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Compliance Digest – May 31

Every week, AccountsRecovery.net brings you the most important news in the industry. But, with compliance-related articles, context is king. That’s why the brightest and most knowledgable compliance experts are sought to offer their perspectives and insights into the most important news of the day. Read on to hear what the experts have to say this week.

I’m thrilled to announce that Applied Innovation has signed on to be the new sponsor of the ARM Compliance Digest. Utilizing over 50 years’ experience in the collections industry and over 75 in technology, Applied Innovation is helping to shape the future of accounts receivable management.

Appeals Court Rules Dismissal of FDCPA Suit Was Premature

The Third Circuit Court of Appeals has overturned a lower court’s summary judgment ruling in favor of a defendant in a Fair Debt Collection Practices Act case on a legal technicality, sending the case back to the District Court for further proceedings. The defendant had withdrawn one of its arguments when seeking to have the case dismissed, only to re-introduce it in a supplemental brief, leaving the plaintiff without an opportunity to oppose the re-introduced argument. More details here.

WHAT THIS MEANS, FROM ETHAN OSTROFF OF TROUTMAN SANDERS: What a frustrating result for the law firm defending this class action! This case involves the all too familiar claim that the amount due stated in a letter improperly included filing and services costs relating to a lawsuit filed in state court. But it takes an odd procedural time, resulting in a nice win getting overturned, which could have been avoided if the debt collector had simply informed the consumer that it intended to renew an argument it had previously withdrawn.

The law firm chose to file a hybrid motion to dismiss, or in the alternative, for summary judgment, which raised only two arguments: (1) Saroza failed to allege the credit card account is a consumer debt under the FDCPA; and (2) the customer agreement between Saroza and the creditor authorized recovery of the costs of the lawsuit, which the Court of Appeals deemed “evidence extrinsic” to the complaint. The firm then withdrew its argument based on the customer agreement for reasons not expressly stated, but presumably because it believed it could prevail solely on the consumer debt argument, and Saroza argued the customer agreement could not be considered on a motion to dismiss because it was outside the complaint and its authenticity was disputed.

The District Court of New Jersey concluded the motion for summary judgment was withdrawn, and then decided, on its own initiative, to convert the motion the dismiss raising just the consumer debt issue to a motion for summary judgment, allowing each party an opportunity to submit an additional brief, both of which were due the same day. The debt collector, for reasons unknown, nonetheless argued both issues in its supplemental brief, but Saroza only addressed the consumer debt issue. Less than 2 days later, the District Court granted summary judgment in favor of the law firm, but it reached this decision based solely on the customer agreement. The Third Circuit concluded that, because Saroza did not have adequate notice that the District Court was considering granting summary judgment on an argument that had been expressly withdrawn by the debt collector, and this was not harmless error since there is not “no set of facts” on which Saroza could possibly recover, the case must be reversed and remanded.

So here’s a practical take away: don’t try to hide the ball on what arguments you are asserting to defend litigation, instead be transparent and clear. In this case, had the debt collector filed a notice with the Court, during the 27 day time period between when the Court converted the motion to summary judgment and the filing of supplemental briefs, saying it was going to renew its previously withdrawn argument, this case would likely be over. Instead, a case about $82.00 that has dragged on for nearly 30 months will continue, perhaps for years. Practically speaking, on remand it seems likely the District Court will simply allow further briefing so that Saroza can address this argument, and then reach the same result for the same reasons, leading the law firm to incur unnecessary legal fees and costs to get to the same point it reached 18 months ago (and then likely also defend another appeal).

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Judge Grants MTD in FDCPA Overshadowing Case

A Magistrate Judge in a District Court in Alabama has granted a defendant’s motion to dismiss after it was sued for allegedly violating the Fair Debt Collection Practices Act by sending a second collection letter during the validation period that offered a settlement and informed the plaintiff that the account may be forwarded to an attorney. More details here.

WHAT THIS MEANS, FROM BRENT YARBOROUGH OF MAURICE WUTSCHER: The 30-day validation is not a grace period and collectors can make efforts to collect the debt during this time so long as the debt has not been disputed and as long as those efforts do not overshadow the consumer’s rights as outlined in the validation notice. In this case, the court held that the collector’s second letter, which was sent ten days after the validation notice and contained a settlement offer that expired before the 30-day dispute window closed, did not overshadow the validation notice. To the contrary, the second letter referred the consumer back to the validation notice and contained this disclaimer: “These payment opportunities do not alter or amend your validation rights as described in our previous letter to you.”

Illinois Legislature Passes Bill Lowering Post-Judgment Interest Rate, Collection Period

The Illinois Senate yesterday joined the state’s House of Representatives in unanimously passing a bill that decreases the post-judgment interest rate that can be charged on unpaid debts and lowers the timeframe that judgment holders have to collect. More details here.

WHAT THIS MEANS, FROM NICOLE STRICKLER OF MESSER STRICKLER: Numerous states are attempting to pass legislation carving out consumer debt from other types of obligations. In Illinois, this new law not only reduces the post-judgment interest rate from 9% to 5% on consumer debts less than $25,000.00 but also limits the time in which a creditor can revive a dormant judgment. The credit and collection industry need to remain mindful of the constant flux of state law regulations.

Dems Introduce Bill in Senate to Amend FCRA, FDCPA Related to Credit Reporting of Medical Debt

A bill has been introduced in the Senate that would amend both the Fair Credit Reporting Act and the Fair Debt Collection Practices Act to enhance consumer protections related to medical debt. More details here.

WHAT THIS MEANS, FROM MANNY NEWBURGER OF BARRON & NEWBURGER: The bill, while well-intentioned, is flawed in ways that are significant. It prohibits the reporting of “Any information relating to a medical debt if the date on which the debt was placed for collection, charged to profit or loss, or subjected to any similar action antedates the report by less than 1 year.” This encourages medical debtors, no matter what their financial condition, to take a grace period and not pay until they are facing the reality of the negative report. Since medical debts are not placed for collection or charged off until months after they are incurred, the grace period that the bill creates is actually much longer than a year. The bill makes no distinctions as to income level. A millionaire gets the same grace period as the unemployed person (who desperately wishes that he could pay).

There is no CBO cost estimate for the bill, but it is difficult to believe that it will not increase the operating costs of every hospital in the country – costs that result in increased charges that are passed on to patients who do pay, and resulting in premium increases for health insurance. That, in turn, will increase the cost of employee benefits, which has a significant impact on small businesses. Ultimately, it incentivizes small healthcare providers to require payment in advance, and that will harm the very same patients that the bill seeks to protect.

Finally, the bill deprives banks of the opportunity to make accurate credit-granting decisions, as it conceals from credit searches what could be significant debt. This undermines a primary purpose of the credit-reporting system.

Oregon House Passes Bill Limiting Interest Rate on Unpaid Medical Debt

The Oregon House of Representatives yesterday passed a bill that would alter the amount of interest that a healthcare facility or debt collector can charge on unpaid medical debt, ensure that collectors are following state collection guidelines when collecting on medical debt, and open up charity care and financial assistance to more low-income individuals. More details here.

WHAT THIS MEANS, FROM HELEN MACMURRAY OF MAC MURRAY & SHUSTER: The debt collection industry continues to have concerns regarding Oregon House Bill 3076 especially with regards to unintentional consequences of some provisions of the bill and potentially creating liability for debt collectors for conduct over which they have no control. Specifically, concerns arise when different interest rates apply to different providers within the same medical event or the provider sends a debt collector debts owed for services other than the date of service for which a patient is granted assistance. The industry also questions the fairness of allowing a high-income patient to have pay only as little as 2% a year on the debt.

Judge Grants MTD in FDCPA Case Over Lack of Response

In another one of those “if you get a letter from a debt collector saying you need to contact them, please do so” cases, a District Court judge in Indiana has dismissed a case against a collector that was accused of violating the Fair Debt Collection Practices Act because it did exactly what it said it would do in letters sent to the plaintiff. More details here.

WHAT THIS MEANS, FROM BOYD GENTRY OF THE BOYD GENTRY LAW FIRM: “You guys are pecking with the chickens!”, a wise judge scolded (a much younger) me and my opposing counsel as we were preparing for a jury trial. We had found ourselves fighting over minutiae, and the judge was exasperated. Although I was right, the judge’s point was clear: we didn’t go to law school to fight over things so small.

This case is another example of a consumer trying to profit from the FDCPA. The debtor had a payment arrangement (auto debits) with the Blatt firm, and when Loyd & McDaniel took over servicing, it twice asked the debtor to contact it if she wished to continue the payment arrangements. She ignored those letters, and Loyd did not initiate debits from her account: it had no authority to make debits from her bank account. After a few months of no contact from the debtor, the Loyd firm garnished the debtor’s bank account.

The debtor’s FDCPA theory was that the two letters from Loyd were “too generic” and did not explicitly say that the auto debits arranged by Blatt (by then out of business) would cease. This caused confusion for the debtor, so she claimed, but she did not call or write to Loyd to clarify or continue the payment arrangement. The letters from Loyd could not have been much nicer.

The judge rightly dismissed this case. The Complaint did not identify any false statements. The judge did not like the debtor’s strategy: “I will stick my head in the sand and then get a windfall FDCPA judgment.” Although the suits keep coming, good judges will recognize when lawyers (or here, debtors) are just “pecking with the chickens.”

Thanks again to Applied Innovation — the team behind ClientAccessWeb, Papyrus, PayStream, and GreenLight — for sponsoring the Compliance Digest. 

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