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2nd Cir. Cleans Up Interest Disclosure Mess, Upholds Taylor

Just over two years to the day after it issued its opinion in Avila v. Riexinger & Associates, LLC, the Second Circuit Court of Appeals has issued a critical blow to a recent spate of FDCPA lawsuits attempting to create liability out of thin air.

A copy of the opinion in Taylor v. Financial Recovery Services is available at:  Link to Opinion.

In Avila, the Second Circuit held that a debt collector violates the FDCPA by stating the “current balance” of a consumer’s debt without disclosing that the balance is increasing due to the accrual of interest or fees.  In Avila, the debt at issue was actually accruing interest at a rate equivalent to 500% per year.

The Avila opinion adopted the same safe harbor approach in the Second Circuit that the Seventh Circuit adopted 16 years earlier in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols & Clark, LLC.  Like Miller, Avila suggested a disclosure that interest was accruing and that so long as that disclosure was used (or something similar) there would be no liability.  What Avila did not hold however was that a debt collector was required to affirmatively state that interest had been waived or was otherwise not accruing.

Nevertheless, sophisticated consumers in the Second Circuit (primarily in the Eastern and Southern Districts of New York) seized upon this nonmaterial minutiae and repaired to their lawyers’ offices en masse to file reverse-Avila cases.  The argument was that the debt collector violated the FDCPA by failing to inform the debtor that interest was not accruing.  The glut of cases was immediate and although collectors were generally successful in motions for summary judgment, the problem was that this claim could not be dismissed on a rule 12(b)(6) motion because plaintiffs pleaded that interest was actually accruing.

The facts of Taylor are similar to all of the reverse-Avila claims: debt collector sent a series of letters to the debtor, all of which demanded the same balance that never increased due to the imposition of interest or fees.  Discovery produced unrebutted evidence that the debt had not accrued interest or fees and the collector moved for summary judgment arguing that there was no obligation to affirmatively state that neither interest nor fees were accruing.  The district court agreed and granted summary judgment.

The plaintiffs argued that the collection letters were misleading however because without a disclaimer regarding interest, the least sophisticated consumer could interpret the letters to mean either that interest and fees were accruing or that interest and fees were not accruing and one of those interpretations necessarily has to be false.  They argued that Avila supported this interpretation.

The Second Circuit disagreed and referred back to the source of this problem, the actual facts of Avila, which were that interest was in fact accruing and thus “a reasonable consumer could read the notice and be misled into believing that she could pay her debt in full by paying the amount listed on the notice, whereas, in reality, such a payment would not settle the debt.”  Here, however, on the facts of this case, the statement “was accurate: prompt payment of the amounts stated in Taylor’s and Klein’s notices would have satisfied their debts.”  This is true in all of these reverse-Avila cases: prompt payment of the amounts stated will satisfy the debts.

The Second Circuit took it one step further though and noted that disclosing that interest was not accruing could have been advantageous to the debtors as it would have alerted them that they could delay repayment without their debts increasing.  Thus “it is hard to see how or where the FDCPA imposes a duty on debt collectors to encourage consumers to delay repayment of their debts.”

The Second Circuit joined the Seventh Circuit once again and held that “a collection notice that fails to disclose that interest and fees are not currently accruing on a debt is not misleading. . . . if instead the notice contains no mention of interest or fees, and they are accruing, then the notice will run afoul of [the FDCPA].”

The Second Circuit also rejected the speculative argument that even though the current debt collector was not accruing interest or fees, they (or their successor) retained the right to do so and thus the letter was still false.  But reading the letters at issue like a normal person as opposed to the astuteness of a Philadelphia lawyer, the Court held that the plaintiffs could have satisfied their debts by making reasonably prompt payment of the amounts stated in the notices and thus they were not mislead.

But all is not lost for these sophisticated debtors.  The Second Circuit did not address the argument that the debts were in fact accruing interest even though no one was actually attempting to collect it.  This alternate pleading has been found in many a reverse-Avila complaint since Taylor was decided in the district court and it will likely take another Second Circuit opinion to place the final nail in the coffin of these claims.

The problem with that argument for plaintiffs is going to be proof.  The theoretical argument that a contract or statute permits the imposition of interest is one thing but when the actual collector has unrebutted evidence that the balance it is seeking to collect remains static, the Second Circuit has already shown us which way it is leaning on that argument.

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Tom Dominczyk is based in Maurice Wutscher's New Jersey office and supports the firm's matters in its New York and Pennsylvania offices, practicing in the firm's Commercial Litigation, Consumer Credit Litigation and Bankruptcy groups. Tom has successfully represented financial institutions and law firms throughout the country for claims filed under the Fair Debt Collection Practices Act, Fair Credit Reporting Act and various state consumer protection statutes. In addition to his litigation practice, Tom represents national, regional and local creditors in a variety of bankruptcy matters ranging from the defense of adversary actions to complex non-dischargeability litigation and preference defenses. He served as a Judicial Clerk to the Honorable Graham T. Ross, P.J.F.P., Superior Court of New Jersey, Somerset County. For more information, see

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