Fifth Circuit Adds to the Circuit Split: Offer to Settle Debt Without Disclosing It is Time-Barred Violates FDCPA

In a case of first impression, in Daugherty v. Convergent Outsourcing, Inc., --- F.3d ----, 2016 WL 4709712 (5th Cir. September 8, 2016), the U.S. Court of Appeals for the Fifth Circuit was presented with the issue whether a debt collection letter that offered the consumer alternative settlement options, but did not disclose the debt was time-barred or threatened litigation, could mislead the least sophisticated consumer and therefore violate 15 U.S.C. § 1692.  In reversing the District Court for the Southern District of Texas, the Court of Appeals held the complaint stated a facially plausible cause of action that the letter violated the FDCPA.

After purchasing a credit card debt owed by Daugherty for which the statute of limitations had already expired, LVNV Funding, L.L.C. hired Convergent to collect it.  Convergent sent Daugherty a collection letter offering her various options to settle the debt, discounting the total debt by different amounts depending on the option selected.  The letter made no mention that the debt was time-barred, and did not threaten litigation if Daugherty refused to pay the debt.

Daugherty filed suit alleging both Convergent and LVNV were both debt collectors and that the letter violated 15 U.S.C. § 1692e (“false, deceptive, or misleading representation or means in connection with the collection of any debt”) and 15 U.S.C. § 1692f (“unfair or unconscionable means to collect or attempt to collect any debt”) by failing to disclose:  that the debt was not enforceable, that settling for a reduced amount would trigger income tax liability, and that a partial payment would revive the entire stale debt obligation.

The district court dismissed the case pursuant to Fed.R.Civ.P. 12(b)(6), holding “that the FDCPA permits a debt collector to seek voluntary repayment of a time-barred debt so long as the debt collector does not initiate or threaten legal action in connection with its debt collection efforts,” relying in part on opinions from the Third and Eighth Circuits.  Id. at *2.

On appeal, the Court observed that Congress “intended the FDCPA to have a broad remedial scope,” id. (citations omitted), and that “a court must view the letter from the perspective of an “unsophisticated or least sophisticated consumer,” id. (footnote and citations omitted).  The Court then noted the “apparent conflict in the circuits as to whether a collection letter offering “settlement” of a time-barred debt can violate the FDCPA if the debt collector does not disclose the debt's unenforceability or expressly threaten litigation.”  Id. at 3.  

The Third and Eighth Circuits have stated that “[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.”  Huertas, 641 F.3d at 33 (quoting Freyermuth, 248 F.3d at 771). On the other hand, the Sixth and Seventh Circuits have held that collection letters offering to settle time-barred debts without disclosing the status of the debt can be misleading and therefore violate the FDCPA even if they do not expressly threaten litigation. See Buchanan v. Northland Grp., Inc., 776 F.3d 393, 397 (6th Cir. 2015); McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1020 (7th Cir. 2014).

In the Eighth Circuit “an attempt to collect on a time-barred debt is permissible under the FDCPA  because “a statute of limitations does not eliminate the debt; it merely limits the judicial remedies available.”  248 F.3d at 771.”  Daugherty at * 4.  “The Third Circuit followed suit, noting that “it is appropriate for a debt collector to request voluntary repayment of a time-barred debt.” Huertas, 641 F.3d at 33.  It was the absence of the collection letters of threats to file suit that allowed these courts to conclude there were no FDCPA violations.  Daugherty at *4.

Rejecting the approach of the Third and Eighth Circuits, the Court was persuaded by the Seventh Circuit’s decision in McMahon and the Sixth Circuit’s decision in Buchanan.  Efforts to collect a time-barred debt are not “automatically improper”, but the use of language in the collection letter that would mislead the least sophisticated consumer as to whether the debt is legally enforceable results in a violation of the FDCPA.  Daugherty, at *3, quoting McMahon at 1020.  This is because § 1692e(2)(A) “specifically prohibits 'the false representation of the character or legal status of any debt' [and] 'a gullible consumer who made a partial payment would inadvertently have reset the limitations period and made herself vulnerable to a suit on the full amount'.”  Daugherty at *3, quoting McMahon at 1021.

To report that this is an area of law constantly evolving, even forty years after the FDCPA was enacted, is an understatement.  Just fourteen days before the decision in Daugherty, the U.S. Court of Appeals for the Fourth Circuit issued an opinion that filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the FDCPA when the statute of limitations does not extinguish the debt.  Dubois v. Atlas Acquisitions LLC (In re Dubois), No. 15-1945 (4th Cir. 25 August 2016).  There are obvious material differences between pursuing the collection of a claim in and out of bankruptcy court, as the Dubois court explained.  However, in this still unsettled area of law, debt collectors must ensure they are well-versed in the FDCPA as applied in the particular jurisdictions where they operate.

It appears the positions taken by the Consumer Financial Protection Bureau and the Federal Trade Commission in a number of cases also influenced the Daugherty and McMahon courts, with these agencies contending that most consumers do not understand their legal rights with respect to the collection of time-barred debts.  Daugherty at *3.  The influence of the CFPB on the federal courts will only increase as it initiates more enforcement actions and submits amicus curiae memoranda, and especially once it finalizes regulations interpreting the FDCPA.