This article previously appeared on The Consumer Financial Services Blog and is republished here with permission.
The U.S. District Court for the Middle District of Pennsylvania recently denied a debt collector’s motion to dismiss, holding that a collection notice describing the potential tax consequences of settlements involving cancellation of indebtedness of $600 or more may be misleading or deceptive to the least sophisticated consumer.
A copy of the opinion in Balon v. Enhanced Recovery Company, Inc. is available at: Link to Opinion.
A consumer filed a complaint against a debt collector alleging the defendant supposedly violated the federal Fair Debt Collection Practices Act (FDCPA) by sending a letter that stated that “any indebtedness of $600.00 or more, which is discharged as a result of a settlement, may be reported to the IRS as taxable income pursuant to the Internal Revenue Code 6050 (P) and related federal law. The amount of the alleged debt at the time that the letter was sent was $798.67 and the offer to settle was for $638.94. The amount of savings if the offer was accepted would be $159.73.”
As you may recall, to prevail on an FDCPA claim, a plaintiff must prove that:
- she is a consumer,
- the defendant is a debt collector,
- the defendant’s challenged practice involves an attempt to collect a debt as the act defines it, and
- the defendant has violated a provision of the FDCPA in attempting to collect the debt.
Under section 1692e of the FDCPA, “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e.
Under applicable authority in the Third Circuit, a debt collection letter is deceptive and therefore violates the FDCPA where it can reasonably be held to have two or more different meanings. In addition, when evaluating a claim for alleged deceptive conduct under section 1692e of the FDCPA, the Third Circuit employs a least sophisticated debtor standard. This standard is an objective one, meaning that the specific plaintiff need not prove that she was actually confused or mislead, only that the objective least sophisticated debtor would be.
The District Court relied on Velez v. Enhanced Recovery Company LLC, 2016 U.S. Dist. LEXIS 57832 (E.D. Pa. May 2, 2016), to address the allegations in the instant case.
In Velez, the debt collector sent the plaintiff consumer a collection letter for an amount in excess of $600. The communication included the exact same tax reporting language as in the instant case – i.e., that discharged indebtedness of $600 or more would be reported to the IRS. There, as with here, the defendant debt collector argued that the statement simply reflected the controlling statute and IRS regulation, and thus was not deceptive or misleading, and in any event was not material.
The District Court noted that its sister court in Velez found that the proposed amount of reduction of the amount due on the debt could not possibly have been reportable under the relevant circumstances, as like here it was less than a $600 reduction. The Court held that, if under the circumstances there could not have possibly been a tax reportable event, then the statement in the collection letter would have been false. The Court in Velez found that while the communication may not be false in all respects, it certainly was not completely true.
The Court held that the plaintiff consumer in this case pled a plausible claim that the communication at issue could mislead or deceive the least sophisticated debtor. In addition, the Court held, the communication was material because the least sophisticated debtor may be influenced by the communication.
The Court also held that the debt collector’s use of the conditional “may” in the challenged language did not remove from the realm of possibility that the least sophisticated debtor might be deceived into thinking that the debt collector must or will report certain settlement amounts to the IRS, even when it does not intend to, or would not be required to, under the relevant statute and regulations.
In addition, the Court held the least sophisticated debtor might be misled into thinking that there will be adverse tax consequences for settling a debt for less than the total amount due. The Court noted that, in its view, it would not be unusual for the least sophisticated debtor to believe the challenged statements suggest the debtor could get in trouble with the IRS for the refusal to pay the debt, or for obtaining any debt forgiveness of $600 or more.
Accordingly, the District Court denied the defendant debt collector’s motion to dismiss.