The U.S. Court of Appeals for the Third Circuit held that a collection letter sent to collect a time-barred debt that makes a “settlement offer” to accept payment “in settlement of” the debt could potentially violate the federal Fair Debt Collection Practices Act’s (FDCPA) general prohibition against “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e.
Accordingly, the Third Circuit vacated the ruling of the trial court dismissing the complaint, and remanded the matter for further proceedings.
A copy of the opinion is available at: Link to Opinion.
The plaintiff debtor incurred a debt of $1,289.86 at a fitness center. Subsequently, the defendant debt collection company sent a letter dated May 18, 2015 that read as follows: “[The creditor] is willing to accept payment in the amount of $128.99 in settlement of this debt. You can take advantage of this settlement offer if we receive payment of this amount or if you make another mutually acceptable payment arrangement within 40 days . . .”
At the time the letter was sent, the six-year New Jersey statute of limitations applicable to debt-collection actions had already run.
The debtor filed a class action in federal district court alleging that the company’s letter violated the FDCPA. The debtor alleged that she interpreted the word “settlement” in the letter to mean she had a legal obligation to pay, and that the least-sophisticated debtor would hold a similar belief. She claimed that the letter was therefore false, deceptive, or misleading under section 1692e of the FDCPA.
The company filed a motion to dismiss, which was granted by the trial court. In ruling in favor of the company, the trial court relied on Huertas v. Galaxy Asset Management, 641 F.3d 28 (3d Cir. 2011), which it read to hold that an attempt to collect a time-barred debt does not violate the FDCPA unless it is accompanied by the threat of legal action. Because the word “settlement” did not constitute threatened legal action, the trial court dismissed the complaint.
The matter was appealed.
On appeal, the parties offered competing interpretations of the Third Circuit’s ruling in Huertas.
The company argued “that Huertas imposed a ‘threat of litigation’ requirement that must be present for an attempt to collect a time-barred debt to violate the FDCPA.” Conversely, the debtor tried to distinguish Huertas and argued that an “offer to settle may mislead the least sophisticated [debtor] into believing that a time-barred debt is legally enforceable, even when litigation is not threatened.”
Thus, the Third Circuit first analyzed its prior opinion in Huertas, which it stated “stands for the proposition that debt collectors do not violate 15 U.S.C. § 1692e(2)(A) when they seek voluntary repayment of stale debts, so long as they do not threaten to take legal action.” However, “the FDCPA sweeps far more broadly than the specific provision found in § 1692e(2)(A),” and “prohibits ‘any false, deceptive, or misleading representation.’”
The appeal therefore required the Court “to decide whether collection letters may run afoul of the FDCPA by misleading or deceiving debtors into believing they have a legal obligation to repay time-barred debts even when the letters do not threaten legal action.”
In ruling that they could, the Third Circuit noted that “three other United States Courts of Appeals have addressed the question presented in this appeal,” and “[a]ll three have determined that, even absent threats of litigation, it is plausible that offers to ‘settle’ time-barred debts could mislead the least-sophisticated debtor.” See McMahon v. LVNV Funding, LLC, 744 F.3d 1010 (7th Cir. 2014); Buchanan v. Northland Group, Inc., 776 F.3d 393 (6th Cir. 2015); Daugherty v. Convergent Outsourcing, Inc., 836 F.3d 507 (5th Cir. 2016).
Noting that it was not bound by these precedents, the Third Circuit was “persuaded their considered view is the best interpretation of the FDCPA.”
In so ruling, the Court noted that “construing the Act to require a threat of legal action for any FDCPA violation interposes a mandate that is not found in its text.” Further, “in the specific context of a debt-collection letter, the least-sophisticated debtor could be misled into thinking that ‘settlement of the debt’ referred to the creditor’s ability to enforce the debt in court rather than a mere invitation to settle the account.”
“Because the words ‘settlement’ and ‘settlement offer’ could connote litigation, the least-sophisticated debtor could be misled into thinking [the company] could legally enforce the debt.”
Accordingly, the Third Circuit held that the least-sophisticated debtor could plausibly be misled by the specific language used in the company’s letter. The Court therefore vacated the trial court’s order granting the motion to dismiss and remanded the matter for further proceedings.
However, in so doing, the Court “reiterate[d] what we said both in Huertas and elsewhere: standing alone, settlement offers and attempts to obtain voluntary payments of stale debts do not necessarily constitute deceptive or misleading practices.”
In addition, the Court cautioned that it did not “impose any mandates on the language debt collectors must use, such as requiring them to explicitly disclose that the statute of limitations has run,” and that it did not “hold that the use of the word ‘settlement’ is ‘misleading as a matter of federal law.’”
Instead, the Third Circuit held, “in keeping with the text and purpose of the FDCPA, we merely reiterate that any such letters, when read in their entirety, must not deceive or mislead the least-sophisticated debtor into believing that she has a legal obligation to pay the time-barred debt.”