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2nd Cir. Holds Providing Only ‘Current Balance’ on Increasing Debt Violates FDCPA

The U.S. Court of Appeals for the Second Circuit recently vacated the dismissal of federal Fair Debt Collection Practices Act (FDCPA) allegations that a debt collector’s notice stating the “current balance” of the debt without disclosing that the balance may increase over time due to interest and fees was “misleading” within the meaning of Section 1692e.

A copy of the opinion in Avila v. Riexinger & Associates, LLC is available at:  Link to Opinion.

The defendant debt collector sent collection notices to the plaintiff debtors notifying them that their accounts were placed for collection. The notices stated the “current balance,” but did not disclose that the “current balance” continued to accrue interest and late fees.

The plaintiff debtors filed suit alleging that the notices violated the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692.  More specifically, the plaintiff debtors claimed that the notice led them to believe that their current balance was static and that payment of that amount would satisfy their debt no matter what date it was paid.  Notably, one plaintiff debtor alleged that her account balance was accruing daily at a rate equivalent to 500 percent per year.

The defendant debt collector’s motion to dismiss was granted, even though the district court noted that the courts were divided on the issue.  The plaintiff debtors appealed.

As you may recall, 15 U.S.C. § 1692e provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in the collection of any debt.”   On appeal, the Second Circuit noted that the list of practices that fall within the prohibited conduct is not exhaustive and therefore applied two principles of statutory construction previously discussed in Clomon v. Jackson, 988 F.2d 1314 (2d Cir. 1993).

In addition, the Second Circuit noted that it would apply the “least sophisticated consumer” standard, explaining that a collection notice could be misleading if it was open to more than one reasonable interpretation, at least one of which is inaccurate.

The Court rejected the district court’s ruling that the FDCPA requires disclosure only of “the amount of the debt.”  The Second Circuit reasoned that § 1692g only concerns disclosures needed to verify a debt, not the more general disclosures intended to prohibit misleading notices under § 1692e, noting that that § 1692e applies to the collection of any debt by a debt collector.

The court adopted the Seventh Circuit’s “safe harbor approach” in Miller v. Raymer, Padrick, Cobb, Nichols, & Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000), which was intended to address the concern that including information regarding accruing interest and fees in a collection notice could illegally coerce consumers and invite abuse.

In Miller, the Seventh Circuit held that the inclusion of the following statement in a debt validation notice under 15 U.S.C. § 1692g would satisfy the duty to clearly state the amount due on an increasing balance debt as a matter of law:

As of the date of this letter, you owe $___ [the exact amount due]. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1–800– [phone number].

However, the Second Circuit declined to require a debt collector to use the “safe harbor approach” in order to comply with § 1692e.

Rather, the Court held that a debt collector will not violate § 1692e if either: (1) the collection notice states that the amount of debt will increase over time, or (2) clearly states that the debt collector will accept the amount stated in the notice in full satisfaction of the debt if payment is made by a specific date.

As the defendant debt collector’s notices did not mention the accrual of interest and fees or provide a date by which payment would fully satisfy the debts, the Second Circuit held that the plaintiff debtors stated a claim under the FDCPA.

The Second Circuit reasoned that, if in fact interest and fees were accruing daily, the plaintiff debtors would still be liable for additional debt that accumulated before the stated balance in the notices at issue were paid.  In addition, the owner of the debt identified in the notice could sell this additional accrued interest and charges to another party for collection even after payment of the stated balance.

Accordingly, the Second Circuit vacated the district court’s dismissal and remanded for further proceedings.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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