On June 12, 2017, the Supreme Court of Appeals for the State of West Virginia issued an opinion that a debt collector did not violate West Virginia Code § 46A-2-125(d) (1974) by calling a consumer over 250 times during an eight-month period. The court reversed a earlier, opposite decision reached after a bench trial. The case is Valentine & Kebartas, Inc. v. Lenahan (Case No. 16-0127, WV Supreme Court of Appeals).

A copy of the opinion can be found here. 

The version of West Virginia Code § 46A-2-125 in effect at the time of the bench trial in this case states as follows:

No debt collector shall unreasonably oppress or abuse any person in connection with the collection of or attempt to collect any claim alleged to be due and owing by that person to another. Without limiting the general application of the foregoing, the following conduct is deemed to violate this section:

(a) The use of profane or obscene language or language that is intended to unreasonably abuse the hearer or reader;

(b) The placement of telephone calls without disclosure of the caller’s identity and with the intent to annoy, harass or threaten any person at the called number.

(c) Causing expense to any person in the form of long distance telephone tolls, telegram fees or other charges incurred by a medium of communication, by concealment of the true purpose of the communication; and

(d) Causing the telephone to ring or engaging any person in telephone conversation repeatedly or continuously, or at unusual times or at times known to be inconvenient, with the intent to annoy, abuse, oppress or threaten any person at the called number.

Background 

The court’s opinion concisely outlined the facts in the case. Valentine & Kebartas (V&K) is a third-party debt collector who purchased Mr. Lenahan’s delinquent consumer account from ADT, a home security system provider. ADT informed V&K that Mr. Lenahan owed $1,349.53 on the account. The facts are undisputed that Mr. Lenahan informed ADT that he denied owing the debt. Similarly, there is no dispute that Mr. Lenahan never notified V&K that he denied owing the debt. 

V&K’s collection efforts commenced with a March 9, 2012, letter to Mr. Lenahan notifying him of V&K’s intent to collect the debt on the ADT account. Mr. Lenahan admitted receiving the letter. Thereafter, V&K made telephone calls to the telephone number provided by ADT for Mr. Lenahan. 

The number of telephone calls placed by V&K to Mr. Lenahan is also not in dispute. Between March 10 and 25, 2012, V&K called Mr. Lenahan twenty-two times. Between March 26 and 28, 2012, they placed seventeen additional calls to Mr. Lenahan. Beginning on March 29 and continuing through November 17, 2012, V&K attempted 211 more calls to Mr. Lenahan at times after 8:00 a.m. but before 9:00 p.m. on various days, never more than six times per day. The parties agree that V&K attempted to call Mr. Lenahan 250 times during the eight-month period between March 10, 2012, and November 17, 2012. 

Mr. Lenahan never answered the 250 phone calls and V&K never left a message. Lenahan kept no record of the phone calls and never contacted V&K to dispute the debt. 

Following the 250 attempted telephone calls, the record indicates that three additional phone calls from V&K were answered by Mr. Lenahan on November 17, 19 and 20, 2012. Mr. Lenahan argued at trial that he informed V&K during one or more of these three phone calls that he was represented by counsel. He asserted at trial that one or two of the subsequent calls were made in violation of West Virginia Code § 46A-2-128, which among other things limits a debt collector from contacting a consumer once the debt collector received notice that the consumer is represented by counsel. The circuit court did not rule on this claim and neither party raised it on appeal. Therefore, the court did not address the issue. 

Mr. Lenahan filed suit against V&K in March 2013. During a bench trial on February 2, 2015, a V&K representative and Mr. Lenahan were the only two witnesses who testified. On May 22, 2015, the circuit court ruled in a memorandum opinion that V&K’s unanswered telephone calls to Mr. Lenahan violated West Virginia Code § 46A-2125(d)(1974). On January 15, 2016,⁵ the circuit entered its Verdict Order awarding Mr. Lenahan $75,000 in damages. V&K filed this appeal. 

The Supreme Court Opinion

As noted above, the West Virginia Supreme Court reversed the trial court decision. The court focused its “attention on whether the circuit court erred in determining that the volume of V&K’s telephone calls to Mr. Lenahan constituted abuse or unreasonable oppression by virtue of “causing a telephone to ring . . . repeatedly or continuously . . . with intent to annoy, abuse, oppress or threaten” under West Virginia Code § 46A-2-125(d).” 

The court examined cases in other jurisdictions that discussed call volume under 15 U.S.C. § 1692d(5), of the Fair Debt Collection Practices Act, (FDCPA ) the provision of the “FDCPA” nearly identical to West Virginia Code §46A-2-125(d) and felt that the compelling argument was that call volume alone, absent evidence of other  abusive conduct, is insufficient to sustain a claim. 

The court wrote: 

“Clearly, the weight of federal authority requires some evidence of intent to establish liability under the federal equivalent to West Virginia Code § 46A-2-125(d). We agree with the reasoning of these federal courts interpreting a nearly identical statute. We similarly find that the volume of unanswered calls in this case does not establish intent in violation of West Virginia Code § 46A-2125(d). Rather than answer any one of the 211 calls made by V&K in compliance with federal law over eight months, Mr. Lenahan remained silent and never informed V&K of the simple fact that he disputed the debt. Accordingly, we find that the circuit court erred as a matter of law in finding that V&K violated West Virginia Code § 46A-2-125(d).

The calls continued because Mr. Lenahan never answered the telephone calls and never informed V&K that he contested the debt. The circuit court made an inference of intent to “harass or oppress” based upon its own inability to “fathom any possible legitimate purpose” for V&K’s auto dialer placing more calls over a three-day period in the third week of its eight-month collection effort than it placed in the first two weeks. The circuit court surmised that after a certain amount of unanswered calls, a reasonable debt collector should know that the consumer does not want to be contacted. However, the circuit court’s inference was based entirely on the volume of calls and no other evidence.”

insideARM Perspective 

To be perfectly honest, this result is surprising, not because of the court’s reasoning, and not because of the particular facts presented. It is surprising because of the venue. West Virginia has a reputation as being VERY pro-consumer. Many third-party agencies dramatically restrict collection calls into West Virginia and proceed with extreme caution in dealing with West Virginia accounts under the theory that the RISK/REWARD analysis suggests the potential exposure is not worth the potential revenue derived from additional activity on those accounts. 

This is a very positive outcome considering the above.

This article previously appeared on Ontario System’s blog and is republished here with permission.

Traditionally, financial services organizations including the third-party debt collection industry have been slow to adopt technology that enhances communication with consumers. Complex and conflicting federal laws make letters and phone calls a crutch, and fear of lawsuits tend to cripple even the most savvy businesses. But consumers are demanding change, and it is time for the industry to step up its game.

According to Christoph Bene, Managing Director at Brock Capital Group speaking to Forbes, the ARM industry needs to take note:

“Fifty years ago, debt collection agencies relied on annoying phone calls and form letters sent through the mail to encourage people to pay their past due accounts. Today, with the ubiquitous use of smart phones, texting, email and social media, the debt collection industry… still mainly relies on annoying phone calls and form letters.”

Ask a millennial, and you will learn they could not agree more. Younger generations opt for a digital form of communication before answering a phone call. They will read many tens of text messages before listening to a single voicemail. They will visit a website before placing a return call to a financial services organization. They will chat before shooting off an email. And the very last thing they will ever do is write a letter and drop it in a big, blue, metal receptacle at the end of a driveway – the mailbox. In short, they will exhaust every form of person to person avoidance behavior before engaging in a phone conversation with a live person.

Equally significant is the fact users of one or more types of digital communication channels are more likely to engage using other media channels than those who avoid digital technology altogether. For example, those who use text messaging to communicate are also more likely to use the web, IVR or email. This means once you engage with a consumer digitally it’s more likely the consumer will employ the same or similar types of communication channels to communicate with you in the future.

So how do we evolve our business strategies to meet these new consumer communication preferences? The answer is simple. Use a variety of communication methodologies to meet the needs of your consumer population. Doing so means considering the following:

1. Multi-channel communication systems – If you have ever worked in education or marketing, you know adult learners do not all learn alike. Some prefer to read, some prefer to listen – It varies upon the person and the generation. But make no mistake, a single communication system will no longer reach all the consumers we need to reach for effective debt management. We need to provide options that meet people at their convenience and preference.

2. Integrated contact management – Siloed communication systems, at least in the world of financial services, have become dinosaurs. To effectively communicate with people and manage their preferences in terms of time, place and manner, we need integrated contact management systems that tie to an agency’s software and provide accurate and holistic information to the debt collector about each consumer’s behavior.

3. Individually-tailored communication – Combining analytics with Big Data will determine the best way to engage a debtor, as opposed to just addressing a general demographic category. Leveraging those sources of information means the ARM industry would be able to select the most appropriate mode of communication, the wording and tone of the message, the best time of day and frequency to engage, and even the type of payment options offered.

4. Intelligent rules engine – ARM operators today need rules engines that not only follow new collections rules and regulations, but also track and update changes in real time. Rules engines not only drive effective, compliant consumer communications, they help collect money.

5. Website as Communication Management Hub – Most debt collectors have websites, but few know how to employ one as a tool to manage consumer communication preferences. At minimum, a robust website should provide consumers with information about their rights under the law; a place to register complaints; a way to request documentation about the debt; a page to grant and revoke consent to dial, text and email; a portal to manage communication preferences, settlements and payment arrangements; and of course a page to authorize and make electronic payments.

Consumers are not the only ones demanding a menu of communication options to manage their debt. Regulators are working with industry groups to help companies better understand how to enhance consumer communications using a menu of technology driven communication channels. Do not be left behind. Take steps now to employ a multi-channel communication platform designed to meet the needs of your consumer population.

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Interested in learning more about this topic? Watch the replay of Rozanne Andersen’s webinar New Channels, New Tactics: Improving Performance with New Consumer Communication

This article originally appeared as an Alert on ClarkHill.com, and is republished here with permission.

Pursuant to Executive Order 13772, issued February 3, 2017, the Department of Treasury has issued a report, A Financial System that Creates Economic Opportunities for Banks and Credit Unions (the “Report”), which sets forth the Trump Administration’s plan to implement core principles to regulate the United States Financial Services Systems. The goal of these reform proposals is to promote individual decision-making regarding investments, to ensure efficiency and accountability in the operation of each administrative agency, and to provide competition and growth for the American economy. 

This report discusses potential reforms to the depository system, which covers banks, savings associations, and credit unions of all sizes, types and regulatory charters. Subsequent reports will discuss capital markets reform, asset management, insurance and housing reform. 

Some of the highlighted proposals are as follows: 

1)      Addressing the U.S. Regulatory Structure

• Reduce fragmentation of administrative work; promote cooperation and clear jurisdiction for each agency.
• Expand the authority of the Financial Stability Oversight Council (FSOC) (appointment of a lead regulator when multiple agencies have different interpretations of the law).
• Improve the effectiveness and accountability of the Office of Financial Research. 

2)      Refining Capital, Liquidity and Leverage Standards

• Raise the threshold of the Dodd-Frank stress test to $50 billion; eliminate the mid-year test; provide more independency for the banking institutions.
• Elimination of the Comprehensive Capital Analysis and Review (CCAR) qualitative assessment as non-transparent.
• Standardize processes for risk-weighting assets to simplify the capital regime.
• Amendment of the Liquidity Coverage Ratio (LCR) to apply only to international active banks. 

3)     Providing Credit to Fund Consumers and Businesses to Stimulate Economic Growth

• Recalibrate capital requirements that place an undue burden on individual loan-asset classes for mid-sized and community financial institutions.
• Restructuring of the Consumer Financial Protection Bureau (CFPB) regarding its regulatory responsibilities and accountability: 
  1. Its director should be removable by the president at will or, in the alternative, restructure the CFPB as an independent multi-member commission.
  2. Fund the CFPB through the annual appropriation process.
  3. CFPB should inform all regulated entities of its interpretation of the law before subjecting them to its regulations. 

4)      Improving Market Liquidity

• Considerations to adjust the Supplementary Leverage Ratio (SLR) and enhanced SLR (eSLR). Provide exceptions for cash on deposit with central banks, U.S. treasury securities and initial margin for centrally cleared derivatives from entering the denominator of total exposure.
• Significant amendment of the Volcker Rule to make it simpler and decrease unnecessary burdens. Banks with less than $10 billion in assets should not be subject to the rule. 

5)      Allowing Community Banks and Credit Unions to Thrive

• Simplification of the regulatory regime for these institutions by exempting them from the U.S Basel III risk-based capital regime and, if required, from Dodd Frank’s Collins Amendment.
• Change the CFPB’s ATR/QM rule and increase the total asset threshold for making small creditor QM Loans from $2 billion to a threshold between $5 and $10 billion.
• For federally insured credit unions, raise the scope of application for stress-testing requirements to $50 billion in assets.
• For credit unions, repeal of the requirement to hold more than $100 million in assets to satisfy a risk-weighted capital framework. Introduce a simple leverage test. 

6)      Improving the Regulatory Engagement Model

• The Board of Directors of each banking institution must have clear roles and responsibilities along with accountability. Non-accountability was one of the primary reasons of the financial crisis of 2008.
• Clear distinction between Board and management/no “one size fits all” strategy.
• Modified reform of the rules of regulatory coordination among administrative agencies. 

7)      Enhancing Use of Regulatory Cost-Benefit Analysis

• The Dodd-Frank Act has created numerous administrative agencies to oversee its application, which do not coordinate. Thus, the cost of following the Dodd-Frank Act has increased, especially for mid-size banking institutions.
• Impose a uniform and consistent method that all administrative agencies will use to determine the cost and the benefits of all proposed regulations, which are economically significant.
• Promote cooperation among the agencies, along with public accountability.  

It is unclear how the Administration will make good on these and other proposals. Many of the suggested recommendations will require legislative changes to Dodd Frank. One wild card of course will be whether the independent agencies will adopt these proposals on their own. Organizations that are subject to regulation by these various agencies should consider these proposals as opportunities for outreach and should be putting together wish lists and talking points for future engagement. Clark Hill will continue to monitor the development of these proposals.

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JACKSONVILLE, Fla. — Diversified Consultants Incorporated (DCI) is pleased to announce the promotion of Gordon Beck III to Chief Executive Officer (CEO). 

Gordon previously held the position of Chief Operations Officer (COO) where he performed in all aspects , to include, the company’s goals and driving its vision. The enhanced role will further allow Gordon to concentrate more fully on DCI’s vision and afford him the ability to cement current relationships and to take DCI to new heights.  Gordon said,

“It is a tremendous honor to accept the role as CEO for DCI. This is not just a job to me; this is my family and my life. After two decades with the organization encompassing countless levels of responsibility, to reach the pinnacle of my career at age 39 is a great accomplishment of which I am very proud, but  the journey is just the beginning.  I have a team at DCI that is second to none and our sole mission is to be the greatest call center that this country has ever seen.  My mentor, Charlotte Zehnder, has done so much for me and the entire DCI family and we are all excited to make her proud.” 

Gordon is replacing Charlotte Zehnder, who has long been the matriarch of the company. Charlotte will remain as the major shareholder at DCI and will also serve as Chairman of the Board. When asked about her decision Charlotte said,

‘It was time for me to pull back as CEO of DCI.  Personal goals and family are at the forefront of my thought process. I felt that the time was right as Gordon has been functioning within the CEO role for some time. After twenty years with DCI Gordon not only deserves this opportunity, but has unequivocally earned it. He has my respect and that of all who know him. I am 100% confident that I am turning the reins over to a very competent executive, an incredible man, and a dear friend. There is no doubt that Gordon will continue to move the company onward and upward.”

DCI has three stateside locations, Jacksonville FL, Portland, OR and Louisville KY. The company also maintains a presence in the Philippines and in India. DCI currently employs 940 people with room to grow to 1800 based upon the recent opening of the Louisville KY office, which is Gordon’s hometown. 

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This article was originally published on the Maurice Wutscher blog and is republished here with permission.

A purchaser of a defaulted debt who then seeks to collect the debt for itself is not a “debt collector” subject to the federal Fair Debt Collection Practices Act under an opinion delivered today by the U.S. Supreme Court.

The issue before the Court was whether a purchaser of defaulted debt meets the FDCPA’s definition of a “debt collector” as one who “regularly collects or attempts to collect . . . debts owed or due . . . another.” 15 U. S. C. §1692a(6).

Here, Santander Consumer USA Inc. acquired defaulted loans from CitiFinancial Auto and then began to collect on those loans. The petitioners argued this activity made Santander a debt collector subject to the FDCPA.  The Fourth Circuit Court of Appeals disagreed because the debt purchaser was not seeking to collect a debt “owed . . . another.” The Supreme Court affirmed in a unanimous decision.

The opinion did not consider whether a purchaser of defaulted debt is engaged “in any business the principal purpose of which is the collection of any debts.” §1692a(6).

A copy of the decision in Henson v. Santander Consumer USA Inc. is available here.

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Editor’s note: RMA International is urging caution when interpreting this decision.

This article previously appeared on Ballard Spahr’s CFPB Monitor and is re-published here with permission.

A federal district court in New Jersey dismissed a putative class-action lawsuit against Total Card, Inc. (TCI), a South Dakota-based debt collector. The plaintiff alleged that TCI violated the Fair Debt Collection Practices Act (FDCPA) when it attempted to collect time-barred debts with payment plan solicitations.

According to the lawsuit, TCI sent a collection letter to a New Jersey consumer who owed $1,648.56 on a past-due cellular telephone bill. The collection letter stated that resolving the debt would “put an end to the calls and letters attempting to collect on this account,” but because of the age of the debt, the collector would not file a lawsuit or report the debt to a credit reporting agency.

Despite the time-barred debt disclosure, the plaintiff claimed that the letter was “misleading” under sections 1692e and 1692f of the FDCPA because it failed to advise consumers whether a new debt or contract would be formed or whether the statute of limitations would be revived if the consumer made a payment. TCI, by contrast, argued that under Huertas v. Galaxy Asset Mgmt., a debt collector may seek voluntary repayment of a time-barred debt under the FDCPA if “the debt collector does not initiate or threaten legal action in connection with its debt collection efforts.”

The court granted TCI’s motion to dismiss. The court first rejected the plaintiff’s argument that the collection letter attempted to create a new contract or enforceable debt. Rather than create a new contract, the court held that the collection letter intended only to collect voluntary payments on existing debts. In so holding, the court relied on the letter’s language that any payments would “full[y] and final[ly] resol[ve] . . . this account!,” “satisfy past financial obligations,” and “resolv[e] your account in full.”

Next, the court rejected the plaintiff’s argument that the collection letter was misleading because it did not warn consumers that partial payments may revive the statute of limitations. This holding relied on a feature of New Jersey statute-of-limitations law providing that a promise to pay only restarts the statute of limitations if it is unconditional and in a signed writing. The court reasoned that a letter that asks a consumer to “[s]imply check a box” to select an installment payment plan is not an unconditional, signed writing. Finally, the court held that the letter was not misleading because it did not threaten legal action and contained a time-barred debt disclosure.

The upshot of the decision is that the court reaffirmed a collection agency’s right to collect time-barred debt, provided it does not do so in a misleading manner. We have previously covered issues involving time-barred debt here. Collecting time-barred debt continues, however, to invite litigation and regulatory attention. It is therefore important to follow state law closely and avoid even the appearance of threatening legal action while keeping in mind the least-sophisticated-consumer standard.

Attorneys in Ballard Spahr’s Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.

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Copyright 2017 Ballard Spahr LLP. Reprinted with permission. Content is general information only, not legal advice or legal opinion based on any specific facts or circumstances.

Yesterday, Receivables Management Association International (RMA) issued a statement urging its membership and the broader receivables management industry to proceed with caution when interpreting the United States Supreme Court ruling in the case of Henson v. Santander.

In this unanimous decision, the Court determined that Santander Consumer USA, Inc. did not fall under the plain meaning of the term “debt collector” in the federal Fair Debt Collection Practices Act (FDCPA) when it purchased defaulted loans originated by another lender and proceeded to collect on these loans because it was not seeking to collect the debts “owed another”. The act of purchasing the loans meant that the debt was owed to Santander—not another entity.

However, the Court left open the question of the applicability of the alternative FDCPA definition of “debt collector” which states that it also applies to “any business the principal purpose of which is the collection of any debts” (emphasis added). This unanswered question by the Supreme Court raises questions for debt buying companies who purchase and actively collect on their own debt. While these companies would not be collecting debt owed another, they are still engaged in collecting debt.

While all judicial decisions are based on the facts contained in the case, it is conceivable that the Santander decision may be used by debt buying companies that operate solely as an investment vehicle and do not engage in any debt collection activity themselves (aside from acquisition) to argue they are not subject to FDCPA regulation. However, RMA would urge all companies that operate under either the active or passive business model to consult with legal counsel before making any operational changes.

In the end, RMA does not see the Santander decision as lessening the consumer protections required of its membership due to the rigorous requirements of RMA’s Receivables Management Certification Program (RMCP). RMA estimates that over 80 percent of consumer receivables in the United States that have been sold on the secondary market are owned by companies who are RMCP certified and thereby bound by standards that already go above and beyond the requirements of the FDCPA.

The CFPB’s decision to change course on one key aspect of its debt collection rulemaking was not only unexpected by industry and consumer advocates alike, but an important sign that the debt collection industry should not otherwise ignore. 

First the background. In July 2016, the CFPB issued its Outline of Proposals under Consideration for the regulation of debt collection (the “Outline”). The Outline came in advance of a Small Business Review Panel (“Panel”) to gather feedback from small debt collection industry representatives. The Panel convened in late August 2016. One of the key elements in the Outline was a requirement to ensure that debt collectors substantiate the debt, in other words that debt collectors had the right supporting information about the debts they were collecting. While this sounds sensible, in practice it is problematic; mandating that debt collectors verify the accuracy of the debts on behalf of their 1st party clients is potentially impossible when collectors have no assured access to underlying debt documentation. 

The industry responded and did so effectively both in their oral presentations at the Panel proceedings and in their written comments. Many industry participants also met with the CPFB to discuss the particular topic of substantiation. This outreach has resulted in the Bureau now concluding that issues of “right consumer, right amount” should be a rule geared more toward 1st party creditors instead of 3rd party debt collectors. The Bureau will still move forward with its remaining proposals for 3rd party debt collection, which will include consumer understanding initiatives and limitations on consumer communication, but will look to shift its focus on substantiation to include 1^st parties. A notice of a proposed rule for 3^rd party debt collection is still some time away due to continuing research.  

Although the industry should pat themselves on the back for their advocacy, it is important to remember a critical component that was part of the CFPB’s decision; advocates saw the issue of substantiation as a problem as well. You have to look no farther than the National Consumer Law Center’s (NCLC) comments to the Advanced Notice of Proposed Rulemaking. On page 49, “Rules should require the original creditor and any debt buyer to pass on the information to the next buyer” [emphasis added]. So while the CFPB’s decision was as much about listening to industry, it was also about identifying where both sides agreed. (It should be noted, however, that the NCLC opposed any changes to Foti, while the Outline recommended a clear Foti fix). The NCLC issued a press release applauding the CFPB’s decision on substantiation.   

The CFPB has sent a signal to all stakeholders in the debt collection space: reach out and collaborate with each other. One industry group, the Consumer Relations Consortium (CRC) has been doing this for several years and it seems to be working. We as an industry should go back and look at all the comments of all consumer advocates and see where we can find key topics of agreement and then work from there. The industry wants rules and what better way to achieve that then through consensus from all sides. 

For 1st party creditors, the time is now to consider issues of data integrity and effective collaboration with debt collectors they hire. Creditors will now have to consider documentation issues at the front end of the initiation of the loan in order to substantiate it on the back end, and proactive efforts in advance of the upcoming rulemaking on 1st and 3rd party substantiation programs should begin immediately. Needless to say outreach to advocates must be part of the advocacy strategy. The CFPB appears to be moving toward the realization that we all live in a credit based eco-system and a holistic approach, involving all stakeholders in the debt collection market, is warranted.  

Last Thursday marked my last Consumer Advisory Board (CAB) meeting. All outgoing members were asked to say a few words; in my comments I thanked the CFPB staff who coordinated the CAB for all their hard work. They are truly an incredible group of dedicated public servants, who as I stated, spent the last three years “schlepping” all CAB members from one meeting to another, as well as from one end of the country to the other. I thanked the Director and told him that while we have had our differences and that I do not agree with a lot of the Bureau’s priorities, I have a tremendous amount of respect for him and what he has accomplished from ground zero. Finally, I thanked all my fellow CAB members and told them I was privileged to have been included in this special group. I told the consumer advocates in the room that I valued my experience on the CAB because it gave me an opportunity to know people with whom I would never have had the opportunity to collaborate. Finally, I suggested they remember that what we all have in common is much greater than our differences. We as an industry need to build on that understanding.   

On May 26, 2017 a federal judge in Florida issued an order in an appeal from a Bankruptcy Court proceeding that could have a chilling impact on the consumer litigation activities of a local Bankruptcy Trustee and Special Counsel to the Trustee. The case is Cadlerock Joint Ventures, L.P. v. Christine Herendeen and Thomas A. Lash (Case No. 16-cv-2046, U.S. D.C. Middle District of Florida).

A copy of the Order can be found here. 

Background 

The case was decided by the Honorable James S. Moody, Jr., United States District Court Judge.  

From the court’s order: 

“The procedural history of this individual case is extensive and adequately summarized in the parties’ briefs. The essential issue here is whether the Bankruptcy Court should have sanctioned the Bankruptcy Trustee and Special Counsel based on their common practice and conduct of filing meritless cases. Special Counsel has a paralegal attend § 341 Meetings of Creditors in order to solicit potential violations of consumer protection acts against creditors. That common practice gave rise to the filing of this meritless case against Appellant Cadlerock Joint Ventures, L.P.” 

The parties have a slightly different perspective on the facts of the case. A copy of the Cadlerock brief can be found here.  A copy of the Lash brief can be found here. A copy of the Herendeen brief can be found here. 

Key Issue 

Judge Moody defined the issue: 

“As Appellant (Cadlerock Joint Ventures, L.P.) stated during oral argument, this appeal turns on the Bankruptcy Court’s decision to limit the sanctions proceeding to the facts of this case alone. By limiting its review to this singular case, the Bankruptcy Court concluded that there was not “a whiff of an abuse of process . . .” The Bankruptcy Court focused on the fact that the adversary proceeding complaint was dismissed within the safe harbor time period and concluded that any erroneous allegations contained in the complaint were therefore harmless. 

In narrowly limiting its review, the Bankruptcy Court was unable to consider certain statistical evidence that was presented to this Court during the pendency of this appeal about the Trustee’s and Special Counsel’s pattern and practice of filing similar meritless lawsuits. This evidence goes to the heart of the sanctions issue—that is, whether it is an abuse of process under § 105(a) for a bankruptcy trustee to invite a law firm’s paralegal to solicit claims at the 341 hearing, and then permit the filing of adversary proceedings without any further inquiry into the claims’ merits. 

If the Bankruptcy Court had permitted discovery on this statistical evidence, it may have had a different perspective and may have reached a different conclusion about the appropriateness of sanctions. The evidence, if true, raises grave concerns about the Trustee’s conduct in this case and prior cases. In a larger sense, this evidence raises a concern about an abuse of the overall bankruptcy process.” (Emphasis added by insideARM.) 

The court’s determination 

Judge Moody found the following: 

“The evidence suggests that Appellees have made a habit of routinely filing thousands of lawsuits against creditors with little investigation of the facts and alleging identical boilerplate language. The boilerplate complaints are supported by only the Trustee’s leading line of questioning at a debtor’s 341 hearing. Creditors are forced to settle or spend attorney’s fees to defend these meritless lawsuits, or are left with no option but to execute a joint stipulation of dismissal with prejudice, thereby waiving any subsequent claim for sanctions or attorney’s fees to compensate them. The statistical evidence suggests that more than 1/3 of all cases filed (864 out of 2,494) were voluntarily dismissed with no recovery for the bankruptcy estate. 

In denying sanctions under 11 U.S.C. § 105(a), the Bankruptcy Court noted in its Order on Special Counsel’s Amended Motion for Summary Judgment that if it “believed that the Trustee and Special Counsel had engaged in any wrongdoing, that the public was endangered by their conduct, or that there was any mockery of the Court’s processes,” it would impose sanctions. But it would be impossible to conclude whether the public, or creditors, were negatively impacted by the Trustee’s and Special Counsel’s conduct because the Bankruptcy Court limited the record to the facts of this case and then granted summary judgment in Appellees’ favor. Restricting discovery in this manner was error because Appellees’ conduct in similar cases is highly relevant to determine whether an abuse or “mockery” of the bankruptcy process occurred and whether it will continue to occur.” 

Judge Moody ultimately determined:

“The Court concludes that the Bankruptcy Court committed error when it granted summary judgment in Appellees’ (Herendeen and Lash) favor prior to permitting limited discovery regarding Appellees’ conduct in similar cases. Statistical evidence regarding Appellees’ similar filings was presented to this Court, which the Bankruptcy Court did not have the opportunity to review. Accordingly, the Court reverses and remands on this narrow and limited issue so that the Bankruptcy Court can consider this statistical evidence, determine if additional discovery is necessary, and, in light of this evidence and any additional discovery, make supplemental findings of fact on the issue of whether sanctions are appropriate in this case.” 

insideARM Perspective 

insideARM normally writes an original perspective on cases we cover, however, in this case, we are going to simply reprint comments from Judge Moody as they are probably better than any commentary we could write on our own. 

Judge Moody wrote: 

“Finally, the Court is compelled to comment further on the issue of whether Appellees’ conduct constitutes inappropriate solicitation. As the Court previously noted, it has serious concerns about the Trustee’s conduct of having a paralegal from Special Counsel’s office attend the 341 hearing to essentially “drum up” business, especially when the Trustee has a financial interest in monies recovered (up to 25%), but has nothing to lose if the suit is frivolous. The Court understands that the solicitation issue is skirted because the Trustee, not the debtor, owns all assets (not claimed as exempt), including all causes of action previously owned by the debtor. Because the Trustee has invited the lawyer—or his paralegal—to attend, the questions posed by the lawyer to ferret out a claim are not technically a “solicitation.” But, taking this reasoning further, the Trustee could invite a whole panel of lawyers to attend the 341 hearing. These lawyers, sitting like birds of prey, could pose questions about: potential car accident claims; recent medical treatment or surgeries; recent injuries; overtime claims; or about whether the debtor had received improper legal advice. At some point, while perhaps successfully avoiding the “solicitation” issue, such conduct would constitute an abuse of the bankruptcy process. 

Regardless of the technicalities, if one out of every three or four cases filed are meritless, something is wrong with the process. On remand, the Bankruptcy Court should consider whether allowing this process to continue without correction is abuse.” (Emphasis added by insideARM)

In Flecha v. Medicredit (Flecha v. MEDICREDIT, INC., Dist. Court, WD Texas 2017), Texas District Court Judge Lee Yeakel has denied a request by Medicredit to dismiss the case on grounds that there is no basis for the Plaintiff’s complaint. The case is allowed to continue. Nina Flecha has alleged, in a class action case, that Medicredit threatened her with litigation to scare her into paying her medical bill, without any real intent to sue, which, if true, would constitute a violation of the Fair Debt Collection Practices Act (FDCPA).

Background

In June 2016, Nina Flecha (“Flecha”) filed a class action suit under the FDCPA alleging that Medicredit had sent her a letter containing a false threat to sue. Flecha argued that since Seton Medical Center Hays (“Seton” is Medicredit’s client and the original creditor on an unpaid $5,166.71 medical bill)  does not sue consumers for medical debts, the collection letter caused an FDCPA violation.  Medicredit filed an instant Motion for Judgment on the Pleadings in the fall of 2016, citing Federal Rule of Civil Procedure 12(c), alleging that Flecha did not have a valid claim for relief under the FDCPA because the collection letter did not contain an explicit threat of litigation.

The court denied Medicredit’s motion, finding that a dismissal would only be appropriate  when/if it is apparent that not even a “significant fraction of the population would be misled” by the contents of a collection letter. A review of the purpose of the FDCPA is offered, reminding us:

15 U.S.C § 1692(e). Section 1692e generally prohibits “false, deceptive, or misleading representation[s] or means in connection with the collection of any debt.” 15 U.S.C. §1692e. The section provides a non-exhaustive list of examples of such conduct, including “[t]he threat to take any action that cannot legally be taken or that is not intended to be taken,” and “[t]he use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.” 15 U.S.C. §1692e(5) and (10). Congress “clearly intended the FDCPA to have a broad remedial scope” and “[t]he FDCPA should therefore be construed liberally in favor of the consumer.” Daugherty v. Convergent Outsourcing, Inc., 836 F.3d 507, 511 (5th Cir. 2016) (quoting Serna v. Law Office of Joseph Onwuteaka, P.C., 732 F.3d 440, 445 n. 11(5th Cir. 2013)).

Importantly, Seton does not deny Flecha’s claim that it does not sue patients to collect outstanding medical bills. There is also no dispute about the contents of the collection letter in question, which states, in part: 

“…a determination must be made with our client as to the disposition of your account…voluntary resolution is doubtful…DO NOT IGNORE THIS NOTICE.” (emphasis in original) 

Medicredit argued (relying on Jenkins v. Union Corp., 999 F. Supp. 1120, 1136 (N.D. Ill. 1998) that Flecha has no claim under § 1692e(5) because the letter in question does not outright mention litigation, or imply the pursuit of litigation. However, many courts have established that explicit threat is not required in order to establish a violation of § 1692e(5), and Judge Yeakel noted that the Texas court is not bound by the Jenkins ruling, adding that the “the standard articulated by Jenkins is far from the controlling rule regarding what is necessary to state a § 1692e(5) claim.” 

Instead, the court decided that “a plaintiff is permitted to offer evidence at a summary judgment or trial stage to show that indeed the language confuses the unsophisticated consumer.” In the eyes of the judge, at this stage of the case, Flecha has brought a plausible claim that Medicredit violated 15 U.S.C. § 1692e(5) by threatening legal action it had no intention of pursuing. The case will proceed to its next stage.

insideARM Perspective

This case is still in the pleading stage, and we’ll continue to watch it unfold. However, Flecha v. Medicredit already holds a gift for the healthcare provider community. 

This is an auspicious moment in the history of the modern healthcare business: With the rise of high deductible health plans, an unprecedented influx of insured healthcare consumers are bound to enter third-party collections too hard and too soon thanks to overdue, unmanageable and surprise self-pay medical bills. Although better patient financial service options are proliferating, and both billing and collection agencies are seeing excellent results from a softer and more flexible revenue cycle approach, traditional collection methods like Medicredit’s are still most common. We expect to see many more cases of the same ilk in the near future as a result.

How can the provider community shunt the infection? 

I wrote a series not long ago for insideARM about how providers can take steps to audit their collection agencies to ensure the presence of a solid compliance protocol. Many collection agencies have call monitoring programs in place (many using voice analytics software to flag potential call center compliance issues), and some even have dedicated audit teams that review flagged calls and address breaches by agents. A smaller number put their written communications under the looking glass, especially routinely, as would be prudent, since case law on these issues does evolve. 

It’s worth considering the guidance of the judge in Flecha, who re-capped a slew of written collection letter statements that have been sufficient to create a fact question on whether or not collection letters contained threatening language: 

• “[i]tem has been referred for Collection Action” and “[w]e will at any time after 48 hours take action as necessary and appropriate to secure payment in full;” Pipiles, 886 F.2d at 25-26.
• referenced settling matters “out of court” and “unless we receive your check or money order, we will proceed with collection procedures;” Baker, 677 F.2d at 778-79.
• “[f]ailure to pay this debt immediately can result in involuntary resolution;” Samuel v. Approved Credit Solutions, 2015 WL 4548745, at *3 (S.D. Ind. July 28, 2015).
• directing consumer to pay debt “so that further action by our office can be avoided;” Canlas v. Eskanos & Adler, P.C., 2005 WL 1630014 at * 2 (N.D. Cal. July 6, 2005)
• if debtor did not “work with” creditor, “further steps would be taken.”  Perretta v. Cap. Acquisitions & Mgmt. Co., 2003 WL 21383757 at *4 (N.D. Cal. May 5, 2003).

What’s the key takeaway so far in Flecha v. Medicredit? Whether you engage third party collections or not, make sure there are established procedures and controls in place to ensure (both internal and vendor) compliance with the FDCPA. Written communications sent on your organization’s behalf at any point in the patient lifecycle are a reflection of your brand and part of the customer experience. They’re also fodder for litigation under the FDCPA. It’s never a bad idea to ask to see which letters your billing and collections vendors are using to communicate with patients. Make a good faith effort to review them in light of FDCPA examination criteria. Document your review. Repeat it routinely and involve other senior leaders in your organization in the effort. An ounce of prevention is worth a pound of cure.