Debt Buyers & Collectors

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On June 6, the Consumer Advisory Board’s twenty-two members were informed that they would no longer serve on the CAB and could not reapply for their former positions.

Through June 5, the Consumer Financial Protection Bureau had four advisory bodies: the Academic Research Council, the Community Bank Advisory Council, the Credit Union Advisory Council, and the Consumer Advisory Board. By law, the CFPB must meet twice a year with the CAB to discuss trends in the financial industry, regulations, and the impact of financial products and practices on consumers. Tellingly, the CFPB’s acting director, Mick Mulvaney, has canceled several meetings between the CFPB and its advisory groups during his short tenure.

For the CAB’s former members, the coup de grace came on June 6 when, in an afternoon call, Anthony Welcher, the Bureau’s recently hired Policy Associate Director for External Affairs, informed them that they were terminated. This move came after several members criticized Mulvaney’s leadership and implored him to keep this week’s scheduled—and just cancelled—meeting on the books.

“We’re going to start the advisory groups with sort of a new membership, to bring in these new perspectives for these new dialogues,” Welcher said on the call. “We’re going to be using the current application cycle to populate these memberships in the new groups. So we’re going to be transitioning these current advisory groups over the next few months.”

In the memo announcing the members’ terminations, the CFPB defended this “[r]evamping” as necessary to “increase high quality feedback” and mentioned plans to hold more town halls and roundtable discussions and reduce the new CAB’s ranks. As a later released statement argued, “[b]y both right-sizing its advisory councils and ramping up outreach to external groups, the Bureau will enhance its ability to hear from consumer, civil rights, and industry groups on a more regular basis.” In response to press queries, a CFPB spokesman not only denied the members’ characterization of the agency’s action—“The Bureau has not fired anyone”—but also accused these “outspoken” officials of “seem[ing] more concerned about protecting their taxpayer funded junkets to Washington, D.C., and being wined and dined by the Bureau than protecting consumers.”

On May 31, the Fourth Circuit Court of Appeals affirmed a $150,000 sanctions award against three consumer attorneys and their law firms for bad faith conduct and misrepresentations.

The opinion reads like a detective story and lays out, in the Court’s own words, “a mosaic of half-truths, inconsistencies, mischaracterizations, exaggerations, omissions, evasions, and failures to correct known misimpressions created by [consumer attorneys’] own conduct that, in their totality, evince lack of candor to the court and disrespect for the judicial process.”

The litigation arose from a payday loan that plaintiff James Dillon obtained from online lender Western Sky.  Later, Dillon engaged attorneys Stephen Six and Austin Moore of Stueve Siegel Hanson LLP and Darren Kaplan of Kaplan Law Firm, PC who filed a putative class action against several non-lender banks that processed loan-related transactions through the Automatic Clearing House network.  Defendant Generations Community Federal Credit Union promptly moved to dismiss Dillon’s lawsuit on the basis of the loan agreement’s arbitration clause.  In response, Dillon challenged authenticity of the loan agreement and a two-year-long dispute ensued during which the district court refused to send the case to arbitration based on Dillon’s authenticity challenge; Generations appealed the district court’s decision; and the Fourth Circuit vacated it and remanded the case for further proceedings on the arbitration issue.  Significantly, when questioned by both the district court and the Fourth Circuit, Six maintained authenticity challenge and represented that he had drafted the complaint without the loan agreement and that Dillon’s claims do not rely on the loan agreement.

Six’s representations regarding the contents of the complaint were problematic given the complaint specifically referenced the loan agreement and its terms.  Evidence uncovered during arbitration-related discovery showed that Dillon possessed the loan agreement all along and, crucially, that he supplied his counsel with a copy of the agreement a week before the complaint was filed.  The latter piece of evidence was discovered only as a result of forensic examination of Dillon’s computer.  Once this evidence came to light, Dillon responded to Generations’ requests for admissions that the loan agreement was authentic.

Generations moved for sanctions against Dillon’s attorneys.  Instead of admitting their wrongdoing, Kaplan argued that there was never any challenge to authenticity, and Six argued that he still doubted authenticity even though he signed Dillon’s admissions that the loan agreement was authentic.  Invoking its inherent authority to punish bad faith behavior, the district court sanctioned Six, Kaplan, and their law firms jointly, ordering them to pay the defendants $150,000 in attorneys’ fees.  Moore was held liable jointly for only $100,000 of the total amount due to his lesser role in the bad-faith conduct.  The lawyers appealed.

The Fourth Circuit summarily rejected their arguments that neither the rules of ethics nor the Federal Rules of Civil Procedure required them to disclose the copy of the loan agreement before discovery commenced.  “These arguments miss the point.  Counsel are not being sanctioned for their failure to disclose the Dillon copy of the Western Sky loan agreement.  Rather, counsel are being sanctioned for raising objections in bad faith—simultaneously questioning (and encouraging the district court to question) the authenticity of a loan agreement without disclosing that the Plaintiff provided them a copy of that loan agreement before the complaint was filed.”

Discovery in consumer litigation is often asymmetrical and focuses on defendants’ obligations.  This opinion is a good reminder that the rules apply to plaintiffs too and that the courts will not condone a “crusade to suppress the truth to gain a tactical advantage.”

On May 15, an en banc panel of the Third Circuit Court of Appeals issued a decision finding the statute of limitations for an alleged violation of the Fair Debt Collection Practices Act begins on the date the violation occurs, not on the date the debtor discovers the violation. The ruling adds to the growing Circuit Court of Appeals split on this issue which, in addition to the Third Circuit, now involves the Fourth, Eighth, Ninth, and Eleventh circuits.

The case is Kevin Rotkiske v. Paul Klemm, et al., No. 16-1668 (3d Cir. May 15, 2018).

Plaintiff Kevin Rotkiske brought the FDCPA action in 2015, roughly one year after he discovered that Defendant Paul Klemm obtained a judgment against him in a 2009 state court debt collection action. Rotkiske claimed Klemm served the collection complaint on the wrong person, with the result that Rotkiske did not learn of the 2009 judgment until 2014, after he was rejected for a home loan due to credit reporting reflecting the outstanding judgment. Rotkiske alleged Klemm deliberately made sure that he did not receive service in order to obtain a default judgment in violation of the FDCPA. Klemm moved to dismiss the complaint, arguing Rotkiske did not bring the action within the FDCPA one-year statute of limitations. The lower court granted Klemm’s motion and Rotkiske appealed.

Relying on the Fourth Circuit’s decision in Lembach v. Bierman and the Ninth Circuit’s decision in Mangum v. Action Collection Serv. Inc. (both of which found the discovery rule applies to statutes of limitation in federal litigation, including the FDCPA), Rotkiske argued the statute of limitations was tolled until he discovered the alleged FDCPA violation in 2014. The Third Circuit panel disagreed, finding the text of the FDCPA, which states that an action for an alleged violation may be brought “within one year from the date on which the violation occurs,” plainly applies the occurrence rule. With respect to Lembach and Mangum, the Court found these decisions did not analyze the specific text of the FDCPA and it therefore rejected their application of the discovery rule.

The Third Circuit now joins the Eighth and Eleventh circuits in finding the occurrence rule applies to FDCPA actions, while the Fourth and Ninth circuits apply the discovery rule.

We will continue to monitor developments in this case, including any petition to the Supreme Court of the United States to resolve this burgeoning Circuit split.

In a recent decision denying plaintiffs Aldean Isaac’s and Julissa Ortiz’s motion for summary judgment, a federal district court judge in the Eastern District of New York found that defendant NRA Group, LLC’s collection letter that included the same amount of debt twice and then a payment slip for the sum of these duplicate amounts would not mislead the least sophisticated consumer because it was clear that the duplicate charges were a mistake.

The case is Aldean Isaac, et al. v. NRA Group, LLC, 16-cv-5210 (E.D.N.Y. Mar. 28, 2018).

The Fair Debt Collection Practices Act putative class action arose out of two collection letters Isaac and Ortiz received in late 2015. Each letter contained an itemization of the amount of debt, the date on which the debt was incurred, and the account number associated with the debt. The amount of the debt was listed twice within this itemization section for both letters. However, for the duplicated amounts, the date the debt was incurred was listed as “00/00/00.” Payment slips at the bottom of the letters included all amounts listed in the itemization section, effectively doubling the amount due. According to NRA, the duplicate charges were included in the letters based on erroneous information it received from the original creditor which NRA’s computer systems then automatically included in the collection letters at issue.

Isaac and Ortiz alleged these letters constituted multiple violations of the FDCPA, including misrepresentations about the amount of debt owed in violation of §§ 1692e and 1692g, as well as suggesting NRA had the right to collect interest and fees in violation of §§ 1692e and 1692f. While discovery was ongoing, Isaac and Ortiz filed a motion for summary judgment as to their allegations that NRA had misrepresented the amount of debt owed.

In denying the motion for summary judgment, District Court Judge Joseph Bianco found that while the letters contained technically false representations, these representations would not mislead the least sophisticated consumer because it was clear that the duplicative amounts were included in error. Judge Bianco reasoned that because letters contained identical amounts for the exact same account numbers, coupled with the “00/00/00” date of accrual, “the only ‘basic, reasonable, and logical inference’ to be drawn … is that the duplicated charges were included by mistake, and were not actually owed.” As such, the least sophisticated consumer would not be misled as to the nature or legal status of the debt nor would the mistake hinder the consumer’s ability to dispute or respond to the collection attempt.

While this decision is based on unique circumstances and is therefore likely inapplicable to many scenarios, Judge Bianco’s commonsense interpretation of the least sophisticated consumer standard could be helpful for financial services institutions facing litigation in the Eastern District of New York.

We will continue to monitor this case along with other developments in this area of the law.

Chapter 13 of the United States Code’s eleventh title (“Bankruptcy Code” or “Code”) “permits any individual with regular income to propose and have approved a reasonable plan for debt repayment based on that individual’s exact circumstances,” explaining why a Chapter 13 plan is commonly known as “a wage earner’s plan.”  In general, upon winning approval of such a plan by a bankruptcy court, a debtor is obligated to pay any post-petition disposable income in sufficient quantity to guarantee every unsecured creditor at least what would have been received in a bankruptcy proceeding under the Code’s seventh chapter. In exchange, the debtor gains unconstrained control of every asset subsumed into the bankruptcy estate upon the date that he, she, or they filed for bankruptcy relief. Even after the passage of the 2005 bankruptcy reform law, a Chapter 13 discharge still eliminates types of debts not dischargeable via Chapter 7, including civil fines and penalties, divorce decree debts, and welfare repayment obligations.

To be eligible for Chapter 13 and thus for this expanded discharge, however, a debtor must satisfy the eligibility criteria in § 109(e): “Only an individual with regular income that owes . . . noncontingent, liquidated, unsecured debts of less than [$394,725] . . . may be a debtor under chapter 13.” Over the past year, a question that could affect lenders’ ability to collect on outstanding student loans debts—whether a debtor whose student loan debt pushes them above this statutory maximum forfeits their eligibility for relief under Chapter 13—has resulted in inconsistent rulings by several bankruptcy courts.

Conflicting Cases

The latest case—In re Fishel, No. 17-14180-13, 2018 Bankr. LEXIS 965, 2018 WL 1870368 (Bankr. W.D. Wis. Mar. 30, 2018)—is from Madison, Wisconsin.

On December 18, 2017, Victoria Sue Fishel, a consumer debtor with a car loan, tax debt, credit card and charge account debt, and a small amount of medical bills, filed a bankruptcy petition listing some $150,000 in unsecured, nonpriority debt, including about $16,000 in student loans, as well as other student loans of an unknown size. Filed with her petition, Fishel’s repayment plan proposed to devote all disposable income for five years toward payment of her creditors. While the Chapter 13 trustee tabulated only $132,000 of student loan debt, the United States Department of Education (“DOE”) filed a claim for more than $340,000. Noting that Fishel’s debt totaled more than $394,725 using the latter figure, the trustee objected to her plan and consequently filed a motion to dismiss based on § 109(e).

In articulating her decision, Judge Catherine J. Furay made several points. Legally, regardless of the fact that a lack of § 109(e) eligibility, though not identified as a basis for mandatory dismissal in § 1307, had been treated as a valid reason for dismissal by some courts, the decision to convert or to dismiss a Chapter 13 case always remains “a matter of discretion for the bankruptcy court.” “It should be made,” she added, “on a case-by-case basis considering the best interest of creditors and the bankruptcy estate.” Factually, it was “undisputed the Debtor can make the proposed [p]lan payments,” “[t]he only real roadblock to confirmation of Debtor’s [p]lan . . . [being] the alleged amount of her student loans which, in any case, will not be discharged in her bankruptcy.” Lastly, she stressed the policy considerations set forth in In re Pratola, 578 B.R. 414 (Bankr. N.D. Ill. 2017), that she held weighed in favor of permitting Fishel’s case to proceed.

As Judge Furay herself acknowledged, multiple courts have rejected the approach to student loans and § 109(e) favored by Fishel and Pratola, including In re Petty, No. 18-40258, 2018 Bankr. LEXIS 1231, 2018 WL 1956187 (Bankr. E.D. Tex. Apr. 24, 2018); In re Bailey-Pfeiffer, No. 1-17-13506-bhl, 2018 WL 1896307 (Bankr. W.D. Wis. Mar. 23, 2018); and In re Mendenhall, No. 17-40592-JDP, 2017 Bankr. LEXIS 3600, 2017 WL 4684999 (Bankr. D. Idaho Oct. 17, 2017).

Troutman Sanders LLP will continue to monitor these developments and the intersection of bankruptcy law with student loans.

On May 2, the U.S. District Court for the District of New Jersey granted a debt collector’s motion to dismiss a putative class action brought under the Fair Debt Collection Practices Act, holding the validation notice in the collection letter was not overshadowed or contradicted by other language in the letter.

The case is Reizner v. National Recoveries, Inc., No. 2:17-cv-2572 (D.N.J. May 2, 2018).  A copy of the opinion can be found here.

Plaintiff Alex Reizner incurred a $96,601.75 debt with the U.S. Department of Education.  The DOE assigned the debt to National Recoveries, Inc. on March 28, 2017.  That day, NRI mailed a collection letter to Reizner notifying him that it was collecting on his debt to the DOE.  In the second paragraph, in bold font, NRI included the following validation notice:

Unless you notify this office within 30 days after receiving this notice that you dispute the validity of the debt, or any portion thereof, this office will assume this debt is valid.  If you notify this office in writing within 30 days from receiving this notice, that you dispute the validity of this debt or any portion thereof, this office will obtain verification of the debt or obtain a copy of a judgment and mail you a copy of such verification or judgment.  Upon your written request within 30 days after receiving this notice, this office will provide you with the name and address of the original creditor, if different from the current creditor.

The letter also provided a phone number, fax number, and email address to which complaints, questions, or concerns could be submitted.

Reizner filed a putative class action, alleging the validation notice did not meet the requirements of § 1692g(a) of the FDCPA.

In viewing the letter from the perspective of the least sophisticated debtor, the Court rejected Reizner’s argument that the validation notice was overshadowed or contradicted.  The Court found compelling that the validation notice appeared in the first two paragraphs, preceded NRI’s address and telephone number, did not expressly state that Reizner should call to contest the debt, and was in bold typeface and set off from the rest of the letter.  Additionally, nothing in the rest of the letter threatened or encouraged Reizner to waive his right to challenge the debt.

In analyzing the letter, the Court distinguished the body of case law holding other collection letters in violation of the FDCPA.  Those letters often encouraged the recipient to call the debt collector, which could confuse the least sophisticated consumer into believing they did not need to dispute the debt in writing, as required by the statute.  Moreover, those letters often included a threat of immediate legal action if the debtor did not pay, which would contradict the 30-day timeframe in the validation notice.  In others, the validation notice appeared on the back of the letter or was otherwise inconspicuously buried in the text.  NRI’s letter, according to the Court, suffered from none of these defects.

NRI escaped liability because it prominently featured its validation notice and did not otherwise contradict it with threats of imminent action or an encouragement to call.

This decision highlights the importance of debt collectors including a clear and uncontradicted validation notice in their collection letters.  They should evaluate their collection letters to minimize exposure to potential liability under the FDCPA.

In Echlin v. PeaceHealth, the U.S. Court of Appeals for the Ninth Circuit held that a debt collection agency meaningfully participated in collection efforts even if it did not have authority to settle the account, did not receive payments, and was not involved in collection beyond sending two collection letters.  Accordingly, the collection agency did not violate the Fair Debt Collection Practices Act by sending the letters on its own letterhead.

Michelle Echlin incurred a debt in the form of medical bills owed to PeaceHealth.  After Echlin ignored multiple requests for payment, PeaceHealth referred her account to ComputerCredit, Inc. (“CCI”).  CCI sent Echlin two collection letters on its letterhead but Echlin did not respond.  In accordance with its agreement with PeaceHealth, CCI returned the account back to PeaceHealth.  Echlin later filed a purported class action alleging that CCI’s letters created a false or misleading belief that CCI was meaningfully involved in the collection of her debt—a practice known as flat-rating.  CCI and PeaceHealth moved for summary judgment.  The district court granted PeaceHealth’s and CCI’s motions for summary judgment, and Echlin appealed.

The Ninth Circuit found that CCI had meaningfully participated in collection of Echlin’s debt because it controlled the content of collection letters it sent and did not seek PeaceHealth’s approval prior to mailing.  While CCI did not have authority to process or negotiate payments from PeaceHealth, CCI handled correspondence and phone inquiries from debtors.  In addition, CCI personnel returned consumers’ calls if requested.  In rejecting Echlin’s claims that CCI could not have meaningfully participated if it had not handled payments or taken further action in collecting on the account, the Court noted that “[m]eaningful participation in the debt-collection process may take a variety of forms,” as shown by a long, non-exhaustive list of factors considered by courts across the country.

Notably, the Ninth Circuit distinguished cases that addressed the meaningful involvement by attorneys because those cases reflect concerns regarding the “unique sort of participation that is implied by letters that indicate the creditor has retained an attorney to collect its debts.”  The higher standard of involvement required of attorneys and law firms collecting a debt did not apply to non-attorneys.

In a short, straightforward opinion, the Eighth Circuit Court of Appeals joined its sister circuits that have applied a materiality standard to consumer claims of falsity and deception under the Fair Debt Collection Practices Act.

Consumer Paul Hill incurred a medical debt, and the creditor hired Accounts Receivable Services, LLC to collect the debt.  In the collections process, Accounts Receivable unsuccessfully filed a lawsuit against Hill to recover the debt.  The state court ruled that Accounts Receivable was not entitled to prevail in the collection lawsuit because it had not established that the documents purporting to show the assignment of debt were authentic.  Hill then sued Accounts Receivable under the FDCPA, claiming false and misleading representations in violation of 15 U.S.C. § 1692e, including threats “to take any action that cannot legally be taken … .”  15 U.S.C. § 1692e(5).  The United States District Court for the District of Minnesota dismissed Hill’s claims and he appealed, arguing that the Court erred in applying a materiality standard to these provisions.

To decide whether a materiality threshold applies, the Eighth Circuit Court of Appeals examined decisions from its sister circuits on the issue, found their reasoning persuasive, and adopted the view that a violation requires a showing of materiality.  The FDCPA was enacted to require that debt collectors provide information which helps consumers choose intelligently their actions with respect to their debts.  As the Seventh Circuit had explained, “immaterial information neither contributes to that objective (if the statement is correct) nor undermines it (if the statement is incorrect).”  An immaterial statement cannot mislead and, therefore, even if technically false, it is not actionable.

Applying the materiality requirement, the Eighth Circuit concluded that, even if Accounts Receivable had misrepresented authenticity of the debt assignment documents, such misrepresentations were immaterial because Hill did not deny that he incurred the debt and owed it.  Just because the debt collection lawsuit was unsuccessful does not automatically establish a violation of the FDCPA, as the Court previously held in Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814, 820 (8th Cir. 2012).  “Accounts Receivable’s inadequate documentation of the assignment did not constitute a materially false representation, and the other alleged inaccuracies in the exhibits are not material.”

The Eighth Circuit’s decision is a welcome addition to the growing line of cases adopting the materiality threshold.

A district court in the Northern District of Illinois recently granted a debt collector’s motion to compel arbitration in a Fair Debt Collection Practices Act lawsuit even though it could not provide the original bill of sale to prove it purchased the debt and the concomitant rights to enforce the arbitration provision in the underlying credit card agreement.

The case is Janis Fuller v. Frontline Asset Strategies, LLC, No. 1:17-cv-7901 (N.D. Ill. Apr. 11, 2018).

The FDCPA putative class action arose out of a collection letter that debt collector Frontline mailed to Janis Fuller allegedly threatening legal action that could not be taken. Importantly, Fuller alleged in her complaint that Frontline had purchased the debt from Credit Bank One. Frontline subsequently moved to compel arbitration per the terms of the underlying credit card agreement it acquired from Credit Bank One upon purchase of Fuller’s debt.

In opposing the motion to compel, Fuller argued that Frontline failed to provide the bill of sale to prove it was “validly assigned Plaintiff’s Credit One account and all rights thereunder.” The Court rejected this argument for two reasons. First, the Court found that Fuller’s allegation in her complaint that the debt collector had purchased her debt constituted a binding admission. Second, the Court found the debt collector had provided sufficient evidence from Credit Bank and its own business records to prove it was validly assigned Fuller’s debt, even absent the binding admission. Specifically, the Court found that an affidavit from Credit One stating it had sold the account to Frontline, as well as Frontline’s internal list of receivables including Fuller’s account, proved the debt collector was the current owner of Fuller’s debt.

The Court also summarily rejected Fuller’s arguments that Frontline failed to prove she ever signed the credit card agreement or that her FDCPA claims fell within the scope of the arbitration provision.

The district court’s common-sense approach to this issue could provide a powerful tool for litigants lacking chain-of-title documents through no fault of their own. However, the evidentiary standard required to compel arbitration in FDCPA and other consumer protection-related actions varies widely by jurisdiction and can contain many pitfalls. We will continue to monitor developments within this area of the law.

On April 13, the United States District Court for the Eastern District of Wisconsin granted summary judgment to defendants in a lawsuit brought under the Fair Debt Collection Practices Act (“FDCPA”) and the Wisconsin Consumer Act (“WCA”).  A copy of the Court’s opinion can be found here.

The case arises from a state court action filed by Kohn Law Firm on behalf of Unifund CCR, LLC, for breach of contract stemming from an unpaid credit card with Citibank, NA. In his answer and counterclaim, consumer John Burton stated he had no knowledge of the credit agreement and denied that he had ever applied for the account with Citibank.  The initial state court action by Kohn was dismissed without prejudice and, subsequently, Burton filed the FDCPA/WCA suit against Kohn (later adding Unifund as a co-defendant) in the Eastern District of Wisconsin.

In granting summary judgment to Kohn and Unifund, the Court noted that in order for Burton to be entitled to relief under the FDCPA, he must establish that: (1) Kohn and Unifund are debt collectors; (2) they sought to collect a “debt” as defined by the FDCPA; and (3) the collection attempt violated the FDCPA.

In support of his claim, Burton argued that the debt in question was a consumer debt for two reasons.  First, he argued that the billing statements produced in discovery show that the charges were for personal, family, and household use.  Second, he argued that an employee of Citibank described the underlying account as a “consumer account.”

In dispelling these arguments, the Court held that the burden was on Burton to establish each requirement for his FDCPA claim, including that the debt was “consumer debt.”  Billing statements do not, in and of themselves, establish that the debt was clearly incurred for personal, family, or household purposes as required by the FDCPA as a person can be sued “in his or her individual capacity even for business debt … .”  The Court found that the billing statements in the record do not reveal the nature of the transactions.  Additionally, the Court found that a statement from a non-party entity, such as the employee from Citibank, is inadmissible hearsay which does not fall into any exception.

As the Court reasoned, the burden is on the plaintiff to establish the elements of his or her claim, and failure to do so should result in a defeat of the claim.  For this reason, the Court held that Burton did not meet his burden in establishing that the debt was a “consumer debt” so as to entitle him to relief under either the FDCPA or WCA.

The “consumer debt” requirement is an often overlooked but important element that debt collectors should analyze in preparing a defense to any FDCPA claim. Troutman Sanders will continue to monitor this case should Burton seek to appeal the Court’s ruling.