On August 18, 2017, the United States Court of Appeals for the Ninth Circuit published an opinion in a Fair Debt Collection Practices Act (FDCPA) case against a law firm that misstated the principal and interest due on a credit card loan in a collection effort. 

While the defendant law firm received an unfavorable decision in regard to the FDCPA claim, the court provided a positive disposition for the defendant on the plaintiff’s claim under California’s Rosenthal Fair Debt Collection Practices Act (RFDCPA). The decision highlights the importance of the “Right to Cure” provisions of the RFDCPA. The case is Afewerki v. Anaya Law Group, (Case No. 15-56510) U.S. Court of Appeals, Ninth Circuit). 

A copy of the court’s order can be found here.

Background 

Los Angeles Federal Credit Union (“LAFCU”) was owed money by Plaintiff Robel Afewerki, a credit card customer of LAFCU who had fallen behind on payments. LAFCU hired Anaya Law Group to collect the debt and informed them that the principal due was $26,916.08, and that the debt was subject to a 9.65 percent interest rate.

Anaya Law Group filed a complaint on behalf of LAFCU against Afewerki on May 6, 2014 in Los Angeles County Superior Court, alleging that the principal of Afewerki’s debt was $29,916.08 ($3,000 more than he in fact owed) and that the debt was subject to an interest rate of 9.965 percent (a figure that was 0.315 percent too high). 

Afewerki retained a lawyer, who sent a demand for a bill of particulars to Anaya Law Group on June 6, 2014. As she later set out in a declaration, an Anaya Law Group attorney discovered the errors in the complaint for the first time on June 16, 2014, while preparing a response to the demand. She asserted that the errors were inadvertent. Two days later, on June 18, 2014, Anaya Law Group filed a notice of errata correcting the errors. 

The debtor sued the debt collector in federal court for violations of the FDCPA and of the RFDCPA, (Cal. Civ. Code § 1788 et seq.). Each of the parties moved for summary judgment.

Editor’s Note: A motion for summary judgment is based upon a claim by one party (or, in some cases, both parties) that contends that all necessary factual issues are settled or so one-sided they need not be tried. The summary judgment is appropriate when the court determines there no factual issues remaining to be tried, and therefore a cause of action or all causes of action in a complaint can be decided upon certain facts without trial. 

The district court granted summary judgment to the debt collector on both claims because it concluded that the errors in the complaint were not material. 

The federal FDCPA, (15 U.S.C. § 1692 et seq.), prohibits debt collectors from making false statements when attempting to collect debts from consumers. However, not all false statements are actionable. To constitute a violation of the FDCPA, a false statement must be “material.” 

The Court of Appeals succinctly described the issue presented: 

What makes a false statement material or immaterial in the debt collection world? Material false statements, we have held, are those that could “cause the least sophisticated debtor to suffer a disadvantage in charting a course of action in response to the collection effort.” Tourgeman v. Collins Fin. Servs., Inc., 755 F.3d 1109, 1121 (9th Cir. 2014). This appeal requires us to consider the materiality of modest overstatements of an amount due and an interest rate.

As to the “materiality” issue, the court concluded: 

“We conclude, however, that the false statements made by the debt collector in this case were material because they could have disadvantaged the least sophisticated debtor in responding to the complaint. 

We agree and conclude that Anaya Law Group’s $3,000 overstatement of the principal due in the state court complaint, exacerbated by the statement of an inflated interest rate, was material.” 

As to the RFDCPA claim, the court wrote: 

“Although we disagree with the district court’s conclusion that the misstatements were not material, which was the basis on which the district court granted summary judgment to Defendants, “[w]e may affirm on any basis supported by the record.” Fisher v. Kealoha, 855 F.3d 1067, 1069 (9th Cir. 2017). We conclude that Defendants are entitled to the benefit of a separate defense under the Rosenthal Act, and on that basis we affirm the district court’s grant of summary judgment to Defendants as to the Rosenthal Act claim.”

California Civil Code § 1788.30(d) states: 

A debt collector shall have no civil liability under this title if, within 15 days either after discovering a violation which is able to be cured, or after the receipt of a written notice of such violation, the debt collector notifies the debtor of the violation, and makes whatever adjustments or corrections are necessary to cure the violation with respect to the debtor. 

The notice of errata was filed on June 18, 2014, which was within fifteen days of June 6, 2014, when the demand for a bill of particulars was served. Accordingly, Defendants satisfied the criteria to invoke the defense provided by § 1788.30(d).” 

insideARM Perspective 

The “Right to Cure” provision in the RFDCPA is a very powerful provision, one that is often ignored by companies in the ARM space. On July 19, 2017, insideARM wrote an article about a similar provision enacted in West Virginia. The Consumer Relations Consortium has suggested that the Consumer Financial Protection Bureau (CFPB) consider a similar provision in their upcoming Notice of Proposed Rulemaking. 

Finally, in last month’s version of the Moss & Barnett Debt Collection Drill podcast Moss & Barnett attorneys John Rossman and Mike Poncin discuss a new wave of lawsuits against debt collectors in California which focuses on the font size of certain disclosures. In that podcast, they also discuss the RDCPA “Right to Cure” provision. 

With great sadness the team at Diversified Consultants, Inc. (DCI) announced that Marcus Taylor passed away on Tuesday September 5th, having suffered a heart attack.  

Part of DCI’s initial Louisville, Kentucky hiring class on 05/30/2017, Marcus was a passionate young man whose career was blossoming right before our eyes. There was no doubt the sky was the limit with what Marcus could have accomplished with DCI and within the entire debt collection industry.  

Nicknamed “Fudge” because of a song he sang in front of the initial 90-person training class back in May, Marcus was a loving father to his daughter and devoted husband to his wife.  He was rapidly moving up the ranks of the company and was promoted to Assistant Manager within the first 30 days of being with the company. Marcus was a man who would help someone else before he helped himself and always put others first. He wasn’t only loved by his team and the people directly worked with, but the entire office as a whole.  

The collection industry has lost a true leader whose potential was cut way too short. We ask that you send your thoughts and prayers to not only his wife and young daughter but also the staff at DCI and the entire collection world.

Can I be brutally honest? I don’t like the calls from “Phyllis from Card Services.” She has an annoying voice.

The first time I got the call from the “Treasury Department” telling me the sheriff was on the way to my house to arrest me was a little traumatic, but I got used to it after the third or fourth call.  

Likewise, I think I am going to pass on the extended warranty for my car in spite of the 15-20 calls telling me how much I need it. 

Finally, though it was fun for a while, I am now officially tired of talking to the “software support center.” The callers get so angry when they realize I know their game and am just leading them on to annoy them as much as they annoy me. 

Most people would agree, these calls are annoying.  Please make the bad people go away who make these calls! 

Well, our federal government heard me and the rest of the world and is trying to do something.  But, be careful what you wish for. 

Just a little background is in order.  In response to consumer complaints, in August of 2016 the Federal Communications Commission (FCC) launched the Robocall Strike Force. The Strike Force included telecommunication service providers, ISP, device makers, and cable providers. 

In October of 2016 a “Robocall Strike Force Plan” was introduced. The plan outlined actions under three initiatives: 1) source authentication, 2) network and consumer call blocking tools, and 3) effective enforcement with the power to shut down offending accounts. 

On March 23, 2017 the FCC proposed new rules to facilitate voice provider’s blocking of “robocalls.” See the FCC NPRM & Notice of Inquiry here. 

On August 31, 2017 the Federal Trade Commission (FTC) jumped into the fray. The FTC announced that they were “escalating the fight against illegal robocalls by publishing on its website a daily list of Do Not Call (DNC) reported call complaints. (The list is published here.) Per Acting FTC Chairman Maureen Ohlhausen: “Sharing the critical information from consumers’ unwanted call complaints to enable industry innovators to stop illegal robocalls is exactly the type of public-private partnership the FTC champions.” 

This all sounds good, right? Why am I sounding the alarm? The problem is what our government is trying has significant unintended consequences that will hurt legitimate businesses and specifically hurt the call center and ARM industries. 

The problem starts with the inflammatory term “ROBOCALLS.” First of all, the FCC and the FTC have significantly different interpretations of that term.  The FCC spent much of its July 2015 rulemaking trying to define the term. Just what is or is not a “robocall” under the FCC interpretation is still the subject of significant litigation. Oral arguments in the case of ACA International, et al. v. the Federal Communications Commission (FCC) and United States of America were heard in October of 2016 at the U.S. Court of Appeals for the D.C. circuit. The appellate court decision in that case could have significant ramifications. 

The FTC involvement in the fight against “robocalls” encompasses a much broader definition of the term.  The data they are uploading on a daily basis is a list of “unwanted calls reported by consumers.” A quick review of any one of the daily lists will show that not all of these “unwanted calls” are the same type of “robocalls” under the FCC definition.  In fact, one of the “subject” categories for these calls is “Debt Collection.” 

The second initiative from the Robocall Strike Force Plan noted above (network and consumer call blocking tools) is the source of the problem.  This initiative focuses on ways the carrier and network and consumers will can and will use to block calls. It is these tools that legitimate businesses should be concerned about. 

Consumer call blocking tools are simple to describe. They are apps that a consumer can download to their phone to block unwanted calls. A quick search of the Apple App Store or the Google Play Store will produce numerous apps that can be quickly downloaded and installed to block calls. The efficiency and reliability of these apps is all over the board. Buyer beware! The key with these apps is that they require an affirmative action by the consumer to block calls. 

The network blocking of calls is a much bigger concern. Basically, this is where a carrier (AT&T, Verizon, T-Mobile, Sprint, U.S. Cellular, or other) will install functionality on their system that will either block a call from arriving on an individual’s phone or allow the call to go through, but identify it with labels such as “Possible Spam,” “Spam Likely,” “Nuisance Likely,” “Telemarketing, “Informational”, or maybe even “Debt Collector.” 

The major carriers listed above are all in various stages of rolling out “robocall” blocking technology.  However, it is clear that the technology is not yet perfect. Members of the insideARM Compliance Professionals Forum are telling us that calls from legitimate businesses are being incorrected blocked or labeled as “Possible Spam.” Right party connects are being negatively impacted (who wants to answer a call from anyone that is labeled as “Possible Spam?”). We have received anecdotal reports of right party connects down by 15-30% — and the call blocking technology at the carrier level is not yet near 100% utilization. 

What can be done? 

First of all, the industry needs to be talking and working with the developers of individual apps and carrier level software to eliminate the blocking of legitimate business calls (we are aware that this is happening as multiple CRC members have initiated these conversations; we suspect others have as well). The developers of these products recognize the need to work with the industry to avoid costly litigation from call center operators. 

Secondly, carriers need to understand that they have some responsibility in this area too.  Along those lines, insideARM notes with some interest that, in an ex parte filing with the FCC on August 31, 2017, AT&T encouraged the FCC to create a safe harbor for providers “that cooperate with industry-led efforts designed to address the issue of illegal robocalls, and implement policies and procedures detailing its practices to identify and address such robocalls, including procedures to cease blocking of any calls upon learning they are legitimate calls.”

In other words, the carriers want the ability to roll out software at the system level that may block or mislabel calls from legitimate businesses and say, “Sorry, those unintended consequences are not my problem.” 

Now is the time for all ARM industry associations to work together on this issue. The ability for a debt collector to contact a consumer is getting crushed on numerous fronts. On September 20, 2017 PACE (The Professional Association for Customer Engagement) is hosting an industry coalition meeting to discuss this matter and develop action plans to address the problem. insideARM and the Consumer Relations Consortium (CRC) will be in attendance (as well as a number of other major industry groups that we are aware of). insideARM will report as appropriate on developments at that meeting. 

The TCPA and the 2015 FCC Rules interpreting the act have effectively eliminated the use of technology to efficiently call cell phones. Land line usage is dropping like an anchor. The CFPB is on the brink of announcing proposed debt collection rules that are likely to reduce the number of call attempts that can be made. Now, add this latest call blocking technology and the industry is challenged again. 

One can only hope that the CFPB will open the door to use of new methods of communicating with the consumer – email, texts, chat, private messaging, etc. The reality is that these are now the preferred methods of communication for many, many consumers. The door needs to be opened. Rules need to be enacted that provide directions for use of these alternative methods of communication so that creditors can feel comfortable allowing their service providers to do so. 

Pardon the slightly tortured Princess Leia quote from STAR WARS – “Help us CFPB, you’re our only hope!”

LIBERTYVILLE, Ill. — CMAX Finance LLC, a Specialty Lending Finance Company, serving small and medium size debt-buyers with flexible and dependable funding solutions is pleased to announce that it has recently hired David Paris, CRCP and Edward Forbes (“Ed”) as the key leaders of our Marketing and Customer relationship group. Both David and Ed come to CMAX with over 25 years of experience in the ARM industry and are highly respected professionals within all aspects of the Debt Buying industry.    

David has worked on both the direct buying and financing side of the industry and has been a frequent speaker and panel member at the major debt-buying conferences, and has actively served as an Executive Board member and is currently President Elect of RMA (formerly DBA International). David is a graduate of the State University of New York. 

Ed has held a number of senior management positions with JP Morgan/Chase, Fleet Credit Card Services and the Advanta Corporation where he was responsible for collection activities, agency outsourcing, litigation and debt sales. Ed was also the founder and President of Stirling Capital Management LLC, which was focused on debt industry advisory and brokerage activities. Mr. Forbes received his commission in the U.S. Army Reserve after graduating from Valley Forge Military Academy as a Distinguished Military Student and is a graduate of La Salle University. 

Roger Saylor, CMAX CEO stated, “We are extremely excited to be able to bring two high quality and experienced individuals into CMAX to support our growth and improved customer relationship efforts. Their recent efforts are already bearing fruit and we believe that together, CMAX will more than meet its 2018 goal of doubling its annual loan volume.”

About CMAX Finance  

CMAX is dedicated to supporting small and mid-sized clients with both expertise and dependable financing for the purchase of charged-off debt portfolios across the breadth of non-mortgage consumer assets. Since its establishment in 2010, CMAX has provided in excess of $325 million of lending facilities, representing over 1,100 individual facilities to over 85 discrete borrowers.   

For additional information about CMAX and its lending opportunities, please call us at 312-778-8950. 

LONDON — CallMiner, the leading platform provider of speech and customer engagement analytics, announced today that CallMiner and Phillips & Cohen Associates, a global pioneer in Deceased Account Management services, have been shortlisted for the ‘Best Customer Insight/Voice of the Customer Initiative’ by the European Contact Centre and Customer Service Awards 2017. The ECCCSAs are the largest and longest running awards in the customer contact industry and recognise and reward organisations that are leading the way in delivering exceptional service to customers.

The ‘Best Customer Insight/Voice of the Customer Initiative’ Award recognises organisations who have successfully implemented a robust model for collecting and analysing Voice of the Customer data. Phillips & Cohen was shortlisted for achieving significant customer experience benefits from its deployment of the CallMiner Eureka speech analytics solution. The entry showed how interaction analytics helped its call centre to drive successful customer outcomes, enhance competitive strengths and improve key metrics, by analysing 100% of customer calls to deliver a truly accurate picture of the voice of the customer.

Nick Cherry, COO, Phillips & Cohen Associates, said: “We are very proud to be shortlisted for the award. Voice of the customer feedback is a real game-changer for us as the nature of our work makes it a challenge to obtain through traditional feedback and survey methods. CallMiner Eureka provides us with meaningful trend analysis and voice of the customer measures we simply didn’t have before.”

Bob Bednar, Senior Vice President of Consumer Communication & Digital Strategy at Phillips & Cohen added, “The deployment of the Eureka speech and text analytics platform is a key aspect of our communication strategy as we seek to provide an outstanding experience to consumers across all channels.  Alongside its real-time capability, the ability to analyse multiple channels of data makes it a valuable addition to our global processes.”    

“We are delighted to be working with such a forward-thinking organisation, one that excels at delivering the highest standards of customer service in their sector,” said Frank Sherlock, Vice President International Sales at CallMiner. “Phillips & Cohen is displaying true thought leadership in the way they have used our technology to deliver value to their customers, clients, agents and the business,” added Sherlock.

The Winners will be announced on November 28^that the ECCCSAs Award Gala Dinner. 

About Phillips & Cohen Associates

Phillips & Cohen Associates Ltd. was established in the United States in 1997 and has expanded internationally building a reputation as a responsible and trusted partner to creditors around the globe. The global group includes offices in Manchester, UK, three offices in the United States including a dedicated analytics centre, offices in Quebec, Canada and Melbourne, Australia and a newly founded office in Madrid, Spain. The business has achieved national and international prominence by providing highly effective financial recovery services built around a uniquely compassionate style of customer engagement. With clients ranging from mid-sized firms to leading national and international creditor and banking institutions, the company serves the consumer credit, banking, and finance markets, as well as specialized industries including home shopping, utility, telecoms, debt purchase, local & central government.  

About CallMiner

CallMiner believes that resolution is the fundamental driver of positive customer experiences. When contact centre agents and others responsible for customer engagement are empowered by insight and feedback, they can dramatically improve the rate of positive outcomes.  With the tagline “Listen to Your Customers, Improve Your Business” our goal is to help companies automate the overwhelming process of extracting insight from phone calls, chats, emails and social media to dramatically improve customer service and sales, reduce the cost of service delivery, mitigate risk, and identify areas for process and product improvement.  Highlighted by multiple customer achievement awards, including seven Speech Technology implementation awards in the past five years, CallMiner has consistently ranked number one in customer satisfaction, including surveys conducted by DMG Consulting and Ovum. 

TUCSON, Ariz -– BARR Credit Services, Inc., announced that it has acquired Credit Decision International, Ltd., a commercial debt collections agency located in Chicago, Illinois. The acquisition of Credit Decision International will expand the BARR Credit Services commercial debt recovery service even further into additional international and domestic markets, and increase their position as an industry leader. 

BARR Credit Services, headquartered in Tucson, Arizona, with offices throughout the United States, is a leading provider of commercial debt recovery, collections, and credit services. The acquisition of Credit Decisions International, Ltd., fits into BARR Credit Services’ long-term strategy to expand their business into additional markets and grow their commercial credit services. 

Credit Decisions International, Ltd., established in 1985, was the first agency to become certified by the Commercial Law League of America and the International Association of Commercial Collectors. Credit Decisions International, Ltd., offers first-party collections, third-party collections, credit reporting, and global collections services. They also accelerate the cash conversion of accounts receivable after acquisition, divestiture, or merger, during reorganization, or subsequent to foreclosure or bankruptcy.   

“The acquisition of Credit Decisions International continues building on our strategic goal to be the worldwide leader in our industry,” said Randy Frazee, CEO of BARR Credit Services. This investment represents an opportunity to offer additional accounts receivable solutions throughout the world. Additionally, this acquisition increases our capacity and geographic presence.” 

About BARR Credit Services

BARR Credit Services, headquartered in Tucson, Arizona, is a results-oriented and customer-focused commercial credit and collections company that partners with clients to provide account receivable solutions around the globe.

LIBERTYVILLE, Ill. — CMAX Finance LLC, a Specialty Lending Finance Company, serving the Small and Medium size debt-buyers with flexible and dependable funding solutions is pleased to announce that it has successfully completed the move of its operations to Libertyville, IL., a convenient suburb of Chicago.  Roger Saylor, CEO of CMAX, stated that “the move to Illinois is the completion of the first phase of improving the lending platform and ability of CMAX to provide efficient and flexible financing to our customers”.  

The move has allowed CMAX to completely revamp and upgrade both its IT infrastructure and its industry leading historical data base within a more robust and secure cloud environment. Jason Roe, new CTO for CMAX stated:  “The partnership with Netrix and utilization of their “Cloudhelm” hosting environment provides CMAX with state of the art IT infrastructure and provides excellent security and flexibility for our data and customer sensitive information”.  

The move also provides CMAX with a highly qualified and motivated personnel environment from which to deepen and grow its employee base.  Combined with the compete restructuring of our Loan Documentation and process, we are already seeing the benefits of the move in our ability to quickly analyze and respond to customer needs in a highly flexible, consistent and timely manner.

About CMAX Finance

CMAX is dedicated to supporting small and mid-sized clients with both expertise and dependable financing for the purchase of charged-off debt portfolios across the breadth of non-mortgage consumer assets.  Since its establishment in 2010, CMAX has provided in excess of $325 million of lending facilities, representing over 1,100 individual loans to over 85 discrete borrowers.  

For additional information about CMAX and its lending opportunities, please call us at 312-778-8950. 

Today the House Subcommittee on Financial Institutions and Consumer Credit will hold a hearing entitled “Legislative Proposals for a More Efficient Federal Financial Regulatory Regime.” One of the bills to be addressed would amend the Fair Debt Collection Practices Act.

The hearing will address six legislative proposals, including:

1. R. 1849 (Trott), the Practice of Law Technical Clarification Act of 2017
2. R. 2359 (Loudermilk), the FCRA Liability Harmonization Act
3. R. 3312 (Luetkemeyer), the Systemic Risk Designation Improvement Act of 2017
4. R. XXXX (Royce), the Facilitating Access to Credit Act
5. R. XXXX, (Tenney), the Community Institution Mortgage Relief Act of 2017
6. R. XXXX, (Hill), the TRID Improvement Act of 2017

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The Practice of Law Technical Clarification Act of 2017 amends the Fair Debt Collection Practices Act to exclude from the definition of “debt collector” any law firm or licensed attorney: (1) serving, filing, or conveying formal legal pleadings, discovery requests, or other documents pursuant to the applicable rules of civil procedure; or (2) communicating in, or at the direction of, a court of law or in depositions or settlement conferences, in connection with a pending legal action to collect a debt on behalf of a client.

This bill also amends the Consumer Financial Protection Act of 2010 to clarify that the Consumer Financial Protection Bureau (CFPB) may not exercise supervisory or enforcement authority with respect to attorneys engaged in the practice of law and not offering or providing consumer financial products or services.

The hearing will include the following witnesses:

• Anne Fortney, Partner Emerita, Hudson Cook LLP
• Charles Tuggle, Executive Vice President and General Counsel, First Horizon National Corporation
• Thomas Quaadman, Executive Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
• Chi Chi Wu, Staff Attorney, National Consumer Law Center

insideARM Perspective

The CFPB has been especially aggressive in taking action against collection law firms. This began in 2014 with their investigation of Frederick J. Hanna & Associates P.C. That ended after 18 months with a consent order against the firm. insideARM wrote extensively about this case. You can read the final chapter here, including comments from the Hanna firm and also NARCA, the National Creditors Bar Association.

On December 28, 2015 insideARM published an article by Joann Needleman where she discussed the significance of the Hanna order and predicted continued oversight by the CFPB over the practice of law in the collection arena.

She was right.

On April 26, 2016 the CFPB announced the filing of a consent order with the New Jersey debt collection law firm, Pressler & Pressler LLP. You can read the insideARM coverage of that story here.

On April 17, 2017 the CFPB filed suit against the law firm of Weltman, Weinberg & Reis Co, L.P.A. (WWR). Read our story here.

Both Pressler & Pressler and WWR argued that they did not violate any federal or state laws, and suggested that the CFPB is making rules through enforcement activity. 

Once the CFPB brings an enforcement action, the challenge for any law firm is the cost and resources necessary to defend themselves against the bureau’s unlimited resources.

Everyone in the hospital revenue cycle community is clamoring to know which hospital lost its tax-exempt status this year, how exactly it all happened, why the hospital in question does not exactly seem to care, and — in our corner of the world — what revenue cycle professionals can learn about the situation.

Non-profit hospitals take billions of dollars of tax exemptions every year, so it stands to reason that their eligibility to retain a tax-advantaged position relies on concrete characteristics that set non-profits apart from for-profit enterprises. As jarring as it is that another hospital has lost its preferred tax status, it hasn’t come out of nowhere, and it hardly matters which hospital it was.

Not long ago, insideARM covered the heart of what’s needed to comply with 501(r), and it bears repeating: Municipalities are under pressure. Tax advantages are under scrutiny, and with operating margins so lean, hospitals usually need these breaks to keep afloat. While it may seem like keeping tax status isn’t your job as a rev cycle professional, in fact everyone has a part to play in making sure tax exemption isn’t a problem on top of all the other financial pressures hospital rev cycle teams now face.

We’ve heard this song before

For context and cautionary tales, it’s useful to look in the rear view: Let’s look back at  2015, when a New Jersey tax court case found that Morristown Medical Center, a not-for-profit hospital, was essentially operating like a for-profit entity, and as such, did not qualify for the New Jersey property tax exemption. The judge in that case found that the hospital provided substantial loans, capital, and subsidies to for-profit entities, including physician groups. In this case, the hospital’s operations were under the microscope, rather than a (lack of) community impact.

For Morristown, the issue of the fair market value of executive compensation was called into question. It had not been sufficient in the eyes of the IRS that Morristown Medical had benchmarked executive compensation to that of other, similar hospitals. Why? The hospital could not demonstrate that the compensation at its peer hospitals was reasonable either. Ouch. That seems harsh. And yet, this all underscores the reality that when it comes to hospitals and their claims of serving the greater good, the IRS is really not in the mood to play. The IRS is going to peer into your operational closets, looking for skeletons, and into your claims of benevolence, looking for evidence you are actually serving the community. If you’re in the hospital business, and you are receiving IRS tax exemption, be ready to meet the high bar, or your entire financial model could come crashing down around you. In the end, Morristown Medical Center got stuck paying ten years of back taxes and penalties on portions of the hospital used for certain for-profit activities. That kind of a hit could shutter many medical centers that are already straining under the weight of Medicare scarcity and the burden of insured patients who aren’t paying their balance bills.

Remember too that in 2010, the Illinois Supreme Court upheld the denial of a property tax exemption for Provena Covenant Medical Center. In that case, the court found that the hospital failed to generate most of its money from charity, did not demonstrate its commitment to charity care, and wasn’t able to show it was operating for charitable purposes.

Legislative developments

Many states are discussing bills to adopt statewide rules for not-for-profit hospitals to make some type of payment in lieu of property taxes, without necessarily requiring property tax payments for all hospital real estate and buildings.

Illinois passed a law to this effect in 2012, in the wake of the Provena fiasco, that created a property tax exemption for hospitals. The law established a test to determine eligibility for property tax exemption based on whether the total value of a hospital’s charitable services or activities is at least equal to the hospital’s estimated property tax liability.

The Illinois law has since survived constitutionality challenges in the lower courts. Litigation is still pending on the law, but other jurisdictions are considering the same property tax exemption standards for hospitals. This all bears watching.

Reverberations

Not only are hospitals facing tax-exempt scrutiny by governments, but so are health insurance companies. Remember when the California Franchise Tax Board revoked the tax-exempt status of Blue Shield of California, subjecting the company to state income taxes? California tax officials based the decision, in part, on the company’s $4 billion surplus and on its failure to offer more affordable coverage or public benefits.  

PILOT programs

One alternative to a legislative fix is a Payment In Lieu Of Taxes, also known as a PILOT program. This kind of program often involves special financial agreements between municipalities and hospitals. This type of program can prevent litigation and does not necessarily require legislation, but they’re unregulated and more susceptible to abuse. Already, this type of program is on the decline in 2017 after a popularity peak in 2015.

Moral of the story

Every person on the rev cycle team has a vested interest, and a critical role to play, in helping comply with the rules for tax-exempt hospitals. Unexpected tax bills shutter a hospital at worst, or completely torpedo its financial modeling at best—and revenue cycles are already strained by uncompensated care and the risk of unfavorable policies potentially soon to emerge from Capitol Hill. There’s simply no shortchanging the IRS. Hospitals need financial assistance programs; they need to assess and document a plan to serve the communities in which they exist if they care to maintain a valuable tax advantage.

On August 30, 2017, the Court of Appeals for the Third Circuit issued an opinion determining that a second collection letter sent to a consumer within thirty days of an initial letter “overshadowed and contradicted the “Validation Notice” in the initial letter.  The case is Laniado v. Certified Credit & Collection Bureau, (Case No. 16-3430, U.S. Court of Appeals, Third District).

A copy of the court’s opinion can be found here. 

Background

In May of 2014, Laniado filed suit against Certified Credit & Collection Bureau (Certified) under the Fair Debt Collection Practices Act (FDCPA). The allegations in the suit implicate two letters sent by Certified: (1) a letter mailed to Laniado on or about February 13, 2014; and (2) a second letter mailed to Laniado on or about March 5, 2014. It was undisputed that the initial demand letter contained the 30-day Validation Notice required by 15 USC § 1692g.”  However, according to Laniado, the March 5, 2014 letter (the second letter) contained language that overshadowed and contradicted the “Validation Notice” in violation of 15 U.S.C. §§ 1692g and 1692e(10). 

This case has already had quite a life. Certified moved to dismiss the case under Federal Rule of Civil Procedure 12(b)(6). In March of 2015, the District Court granted that motion. Laniado appealed. In January, 2016 the Court of Appeals vacated the District Court’s order, remanded the case and directed the District Court to consider the case of Caprio v. Healthcare Revenue Recovery Group, LLC, 709 F.3d 142 (3d Cir. 2013). On remand, in July of 2016, the District Court again granted Certified’s motion to dismiss. In August of 2016, Laniado again appealed. 

The Court of Appeals described the second letter that is the crux of the case: 

“Turning to the March 5, 2014 letter, we note that the letterhead listed (below the debt collector’s name) Certified Credit’s mailing address and a toll-free telephone number (“PO BOX 336 RARITAN, NJ 08869 TOLL FREE 888.750.9500”). The letterhead also identified Certified Credit’s website and fax number. The bottom part of the letter evidently consisted of a detachable slip (which Laniado was asked to enclose with her payment). The slip included Laniado’s name and address as well as information about the client, account number, date, file number, and “BALANCE DUE” (i.e., “216.50”). (Id.) At the very bottom of the page, the document stated the following: “CALL OUR 24 HOUR AUTOMATED CUSTOMER SERVICE 800-354-4744 OR VISIT OUR WEBSITE: WWW.CERTIFIEDCCB.COM.” (Id.) Where the return address would typically be located, Certified Credit’s letter set forth another toll-free telephone number (“TOLL FREE 800-253-2920”), the date, a subject-matter line, the patient’s name, the account number, and the date of service. (Id.) It also contained instructions (below the signature line and above the slip) to see the reverse side for important information, noted that Certified Credit accepted all major credit cards, and referred to Western Union and Quick Collect.

The body of the March 5, 2014 letter consisted of the following three paragraphs:

THE ABOVE ACCOUNT HAS BEEN PLACED WITH US FOR COLLECTION. SETTLEMENT IS EXPECTED TO BE MADE WITH THIS OFFICE. KINDLY REMIT PAYMENT IN FULL. 

SHOULD THERE BE ANY DISCREPANY PLEASE CALL TOLL FREE 800-253-2920 OR FOR OUR 24 HOUR AUTOMATED CUSTOMER SERVICE CALL 800-354-4744. 

THIS IS AN ATTEMPT TO COLLECT A DEBT BY A DEBT COLLECTOR AND ANY INFORMATION OBTAINED WILL BE USED FOR THAT PURPOSE.” 

The Court of Appeals Opinion 

In short, the Court of Appeals ruled that the second letter overshadowed and contradicted the Validation Notice in the first letter.

First of all the court determined that “whether language in a collection letter contradicts or overshadows the Validation Notice is a question of law, not a question of fact. 

The court then applied the “least sophisticated debtor” standard to ascertain whether the second letter overshadowed or contradicted the Validation Notice. The court wrote:

“Considering the substance of the March 5, 2014 letter that Certified Credit sent to Laniado, we find that it is materially indistinguishable from the letter at issue in Caprio. The debt collector’s letter in Caprio instructed “to call or write ‘if you feel you do not owe this amount.’” Id. at 151 (citation omitted). “At the very least, the ‘least sophisticated debtor’ could reasonably “feel” that he or she “do[es] not owe this amount” if he or she actually disputed the debt and its validity. If so, this “please call” language basically instructed such a debtor to call or write in order to dispute the debt itself.”

Likewise, the letter currently before us instructed Laniado to call either a toll-free telephone number or a 24-hour automated customer service number should there be any discrepancy. The least sophisticated debtor could reasonably believe there was a discrepancy if he or she “actually disputed the debt and its validity.” “If so, this ‘please call’ language basically instructed such a debtor to call . . . to dispute the debt itself. While he or she certainly could (and, in actuality, must) raise a debt dispute in writing, it is well established that a telephone call is not a legally effective alternative for disputing the debt.

Given the substance and form of the second letter, we conclude that it did overshadow and contradict the notice.” 

insideARM Perspective 

What should compliance professionals take from this case? More than anything, it should be clear that any letter sent within the thirty day validation period is high risk, at least in the Third Circuit. The risk/reward analysis when considering a second letter should persuade ARM companies to hold off on a second letter until the thirty day period has expired. 

This case has been ongoing since May of 2014. It has bounced back and forth between the District Court and the Court of Appeals twice. It is clear that the District Court judge and the Appellate Court judges are not on the same page on this issue. 

Finally, it should be noted that the opinion is listed as “Not Precedential.” The court notes: This disposition is not an opinion of the full court and pursuant to I.O.P. 5.7 does not constitute binding precedent. Regardless of the non-precedential status, it is clear what the three judge panel of the Third Circuit thinks about this issue.