Seventh Circuit: Urging settlement of an old debt could be misleading to unsophisticated consumers

By Kyla Asbury | Mar 18, 2014

CHICAGO (Legal Newsline) - The U.S. Court of Appeals for the Seventh Circuit issued a decision on two lawsuits involving creditors seeking debt collection several years after the debts were originally owed.

Two lawsuits, one against LVNV Funding and the other against Capital Management Services, were consolidated for the purposes of an opinion, according to circuit judges Diane Pamela Wood, Joel Martin Flaum and Diane S. Sykes.

The appeal was argued on Sept. 25 and decided on March 11. The plaintiffs in the cases are Scott McMahon and Juanita Delgado.

"The underlying question presented by these two appeals...relates to the circumstances under which a dunning letter for a time-barred debt could mislead an unsophisticated consumer to believe that the debt is enforceable in court, and thereby violate the Fair Debt Collection Practices Act," according to the decision.

"In Delgado, we face a variant on that issue; it concerns the effect of a settlement offer in the dunning letter. McMahon raises a question of possible mootness in the wake of the defendants' effort to buy out the putative named plaintiff. We conclude that McMahon is not moot, and thus that the district court's dismissal of the action must be reversed."

In Delgado, which is before the court on an interlocutory appeal, the district court denied the defendants' motion to dismiss. The appeals court affirms that decision.

In 1997, McMahon received a bill from a utility company, Nicor Gas, and apparently did not pay the bill. Fourteen years later, in September 2011, LVNV purchased the debt, which by then was $584.98.

LVNV retained a collection agency, Tate & Kirlin, to pursue payment, and Tate sent the letter that sparked the lawsuit to McMahon on Dec. 19, 2011.

In February 2012, McMahon filed a suit under the Fair Debt Collection Practices Act and on July 5, 2012, the district court issued an order dismissing McMahon's class-wide allegations, but denying LVNV's motion to dismiss his individual claims, according to the decision.

McMahon promptly filed a motion to reconsider and on Aug. 13, 2012, the court denied the motion to reconsider but granted him leave to amend his class complaint.

LVNV's attorney faxed McMahon's attorney, offering a settle the case in exchange for McMahon's dropping his class claims. However, McMahon did not respond to the offer, according to the decision.

Two days later, McMahon filed an amended class complaint, along with an amended motion for class certification and LVNV moved for dismissal of the entire case under Federal Rule of Civil Procedure 12(b)(1) and took the position that its settlement offer rendered McMahon's individual claim moot and that this made McMahon an inadequate representative of the proposed class.

The district court found that the Aug. 13 fax offered McMahon complete recovery of his individual claim, that it was made prior to class certification and thus that it had the effect of depriving McMahon of a personal stake in the litigation, according to the decision.

With no controversy meeting the requirements of Article III before it, the court granted LVNV's motion to dismiss for want of jurisdiction. In McMahon's appeal, he contests both the finding that LVNV's settlement offer mooted the case and the original dismissal of the class claims under the FDCPA.

On Feb. 7, 2012, Capital Management Services sent a debt-collection letter to Delgado, stating she owed $2,404.13. The letter did not say that CMS was time-barred from enforcing the debt under Illinois's statute of limitations, nor did it disclose when the debt was incurred.

Delgado's letter was about an eight-year-old debt, which meant that any collection action would have been barred by Illinois' statute of limitations if the debtor were "savvy enough to raise the point," according to the decision.

Delgado filed a complaint under the FDCPA, charging that CMS violated that statute by sending a dunning letter on a time-barred debt and including an offer of "settlement" which, if accepted, would in fact make the debtor worse off.

"CMS filed a motion to dismiss for failure to state a claim," the decision states.

The court found the reference in Delgado's letter of a possible "settlement" of the debt to be deceptive, because it implied that allegedly enforceable obligation to pay the debt existed.

CMS filed a motion under 28 U.S.C. ยง 1292(b) for immediate appeal, given the importance of the issues, according to the decision, and the appeals court accepted the appeal on May 8.

Delgado's request for class certification is still before the district court, which has suspended proceedings pending the outcome of this appeal.

"Our decision today does not require debt collectors to conduct additional research," the decision states. "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, the court ruled. 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, according to the decision.

"If the collector has purchased the debt from the original creditor, we know from the FTC 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 decision states.

"In summary, we conclude that an unsophisticated consumer could be misled by a dunning letter for a time-barred debt, especially a letter that uses the term 'settle' or 'settlement.'"

The appeals court affirmed the district court's denial of the defendant's motion to dismiss in Delgado, and the court reversed and remanded McMahon for further proceedings consistent with the appeals court's opinion.

The plaintiffs were represented by Cathleen M. Combs, Daniel A. Edelman, Tiffany Nicole Hardy, James O. Latturner and Francis R. Greene of Edelmen, Combs, Latturner & Goodwin.

LVNV was represented by Nabil G. Foster and David M. Schultz of Hinshaw & Culbertson.

CMS was represented by Daniel W. Pisani and James J. Schultz of Sessions Fishman Nathan & Isreal.

U.S. Court of Appeals for the Seventh Circuit case numbers: 12-3504, 13-2030

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