Last week the Seventh Circuit Court of Appeals issued its opinion in the consolidated appeals of McMahon v. LVNV Funding and Delgado v. Capital Management Services concerning the collection of time-barred debt without the threat of litigation. The result is not good for the credit and collections industry, principally because it further confuses application of the Fair Debt Collections Practices Act across the nation.
In both cases the debt collectors offered to settle the debts, without mention of a lawsuit or any legal action. Both suits claimed that the letters were false, deceptive and misleading, in violation of sections 1692e and 1692f of the FDCPA. In McMahon, the trial court dismissed the complaint, finding that it failed, as a matter of law, to state a claim for violation of the FDCPA. The Delgado court, though, denied the debt collector’s motion to dismiss, finding that an actionable FDCPA claim was stated.
Appeals followed and in Delgado, at the invitation of the 7th Circuit, the Consumer Financial Protection Bureau and the Federal Trade Commission filed an amicus brief arguing that a consumer can be mislead by a settlement letter requesting payment of a time barred debt because they would not understand that “no further legal action to collect on a debt is permitted.”
The failure to disclose that the debt is subject to an expired limitations period, the regulators said, is therefore misleading in violation of the FDCPA. A similar argument was made by the regulators in their amicus filed this month in the Sixth Circuit Court of Appeals.
The Court of Appeals reversed McMahon and affirmed Delgado. The decision does not prohibit the collection of time barred debt where there is no threat of litigation, but makes actionable under the FDCPA a communication that seeks payment of a time barred debt by misleading “an unsophisticated consumer into believing that the debt is legally enforceable, regardless of whether the letter actually threatens litigation.”
The opinion notes that its holding is in conflict with decisions from the Third and Eighth Circuit Courts of Appeals.
The Seventh Circuit’s decision is just another example of departure from the text of the FDCPA. The conflict created with other circuits will fuel lawsuits in this area and cause many industry participants to revisit their operational compliance.
Joann Needleman, Tom Dominczyk and I have put together a webinar for Wednesday, March 19 where we will break down Delgado, McMahon and other decisions impacting collection of time-barred debt and what participants in credit and collections should be thinking about as a result of these decisions. You can register for the webinar here.