District Court: 1099-C Language May State Claim for FDCPA Violation

By Caren Enloe and Anna Claire Turpin

A recent case from a New York district court serves as a reminder that a single word in a debt collection letter may cause a wave of implications if enough further information is not supplied.  In Leonard v. Capital Management Services, LP, 2019, No. 1:18-cv-90, 2019 U.S. Dist. LEXIS 18336 (W.D.N.Y. Feb. 4, 2019), a debt collection letter offering to settle the debt for less than the full balance included a statement that “[s]ettling a debt for less than the balance owed may have tax consequences and Discover may file a 1099-C form” (emphasis added).  Because the total debt forgiveness would have been less than $600.00 and therefore did not meet the IRS threshold for reporting, the Plaintiff alleged that the language violated 15 U.S.C. §§1692e and 1692f.

The debt collector moved to dismiss, arguing that the letter was not false and that the 1099-C clause was true because it was not cast in mandatory language.  Instead, the debt collector argued that the use of the word “may” in the statement did not imply that Discover or CMS would in fact file a 1099-C or take other actions that would create “tax consequences” with the IRS.  

The court disagreed.  While not concerned with the tax consequence language, the court took issue with the 1099-C clause.  Despite the debt collector’s arguments to the contrary, the court held that the use of the word “may” did not insulate the statement from potential liability.  The court concluded that the 1099-C clause stated a plausible claim because it did not provide any reference to nor clarify that the reporting requirements only applied where the $600.00 threshold was met.  Without that clarification, the court concluded the least sophisticated consumer could reasonably believe that CMS or Discover might report the cancelled debt to the IRS.

The key take-away is that the use of generic conditional language is not a cure-all.  In the case of 1099 language and to the extent conditional language is used, letters should be reviewed to insure they provide enough information as to the tax consequences to make clear the circumstances in which the tax reporting requirements may apply.

Anna Claire Turpin is a third year law student at Campbell University and a graduate of James Madison University.  Turpin is currently a law clerk with Smith Debnam’s Consumer Financial Services Litigation and Compliance group.

Bankruptcy Disclaimer Did Not Violate FDCPA

A district court in Michigan recently dismissed an FDCPA action, holding that a letter which included a bankruptcy disclaimer was for informational purposes only and did not violate the FDCPA.  Tyler v. Fabrizio & Brook, P.C., 2019 U.S. Dist. LEXIS 33450 (E.D. Mich. Mar. 4, 2019).  At first glance, the decision appears to be in conflict with the Sixth Circuit’s prior decisions in Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6th Cir. 2013) and Scott v. Trott Law, P.C., 2019 U.S. App. LEXIS 1015 (6^th Cir. Jan. 11, 2019).  In those cases, the Sixth Circuit concluded that foreclosure proceedings are debt collection.

The case centers around a single letter and a bankruptcy disclaimer.  In 2015, Tyler’s mortgage debt was discharged in bankruptcy.  In 2016, the bank engaged the defendant law firm to foreclose on the underlying real property.  The law firm then sent Ms. Tyler the following letter:

Dear Borrower(s),

BANK OF AMERICA, N.A., successor by merger to LaSalle Bank Midwest, N.A. fka Standard Federal Bank has retained our law firm to begin foreclosure proceedings on the above referenced property. As of the date of this letter, you owe $27,036.78. Because of interest, late charges and other charges that may vary from day to day, the amount due [*8]  on the day you pay may be greater, and an adjustment may be necessary after our client receives your payment.

Unless you notify this office within 30 days after receiving this notice that you dispute the validity of the debt or some portion of it, this office will assume that the debt is valid. If you notify this office in writing within 30 days of receiving this notice, this office will obtain verification of the debt or a copy of a judgment and mail a copy of it to you. If you request in writing within 30 days after receiving this notice, this office will provide you with the name and address of the original creditor if different from the current creditor.

Thank you for your attention to this matter.

Very truly yours,

Devara Walton

Real Estate Default Team

FABRIZIO & BROOK, P.C.

FABRIZIO & BROOK, P.C. IS THE CREDITOR'S ATTORNEY AND IS ATTEMPTING TO COLLECT A DEBT ON ITS BEHALF. ANY INFORMATION OBTAINED WILL BE USED FOR THAT PURPOSE. HOWEVER. IF YOU ARE IN BANKRUPTCY OR HAVE BEEN DISCHARGED IN BANKRUPTCY, THIS LETTER IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED AS AN ATTEMPT TO COLLECTA DEBT OR AS AN ACT TO COLLECT, ASSESS, OR RECOVER ALL OR ANY PORTION OF THE DEBT FROM YOU PERSONALLY

Tyler at *7-9.

Tyler sued the law firm, claiming the letter violated 15 U.S.C. §1692e and asserted that the language “you owe $27,036.78” was misleading since the debt had been discharged in her bankruptcy. The law firm moved to dismiss, alleging that the letter was not an attempt to collect a debt, but instead for informational purposes only.

The court determined that the letter’s primary purpose was informational and to notify Tyler that foreclosure proceedings were about to start.  The court noted that the letter did not explicitly ask for payment, did not provide a due date for payment, did not provide a payment coupon and did not provide an address to mail payment.  Moreover, the court noted the letter contained a bankruptcy disclaimer which was on the same page as the remainder of the letter and “arguably the most conspicuous thing on the letter.”  Id. at *6.

The court’s decision is difficult to reconcile with its Circuit’s recent holding in Scott v. Trott Law, P.C.  in which the Sixth Circuit confirmed its view that foreclosure proceedings are debt collection.  The district court attempted to reconcile its decision by noting that the letter was not a required step in the foreclosure or actual foreclosure activity.  Instead, the court noted that “the letter was a courtesy to Tyler letting her know that foreclosure proceedings were about to start.  Its primary purpose to inform.” Id. at *5. 

Foreclosure law firms should continue to monitor developments in this area closely.  A split in the circuits as to whether non-judicial foreclosure constitutes debt collection may be resolved shortly by the Supreme Court.  Oral arguments were heard in January regarding this issue and a decision is expected this Spring.

District Court Rules That a Telemarketer’s Single Unanswered Call Creates Article III Standing

By: Zachary K. Dunn

A single missed call from a telemarketer constitutes a concrete injury that gives rise to standing, a federal district court in California has ruled. In Shuckett v. DialAmerica Marketing, Inc., 2019 U.S. Dist. LEXIS 29598 (S.D. Cal. Feb. 22, 2019), the defendant DialAmerica was hired by another company, American Standard, to conduct telemarketing calls. Ms. Shuckett, the plaintiff, alleged in her complaint that she had received a series of telemarketing phone calls on behalf of American Standard, each of which violated the Telephone Consumer Protection Act (“TCPA”). Both DialAmerica’s and Shuckett’s phone records indicate that DialAmerica only made one phone call to Schuckett (the other telemarketing calls Shuckett received emanated from another company), and that the single call contained 0 minutes of “talk time,” meaning that Shuckett did not answer it.

While DialAmerica conceded that a single call can give rise to a concrete injury, it contended that because the call went unanswered Shuckett could not have been harmed and therefore did not have standing to pursue a TCPA claim. For her part, Shuckett alleged that the call caused her nuisance and invaded her privacy, thereby injuring her.

The district court sided with Shuckett and found that she had standing to pursue her TCPA claim against DialAmerica. Under the landmark Supreme Court case Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 194 L. Ed. 2d 635 (2016), a federal statute is insufficient by itself to confer standing. Instead, a plaintiff must show that he or she suffered an actual, concrete injury that is traceable to the conduct of the defendant. The district court noted that other courts have held that a text message gave rise to standing under the TCPA, and found no meaningful difference between a text message and an unanswered phone call. Both, according to the district court, “invade the privacy and disturb the solicitude” of the recipient and thereby create an injury.

Interestingly, the court left open the possibility that “[h]ad the call gone entirely unnoticed, perhaps this would be a different case” because the plaintiff would not have sustained an injury. That was not the case here, though: “While it appears undisputed that Shuckett did not pick up the call, there is no evidence that she was entirely unaware of it.” Therefore, the court ruled that Shuckett had standing to pursue her TCPA claim against DialAmerica.  

Takeaways from Shuckett

Shuckett reminds us that even a single phone call can lead to liability under the TCPA, and informs us that a plaintiff may have standing even if he or she did not pick up the call. However, this case does leave a small amount of hope for telemarketers; if the plaintiff admits to not noticing the phone call, then he or she may not have standing to pursue TCPA claims.  

Zachary Dunn is an attorney practicing in Smith Debnam’s Consumer Financial Services Litigation and Compliance Group

CFPB Issues Semi Annual Report to Congress

The CFPB has issued its Semi-Annual Report to Congress for the time period beginning April 1, 2018 and ending September 30, 2018. The Report is the first issued by newly confirmed Director Kathy Kraninger and outlines the actions taken by her predecessor in the April-September 2018 time period.

Significant Problems Facing Consumers.

The Report identifies two “significant problems” facing consumers shopping for or obtaining consumer financial service products: (a) credit invisibility and (b) mortgage shopping. “Credit invisibility” is not a new concern and was identified as an issue during Cordray’s tenure. The Report highlights a study released by the CFPB which examines the relationship of geography to credit invisibility. It is significant that there appears to be consensus from CFPB leaders (both liberal and conservative) that credit invisibility is an issue. The Report also identified “mortgage shopping” as an issue, pointing to studies indicating that consumers do not shop for the lowest interest rates when applying for a mortgage.

Consumer Complaints Reflect a Status Quo.

The Report also summarizes the consumer complaints received by the Bureau from consumers for the past year. There were no surprises here – the three front runners for complaints filed with the CFPB were credit reporting, debt collection and mortgage. 

Debt Collection Rules Are Coming!

Perhaps the most significant news in the Report was confirmation that debt collection rules are coming. For those that have followed the rulemaking, an advanced notice of proposed rulemaking was issued in late 2013. In the summer of 2016, the CFPB issued an Outline of Proposals for Third Party Rules and indicated that “[a]s part of its overhaul of the debt collection marketplace, the CFPB plans to address consumer protection issues involving first-party debt collectors and creditors on a separate track.” Later that summer, a third party SBREFA was held.

For two years, there was no further action. In October, however, the CFPB announced that it anticipated a Notice of Public Rulemaking in March of 2019. The Report confirms that a proposed rule is coming, but that it is likely to be a more narrowed version that what was suggested by Cordray’s CFPB in 2016. According to the Report, “the Bureau will work towards releasing a proposed rules concerning FDCPA collectors’ communications practices and consumer disclosures.”

What's Next?

Kraninger is expected to testify before the House Financial Services Committee on March 7th and the hearing is highly anticipated as it will be the first opportunity to see her interactions with the Democratic led committee. No doubt, the committee will have a number of questions concerning the Bureau’s decision to walk back the Payday Lending Rules.

CFPB Issues First Complaint Snapshot Under Kraninger

For the first time in over a year, the CFPB has issued a Complaint Snapshot. A practice started by Cordray in 2015, the report is a high level snapshot of trends in consumer complaints and provides a summary of the volume of complaints by product category and by state. While the Complaint Snapshot issued by Kraninger’s office differs slightly in content from the reports issued under Cordray and does not promise to be a regular occurrence, it provides excellent content that will allow financial services to identify risks within their organization structure. The January 2019 report focuses on mortgage products and looks at the three month period of August 2018-October 2018.

Here’s what you need to know:

• The Snapshot provides a high level overview of trends in consumer reports over the last 24 months;
• The Snapshot continues to use the three-month rolling average, comparing the current average to the same period in the previous year;
• Since the last Report issued by Cordray, not much has changed. Credit reporting and debt collection continue to be the leading sources of complaints.
• Mortgage complaints appear to have fallen off and are no longer in the top three sources of consumer complaints, having been surpassed narrowly by credit card complaints.

NATIONAL OUTLOOK. 

While credit reporting and debt collection continue to provide the most significant volume of complaints, credit reporting is showing a significant decrease when compared to its complaint average for the same period in 2017 – a 14% decrease. Similarly, mortgage products, which used to always be in the top three products for complaints, have shown a 15% decrease for the same period. Picking up the slack, prepaid card complaints have increased 26% for the same period and depository and credit card products have shown 14% and 8% increases, respectively. Debt collection remains relatively flat with a 3% decrease compared to the same period in 2017. 

FEATURED PRODUCT OR SERVICE. 

This Snapshot highlights mortgage products.  The most common issue identified by consumers between August and October 2018 was trouble during the payment process. Breaking that down further, the Snapshot indicates the majority of issues involved periodic statements, applications of payment, escrow accounts and payoff requests. Specifically,

• Periodic Payments. According to the Snapshot, the complaints centered on consumers not receiving statements on time and periodic statements which contained inaccurate information such as late fees being assessed despite payments made on or before the due date. 
• Application of Payment. According to the Snapshot, consumers complained of payments not being properly applied as directed. 
• Escrow Accounts. According to the Snapshot, consumers complained of inaccurate shortages being assessed on their escrow accounts as a result of misinformation as to increases in taxes or increases in insurance premiums. 
• Payoff Requests. Consumers also complained of payoff requests which were either ignored or delayed, resulting in inaccurate payoff information.

We hope this signals a return of the Complaint Snapshots which, if presented even handedly, provide financial service providers with an excellent tool to identify and mitigate risks within their organizations.

Sixth Circuit Doubles Down Despite Impending U.S. Supreme Court Decision

By Caren Enloe and Anna Claire Turpin

Just four days after the U.S. Supreme Court heard oral arguments in Obduskey v. McCarthy & Holthus LLP regarding whether non-judicial foreclosures qualify as debt collection under the FDCPA, the Sixth Circuit doubled down on its position that non-judicial foreclosures are debt collection.  Building on its 2013 decision in Glazer v. Chase Home Finance LLC., 704 F.3d 453 (6th Cir. 2013), which joined the Fourth and Fifth Circuits in holding that non-judicial foreclosures are “debt collection” under the FDCPA, the Sixth Circuit held on January 11 that a law firm has an affirmative duty to “stop the clock” on an initiated foreclosure once it receives a §1692g(b) dispute from the debtor.

In Scott v. Trott Law, P.C., 2019 U.S. App. LEXIS 1015* (6th Cir., Jan. 11, 2019), the consumer alleged that Trott Law violated the FDCPA by failing to cease debt collection activities after receiving his dispute and request for validation.  After being retained by Bank of America to begin non-judicial foreclosure proceedings, the law firm sent the consumer a debt validation letter. The law firm then proceeded forward with arranging a sheriff’s sale for Foreclosure of Mortgage by Advertisement, preparing a Notice of Mortgage Foreclosure Sale to post on the premises and to publish in the local newspaper for four consecutive weeks, and mailing a copy of the Notice to the consumer. Three days after the law firm initiated these actions, and still within the thirty day debt dispute and validation period, the consumer disputed the debt and requested validation of the debt.  Although the law firm took no further affirmative actions, the notice was posted on the premises and published in the newspaper after the law firm received the dispute and debt validation request. Within days of sending his dispute and request for validation, the consumer then filed its suit against the law firm alleging a violation of the FDCPA and seeking to enjoin the impending sale and then filed Chapter 13 thereby stopping the sale.

The district court granted summary judgment in favor of the law firm based on its determination that the debt collector was not required to validate the debt and had ceased collection of the debt because third-parties, not the debt collector, posted and published the Notice.  On appeal, the Sixth Circuit addressed the issue of whether the actions taken after the consumer’s dispute and request for validation qualified as debt collection activity, and whether the FDCPA required Trott to take affirmative action to “stop the clock.”

The Sixth Circuit reversed. Because the FDCPA does not provide a precise definition of "debt collection" or what it means to cease debt collection, the Sixth Circuit analyzed the relationship between Michigan law on non-judicial foreclosures, debt collection under the FDCPA, and Congress’ intent and policy behind the requirement that a debt collector cease collection when it receives a dispute letter. 15 U.S.C. §1692g(b). Because Michigan law requires notice and publication before a non-judicial foreclosure, the Court concluded that such activities are continued debt collection activity under the FDCPA.  The Court then reasoned that those activities remain the debt collector’s responsibility.  Otherwise, according to the Court, dispute letters would not achieve Congress’ intended effect of “ceasing debt collection” if debt collection activities may continue solely because they are not performed by the debt collector.

The Court held that instead, a debt collector is responsible for the activities it sets in motion as required by state law in the non-judicial foreclosure process.  The debt collector must “stop the clock” on all debt collection activities until the debt collector obtains verification. Scott at *13.  Because the sale, posting, and publication (performed by the sheriff and newspaper, respectively) were required under state law in the non-judicial foreclosure process, those actions constituted debt collection and the law firm was responsible for intervening and stopping the entire process.

It is important to note that after hearing oral arguments in Obduskey, the Supreme Court may render the Sixth Circuit’s recent decision moot.  Should the Supreme Court hold that non-judicial foreclosure is not debt collection, then Scott will have been wrongly decided.  Until the Supreme Court weighs in, however, the circuit split continues.



Anna Claire Turpin is a third year law student at Campbell University and a graduate of James Madison University.  Turpin is currently a law clerk with Smith Debnam’s Consumer Financial Services Litigation and Compliance group.