On October 4, 2017 the Western District of Washington issued a memorandum opinion denying a debt collector's motion to dismiss a federal class action suit implemented by some opportunists who wanted to mince words for a quick buck.
The case is Bereket v. PRA, LLC.
PRA sends a dunning (demand) letter to a debtor on a time-barred debt, which is a debt you can't sue to collect on without running into the defense of limitations, and which is a no-no under the FDCPA, shamed heartily by the FTC and the CFPB, but totally cool in bankruptcy court (because you're not suing, you're filing a proof of claim! isn't law fun?).
The dunning letter honestly discloses that PRA cannot sue to collect the debt, but offers the debtor a couple payment options. The debtor twirled his mustache and ran to find a lawyer who whipped out his well-worn copy of the FDCPA and said "The Seventh Circuit said letters like these are bad, so we'll try to get this district court in the Ninth Circuit to agree that your rights were violated."
What was wrong with a letter admitting PRA could not sue to collect the debt?
The Western District of Washington said: "It's because of what they DIDN'T say!" That's right, folks: not saying stuff now counts as communications under the FDCPA. The provision in questoin was Section 1692e of the FDCPA:
"Section 1692e of the FDCPA prohibits a debt collector from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt." 15 U.S.C. § 1692e. The statute provides a non-exhaustive list of conduct that constitutes a violation of that section, including "[t]he false representation of —(A) the character, amount, or legal status of any debt. . .," which is at issue in this case. 15 U.S.C. § 1692e(2)(A)."
PRA said "Well, we didn't say anything, so this debtor is just making up stuff."
The Court retorted with snark:
"Had Defendant actually read the Complaint, particularly the paragraphs set forth by the Court in this Order, the facts supporting the Complaint would have been clear. See Dkt. #1 at ¶ ¶ 21, 25 and 28-34. Plaintiff alleges that Defendant's failure to state in its letter that the statute of limitations could be revived or begin anew if he made a partial payment on the alleged debt is a violation of Section 1692e of the FDCPA."
Oh, yeah, you see? "Because you didn't warn them that something "could" happen that counted as a "representation." Of the only representation PRA made (that they can't sue) and then argued showed that they didn't violate the FDCPA by making a misleading representation, the Court had this to say: "This argument is moot. As is clear from his Complaint, Plaintiff does not allege that this statement, in and of itself, is misleading. Thus, the Court will not further address this portion of Defendant's motion."
PRA doubled down, arguing it first had no duty to inform the debtor of the effect of partial payment, and second that state law would not restart limitations on the debt by partial payment. The Court pooh-poohed this question of duty by pointing to an Eastern District of California case, which relied on FTC opinions. The FTC, however, hedged its pronouncement: these efforts "may create a misleading impression as to the consequences of making such a payment," again in violation of the FDCPA, and only in those states where partial payment statutorily restarts limitations on the debt. FTC Report 2010 at 28.
The Court then cited some other discussion in the Eastern District of California case and concluded - there is an actionable claim under the FDCPA, so it would survive a 12b(6) motion to dismiss for failure to state a viable cause of action in federal court.
Having dispensed with the duty question, the Court then went on the narrower issue - does Washington law restart limitations on debts with partial payments? Despite concluding "no" it still said "too bad, PRA, you're liable."
PRA's letter did "not inform Plaintiff that there may be legal consequences for making partial payments either under the 12-month savings plan option or the 33-month installment option." The statute in question did not provide for a reset of limitations by partial payment on the original debt, but ah, what about a new contract which promises to pay down the original debt? In settlement of debts, people often sign "settlement agreements" which can be used by debt collectors as "new contracts" or "new debts" to collect. These are often discounted from the "original debt" and are new debts. They are not the "debt" that the debt collector is collecting, however. "Defendant admits that making a partial payment on the debt could open Plaintiff to litigation whereas making no payment would afford him the protection of the statute of limitations."
The court then turned to Chicago for some Seventh Circuit advice based on a similar situation: "For purposes of this appeal, it does not matter whether a failure to make further payments would revive the original amount of the debt or just the smaller amount of the settlement offer."
The Court dusts its hands and proclaims, maddeningly: "At this stage of the proceedings, the Court views the facts alleged in favor of Plaintiff, and also finds that Plaintiff has presented a plausible argument that a partial payment would restart the statute of limitations on the alleged debt, even, as Defendant admits, that debt would be of a lower amount that the original debt."
There are two totally different debts being discussed here. What this Court is holding, and other courts have apparently held, is that if you want to settle a debt with a consumer, you need to tell them that, even though you are making a brand new contract with all new indebtedness and new obligations, they are still "restarting" or "could restart" limitations on "the debt". In short, the Court is saying that in order to avoid misleading for purposes of the FDCPA, you must misrepresent the legal nature of a debt.
Amusingly, the term collection is not defined in the Fair Debt Collection and Practices Act, but remember what 1692e forbids: "any false, deceptive, or misleading representation or means in connection with the collection of any debt." We've already seen that courts are willing to claim that a representation which tells "half the story" and also fails to tell what "half the story" is in some other state is an FDCPA violation, but is a settlement offer on an old debt that contemplates creating a new debt "collection of any debt"? Debt is defined in the FDCPA: "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." Okay, what about consumer? it "means any natural person obligated or allegedly obligated to pay any debt."
Using this more technical definition, you can kinda see how a settlement agreement, which forms a brand new debt, can be a means of collection to pay "any debt", such as the original debt. The Court's problem with this opinion is its failure to engage with these definitions, and to find that, despite there being no statutory rule which would "reset limitations" on the original debt by signing a settlement agreement, there was still an FDCPA obligation to discuss the effects of a settlement agreement as creating a debt all unto itself. I would argue, however, that a "time-barred debt" is like no debt for purposes of discussing limitations; that a settlement agreement's new debt is a creature not yet in existence, and therefore not something to discuss. At this point, the debt collector / creditor is simply a negotiating agent for the creation of a new contract, and in the formation of new contracts there are no FDCPA obligations. This is a very bizarre set of holdings that overextend in trying to do so little for debtors. "Would you repay this old debt we can't sue on?" "Sure." "Okay, here's a new agreement saying you'll repay a certain amount." [month later, default] "Okay, so we're now suing you for breaching our new contract." "DAS AN FDCPA VIOLATION!"
Very troubling for collectors in states where no statute authorizes restarting limitations through partial payments, like in Texas. Should every dunning letter now include the warning that for time-barred debts, we might be able to sue on the new debt formed by settling? That is my takeaway.