by The Fifth Circuit held that “a collection letter violates the FDCPA when its statements could mislead an unsophisticated consumer to believe that her time-barred debt is legally enforceable, regardless of whether litigation is threatened.” Daugherty v. Convergent Outsourcing Inc., No. 15-20392 (5th Cir. Sept. 8, 2016).
Convergent Outsourcing, Inc., as the collection agency for LVNV, sent Roxanne Daugherty a collection letter for a time-barred credit card debt containing a discounted “settlement” offer specifying three ways Ms. Daugherty could eliminate the debt either in one lump sum payment at 10% of the original, or in a higher total amount over a longer period. The letter did not threaten litigation. Upon receiving the letter, Ms. Daugherty filed suit in district court for violation of the FDCPA alleging that the letter was misleading in that it failed to note that the debt was not legally enforceable or that paying a portion of the debt would trigger revival of her liability on the entire debt. The district court found that a letter that does not include threats of litigation does not violate the FDCPA and it granted the defendants’ motion to dismiss. Daugherty v. Convergent Outsourcing, Inc., No. 4:14-CV-3306, 2015 WL 3823654 (S.D. Tex. June 18, 2015).
On appeal, the Fifth Circuit began with the premise that Congress intended the FDCPA to have a “broad remedial scope,” and that creditor conduct must be viewed from the perspective of an unsophisticated debtor. The court noted a split in the circuits with respect to whether a letter from a creditor that does not contain a threat of litigation can ever violate the FDCPA with the Third and Eighth Circuits finding that it cannot, Huertas v. Galaxy Asset Management, 641 F.3d 28 (3d Cir. 2011); Freyermuth v. Credit Bureau Services, Inc., 248 F.3d 767 (8th Cir. 2001), and the Sixth and Seventh Circuits finding that it can. Buchanan v. Northland Grp., Inc., 776 F.3d 393 (6th Cir. 2015); McMahon v. LVNV Funding, LLC, 744 F.3d 1010 (7th Cir. 2014).
Both McMahon and Buchanan agreed with the basic principle relied on in Huertas and Freyermuth, that not every attempt to collect a time-barred debt was necessarily violative of the FDCPA, but held that the letters before them stepped over the boundary.
In McMahon, the Seventh Circuit held that a collection attempt may be misleading if it conveys the impression that the debt is legally enforceable. This is especially so where a partial payment could revive an otherwise time-barred debt in its entirety. That court noted that the FTC and the CFPB have argued that an attempt to collect a time-barred debt must inform the consumer of the legal status of the debt that a partial payment would revive it. Based on these considerations, the Seventh Circuit concluded that the question is one of fact that cannot be resolved on a motion to dismiss. In so holding, that court recognized that it was creating a split in the circuits on the issue.
Likewise, the Sixth Circuit in Buchanan, looked to the potential effect of a collection letter on an unsophisticated consumer debtor and the potential that the letter might lead the debtor to unwittingly revive the entire debt. Unlike the McMahon court, however, the Buchanan court did not go so far as to disagree with the holdings in Huertas and Freyermuth. Rather, it distinguished those cases as not involving an offer to “settle.”
The Daugherty court agreed with the more debtor-friendly decision of the Seventh Circuit and found that the issue was whether the letter made a misleading representation. The court reversed and remanded.