Last week the 5^th Circuit Court of Appeals ruled for the Plaintiff in Daugherty v. Convergent Outsourcing Incorporated; LVNV Funding, LLC, a case about what a collection letter did not say.

The decision can be found here.

Background

Plaintiff Roxanne Daugherty had accumulated $12,824 in credit card debt, and subsequently defaulted.  LVNV Funding purchased the debt from the creditor, and then hired Convergent Outsourcing to collect on its behalf. With interest, after many years the debt had increased to over $32,000. Convergent sent Daugherty a collection letter dated January 23, 2014, proposing a payment of $3,240.59 to “settle” a “past due balance of $32,405.91.” A fact not in dispute is that the debt was out of statute.

Approximately ten months later, on November 18, 2014, Daugherty filed suit against Convergent and LVNV, alleging violations of the FDCPA due to the use of false, deceptive, or misleading representations or means in connection with the collection of the debt, and by using unfair or unconscionable means to attempt to collect the debt. She claimed that the collection letter failed to disclose that the debt was not enforceable by law, that accepting a settlement would trigger tax liability, and that a partial payment would revive the statute of limitations on the full amount of the debt. She sought statutory damages of $1,000 and attorney’s fees and costs.

The Defendants moved to dismiss the suit, which was granted by the court, which ruled that the FDCPA permits a debt collector to seek voluntary repayment of a time-barred debt so long as the collector does not initiate or threaten legal action. The Plaintiff appealed.

The Appeal

The judge in this case noted that there is a conflict among circuits as to whether a collection letter offering “settlement” of a time-barred debt can violate the FDCPA if the collector does not disclose the debt’s unenforceability or expressly threaten litigation. The 3^rd and 8^th Circuits have said that no violation has occurred in these circumstances. The 6^th and 7^th Circuits have ruled that such circumstances do constitute a violation.

In the end, the judge agreed with the 6^th and 7^th Circuits. He referenced McMahon v. LVNV Funding, 776 F.3d 393 397 (6^th Cir. 2015), which concluded that offers to “settle” are misleading to a “least sophisticated consumer” because “a gullible consumer who made a partial payment would inadvertently have reset the limitations period and made herself vulnerable to a suit on the full amount.” The 6^th Cir. Judge also referenced the fact that the FTC and CFPB have argued that a debt collector collecting on time-barred debt “must inform the consumer that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would revive the collector’s ability to sue to collect the balance.”

Accordingly, the 5^th Circuit reversed the district court’s grant of Defendant’s motion to dismiss and remanded the case for further proceedings.

insideARM Perspective

The Court’s reference to the FTC and CFPB’s argument that debt collectors must disclose the status of a time-barred debt is interesting.

The CFPB’s Outline of Proposed Rules for debt collection, released in late July of this year, contemplates an explicit rule that the collector must provide a time-barred debt disclosure, and under what circumstances such a disclosure would be required.

Industry participants are concerned about such a requirement for a range of reasons, including the difficulty of calculating the date at which a debt will become out of statute. One issue raised is that this is information only the creditor can determine, and also that many unsophisticated creditors would be either unable or unwilling to provide this to the collector. This puts collection of not only already time-barred debt at risk, but also soon-to-be time-barred debt.

We reached out to Convergent Outsourcing for comment. Tim Collins, General Counsel, provided this statement,

“It used to be what you put in your letters that got you sued, today that has expanded to what you have not put in your letter. This creates infinite possibilities for plaintiff attorneys to sue collection agencies. Hopefully the final published rules from the CFPB will help to create some clarity as it relates to this issue but until the incentives are changed in the FDCPA, plaintiff lawyers will just find something else not in your letter to sue us on.”

Last week the 5^th Circuit Court of Appeals ruled for the Plaintiff in Daugherty v. Convergent Outsourcing Incorporated; LVNV Funding, LLC, a case about what a collection letter did not say.

The decision can be found here.

Background

Plaintiff Roxanne Daugherty had accumulated $12,824 in credit card debt, and subsequently defaulted.  LVNV Funding purchased the debt from the creditor, and then hired Convergent Outsourcing to collect on its behalf. With interest, after many years the debt had increased to over $32,000. Convergent sent Daugherty a collection letter dated January 23, 2014, proposing a payment of $3,240.59 to “settle” a “past due balance of $32,405.91.” A fact not in dispute is that the debt was out of statute.

Approximately ten months later, on November 18, 2014, Daugherty filed suit against Convergent and LVNV, alleging violations of the FDCPA due to the use of false, deceptive, or misleading representations or means in connection with the collection of the debt, and by using unfair or unconscionable means to attempt to collect the debt. She claimed that the collection letter failed to disclose that the debt was not enforceable by law, that accepting a settlement would trigger tax liability, and that a partial payment would revive the statute of limitations on the full amount of the debt. She sought statutory damages of $1,000 and attorney’s fees and costs.

The Defendants moved to dismiss the suit, which was granted by the court, which ruled that the FDCPA permits a debt collector to seek voluntary repayment of a time-barred debt so long as the collector does not initiate or threaten legal action. The Plaintiff appealed.

The Appeal

The judge in this case noted that there is a conflict among circuits as to whether a collection letter offering “settlement” of a time-barred debt can violate the FDCPA if the collector does not disclose the debt’s unenforceability or expressly threaten litigation. The 3^rd and 8^th Circuits have said that no violation has occurred in these circumstances. The 6^th and 7^th Circuits have ruled that such circumstances do constitute a violation.

In the end, the judge agreed with the 6^th and 7^th Circuits. He referenced McMahon v. LVNV Funding, 776 F.3d 393 397 (6^th Cir. 2015), which concluded that offers to “settle” are misleading to a “least sophisticated consumer” because “a gullible consumer who made a partial payment would inadvertently have reset the limitations period and made herself vulnerable to a suit on the full amount.” The 6^th Cir. Judge also referenced the fact that the FTC and CFPB have argued that a debt collector collecting on time-barred debt “must inform the consumer that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would revive the collector’s ability to sue to collect the balance.”

Accordingly, the 5^th Circuit reversed the district court’s grant of Defendant’s motion to dismiss and remanded the case for further proceedings.

insideARM Perspective

The Court’s reference to the FTC and CFPB’s argument that debt collectors must disclose the status of a time-barred debt is interesting.

The CFPB’s Outline of Proposed Rules for debt collection, released in late July of this year, contemplates an explicit rule that the collector must provide a time-barred debt disclosure, and under what circumstances such a disclosure would be required.

Industry participants are concerned about such a requirement for a range of reasons, including the difficulty of calculating the date at which a debt will become out of statute. One issue raised is that this is information only the creditor can determine, and also that many unsophisticated creditors would be either unable or unwilling to provide this to the collector. This puts collection of not only already time-barred debt at risk, but also soon-to-be time-barred debt.

We reached out to Convergent Outsourcing for comment. Tim Collins, General Counsel, provided this statement,

“It used to be what you put in your letters that got you sued, today that has expanded to what you have not put in your letter. This creates infinite possibilities for plaintiff attorneys to sue collection agencies. Hopefully the final published rules from the CFPB will help to create some clarity as it relates to this issue but until the incentives are changed in the FDCPA, plaintiff lawyers will just find something else not in your letter to sue us on.”