Following on the heels of the Sixth Circuit’s decision in Buchanan v. Northland Group, Inc. 776 F.3d 393 (6th Cir. 2015), a Texas District Court has held that a complaint alleging that debt collector’s use of the term "settlement" in a letter to collect a time barred debt may violate the FDCPA absent a disclosure that the underlying debt is time barred.
In Carter v. First National Collection Bureau, the consumer received a letter which provided: "We would like to extend the following settlement offer: A 90% discount payable in 4 payments of $138.92. Each payment within 30 days of the previous payment. We are not obligated to renew this offer. For your convenience you may pay via a check over the phone or credit card. You have our word that your account executive will treat you fairly and with respect…" Carter v. First National Collection Bureau. C.A. No. 4:15-cv-1695 (S.D. Tex. Sep. 11, 2015), Slip Op. at 1-2. The consumer alleged that the letter was unfair and deceptive and violated sections 1692e and 1692f of the FDCPA. The collection agencies moved to dismiss because the letter did not contain any inference or threat of litigation and did not contain any misrepresentations of the status of the debt.
Section 1692e of the FDCPA contains a broad prohibition against the use of false, deceptive or misleading representations or means in connection with the collection of a debt. It also contains within it specific non-exclusive examples of representations that violate the statute including the false representation of the character, amount or legal status of any debt. The courts are currently split as to whether seeking to collect a time barred debt, without the threat of suit or disclosure of the time barred nature of the debt, violates section 1692e. Decisions from the Sixth and Seventh Circuits suggest that adequate disclosure of the time barred nature of the debt is required. See Buchanan, supra; McMahon v. LVNV Funding, LLC, 774 F.3d 1010 (7th Cir. 2014). Courts in the Third and Eighth Circuit disagree and have held that "the FDCPA permits a debt collector to seek voluntary repayment of the time-barred debt so long as the debt collector does not initiate or threaten legal action in connection with its debt collection efforts." Huerta v. Galaxy Asset Mgmt.,641 F.3d 28, 32-33 (3d Cir. 2011); see also Freyermuth v. Credit Bureau Sers., Inc., 248 F.3d 767 (8th Cir. 2001).
In denying the motion to dismiss, the court bought into the consumer’s argument that the mere use of the term "settle" or "settlement" is enough to potentially mislead the least sophisticated consumer into believing that a stale debt is legally enforceable -particularly where there is no disclosure that the debt is time barred. In doing so, the court relied upon the FDCPA’s general prohibition against false, deceptive or misleading representations and particularly those regarding the legal status of the debt. The court also relied heavily upon the FTC and CFPB findings that "consumers can be misled or deceived when debt collectors seek partial payments on stale debt," as well as a research study submitted by plaintiff’s counsel which found that "consumers who are aware that a debt is not legally enforceable will, in a statistically significant number of cases, decline to pay it." Slip Op. at 10-12.
The decision is troubling on a number of levels. First, a statute of limitations only bars judicial remedies but does not eliminate the debt or bar voluntary repayment of the debt. Thus, the debt is still subject to credit reporting and settling the debt is of some intrinsic value to the consumer. Secondly, in Texas, a partial payment on a time barred debt does not revive the statute of limitations. So while a more compelling case can be made that nondisclosure of the time barred nature of a debt may violate the FDCPA in a jurisdiction which provides for revival, that was not the underlying law at issue in this case. Finally and most troubling, the court appears to have given significant deference to the findings of the FTC and CFPB. Given the high volume of reports being published by the CFPB, it is likely that consumers will continue to push courts to rely upon favorable CFPB findings to help advance creative legal theories for recovery.
Debt collectors need to keep a close eye on this issue and may need to rethink their settlement strategies. While a few states, including North Carolina, expressly require disclosure of the time barred nature of debts, most states do not. Where state statutes are silent (as is the FDCPA), cases like this one and Buchanan should be taken into account when assessing risk and determining collection strategies on time barred accounts.