Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: FTC, CFPB support reversal of decision on time-barred collection of debts, (Mar 13, 2014)

By Katalina M. Bianco, J.D.

The FTC and Consumer Financial Protection Bureau jointly filed an amicus brief in a class-action suit involving debt collection practices. The agencies, both charged with enforcing the Fair Debt Collection Practices Act, submitted the brief on March 50020to assist the court in its interpretation of the act in the Sixth Circuit case of Buchanan v. Northland Group, Inc.

Background. In 2011, a debt collector, Northland Group, Inc., sent Esther Buchanan a letter in an attempt to collect on a debt originally due to National City Bank. The letter contained a settlement offer. The letter noted that the collector was not obligated to renew the offer. The collector did not tell Buchanan that the statute of limitations for filing an action to collect the debt had expired and that Northland could not therefore compel her to pay.

Buchanan filed a class-action complaint, alleging that the last payment on the debt had been made more than six years before Northland’s letter and that an action to enforce the debt would be barred by Michigan’s six-year statute of limitations for contract actions. The complaint specifically alleges that the letter violates the FDCPA, 15 U.S.C. §§ 1692e, 1692f, because the failure to disclose that the debt was time-barred, together with the offer to settle, amounted to a misleading representation that the debt could be legally enforced.

District court ruling. The district court granted Northland’s motion to dismiss the complaint for failure to state a claim upon which relief may be granted. The court held that although the FDCPA requires a debt collector to include certain information in its communications with a debtor, it “does not specifically require a debt collector to disclose the applicable limitations period.” Further, “[i]n Michigan, the statute of limitations is a procedural defense that does not alter the creditor’s substantive rights,” and concluded that because “the passage of the limitations period does not affect the validity of the debt,” Northland’s failure to state that the debt was time-barred was not a “false misrepresentation” or an “unfair practice” and did not “falsely represent the ‘legal status of the debt’” under the FDCPA.

The court also rejected Buchanan’s contention that the letter “implies that a legally enforceable obligation existed,” and held that as a matter of law, “even the least sophisticated consumer would not infer a threat of litigation” from the letter. The court also dismissed Buchanan’s citations from FTC and CFPB materials interpreting the FDCPA.

Agencies’ stance. The FTC and CFPB note in their brief that a debt collector who seeks payment after the statute of limitations has run on a debt may violate the FDCPA if the communication would lead the least-sophisticated consumer to believe that the debt may be enforced in court. “With respect to time-barred debt, it is well established that implicit or explicit threats to sue and actual lawsuits violate the Act,” the agencies contend. They stress that other communications that mislead consumers also may qualify as violations. In the instant case, the district court erred in its dismissal of the complaint because the collector’s letter could plausibly mislead the least-sophisticated consumer as to the legal status of the debt.

Time-barred debts. Section 1692e contains a nonexclusive list of prohibited practices under the FDCPA. This list includes making a false representation of “the character, amount, or legal status of any debt,” threatening “to take any action that cannot legally be taken or that is not intended to be taken,” and “using any false or deceptive means to collect or attempt to collect any debt.” Under this subsection, misleading the consumer as to the legal consequences of the consumer’s actions is prohibited, the agencies claim. Further, a communication by a debt collector need not contain “overtly false statements” to be considered misleading or deceptive. Omissions also may be deceptive.

Statute of limitations. The agencies note that in most states, the expiration of the statute of limitations does not extinguish the debt. The running of the statute does not bar the collector from using non-litigation methods to collect the debt, as long as those efforts do not violate the prohibitions in the FDCPA and other laws. Consumers may choose to pay their debts even though they know they are time-barred. Therefore, a debt collector may seek voluntary payment of a time-barred debt without violating the FDCPA. However, the communication violates the FDCPA if it explicitly or implicitly represents that the debt collector can sue on the debt.

Failure to state a claim. The court erroneously granted the motion to dismiss Buchanan’s complaint, the agencies argue. The question before the district court was whether Northland’s letter could plausibly be construed as an implied threat of litigation or could otherwise plausibly mislead the least sophisticated consumer to believe that her debt was enforceable in court. The dunning letter included: an offer to settle the debt; a representation that the company is not obligated to renew the offer; a representation that the amount due on the date of payment may be greater because of interest; and a representation that upon payment “your account will be satisfied and closed and a settlement letter will be issued.”

Because the least sophisticated consumer could plausibly infer that Northland would or could sue if she did not pay, the complaint’s allegations were sufficient to “raise a right to relief above the speculative level,” the agencies claim in the brief.

Northland’s settlement had at least “the potential for deception. The least sophisticated consumer could have had a preexisting belief that “settlement” and litigation are mutually exclusive options, and that rejecting a formal offer of “settlement” will result in a lawsuit. In addition, the representation that the company had no obligation to renew the offer should it be turned down could suggest that something worse, like a lawsuit, could happen. Further, the representation that later payment would mean more owed on the debt due to interest implies that the debtor would have to pay more than the outstanding balance, perhaps through a lawsuit.

Conclusion. The agencies conclude by arguing that because the letter could plausibly mislead an unsophisticated consumer to believe that a time-barred debt could be enforced through litigation, the complaint plausibly stated a claim for relief under the FDCPA, and the district court incorrectly granted the motion to dismiss.

Companies: National City Bank; Northland Group, Inc.

News: ConsumerProtection FederalTradeCommissionNews