by Brian Wolfman
A couple weeks ago, in McMahon v. LVNV Funding (and a companion case), the Seventh Circuit held that debt collectors' letters to consumers offering to "settle" time-barred debts (that is, debts that would be subject to a successful statute-of-limitations defense) could mislead consumers and, thus, could violate the federal Fair Debt Collection Practices Act (FDCPA). As a result, the court of appeals reversed the dismissal of a suit alleging that plaintiffs were misled in violation of the FDCPA and affirmed (in an interlocutory appeal) a lower court's refusal to dismiss a similar suit. The court of appeals explained that
The proposition that a debt collector violates the FDCPA when it misleads an unsophisticated consumer to believe a time-barred debt is legally enforceable, regardless of whether litigation is threatened, is straightforward under the statute. Section 1692e(2)(A) specifically prohibits the false representation of the character or legal status of any debt. Whether a debt is legally enforceable is a central fact about the character and legal status of that debt. A misrepresentation about that fact thus violates the FDCPA. Matters may be even worse if the debt collector adds a threat of litigation, see 15 U.S.C. § 1692e(5), but such a threat is not a necessary element of a claim. We recognize that this interpretation conflicts with that of the Eighth and Third Circuits. See 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). With respect, however, we have concluded that the statute cannot bear the reading that those courts have given it. [footnote omitted] In their view, if a dunning letter on a time‐barred debt states that the collector could sue but promised not to, that letter would not violate the FDCPA, since no litigation was actually threatened (and indeed was expressly rejected). On its face, that may seem reasonable, but closer examination reveals why it is not. The plain language of the FDCPA prohibits not only threatening to take actions that the collector cannot take, but also the use of any false, deceptive, or misleading representation, including those about the character or legal status of any debt. If a debt collector stated that it could sue on a timebarred debt but was promising to forbear, that statement would be a false representation about the legal status of that debt. * * * Our decision today does not require debt collectors to conduct additional research. If a debt collector does not know whether the debt submitted for collection is time barred, it would be easy to include general language about that possibility. That said, we find it unlikely that debt owners lack knowledge about the age of the debts they are attempting to collect. If the debt collector is the original creditor, it will know the relevant dates. If the collector is a third party collecting on behalf of the original creditor, it should easily be able to get that information at the time the file is assigned by the original creditor on whose behalf it is acting. If the collector has purchased the debt from the original creditor, we know from the [Federal Trade Commission] that such buyers pay different amounts for debts depending on the age of the debt and the number of previous attempts to collect it, in which case whether the debt is time‐barred should be known.
The Seventh Circuit noted that its ruling was consistent with positions taken by the Federal Trade Commission and the Consumer Financial Protection Bureau, and said that it was "inclined to defer to the agencies’ empirical research and expertise" on what a consumer would think is meant by a debt collector's letter proposing "settlement" or making an “offer for settlement.”
The Seventh Circuit's 3-0 decision was written by Judge Diane Wood. Because the court's ruling created a circuit conflict, the Seventh Circuit panel circulated its decision to the full court, and no active judge voted to rehear the case en banc.