Entities engaged in debt collection must be careful in seeking to collect on old debt – dunning letters could now be found misleading if the debtor has a statute of limitations defense. The Seventh Circuit, in McMahon v. LVNV Funding, LLC and Delgado v. Capital Management Services, L.P., 2014 U.S. App. LEXIS 4592 (7th Cir. March 11, 2014), held that collection letters, which do not disclose the debt as beyond the statute of limitations, violate the Fair Debt Collection Practices Act (FDCPA) even though they do not threaten litigation and merely seek to settle the debt. This result further confuses FDCPA application, creates a circuit split, and increases requirements upon creditors and the collection industry.
The FDCPA prohibits, among other things, the use of “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e. Section 1692e precludes practices such as falsely representing the legal status of any debt or threatening to take any action that cannot legally be taken. In determining whether a representation is misleading, the court views the letter from an “unsophisticated consumer’s” perspective.
McMahon and Delgado
Both cases in the consolidated appeal involved debts older than Illinois’ four-year statute of limitations. And, in both cases, the creditors sent dunning letters that disclosed neither the date the debt was incurred nor that the claims were beyond the statute of limitations. Rather, the dunning letters offered to “settle” the disputes at a substantial discount.
The debtors sued, arguing the dunning letters violated the FDCPA for misleading the debtors into thinking the debt could still be enforced in court. Even though the letters did not threaten to sue, the debtors argued that the creditors’ offer to settle the debt was misleading because it implied the creditors could sue on the otherwise time-barred debt.
The Seventh Circuit agreed. In doing so, it explicitly disagreed with the Third and Eighth Circuits, which have held that a dunning letter seeking to collect time-barred debt does not violate the FDCPA unless the letter includes a threat of litigation. Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 33 (3d Cir. 2011); Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 771 (8th Cir. 2001).
Instead of following its sister circuits, the Seventh Circuit found the amicus curiae from the Federal Trade Commission and the Consumer Financial Protection Bureau more persuasive. The agencies argued “most consumers do not understand their legal rights with respect to time-barred debts.” Slip op. at *21. The Seventh Circuit, finding the agencies’ position “well-reasoned,” held that non-disclosure of a debt’s age may mislead a consumer both by 1) creating a misleading impression that the consumer has no defense to a lawsuit; and 2) possibly reviving the enforceability of the debt, as in many states making a partial payment on an otherwise time-barred debt can revive the entire amount. Id. The Court therefore remanded for further proceedings, concluding “an unsophisticated consumer could be misled by a dunning letter for a time-barred debt, especially one that uses the word “settle” or “settlement.”
The FDCPA does not expressly require debt collectors to disclose that a debt is time-barred when attempting to collect. But, the Seventh Circuit’s McMahon opinion seemingly invites FDCPA lawsuits against debtors seeking to collect on older debt. The Court did give some guidance, suggesting “it would be easy to include general language about” the possibility of a debt being time-barred, but whether such dunning letters will be found misleading and therefore violate the FDCPA could depend on a number of factors, such as the original source of the debt and the certainty of the statute of limitations defense. In light of this development, debt collectors should engage their counsel to review their debt collection tactics.