A recent decision by the Seventh Circuit has held that the Fair Debt Collection Practices Act (FDCPA) is violated when a debt collector sends a dunning letter seeking to settle a time-barred debt, even when no litigation is threatened. The Third and Eighth Circuits have disagreed. This sets up a split in the Circuits that the Supreme Court may need to resolve.
All three cases involved letters sent by debt collectors asking debtors to settle debts that could no longer be enforced by legal action. None of the letters threatened legal action, but neither did they disclose that the debts were time-barred.
The FDCPA prohibits the use of “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. Sec.1692e. This statute sets out a nonexclusive list of prohibited practices, including: false representation of the character, amount, or legal status of any debt Sec. 1692e(2)(A); the threat to take any action that cannot legally be taken, Sec. 1692e(5); and the use of any false representation or deceptive means to collect or attempt to collect any debt, 1692e(10).
The Seventh Circuit, in McMahon v. LNLV Funding, LLC and Delgado v. Capital Management Services, LP, Nos. 12-3507, 13-2030 (7th Cir. Mar. 11, 2014) held that “The proposition that a debt collector violates the FPCPA when it misleads an unsophisticated consumer to believe a time-barred debt is legally enforceable, regardless of whether litigation is threatened, is straightforward under the statute. Section 1692e(2)(A) specifically prohibits the false representation of the character or legal status of any debt.”
However, in Huertas v. Galaxy Asset Management, 641 F. 3d 28 (3rd Cir. 2011), the Third Circuit, applying New Jersey law, found that “the debt obligation was not extinguished by the expiration of the statute of limitations, even though the debt is ultimately unenforceable in a court of law.” Accordingly, the Court held that FDCPA Section 1692e(2)(A) was not violated by a debt collector seeking the “voluntary repayment of the time-barred debt so long as the debt collector does not initiate or threaten legal action in connection with its debt collection efforts.” The Court in Huertas cited Freyermuth v. Credit Bureau Servs.,Inc., 248 F3d 767,771 (8th Cir. 2001) which had held “[I]n the absence of a threat of litigation or actual litigation, no violation of the FDCPA has occurred when a debt collector attempts to collect on a potentially time-barred debt that is otherwise valid.”
In McMahon, the Seventh Circuit expressly rejected the reasoning of the other Circuits, stating: “The plain language of the FDCPA prohibits not only threatening to take actions the collector cannot take, but also the use of any false, deceptive, or misleading representation, including those about the character or legal status of any debt.”
The other Seventh Circuit judges declined to consider this decision in an en banc review. Therefore, it may now be up to the Supreme Court to decide if debt collectors can seek to collect time-barred debts without expressly stating that the debts are unenforceable.