McMAHON v. LVNV FUNDING
The United States Court of Appeals for the Seventh Circuit (the “Seventh Circuit”) sent a message to debt collectors in McMahon v. LVNV Funding, LLC by holding that “an unsophisticated consumer could be misled by a dunning letter for a time-barred debt, especially a letter uses the term ‘settle’ or ‘settlement’.” McMahon v. LVNV Funding, LLC, 744 F.3d 1010 (7th Cir. March 11, 2014).
Until the Seventh Circuit decided McMahon, consumers faced an uphill climb when they attempted to assert claims under the Fair Debt Collections Practices Act (“FDCPA”) against debt collectors who sent them deceptive dunning letters which attempted to collect time-barred debts.
FEW CONSUMERS UNDERSTAND THE STATUTE OF LIMITATIONS :
The issues in McMahon demonstrate the wide gap between prior case law and how frequently consumers do not understand even the basics about statutes of limitations. According to the Federal Trade Commission (“FTC”) and the Consumer Financial Protection Bureau (“CFPB”) :
“most consumers do not understand their legal rights with respect to time-barred debts.”
McMahon, at pg. 1021. The Seventh Circuit agreed with these agencies and put great weight on their findings.
Based upon counseling Florida consumers for over two decades, I know that they seldom understand how the statute of limitations operates and rarely know the correct limitations period. Although the internet is often a good source of information, it is spreading much incorrect information concerning the statute of limitations applicable to many types of consumer debts. Almost every chart concerning the statute of limitations contains many errors including information provided concerning Florida law. Internet forums written by non-lawyers frequently exaggerate the risk of reviving a time-barred debt by “acknowledging” the debt.
According to the FTC’s research, many consumers believe that once a debt is time-barred, the debt is extinguished. Except in Wisconsin & Mississippi the debt is not extinguished when the statute of limitations expires. See, Miss. Code Ann. § 15 – 1 – 3; Wis. Stat. Ann. § 893.05.
Under Florida law, debt collectors who sue on time-barred debts may obtain default judgments against the consumers who fail to respond to the lawsuit. Florida judges can not refuse to enter the default judgment even if the papers indicate the debt is time barred. Therefore, Florida consumers should never ignore a lawsuit even if they believe the statute of limitations has expired.
Debt collectors who traffic in junk debt make most of their money as a result of default judgments or taking on borrowers who try to represent themselves.
As a result, even time-barred debts have a market value. Debt prices depend upon, among other things, the age of the debt. A recent FTC study found that the average prices paid for debt portfolios was :
(1) 7.9 cents per dollar for debts that were less than 3 years old;
(2) 3.1 cents per dollar for debts that were 3 to 6 years old;
(3) 2.2 cents per dollar of debt for debts that were 6 to 15 years old; and
(4) “effectively nothing” for accounts that were older than fifteen years.
See Fed. Trade Comm’n Repairing a Broken System : Protecting Consumers In Debt Collection Litigation And Arbitration, pg. 23 – 24 (2013) cited in McMahon, at pg. 1022.
The McMahon opinion along with the FTC and CFPB’s enforcement efforts may finally put a throttle on some of the most deceptive practices involving the collection of time-barred debts. The Seventh Circuit placed great weight on these agencies findings and they were probably the decisive factor in departing from decisions adverse to consumers which had already been adopted by the Third and Eighth Circuits.
The McMahon court noted :
“[t]he FTC has found that nondisclosure of the fact that a debt is time-barred might deceive consumers in at least two ways :
First, because most consumers do not know or understand their legal rights with respect to the collection of time-barred debt, attempts to collect on such debt may create a misleading impression that the consumer has no defense to a lawsuit;
Second, consumers often do not know that in many states the making of a partial payment on a stale debt actually revives the entire debt even if it was otherwise time-barred.”
McMahon, pg. 1015. To avoid misleading consumers, the FTC recommended that if a collector knows or should know that an account that it is attempting to collect is time-barred, “it must inform the consumer that :
(1) the collector cannot sue to collect the debt; and
(2) providing partial payment would revive the collector’s ability to sue to collect the remaining balance.”
McMahon, pg. 1015. But, such affirmative obligations to disclose to the consumer that the debt collector is attempting to collect a time-barred debt are quite rare.
The FTC obtained a consent agreement from Asset Acceptance that requires Asset Acceptance to provide such disclosures to consumers. The Consent Decree requires Asset Acceptance to also disclose that :
“[t]he law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it.”
McMahon, at 1016. This is language that consumers can quickly understand. When combined with the required disclosures warning the consumer that a partial payment may revive the entire debt, consumers are in a position to protect their interests. The New Mexico Attorney General requires debt collectors to provide New Mexico consumers with disclosures that are at least as thorough as those the FTC is attempting to require the industry to adopt. The City of New York enacted Local Law No. 15 containing a three prong disclosure similar to the FTC’s Consent Agreement with Asset Acceptance.
Until McMahon, the only federal appellate decisions allowed debt collectors to attempt to collect time barred debt so long as they did not threaten litigation or file a lawsuit.
HOW CONSUMERS EFFECTIVELY LOST MUCH OF THEIR PROTECTION AGAINST DECEPTIVE COLLECTION LETTERS ATTEMPTING TO COLLECT OUT OF STATUTE DEBTS
Three influential cases — Kimber , Freyermuth, and Huertas — brought the law interpreting the FDCPA to that point.
In Kimber v. Federal Financial Corp., the United States District Court for the Middle District of Alabama held that it is unfair under Section 1692f to file a lawsuit to collect a time barred debt and deceptive under Section 1692d to threaten to file such a lawsuit. Kimber v. Federal Financial Corp., 668 F. Supp. 1480 (M.D. Ala. 1987).
In Freyermuth v. Credit Bureau Services, the dunning letter did not threaten litigation. Instead, the debt collector stated that Chex Systems would not reinstate the consumer’s checking privileges until the consumer paid the amounts owed for the N.S.F. checks. The dunning letter said :
“Our records show the amount due indicated below remains in our CheckMate permanent bad check data file. To protect your check-writing privileges, remit the balance due immediately (cash or money order only) …. To be sure of proper credit and to stop further procedure [sic], make your payment in full.”
Freyermuth v. Credit Bureau Servs., 248 F.3d 767 (8th Cir. 2001). The United States Court of Appeals for the Eighth Circuit (the “Eighth Circuit”) found that “[h]ere, no legal action was taken or even threatened.” The Eighth Circuit approved Kimber, while allowing debt collectors to ask for payment on time barred debts so long as the debt collector did not threaten litigation or file litigation. The facts in Freyermuth demonstrate why this case should never have been brought nonetheless appealed to the Eighth Circuit.
In Huertas v. Galaxy Asset Management, the United States Court of Appeals for the Third Circuit (the “Third Circuit”) followed Freyermuth. The Third Circuit held that a dunning letter requesting that the consumer call the debt collector to “resolve the issue” did not threaten litigation and was not deceptive although the debt was time barred. Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 33 (3RD Cir. 2011).
The Third Circuit described pro se appellant Huertas’ primary contention on appeal as that the District Court erred in concluding that the expiration of the statute of limitations did not extinguish his debt — an argument that the the Third Circuit summarily rejected. Huertas probably read a debtors’ forum on the interwebz and became convinced that this bogus legal theory was worth a shot. Unfortunately, his decision to file and ultimately appeal his FDCPA case based upon a bogus theory of law created even more powerful bad case law.
The Third Circuit affirmed the dismissal of Huertas’ FDCPA complaint brought under : Sections : (1) 1692e (prohibiting debt collectors from using “any false, deceptive, or misleading representation in connection with the collection of any debt”); (2) 1692e(2)(A) (falsely representing “the character, amount, or legal status of any debt.”); and 1692f (prohibiting debt collectors from using unfair or unconscionable means).
Third Circuit cited Freyermuth and two district court opinions for the proposition that the FDCPA permits debt collectors 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 collection efforts.”
As a result of Freyermuth and Huertas, the courts routinely required consumers to prove that the debt collector threatened litigation. This high threshold prevents most consumers from receiving protection under the FDCPA.
The federal courts have held that dunning letters containing the following statements did not threaten litigation.
A dunning letter stating that it was an “opportunity to resolve this matter amiably” and “advise you to consult an attorney” did not constitute a threat to sue. See, Combs v. Direct Mktg. Credit Servs., 165 F.3d 31, (7th Cir. 1998) (unpublished) (text published at 1998 WL 911691).
A dunning letter stating that the account was ““scheduled to be returned to [consumer’s] original creditor who may … secure advice of counsel” was not a threat of imminent suit. See, Owsley v. Coldata, 104 Fed. Appx. 994, (5th Cir. 2004).
Similarly, the ubiquitous phrases “further collection procedures” and “additional collection activity” do not threaten litigation. See, Goodman v. Southern Recovery, 1998 WL 240403 (E.D. La. May 12, 1998); Kelemen v. Professional Collection Sys., 2011 WL 31396 (M.D. Fla. Jan. 4, 2011). These phrases could mean anything even simply continuing to write or call the consumer and courts have tended to focus on whether the contested words could be literally true. I would not recommend that anyone sue a debt collector for using either of these phrases. McMahon, at 1013.
FINALLY, SOME GOOD NEWS FOR CONSUMERS WITH ZOMBIE DEBTS (THE McMAHON DECISION)
For an analysis of the Seventh Circuit’s rulings, click on “2″ where it says “Pages: 1 2″ immediately below the social share buttons.