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3rd Cir. Holds Statement That Debt Forgiveness ‘Might’ Be Reported to IRS Might Violate FDCPA

The U.S. Court of Appeals for the Third Circuit held that a statement in a letter to the effect that forgiveness of the debt “might” be reported to the Internal Revenue Service may constitute a violation of the federal Fair Debt Collection Practices Act (FDCPA).

In so ruling, the Court reiterated that “even if the language in a letter is true, it can still be deceptive where ‘it can be reasonably read to have two or more different meanings, one of which is inaccurate.’”

Accordingly, the Third Circuit reversed the trial court’s dismissal of the action and remanded for further proceedings.

A copy of the opinion in Robert Schultz, Jr. v. Midland Credit Management is available at:  Link to Opinion.

The defendant debt collector sent six letters on separate dates to the plaintiffs (“consumers”) attempting to collect various outstanding debts that had been outsourced to the collector for collection after the consumers defaulted on them.

Each letter offered to settle the amount of indebtedness for less than the full amount owing, and contained the following language: “We are not obligated to renew this offer.  We will report forgiveness of debt as required by IRS regulations.  Reporting is not required every time a debt is canceled or settled, and might not be required in your case.”

Since the Department of Treasury only requires an entity or organization to report a discharge of indebtedness of $600 or more to the IRS, and because each of the debts linked to the consumers was less than $600, the consumers claimed that the inclusion of the foregoing language was “false, deceptive and misleading” in violation of the FDCPA.

The consumers filed a putative class action complaint on behalf of themselves and others similarly situated asserting violations of the FDCPA.

The collector moved to dismiss on the ground that the consumers failed to plead a plausible violation of the FDCPA.  The trial court granted the collector’s motion, and the consumers appealed.

On appeal, the Third Circuit first examined the language of section 1692e of the FDCPA, which provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.”

The Court explained that whether a collection letter is “false, deceptive, or misleading” under section 1692e is determined from the perspective of the “least sophisticated consumer.”

The consumers argued that the language in the letters presented a false or misleading view of the law, which was designed to intimidate them into paying the outstanding debts listed on the debt collection letters even though the collector knew that any discharge of the consumers’ debt would not result in a report to the IRS.

The Third Circuit agreed, noting that “the reporting requirement under the [IRS] code is wholly inapplicable to the [consumers’] debts because none of them totaled $600 or more, and IRS regulations clearly state that only discharges of debt of $600 or more ‘must’ be included on a Form 1099-C and filed with the IRS.”

Thus, “[b]y including the reporting language on collection letters addressing debts of less than $600, we believe the least sophisticated debtor might be persuaded into thinking that the discharge of any portion of their debt, regardless of the amount discharged, may be reportable.”

The collector argued that in order to conclude that a consumer would be misled, one would have to read the first sentence in isolation while paying no attention to the qualifying statement that “[r]eporting is not required every time a debt is canceled or settled, and might not be required in your case.”

The Third Circuit disagreed, ruling that “even with this qualifying statement, the least sophisticated debtor could be left with the impression that reporting could occur,” when “there was no possibility of IRS reporting in light of the fact that the debt was less than $600.”

The collector further argued that the word “might” in the letters should signal to the least sophisticated debtor that only under certain circumstances would reporting occur.

The Court again disagreed, noting that for the consumers, “under no set of circumstances will reporting ever occur.”  The Third Circuit pointed to prior rulings that “even if the language in a letter is true, it can still be deceptive where ‘it can be reasonably read to have two or more different meanings, one of which is inaccurate.’”

Thus, the Court held that the consumers pleaded “sufficient factual allegations that state a plausible claim upon which a court may grant relief under the FDCPA,” and therefore remanded the matter for further proceedings in the trial court.

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Jeffrey Karek practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in defending consumer finance lawsuits in both state and federal trial courts, and on appeal. Such litigation includes allegations brought under TILA, HOEPA, RESPA, FDCPA, TCPA, FCRA, and state consumer protection statutes, including in the defense of putative class actions. Jeff received his Juris Doctor from the University of Michigan Law School, and graduated magna cum laude with a Bachelor of Business Administration degree from Western Michigan University.

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