In Daugherty v. Convergent Outsourcing, Inc., No. 15-20392 (5th Cir. Sept. 8, 2016) the Fifth Circuit Court of Appeals recently joined the circuit split interpreting the Fair Debt Collections Practices Act (“FDCPA”) in a way that further limits debts collectors.
Under the FDCPA the term “debt collectors” is not limited to those collecting debts for others – certain creditors collecting debts directly owed to them can be bound by the FDCPA. This statute prohibits debt collectors from using “false, deceptive, or misleading representation or means in connection with the collection of any debt.” A debt collector who violates the FDCPA can be forced to pay actual damages, costs, reasonable attorney’s fees and up to $1,000 of additional damages if the plaintiff is an individual or up to $500,000 or one percent of the debt collector’s net worth in a class action.
In Daugherty, the Fifth Circuit considered whether a collection letter for a time-barred debt which contained a discounted “settlement offer” but which was silent as to the unenforceability of the debt and did not threaten litigation could mislead an unsophisticated consumer to believe that the debt could be enforceable in court and thus violate the FDCPA.
There, the debt collector sent the debtor a collection letter which presented three settlement options for the debtor to pay to resolve the debt. The collection letter did not threaten litigation. However, the letter also did not disclose that the statute of limitations had run rendering the debt unable to be collected through litigation. Additionally, the letter did not warn the consumer that a partial payment on the debt could revive the statute of limitations and allow a debt collector to pursue collecting that debt in court. The debtor sued the debt collector for violating the FDCPA. The district court dismissed debtor’s complaint, holding that efforts to collect time-barred debts do not violate the FDCPA if the debt collector does not threaten suit.
The Fifth Circuit reversed the district court and ruled that, regardless of whether litigation is threatened, a collection letter violates the FDCPA if its statements could mislead an unsophisticated consumer to believe that the time-barred debt is legally enforceable.
The Daugherty decision furthered the pending circuit split. The Third and Eighth Circuits have taken a more restrictive view of the FDCPA by holding that a debt collector is permitted to seek a debtor’s voluntary repayment of a time-barred debt so long as the communications to the debtor do not initiate or threaten litigation. However, the Sixth and Seventh Circuits have taken a more expansive view of the FDCPA in favor of debtors by holding that collection letters offering to settle time-barred debts which do not disclose that the debt is legally unenforceable can violate the FDCPA even without threatening litigation. (More about the Sixth and Seventh Circuit’s position on this can be found here.) Now, the Fifth Circuit has joined with the Sixth and Seventh Circuits in its recent ruling.
The FDCPA, always an active statutory scheme for the courts, will also be front and center next year as the Supreme Court determines whether filing a proof of claim on account of time-barred debt violates the FDCPA, as discussed here.
In sum, debt collectors must be compliant with varying legal requirements in multiple jurisdictions. Collection letters should contain sufficient information to avoid being exposed to litigation and potential damages for violating the FDCPA.