7th Circuit: Urging settlement of old debt could be misleading to consumers

The Seventh Circuit Court of Appeals issued a decision earlier this month in a pair of lawsuits involving creditors seeking debt collection several years after the debts were owed.

The lawsuits Scott McMahon and Juanita Delgado respectively brought against LVNV Funding and the Capital Management Services were consolidated for the purposes of an opinion and both came to the federal appeals panel from Chicago's federal court.

The appeal was argued on Sept. 25 and decided on March 11 by Judges Diane Wood, Joel Flaum and Diane Sykes. Wood, the chief judge of the Seventh Circuit, wrote the opinion.

“The underlying question presented by these two appeals…relates to the circumstances under which a dunning letter for a time-barred debt could mislead an unsophisticated consumer to believe that the debt is enforceable in court, and thereby violate the Fair Debt Collection Practices Act,” she wrote.

“In Delgado, we face a variant on that issue; it concerns the effect of a settlement offer in the dunning letter. McMahon raises a question of possible mootness in the wake of the defendants’ effort to buy out the putative named plaintiff."

The panel determined that "McMahon is not moot, and thus that the district court’s dismissal of the action must be reversed.” And in Delgado, which is before the Seventh Circuit on an interlocutory appeal, the panel affirmed the district court's denial of the defendants’ motion to dismiss.

In 1997, McMahon received a bill from a utility company, Nicor Gas, and apparently did not pay the bill. Fourteen years later, in September 2011, LVNV purchased the debt, which by then was $584.98.

LVNV retained a collection agency, Tate & Kirlin, to pursue payment, and it sent McMahon the letter that sparked the lawsuit on Dec. 19, 2011.

In February 2012, McMahon filed a suit under the Fair Debt Collection Practices Act. The district court in July issued an order dismissing his class-wide allegations, but denied LVNV’s motion to dismiss his individual claims.

McMahon promptly filed a motion to reconsider, which was denied in August 2012 with leave to amend his class complaint.

LVNV’s attorney faxed McMahon’s attorney, offering to settle the case if he dropped his class claims. But, McMahon did not respond to the offer, according to the decision.

Two days later, McMahon filed an amended class complaint, along with an amended motion for class certification and LVNV moved for dismissal of the entire case.

It took the position that its settlement offer rendered McMahon’s individual claim moot and that this made McMahon an inadequate representative of the proposed class.

The district court found that the Aug. 13 fax offered McMahon complete recovery of his individual claim, that it was made prior to class certification and thus, it had the effect of depriving McMahon of a personal stake in the litigation, the panel notes in its opinion.

With no controversy before it, the court then granted LVNV’s motion to dismiss for want of jurisdiction. In McMahon’s appeal, he contests both the finding that LVNV’s settlement offer mooted his case and the original dismissal of the class claims under the federal debt collection act.

Delgado's suit stems from the Feb. 7, 2012 letter Capital Management Services (CMS) sent her stating she owed $2,404.13.

Her letter was about an eight-year-old debt, which meant that any collection action would have been barred by Illinois’ statute of limitations if the debtor were “savvy enough to raise the point,” Wood wrote for the federal appeals panel.

The letter did not explain that CMS was time-barred from enforcing the debt under Illinois’s statute of limitations, nor did it disclose when the debt was incurred.

Delgado filed a complaint under the federal collection act, charging that CMS violated that statute by sending a dunning letter on a time‐barred debt and including an offer of “settlement” which, if accepted, would in fact make the debtor worse off.

CMS sought dismissal of Delgado's suit, alleging it failed to state a claim.

The court found the reference in Delgado’s letter of a possible “settlement” to be deceptive, because it implied that an allegedly enforceable obligation to pay the debt existed.

CMS filed a motion under for immediate appeal and the Seventh Circuit accepted it in May. Delgado’s request for class certification is still before the district court, which was put on hold pending the outcome of this appeal.

“Our decision today does not require debt collectors to conduct additional research,” Wood wrote.

She added, “If a debt collector does not know whether the debt submitted for collection is time‐barred, it would be easy to include general language about that possibility. That said, we find it unlikely that debt owners lack knowledge about the age of the debts they are attempting to collect.”

If the debt collector is the original creditor, it will know the relevant dates, Wood wrote. If the collector is a third‐party collecting on behalf of the original creditor, the panel determined it should easily be able to get that information at the time the file is assigned by the original creditor on whose behalf it is acting.

And if the collector has bought the debt from the original creditor, Wood wrote "we know from the FTC that such buyers pay different amounts for debts depending on the age of the debt and the number of previous attempts to collect it, in which case whether the debt is time‐barred should be known."

“In summary, we conclude that an unsophisticated consumer could be misled by a dunning letter for a time‐barred debt, especially a letter that uses the term ‘settle’ or ‘settlement.’”

The appeals court affirmed the district court’s denial of the defendant’s motion to dismiss in Delgado, and the court reversed and remanded McMahon for further proceedings consistent with its opinion.

The plaintiffs were represented by Cathleen M. Combs, Daniel A. Edelman, Tiffany Nicole Hardy, James O. Latturner and Francis R. Greene of Edelman, Combs, Latturner & Goodwin in Chicago.

LVNV was represented by Nabil G. Foster and David M. Schultz of Hinshaw & Culbertson in Chicago. CMS was represented by Chicago attorneys Daniel W. Pisani and James J. Schultz of Sessions Fishman Nathan & Isreal.

This story was first published in Legal Newsline.