The following is a case update written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), a member of the ad hoc group and the Insolvency Law Committee of the Business Law Section, analyzing a recent decision of interest:
The Ninth Circuit Court of Appeals recently determined that the statute-of-limitations disclosure in a debt collector’s letter did not mislead or deceive the “least sophisticated debtor” and therefore was not a violation of the Fair Debt Collection Practices Act. Stimpson v. Midland Credit Management, Inc., 2019 WL 6885508 (9th Cir. Dec. 18, 2019).
To read the full opinion, click here.
An Idaho consumer, Barry Stimpson, brought a putative class action against debt collector Midland Credit Management, Inc., alleging that it violated the Fair Debt Collection Practices Act (FDCPA) by sending deceptive or misleading collection letters seeking repayment of time-barred debt. Stimpson had defaulted on payment of an HSBC credit card after making his last payment on December 12, 2008. HSBC’s credit agreement provided that Nevada law applied. Under Nevada law the limitations period for bringing legal action against Stimpson was six years, which expired on December 12, 2014. In 2009 HSBC sold the account to Midland.
In March 2017, well past the six-year limitations period, Midland sent a letter to Stimpson which identified his balance due and offered various payment options which would expire in less than 30 days. It then described the “benefits of paying your debt”, which included “putting the debt behind you” and peace of mind. The letter was signed by a division manager; under his signature it stated:
The law limits how long you can be sued on a debt and how long a debt can appear on your credit report. Due to the age of this debt, we will not sue you for it or report payment or non-payment of it to a credit bureau.
After receiving the letter, Stimpson filed the action against Midland in Idaho state court, alleging that Midland violated the FDCPA by attempting to collect “time-barred debts without disclosure of that fact”. Midland removed the case to federal court and the district court granted summary judgment in favor of Midland. Stimpson appealed and the Ninth Circuit affirmed, finding no FDCPA violation.
On appeal, Stimpson asserted the letter violated Section 1692e of the FDCPA which prohibits false, misleading or deceptive practices, including misrepresenting “the character, amount, or legal status of the debt.” To address this argument, the Circuit court undertook an objective analysis of the question whether the “least sophisticated debtor” would likely be misled by the communication, a legal, not a factual, determination. To do so, it reviewed existing case law which defined the least sophisticated debtor as distinguished from the ordinary reasonable person by being financially unsophisticated and “comparatively uninformed and naïve about financial matters and function[s] as an ‘average consumer in the lowest quartile (or some other substantial bottom fraction) of consumer competence.’” Although unsophisticated, such debtor is not the least intelligent consumer, can grasp the normal, everyday meaning of words and is not unreasonable. “In short, the least sophisticated debtor is reasonable and functional, but lacks experience and education regarding financial matters.”
The Ninth Circuit applied this definition to the letter before it and ruled as a matter of law that the explicit statement that Midland could not sue on the debt or report about it to credit bureaus communicated to the reader that the debt was time-barred. In addition, nothing in the FDCPA compelled Midland to disclose the consequences of making a payment (reviving the statute in most states) or prevented the debt collector from encouraging the borrower to pay for “peace of mind.” The court specifically dispelled the underlying implication of the arguments that the debt in question had been extinguished by the passage of time: “This is untrue. In most states, a statute of limitations does not extinguish a party’s rights, but merely precludes a judicial remedy.”
Finally, the court noted that the Consumer Financial Protection Bureau (CFPB) in a 2015 settlement had required Midland to use the exact language quoted above in its debt-collection communications and the Sixth Circuit in a published case had blessed almost identical language. [Buchanan v. Northland Grp., Inc. 776 F. 3d 393 (6th Cir. 2015).]
This case is instructive on several key points. First, it reminds us that just because the statute of limitations has expired on a debt, making it unenforceable, the right to payment has not been extinguished. Therefore, a time-barred debt may still be a proper basis for filing a proof of claim in a bankruptcy proceeding and doing so will not be a violation of any federal law, as ruled by the United States Supreme Court in Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (2017). Similarly, in most states, a debt collector is entitled to initiate a lawsuit on time-barred debt because a statute of limitations is an affirmative defense which is waived if not raised. (The case notes that only Wisconsin and Mississippi have passed laws which affirmatively extinguish time-barred debt.)
Second, the definition of the least sophisticated debtor, whom the FDCPA was enacted to primarily protect, was not spelled out in the statute but has been thoroughly fleshed out by 40 years of case law. The standard is an objective one. Attorneys making arguments either for or against a communication being a violation of the FDCPA should couch their argument around the sound bites noted above from the cases; ignoring them will just invite rejection of the argument. Use the tools the cases give you.
Finally, do not try to reinvent the wheel when considering what language in a collection letter might be deceptive or misleading. If plaintiff’s lawyer in this case had done a little sleuthing about Midland’s compliance with the FDCPA, he would have found the CFPB’s 2015 settlement with Midland requiring this exact language be used in collection letters and should have known this putative class action lawsuit was highly unlikely to be successful. Very similar language is required by statute in debt collection communications in California (Cal. Civil Code § 1788.52(d)(3)), Connecticut (Conn. Gen. Stat. § 36a-805(a)(14)(B)), and Texas (Tex. Fin. Code § 392.307(e)(2)).
These materials were written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), a member of the ad hoc group and the Insolvency Law Committee of the Business Law Section. Editorial contributions were provided by Monique Jewett-Brewster of Hopkins & Carley, a Law Corporation, Immediate Past Chair of the CLA Business Law Section, and also a member of the ad hoc group. Thomas Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomas Reuters.