Compliance Digest – Nov. 11

Every week, 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.


Judge Grants MTD in FDCPA Case Over Letter Sent After Cease and Desist Was Communicated

A District Court judge in Alabama has granted a defendant’s motion to dismiss after the plaintiff could not remember if she sent a cease and desist letter to the defendant or the original creditor, and because the communication in question was one of three carve-outs in the Fair Debt Collection Practices Act that allow for an additional communication after a cease and desist has been communicated. More details here.

WHAT THIS MEANS, FROM DENNIS BARTON OF THE BARTON LAW GROUP: The strict liability aspect of the FDCPA (in which Plaintiff’s do not need to prove the intent of a collector) can easily make one cynical when evaluating whether to defend a claim. The case of Russaw v. Scott & Associates, P.C. reminds us, however, that consumers still have the burden of proof to satisfy all elements an FDCPA claim. In Russaw, the consumer mailed a cease and desist letter, and Scott & Associates, P.C. (“Scott”) mailed her a letter stating that it received her cease and desist letter, it was ceasing its collection efforts, and it may pursue other remedies in the future.  Russaw sued alleging S&A violated the FDCPA by contacting her after she mailed her letter.

Russaw had a burden of proof to show she mailed her letter to a debt collector. She did not, though, allege if she sent it to S&A or to the creditor. Her failure to even plead the fundamental element that she sent her letter to a debt collector was fatal to her claim. If Russaw sent the cease and desist letter to the creditor rather than S&A, S&A could not have violated the FDCPA because the Act does not (generally speaking) regulate creditors.

The court pointed out, though, that even had S&A received the letter, the FDCPA’s statutory language expressly permits a collector to send a letter with the language contained in S&A’s response. Finally, the court also rejected Russaw’s assertion the letter was inconsistent and confusing because it said collection efforts would stop and other remedies may be pursued in the future. The court found a collector can both cease efforts and say other remedies may be pursued later. 

In all, S&A wisely saw Russaw failed to plead all of the necessary elements of an FDCPA claim and filed a motion to dismiss rather than throwing litigation chum in the water by settling a clearly defensible case. Apart from this case being an excellent example of when to fight a case and the consumer having a burden of proof as to all elements of a claim, it brings to my mind the following question: how often does sending a response to a cease and desist letter yield a positive result? 

Sending a response like S&A’s letter consumers resources and brings with it the chance of a lawsuit like Russaw being filed by an ignorant consumer attorney or one that unethically seeks a quick settlement while knowing the case is groundless. Collectors sending these letters see, or at least believe, enough consumers respond by paying their debts to justify sending the letter. These letters are legal, so we are only left with a business decision as to whether to even respond to a written request to cease and desist. Collectors should carefully evaluate whether these letters produced returns to be sure that doing so is worth not only the collector’s time and money but also the risk of expenses associated with defending a frivolous lawsuit.


States Urge Supreme Court to Hear Arguments in Another CFPB Leadership Case

Eleven state attorneys general, being led by Ken Paxton, the attorney general of Texas, have filed an amicus brief with the Supreme Court, requesting that it accept a case that challenges the constitutionality of the Consumer Financial Protection Bureau’s leadership structure. More details here.

WHAT THIS MEANS, FROM VIRGINIA BELL FLYNN OF TROUTMAN SANDERS: Last month, Mississippi payday lender, All American Check Cashing, while waiting for a ruling from the Fifth Circuit regarding the constitutionality of the CFPB’s structure, filed a petition asking the U.S. Supreme Court to grant review of its constitutional challenge. Its petition is notable because All American is arging that the Supreme Court can only cure the problem by undoing prior CFPB enforcement actions or by striking down the law that created the Bureau.

Now, 11 state attorneys general, being led by Ken Paxton, the attorney general of Texas, have filed an amicus brief with the Supreme Court, requesting that it accept a case that challenges the constitutionality of the Consumer Financial Protection Bureau’s leadership structure. The signatories of the amicus are the AGs of Texas, Arkansas, Indiana, Kansas, Louisiana, Nebraska, Ohio, Oklahoma, South Carolina, Utah, and West Virginia.

From a compliance perspective, companies should continue to follow and monitor closely any CFPB guidance issued. But from a litigation perspective, a CFPB enforcement action no longer guarantees penalties and judgments against a company. Continue to work amicably with the Bureau but fight back where you can and when you need to. This uncertainty should be helpful in the short term.

Appeals Court Rules Pulling Credit Report Without Permissible Purpose Confers Standing to Sue

The Ninth Circuit Court of Appeals has reversed a lower court’s decision that obtaining an individual’s credit report without a permissible purpose is enough under Article III of the Constitution to confer standing to file a lawsuit, even if the plaintiff is not able to allege a nefarious reason for doing so. More details here.

WHAT THIS MEANS, FROM JUNE COLEMAN OF CARLSON & MESSER: What this case provides is further clarity on how the Ninth Circuit views the standing requirement to have a concrete injury in fact. Ms. Nayab alleges that Capital One Bank impermissibly pulled her credit report repeatedly, without a permissible purpose. Apparently, the credit report not only reflected the numerous times that Capital One Bank had obtained a copy of her report, but also that no one had obtained a copy of her report after Capital One Bank, thereby demonstrating that the information that Capital One Bank had puller her credit report and the impact on Ms. Nayab’s credit score had not been viewed by anyone. The Court rejected that anyone else had to know that Ms. Nayab’s credit report had been pulled – the fact that her privacy had been invaded because Capital One Bank had viewed her private credit information. Thus, the Ninth Circuit views the invasion of privacy as sufficiently concrete harm to satisfy the federal court standing requirement. You could see this translate to standing when there is third party disclosure in violation of the Fair Debt Collection Practices Act, for instance. And you could see this translate to standing when there are too many calls (ringing and heard by the consumer), even if the calls were not answered. While I don’t think that an unanswered call can constitute harassment, generally, under the FDCPA, it would appear that this pattern of repeated calls could constitute standing in the Ninth Circuit. While the Spokeo case was thought to possibly set a higher standard for plaintiffs to demonstrate injury. But even with this higher standard, many courts are finding standing nonetheless.

The Nayab case also sets forth the necessary pleadings for an impermissible credit report claim: pulling the report and a general allegation that there was no permissible purpose. The Ninth Circuit held that Ms. Nayab would not need to allege what the wrongful purposes when Capital One Bank puller her credit report, nor did she have to, according to the Ninth Circuit. The Court noted that Capitol One Bank would be in a better position to state any wrongful intent – and that Ms. Nayab simply would not know what purpose Capitol One Bank had in pulling the credit report.

Judge Denies MTD in FDCPA Case Over State of Balance in Letter

A District Court judge in New Jersey has denied a defendant’s motion to dismiss for violating the Fair Debt Collection Practices Act by allegedly misrepresenting that the balance of a debt may increase when in fact it was static. More details here.

WHAT THIS MEANS, FROM MITCH WILLIAMSON OF BARRON & NEWBURGER: When communicating with debtors follow one important rule: “Less is more.” In Soto v. Law Offices of Faloni & Assocs., LLC, 2019 U.S. Dist. LEXIS 182751 *; 2019 WL 5394926 (D.N.J. October 22, 2019) the issue was the line in a letter sent by the law firm in response to a request for debt validation stating “The current account balance is subject to change pursuant to state or federal law.” Interest was not accruing (see below) so there was no need to mention it. So why include the “warning” and reference to unidentified “state and federal law?”

I normally instruct my witnesses to answer the question and only the question. Don’t improvise, don’t add information. Same goes for answering debtor’s inquiries. Here the letter provided the requested information: “The account was originally opened in or about . . . , the original account number was  . . . , the account was charged off on  . . . .  and the balance at the time of charge off was . . . “ (the charge off balance was the same as the current balance stated in the re: line. ) So why not stop there?

The decision is extremely short so I looked at the federal and state court pleadings to better understand what happened before making my comments. I found that prior to this letter being sent a collection complaint had been filed and subsequently dismissed by the Court. The complaint sought the same amount as charge off. So, at the time of the letter, there was no pending litigation nor was any additional amount being sought. And no apparent reason to mention state or federal law. Less is more.

Judge Denies Motion for Judgment on Pleadings in FDCPA Case Involved Faxed Dispute Letter

A District Court judge in Indiana has denied a defendant’s motion for judgment on the pleadings after it was accused of violating the Fair Debt Collection Practices Act for allegedly reporting a debt that had been disputed, even though the dispute was sent to a fax machine number that the defendant had removed eight months before the dispute was faxed. More details here.

WHAT THIS MEANS, FROM BOYD GENTRY OF THE LAW OFFICE OF BOYD GENTRY: This looks like a good case for summary judgment. Apparently, the critical fact here (that the fax number was no longer used) could not be considered by the court since that fact was not in the pleadings. The takeaway is that collection agencies must limit the avenues available for incoming correspondence. All collection agencies should be able to (1) demonstrate sufficient controls on communication avenues (letters/emails could say “all faxes must be sent to 1-800-xxx-xxxx and all mail to P.O. Box xxx”), and (2) explain written and redundant procedures for handling incoming fax/mail/email and disputes. Many similar cases have dismissed at the summary judgment stage but rarely on the pleadings.

Appeals Court Reverses Lower Court’s Decision to Not Certify Class in FDCPA Suit

The Eleventh Circuit Court of Appeals has reversed a lower court’s denial of class certification of a lawsuit filed against a company accused of sending allegedly deceptive collection letters in violation of the Fair Debt Collection Practices Act to individuals after their debts had been discharged in bankruptcy. More details here.

WHAT THIS MEANS, FROM JUDD PEAK OF FROST-ARNETT: This particular ruling turned on class certification issues – specifically, whether the designated class had commonality of issues that predominated the lawsuit, or whether the facts of the named plaintiff’s claim were unique. In this case, the plaintiff’s mortgage liability had been discharged through the bankruptcy court. Two years later, the defendant began sending “mortgage statements” to the plaintiff listing a balance owed, fees that accumulated, etc. The Eleventh Circuit Court of Appeals ruled that whether such activities constituted attempts to collect a debt were common across all consumers who had filed for bankruptcy protection but had received the statements from the defendant. Consequently, the consumers had common issues and class certification was warranted. 

However, the more interesting issue to me is the underlying liability claim based on collection activity against a bankrupt consumer. The consumer’s individual liability to pay the mortgage debt had been discharged through the bankruptcy court. The claim asserted under the FDCPA (and the similar Florida consumer protection statute) was that the debt was no longer “owing” due to the bankruptcy discharge, and thus it was a violation of law to attempt to collect on a debt not owed. The Court of Appeals declined to make a decision on whether post-discharge collection attempts give rise to a claim under the FDCPA. Alternatively, the court noted, an aggrieved consumer’s only recourse may be to pursue a claim of contempt within the bankruptcy court itself. Does the bankruptcy code preempt the FDCPA? The Court of Appeals noted that there is a split of authority between the Circuit Courts of Appeal, and that the 11th Circuit had not specifically addressed the issue. 

This is a particularly pointed issue with outside collection agencies. It is not uncommon for a creditor to place an account for collections, despite the fact that the consumer may have filed for bankruptcy protection and ultimate discharge of the debt. The fact that a consumer has filed for bankruptcy protection may not even be communicated to the debt collector. Nonetheless, consumer attorneys frequently assert a strict liability standard under the FDCPA – the debt is not owed, ergo the collector is liable. Bankruptcy attorneys doubling as consumer protection attorneys have multiplied, especially in consumer-friendly states such as Florida. I believe this case illustrates the current problem with having no uniform rule on bankrupt consumers and whether the FDCPA is triggered. Given a split in approach between the circuits, the issue appears to be ripe for Supreme Court review. In the meantime, a debt collector’s best solution is to engage in a robust bankruptcy scrub service for all of its accounts. 

Judge Grants Motion For Judgment in FDCPA Case Over Creditor Identification in Letter

A District Court judge in New York has granted a defendant’s motion for judgment on the pleadings after it was sued for violating the Fair Debt Collection Practices Act when it allegedly failed to adequately identify the current owner of a debt in a collection letter. More details here.

WHAT THIS MEANS, FROM PORTER MORGAN OF MALONE FROST MARTIN: This is another common sense decision from New York which should bring some relief to agencies and law firms who collect there.  Hopefully this continues the trend of Courts growing tired of FDCPA lawsuits based idiosyncratic interpretations.  

Since the State of New York changed its rules for debt collection letters without any safe harbor provision for compliance, New York Courts have been buried in FDCPA cases from Plaintiff’s attorneys attempting to assert new and creative theories of FDCPA violations. First, the plaintiff’s attorneys tried to assert the reverse-Avila argument and allege that a debt collector violated the FDCPA when it failed to state that an account was not charging interest, when it was in fact, not charging interest. The Taylor and Derosa decisions shut that theory down, but the plaintiff’s attorneys then pivoted to cases based on the name of the original creditor and who the debt was owed to now.  

The Lugo case brought a new creative theory, that a second collection letter which did not list out both the original creditor and current creditor somehow would confuse the least sophisticated consumer in to wondering who it owed money to. The court correctly held that the plaintiff’s arguments were merely idiosyncratic interpretations that goes way beyond the text of the letter. 

The unfortunate aftermath of the reverse Avila cases is that there were and are hundreds of lawsuits filed in New York that were stayed pending the Second Circuit’s ruling in Taylor and Derosa. Because of the sheer volume of these cases, many still remain open with the courts more than a year later, because the plaintiff’s attorneys have not yet dismissed them despite the adverse rulings in Taylor and Derosa. With Judge Ross’s quick ruling in Lugo, hopefully we won’t see the same aftermath in this creditor issue.

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

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