pertaining to Douglass’s status as a debtor and Convergent’s debt collection effort. Disclosed to the public, it could be used to expose her financial predicament. Because Convergent’s disclosure implicates core privacy concerns, it cannot be deemed benign.” Id. Based on these considerations, the Third Circuit found that “Douglass’s account number is impermissible language or symbols under § 1692f(8)” in violation of the FDCPA. Id. at *6.

On September 10, 2014, Convergent filed a Petition for Rehearing En Banc or Panel Rehearing.     

In light of this decision, entities collecting consumer debt should avoid the use of account numbers and/or QR codes on envelopes or within the viewing area of clear plastic envelope windows. Revealing such information on envelopes or through clear plastic envelope windows may expose debt collectors to liability under the FDCPA.

[1] A “QR” Code is a barcode like image which can be read from a Cell Phone.

[2] Strand v. Diversified Collection Serv., Inc., 380 F.3d 316, 318–19 (8th Cir. 2008); Goswami v. Am. Collections Enter., Inc., 377 F.3d 488, 494 (5th Cir. 2004); Lindbergh v. Transworld Sys., Inc., 846 F. Supp. 175, 180 & n. 27 (D. Conn. 1994); Masuda v. Thomas Richards & Co., 759 F. Supp. 1456, 1466 (C.D. Cal. 1991).

Second Circuit Holds that Liens Incident to Property Ownership are not “Debt” Under the FDCPA

Posted on by
Reply

By: Shane Biffar

A recent Second Circuit Court of Appeals decision ruled that mandatory water and sewer charges are not subject to the Fair Debt Collection Practices Act (“FDCPA”). In Boyd v. J.E. Robert Co., Inc., 2014 U.S. App. LEXIS 16620 (2d Cir. Aug. 27, 2014), the Second Circuit affirmed a New York district court’s holding that liens for mandatory water and sewer charges, which are imposed as an incident to property ownership, do not involve a “debt” as that term is defined in the FDCPA and therefore are not subject to the statute.

In Boyd, the defendants purchased water and sewer lien certificates from the City of New York before commencing foreclosure actions on the plaintiffs’ properties. The putative class action plaintiffs were property owners who alleged that the defendants violated the FDCPA by obtaining unauthorized attorneys’ fees and costs in connection with the foreclosure actions. The district court granted summary judgment for defendants and dismissed the FDCPA claims on the basis that, inter alia, the liens did not involve a “debt” as defined by the FDCPA.

On appeal, the plaintiffs argued that the district court erred in dismissing their FDCPA claims. The Second Circuit rejected plaintiffs’ argument and denied FDCPA recovery, noting that any violation of the FDCPA must occur in connection with the collection of a “debt,” which is defined as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which [] the subject of the transaction [is] primarily for personal, family, or household purposes . . . .” (emphasis added).

In its analysis, the Second Circuit cited its prior decision in Beggs v. Rossi, 145 F.3d 511 (2d Cir. 1998), which held that “municipal taxes levied automatically in connection with ownership of personal property do not involve a ‘transaction’ as that term is understood under the FDCPA and, accordingly, are not “debt” for purposes of the FDCPA.” Applying this reasoning, the Court similarly concluded that water and sewer charges, like property taxes, “are levied, in some amount, as an incident to property ownership in New York” and therefore “do not involve ‘debt’ under the FDCPA.”

Further, the Second Circuit distinguished the Third Circuit’s holding in Piper v. Portnoff Law Assoc., Ltd., 396 F.3d 227 (3d Cir. 2005), which held that certain water and municipal charges are subject to the FDCPA. Specifically, the Second Circuit highlighted that the water and sewer services in Piper were first requested by the property owner before they could be charged by the City. Accordingly, the payment obligation in Piper arguably arose out of the “transaction” of requesting water services and therefore constituted “debt” within the meaning of the FDCPA.

Third Circuit Holds Debtors Need Not Dispute Debt Before Filing Suit Under FDCPA

Posted on by
Reply

By: Louise Bowes Marencik

In McLaughlin v. Phelan Hallinan & Schmeig, LLP, the United States Court of Appeals for the Third Circuit recently held that debtors are not required to notify a debt collector in writing regarding a disputed debt as a prerequisite to filing a lawsuit under § 1692g of the Fair Debt Collection Practices Act (“FDCPA”).  2014 U.S. App. LEXIS 12028 (3d. Cir. June 26, 2014).

Section 1692g(b) of the FDCPA provides that if a “consumer notifies the debt collector in writing . . . that the debt, or any portion of the debt, is disputed,” the debt collector must “cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt . . . and a copy of such verification…is mailed to the consumer by the debt collector.”

In McLaughlin, the borrower entered into a mortgage with CitiMortgage in October 2005, and subsequently became delinquent on his payments based on what was deemed to be a lender error. As a result of the default, CitiMortgage referred the account to Phelan Hallinan & Shmieg, LLP (“Phelan”). Phelan sent the borrower a notice dated June 7, 2010, which included information concerning the amount of debt owed as of May 18, 2010, including attorney’s fees and title search fees.  In lieu of disputing the debt, McLaughlin filed a purported class action complaint alleging various violations of the FDCPA, including a claim that Phelan had violated § 1692e by misrepresenting that they had performed legal services in connection with the loan prior to May 18, 2010. The District Court dismissed the complaint without prejudice, holding that McLaughlin could not bring suit under the FDCPA without first disputing the debt pursuant to the FDCPA’s debt validation procedure.

On appeal, the Third Circuit reversed the District Court’s order and held that disputing the debt under section 1692g is not a prerequisite to filing suit under the FDCPA. The Court held, “The statute’s text provides no indication that Congress intended to require debtors to dispute their debts under § 1692(g) before filing suit under § 1692e, and in fact, the statutory language suggests the opposite.” The Court emphasized that the FDCPA is a “remedial statute,” which requires application of the “least sophisticated debtor” standard to communications between lenders and debtors. The Court also cautioned that requiring debtors to dispute the debt prior to filing suit under the FDCPA would allow debt collectors to avoid liability for misleading statements on the sole basis that the debtor did not dispute the debt, which would frustrate the FDCPA’s purpose of ensuring that debt collectors act responsibly. Thus, a debtor’s failure to dispute the debt pursuant to § 1692g will not likely be a basis for dismissal of claims brought under § 1692e of the FDCPA in the Third Circuit.

Eleventh Circuit Defines “Called Party” for Purposes of the TCPA

Posted on by
Reply

By: Manuel S. Hiraldo

In recent opinions, the United States Court of Appeal for the Eleventh Circuit addressed an issue of first impression in Osorio v. State Farm Bank, F.S.B., 746 F.3d 1242 (11th Cir. 2014) (issued on March 28, 2014) and Breslow v. Wells Fargo Bank, N.A., Case No. 1:11-cv-22681 (11th Cir. 2014) (issued on June 9, 2014). In both cases, the Eleventh Circuit held that the term “called party” as used in the Telephone Consumer Protection Act, 47 U.S.C. § 227, refers to the subscriber of a cellular telephone number, and not the individual whom the caller intended to call. Prior to these opinions, the only federal appellate court that had ruled on the issue was the Seventh Circuit. See Soppet v. Enhanced Recovery Co., LLC, 679 F.3d 637, 640 (7th Cir. 2012). In Osorio and Breslow, the Eleventh Circuit followed the Seventh Circuit’s reasoning that the TCPA consistently uses the term “called party” to mean the subscriber of the telephone number.

In part, the TCPA makes it unlawful for any person

(A) to make any call…using any automatic telephone dialing system or an artificial or prerecorded voice—
. . .
(iii) to any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call . . . .

47 U.S.C. § 227(b)(1) (emphasis supplied).

In Osorio, Clara Betancourt provided the cellular telephone number of Fredy Osorio in connection with auto insurance and credit card applications. 746 F.3d at 1242. Betancourt subsequently defaulted on her credit card payments, which caused State Farm to attempt to contact her on the cell number provided by Betancourt. Osorio, the subscriber of the number provided by Betancourt to State Farm, sued State Farm for violating the TCPA as a result of State Farm’s use of an autodialer to contact Osorio’s cellular telephone without his consent. On summary judgment, State Farm argued that the “called party” should be interpreted to be the “intended recipient” (Betancourt) under the TCPA. “This would mean that Betancourt, as the intended recipient of State Farm’s calls, could consent to Osorio receiving the calls…” Id. at 1250. In rejecting Wells Fargo’s argument, the Eleventh Circuit held that the “called party” referred to under section 227(b)(1)(A) is not the “intended recipient.” Id.

In Breslow, Wells Fargo made calls to a cellular phone assigned to Lynn Breslow using an autodialer. Case No. 1:11-cv-22681. Breslow did not consent to Wells Fargo’s calls and she sued for alleged violations of the TCPA. Wells Fargo believed it was contacting a customer who had previously provided the number as contact number. In an affidavit filed in support of a motion for summary judgment, Wells Fargo stated that it “was unaware that the cell phone number was no longer assigned to the former customer and that the former customer never revoked his consent. . . .” Wells Fargo argued that the intended recipient of the calls (the former customer) was the “called party,” and it had therefore not violated the TCPA, because it had consent from the former customer. In rejecting this argument, and consistent with its ruling in Osorio, the Eleventh Circuit held that the “called party” for purposes of the TCPA “means the subscriber to the cell phone service.”

In all, these cases are consistent with prior interpretations of the TCPA by the Eleventh Circuit as a strict-liability statute that imposes a $500.00 per call penalty for violations, and places the burden on callers to ensure that they do not violate the TCPA. Financial institutions that utilize autodialers to contact their customers should be aware of these recent cases and this developing area of the law. Pursuant to Osorio and Breslow, an error attributable to the customer may not be a defense.

Seventh Circuit FDCPA Ruling May Foreshadow CFPB Rule on Time-Barred Debts

Posted on by
Reply

By Michael Meehan

The Seventh Circuit Court of Appeals recently issued a consolidated opinion, McMahon v. LVNV, 744 F.3d 1010 (7th Cir. 2014), involving time-barred debts under the Fair Debt Collection Practices Act (FDCPA). The opinion addressed two cases on appeal, McMahon v. LVNV, 2012 U.S. Dist. LEXIS 92655 (N.D. Ill., July 5, 2012), and Delgado v. Capital Management Services, 2013 U.S. Dist. LEXIS 40796 (C.D. Ill. March 22, 2013). Each case involved a communication from a debt collector that contained a limited-time offer to settle a time-barred debt. In each case, the plaintiff contended that the letter constituted a “false, deceptive or misleading representation” by the debt collector because an unsophisticated consumer could be led to believe the time-barred debt was enforceable in court.

Although an issue of first impression in the Seventh Circuit, this issue had been heard previously by the Third and Eighth Circuits, with each court holding that, absent litigation or a threat of litigation, such a dunning letter would not violate the FDCPA. 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). However, the Seventh Circuit expressly disagreed with the Third and Eighth Circuits, holding that actual or threatened litigation is not necessary to state a valid claim on this fact pattern. The court reasoned that the FDCPA prohibits false representation of the “character, amount or legal status” of the debt (§ 1692e(2)A)) and prohibits a debt collector from threatening to take any action that cannot legally be taken (§ 1692e(5)). Under this standard, an unsophisticated consumer could believe that a letter offering to settle a debt implies that the debt is legally enforceable. Thus, such a communication from a debt collector could mislead an unsophisticated consumer into believing that the debt is legally enforceable and could therefore constitute a violation of the FDCPA, regardless of whether the letter actually threatens litigation. Notably, however, the court did not hold that it is automatically improper to seek re-payment of time-barred debts and further hinted that a general disclaimer within the dunning letter could have resolved any issue.

The McMahon decision creates a circuit split that may eventually warrant U.S. Supreme Court review. But equally important to the holding in McMahon was the position taken by the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) in an amicus brief filed with the Seventh Circuit. See Brief of Amici Curiae Federal Trade Commission and Consumer Financial Protection Bureau Supporting Affirmance, No 13-2030, Seventh Circuit. In the brief, the CFPB takes the position that actual or threatened litigation is not necessary to demonstrate a potential FDCPA violation, and asserts that, while attempting to collect a time-barred debt does not, per se, violate the FDCPA, in many circumstances a debt collector must disclose that the collector cannot sue to collect the debt and must inform a consumer that providing a partial payment would revive the collector’s ability to sue to collect the balance. The Seventh Circuit gave considerable weight to the amicus brief, calling it a “well-reasoned position” and stating that it was inclined to rely upon the agencies’ “empirical research and expertise.”

Foreshadowing of New FDCPA Rule?

The CFPB has taken an unwavering position on the time-barred debts issue, and in March 2014, it filed an additional amicus brief on this same issue in a Sixth Circuit case, Buchanon v. Northland Group, Inc. See Brief of Amici Curiae Federal Trade Commission and Consumer Financial Protection Bureau Supporting Reversal, No 13-2523, Sixth Circuit. The Bureau is currently reviewing the federal rules and regulations governing debt collection, consistent with its authority under Dodd-Frank, and comments to its November 2013 advanced notice of proposed rulemaking (ANPR) closed in February 2014. The ANPR strongly hints that the CFPB is considering some form of required disclosure from a debt collector to a consumer when collecting on a debt that is time-barred, although the nature and scope of such disclosure is unclear. The CFPB’s position in the amicus briefs could foreshadow a future standard regarding time-barred debts under the FDCPA, and it is likely the CFPB’s position will find its way into an NPR expected to be issued in the coming months.

Impact on Loan Servicers

It is well-established that mortgage servicers are not considered debt collectors under the FDCPA, unless the loan being serviced was in default at the time the mortgage servicer acquired servicing rights. See 15 U.S.C. § 1692a(6)(f)(ii)-(iii). However, in the aftermath of the credit crisis, and in a climate where the servicing rights of delinquent loans are regularly transferred, FDCPA compliance is an increasingly important issue for mortgage servicers. When a servicer acquires servicing rights of a delinquent loan, its communications with a consumer relating to that loan are governed by the FDCPA and its promulgating regulations. Servicers acquiring a new portfolio of loans often need to contend with statute of limitations issues relating to delinquent loans, particularly as we move further from the heart of the credit crisis.

While mortgage servicers await the NPR, they should take note of the CFPB’s position in McMahon and Buchanan and the potential direction of FDCPA regulation in this area. Mortgage servicers should examine their FDCPA protocols and methods of communication with consumers to ensure compliance with this new interpretation and the potential new standard under the FDCPA.

Will Florida Courts Enforce Mortgage Statute of Limitations Waivers?

Posted on by
Reply

By: Manuel S. Hiraldo

In 2006, nationwide foreclosure filings began a significant upward trend that peaked in 2010 with approximately 2.9 million filings that year. [i] For various reasons, some actions filed since 2006 have been dismissed by courts. The re-filing of these dismissed lawsuits may result in the raising of statute of limitations defenses by debtors.  In Florida, the five (5) year statute of limitations for foreclosure actions begins to run when the mortgage loan is accelerated.[ii]. The filing of a foreclosure lawsuit constitutes acceleration of the loan.[iii] Typically, therefore, it is the filing of a foreclosure proceeding that will trigger the five (5) year statute of limitations.

Whether a subsequent foreclosure action filed more than five (5) years after the first proceeding is barred by the statute of limitations is an issue that has not yet been decided by courts in Florida. At least one Florida federal court has found that the voluntary dismissal of an earlier foreclosure action did not bar a subsequent foreclosure action based on defaults on subsequent payments that were less than five years old.[iv] Under this holding, a plaintiff would be able to file suit more than five years after the first action, but would only be entitled to make a claim for payments owed by the debtor that were less than five years old from the date of filing.[v]

The Fourth District Court of Appeal in Florida has held that the dismissal of the first foreclosure lawsuit results in de-acceleration of the loan.[vi] Arguably, under this line of reasoning, de-acceleration of the loan would result in tolling the running of the statute of limitations, since the plaintiff would no longer be demanding payment owed under the loan. This would permit the plaintiff to re-file suit as long as dismissal of the first action did not occur more than five years after the initial filing.

One lesser-known approach for addressing a statute of limitations defense asserted in response to a re-filed foreclosure action is the statute of limitations waiver found in some mortgages. An example of such a waiver is as follows:

26. Waiver of Statute of Limitations. The pleading of the statute of limitations as a defense to enforcement of this Security Instrument, or any and all obligations referred to herein or secured hereby, is hereby waived to the fullest extent permitted by applicable law.

States that have upheld similar statute of limitations waivers, including California[vii], New Jersey[viii], Vermont[ix], and Montana[x] have reasoned that the statute of limitations confers a personal right which is not protected by public policy and which may be waived.[xi] States that have found statute of limitations waivers unenforceable include New York[xii], Texas[xiii], Ohio[xiv], and Arkansas[xv]. In these states, statute of limitations waivers are seen as contrary to public policy.[xvi] Florida courts have not yet addressed statute of limitations waivers found in mortgages. Further, case law regarding the enforceability of statute of limitations waivers in general is limited.

At least one Florida appellate court has upheld a written statute of limitations agreement.[xvii] This was done by the First District Court of Appeal in the case of Pritchett v. Kerr, 354 So. 2d 972 (Fla. 1st 1978). In Pritchett, the plaintiff brought a medical malpractice claim in federal court.[xviii] The defendant failed to timely answer the complaint.[xix] Subsequently, the plaintiff and defendant entered into a stipulation pursuant to which the plaintiff agreed to waive the right to seek a default.[xx] In return, the defendant agreed waived his right to assert a statute of limitations defense in the event of dismissal of the case by the federal court.[xxi]

The federal court dismissed the suit and the plaintiff re-filed the case in state court.[xxii]In response to the state court action, the defendant moved to dismiss on the basis of the running of the statute of limitations, which the trial court granted.[xxiii] On appeal, the First DCA reversed the trial court’s ruling, holding that the lower court erred in failing to give effect to the agreement and stipulation of the parties, because “[t]he statute of limitations is an affirmative defense which can be waived.”[xxiv] The Pritchett court did not raise any public policy concerns in its analysis.[xxv] Rather, the court noted that the defendant had obtained the benefit of the plaintiff’s performance and was therefore clearly bound by the terms of their agreement.[xxvi]

While authority on whether statute of limitations waivers are enforceable is lacking in Florida, cases analyzing the enforceability of mortgage jury trial waivers are instructive, particularly where the right to a jury trial is constitutionally protected, unlike the right to assert the statute of limitations as a defense. Florida courts that have analyzed jury trial waivers have unanimously approved and enforced such waivers.[xxvii]

In all, while limited, case law in Florida supports the enforceability of statute of limitations waivers contained in mortgages, and suggests that Florida will ultimately join other jurisdictions in enforcement of such waivers.  The approval of Florida courts with respect to mortgage jury trial waivers further lends support to this position.  As previously noted, foreclosure filings peaked in 2010.  This would make 2015 the peak year for statute of limitations issues as a result of the five-year limitations period.  As these issues make their way to the appellate courts, we should see opinions enforcing limitations waivers, or at least delineating their applicability in the foreclosure context.

[i] RealtyTrac Staff, 1.4 Million U.S. Properties with Foreclosure Filings in 2013 Down 26 Percent to Lowest Annual Total Since 2007, (January 12, 2014).

[ii] Pursuant to Florida Statute section 95.11(2)(c), the five-year statute of limitations begins to run when the loan is accelerated. See Monte v. Tipton, 612 So. 2d 714, 716 (Fla. 2d DCA 1993)(Section 95.11(2)(c) accrues when optional acceleration clause is invoked).

[iii] Delandro v. America’s Mortg. Servicing, 674 So. 2d 184, 186 (Fla. 3d DCA 1996)(“The complaint in this case indicates that the acceleration took place on February 9, 1994, when the lender filed the mortgage foreclosure complaint and stated, in paragraph 11, that ‘Plaintiff declares the full amount payable under the note and mortgage to be due.’”); Parise v. Citizens Nat’l Bank, 438 So. 2d 1020, 1022 (Fla. 5th DCA 1983)(“Acceleration may be set in motion by filing a pleading in a suit on the full indebtedness.”). “Default by the makers alone [does] not accelerate the indebtedness.” Cent. Home Trust Co. v. Lippincott, 392 So. 2d 931, 933 (Fla. 5th DCA 1980).

[iv] Kaan v. Wells Fargo Bank, N.A., 2013 WL 5944074, at *3 (S.D. Fla. 2013) (“[w]hile any claims relating to individual payment defaults that are now more than five years old may be subject to the statute of limitations, each payment default that is less than five years old…created a basis for a subsequent foreclosure and/or acceleration action.”)(citing Singleton v. Greymar Assocs., 882 So. 2d 1004, 1008 (Fla. 2004) and Fla. Stat. § 95.11(2)(c)).

[v] See id.

[vi] See Olympia Mortgage Corp. v. Pugh, 774 So. 2d 863, 866 (Fla. 4th DCA 2000)(dismissal of lawsuit resulted in mortgagee not accelerating payment on the note and mortgage).

[vii] Prior to the enactment of California Code of Civil Procedure section 360.5, unlimited statute of limitations waivers were upheld as valid by California courts, including the Supreme Court of California. See Dexter v. Pierson, 1 P. 2d 435, 436 (1931); Brownrigg v. deFrees, 238 P. 714, 716 (1925); State Loan etc. Co. v. Cochran, 130 Cal. 245, 248 (1900); Wells, Fargo & Co. v. Enright, 127 Cal. 669, 673-74 (1900); McGee v. Jones, 79 Cal.App. 403, 404 (2d Cal. 1926). However, after the enactment of section 360.5, unlimited waivers were abolished for all practical purposes. Carlton Browne & Co. v. Superior Court, 210 Cal. App. 3d 35, 41 (2d Cal. 1989).

[viii] Hudson County Nat. Bank v. Simpson, 5 N.J. Super. 135, 139 (App. Div. 1950); Quick v. Corlies, 39 N.J.L. 11 (Sup. Ct. 1876).

[ix] State Trust Co. v. Sheldon, 35 A. 177 (1896).

[x] Parchen v. Chessman, 49 Mont. 326 (1914).

[xi] Brownrigg, 238 P. at 716; Sheldon, 35 A. at 177.

[xii] John J. Kassner & Co. v. New York, 415 N.Y.S.2d 785, 789 (1979).

[xiii] Squyres v. Christian, 253 S.W.2d 470, 472 (Tex. Civ. App. 1952).

[xiv] Alliance First National Bank v. Spies, 158 Ohio St. 499, 501 (1953).

[xv] First National Bank of Eastern Arkansas v. Arkansas Development Finance Authority, 44 Ark.App. 143, 146 (1994).

[xvi] See id.

[xvii] See Pritchett v. Kerr, 354 So. 2d 972 (Fla. 1st DCA 1978).

[xviii] Id. at 973.

[xix] Id.

[xx] Id.

[xxi] Id.

[xxii] Id.

[xxiii] Id.

[xxiv] Id.

[xxv] Id.

[xxvi] Id. at 974.

[xxvii] See e.g. Ladner v. AmSouth Bank, 32 So. 3d 99 (Fla. 2d DCA 2009)(affirming trial court’s enforcement of jury trial waiver contained in mortgage); C & C Wholesale, Inc. v. Fusco Management Corp. 564 So. 2d 1259 (Fla. 2d DCA 1990) (waiver of jury trial in lease enforceable); Palomares v. Ocean Bank of Miami 574 So. 2d 1159, 1160 (Fla. 3d DCA 1991)(citing Poller v. First Virginia Mortgage and Real Estate Inv. Trust, 471 So. 2d 104, 106 (Fla. 3d DCA); Credit Alliance Corp. v. Westland Mach. Co., Inc., 439 So. 2d 332 (Fla. 3d DCA 1983); Central Inv. Assoc., Inc. v. Leasing Serv. Corp., 362 So.2d 702 (Fla. 3d DCA 1978)) (rejecting argument that a contractual waiver of jury trial is “constitutionally impermissible”)).