February 1, 2017
by Graham H. Kidner
Formerly with Hutchens Law Firm
USFN Member (North Carolina, South Carolina)
After almost 40 years since its enactment, the Fair Debt Collection Practices Act (FDCPA) remains a fruitful source of litigation. Here are some of the main case highlights from the past year or so. All sections cited refer to Title 15 of the United States Code.
Communicating Correct Debt Amount
The holding in Prescott v. Seterus, Inc., 2015 WL 7769235 (11th Cir. Dec. 3, 2015), generated servicer directives that firms must not include in payoff and reinstatement letters fees and costs that had not been actually incurred. Prescott held that the standard GSE mortgage used in Florida did not permit a lender to seek or collect estimated fees or costs in a reinstatement context, resulting in a violation of § 1692e(2) (“false representation of … the character, amount, or legal status of any debt”) and § 1692f(1) (“collection of any amount … [not] expressly authorized by the agreement …”), despite the fact that the debt collector clearly identified the fees as estimates.
Opinions from the Third Circuit, beginning with McLaughlin v. Phelan Hallinan & Shmieg, LLP, 756 F.3d 240 (3d Cir. 2014), were likely predictors of Prescott, although the appellate court (and federal district courts in that circuit) exhibited a clear intent to not penalize debt collectors who made a clear effort to distinguish estimated or anticipated charges. The pertinent facts in Prescott (the reinstatement letter was sent on September 26, 2013) also pre-dated the Consumer Financial Protection Bureau’s change to the RESPA regulation 12 C.F.R. § 1026.36, which (since January 10, 2014) arguably now requires the servicer (whether or not a debt collector) to include estimated charges through the good-through date of a payoff statement. Prescott also poses problems to servicers with respect to compliance with many state laws, or state judicial practices, which appear to require the inclusion of estimated or anticipated charges in payoff and/or reinstatement quotes.
Avila v. Riexinger, 817 F.3d 72 (2d Cir. Mar. 22, 2016), held that a debt collector’s dunning letter informing the consumer of the current balance of the loan (but failing to disclose that the balance may increase due to interest and fees) violated § 1692e, on the basis that the debtor would understand (incorrectly) that payment of the specified amount would satisfy the debt whenever payment was remitted. Apparently, even the least sophisticated consumer is deemed to have forgotten that the loan which he obtained carries interest and that late payments generate fees. One bright spot: no such warning is necessary in the Eastern District of Virginia. Kelley v. Nationstar, 2013 WL 5874704 (E.D. Va. Oct. 31, 2013); Davis v. Segan, 2016 WL 254388 (E.D. Va. Jan. 19, 2016).
It is hoped that the U.S. Supreme Court will establish certainty on the related issues of whether the Bankruptcy Code preempts the application of the FDCPA, and (if not) whether filing a proof of claim on a time-barred debt protects the debt collector from an adversary action under the FDCPA, provided the proof of claim adequately discloses the legal status of the debt. Johnson v. Midland Funding, 823 F.3d 1334 (11th Cir. 2016), cert. granted, 2016 WL 4944674 (U.S. Oct. 11, 2016). Several circuits are split on these issues, with the Fourth Circuit most recently entering the fray. Dubois v. Atlas Acquisitions LLC (In re Dubois), 834 F.3d 522 (4th Cir. Aug. 25, 2016) (filing proof of claim for time-barred debt, where claim did not disguise fact that debt may be time-barred, neither violates FDCPA nor acts as a fraud upon the court).
In the non-bankruptcy context, the Fifth Circuit has deepened the split, holding that offering to settle debt without disclosing that it is time-barred violates § 1692e. Daugherty v. Convergent Outsourcing, Inc., 836 F.3d 507 (5th Cir. Sept. 8, 2016).
In the first published opinion from any circuit on the question, the Ninth Circuit held that successor debt collectors of the same debt are each responsible for sending a separate debt validation notice. Acknowledging the statute’s ambiguity, the court found that the broader structure of the FDCPA mandated the holding because frequent transfers of debt during the prior validation period could adversely affect the consumer’s right to seek and receive validation. Also, transferee debt collectors often do not obtain accurate debt figures from their transferors, resulting in conflicting debt collection claims. Hernandez v. Williams, Zinman, & Parham, PC, 829 F.3d 1068 (9th Cir. July 20, 2016).
Simple errors, such as the failure to disclose the correct identity of the creditor, can prove costly. Janetos v. Fulton Friedman & Gullace, LLP, 825 F.3d 317 (7th Cir. Apr. 7, 2016). The Janetos case is also instructive for the proposition that one debt collector may be vicariously liable for the conduct of another. Additionally, getting the timing of debtor communications wrong can hurt. The safest approach is to send out the validation notice as a stand-alone letter, if feasible. When it must be combined or sent with other communications, beware of the risk of misstatement and overshadowing — as was the fate of the defendant in Marquez v. Weinstein, Pinson & Riley, P.S., 836 F.3d 808 (7th Cir. Sept. 7, 2016). There, the court found that response requirements and deadlines in the validation notice set forth in the debt collection complaint confused the consumer as to the timing and manner of responding to the complaint.
Third Party Communications
Following three other circuits, the Eleventh Circuit held that when a debt collector sends a consumer’s attorney a communication in connection with the collection of a debt, this qualifies as a communication with a consumer so as to trigger the requirement to send a debt validation notice as required under 15 U.S.C. § 1692g. Bishop v. Ross Earle & Bonan, P.A., 817 F.3d 1268 (11th Cir. Mar. 25, 2016). The court reasoned that the attorney is a mere conduit for the intended recipient of the collection letter.
Calling the borrower on the telephone continues to pose risk. If someone other than the borrower answers, or if the call is directed to a message service, what (if anything) may the debt collector say? Courts have consistently rejected the argument that the FDCPA presents an irreconcilable conflict between the risks of improperly communicating with a third party versus the failure to disclose that the call is from a debt collector. Leaving a message with a third party, seeking to induce the consumer to return the call — without disclosing the nature of the call — violates § 1692e(11) (the mini-Miranda warning). Halberstam v. Global Credit and Collection Corp., 2016 WL 154090 (E.D.N.Y. Jan. 12, 2016).
Foreclosure as Debt Collection
Another circuit split concerns whether foreclosure of the security interest alone, without an express demand to pay the underlying debt, qualifies as debt collection. This action by a trustee in California is not debt collection, according to a plain reading of § 1692a. Ho v. ReconTrust Company, NA, 840 F.3d 618 (9th Cir. Oct. 19, 2016). The foreclosure obligates only the purchaser at sale to pay money; moreover, California’s anti-deficiency statute insulates the borrower from any personal liability.
Twelve days earlier, the Fourth Circuit affirmed that a trustee engages in debt collection by initiating foreclosure because even if the trustee makes no express demand for payment, the purpose behind the proceeding is to collect the debt. The court found it particularly relevant that the debt remained a debt even after proceedings were initiated. McCray v. Federal Home Loan Mortgage Corporation, 839 F.3d 354 (4th Cir. Oct. 7, 2016).
CFPB’s Interpretation of FDCPA
While the constitutional structure of the Bureau is uncertain following the decision in PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (D.C. Cir. Oct. 11, 2016), the Bureau has already made its mark on FDCPA enforcement. In consent orders established with major debt collection law firms, the Bureau’s position is that inadequate involvement by an attorney in debt collection activity violates § 1692e(3) and (10), as well as § 1692f. [See CFPB v. Frederick J. Hanna & Associates, P.C., No. 1:14-cv-02211-AT (N.D. Ga. Dec. 28, 2015) and In the Matter of: Pressler & Pressler, LLP, File No. 2016-CFPB-0009 (Admin. Proc. Apr. 25, 2016).] These orders set a minimum standard for other volume debt collector law firms to look to.
Not all Doom and Gloom
In conclusion, difficult though it may be to believe when looking at much of the case law, the courts do draw the line on consumers’ complaints. Two notable decisions in 2016 include Henson v. Santander Consumer USA, Inc., 817 F.3d 131 (4th Cir. Mar. 23, 2016) and Oliva v. Blatt, Hasenmiller, Leibsker & Moore, LLC, 825 F.3d 788, reh’g en banc granted (7th Cir. June 14, 2016).
In Henson the Fourth Circuit held that the default status of debt, at the time the transferee acquires it, has no bearing on whether the transferee qualifies as a debt collector under § 1692a(6). If the transferee purchases that debt, then its subsequent attempts to collect are not efforts made on behalf of another but for its own account.
In Oliva, the Seventh Circuit held that if a debt collector engages in conduct that is expressly permitted under the controlling law at the time of the alleged conduct (in this case, filing collection cases in a certain judicial district in accordance with binding precedent interpreting the FDCPA’s venue section, § 1692i(a)2), and if there is then a retroactive change to the law that now prohibits such conduct, the debt collector cannot be held liable for conduct preceding the change.
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