Seventh Circuit Examines Standing for Class Rep and Departs from 3rd 8th Circuits on FDCPA Interpretation

by: Colin E. Flora

     One post down, three to go. For those who did not read the first post today – Indiana Supreme Court Analyzes Whether Workers’ Compensation Applies to Diminish UIM Calculation – in honor of the first post of the day being my 100th installment on the Hoosier Litigation Blog and the surplus of blog-worthy decisions from the Seventh Circuit and Indiana Supreme Court, today we are doing an unprecedented quadruple-post day. Typically, I only add one post on the HLB per week.

     Our first discussion today was on Justice v. American Family Mutual Insurance Company from the Indiana Supreme Court, holding that workers’ compensation payments cannot be used to diminish recovery from underinsured motorist (UIM) insurance coverage. Our second discussion of the day now shifts us into federal law, where we shall remain in our three remaining posts. The next case on the blocks is McMahon v. LVNV Funding, LLC authored by Seventh Circuit Chief Judge Diane Wood. The final two posts will focus on decisions by iconic Judge Richard A. Posnercalled by some his generation’s “Tenth Justice” – a link to the use of that title for revered Second Circuit Judge Learned Hand and not the frequent reference to the United States Solicitor General.

     Turning our focus now to McMahon v. LVNV Funding, LLC, I would like to take a moment to extend a long overdue welcome to Chief Judge Wood to the HBL. While we may very well have previously discussed a case authored by her, we have not previously identified her by name. An oversight if such an opportunity has previously arisen. It merits note that Chief Judge Wood, who assumed the position of chief judge this past year is the first woman to ever hold that position for the Seventh Circuit Court of Appeals.

     Now to the substance of McMahon.

     McMahon provides insight not only on procedural issues of class action law, but it also discovers terra nova in Fair Debt Collection Practices Act (FDCPA)law. Indeed, the court, as we’ll discuss later, specifically disagreed with the Eighth and Third Circuits on a key issue of FDCPA law. Sorry for the tantalizing tease, but I’m allowing Judge Posner’s advice for opinion drafting to spill into blog post drafting. So, may the water beneath you not recede too quickly nor the fruit be too elusive before we reach the FDCPA discussion.

     The decision arose from a consolidated appeal of two cases: Delgado v. Capital Management Services LP and McMahon v. LVNV Funding, LLC. Even though the cases had sufficient overlap with regards to legal issues, the procedural and thereby factual differences were sufficient for the court to address each case individually. The uniting issue between the two cases “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” FDCPA. The Delgado case posed a slight variant issue as “it concern[ed] the effect of a settlement offer in the dunning letter.” McMahon dealt with the impact of a defendant attempting to moot a named plaintiff’s claim prior to class certification.

     In McMahon, the named plaintiff received a utility bill in 1997 that went unpaid. Fourteen years later, LVNV Funding acquired the debt and retained a collection agency to pursue payment. The collection agency sent a collection letter to the plaintiff in December 2011. The letter offered to settle the debt for 60% off the balance. It also instructed the plaintiff that he had thirty days to notify the collection agency that he disputed the debt or the agency would then conclude that it was valid. Notably, the letter did not say when the debt was incurred and failed to so much as “hint that the four-year statute of limitations applicable in Illinois had long since expired.” The plaintiff promptly responded and requested verification of the debt, “stating that ‘we can settle this quickly’ once the debt was verified.” The collection agency’s response identified when LVNV acquired the debt and its balance, but did not identify “the advanced age of the debt.” The plaintiff responded with a class action lawsuit for violations of the FDCPA.

     The district court dismissed the plaintiff’s classwide allegations but denied LVNV’s motion to dismiss the individual claims. The plaintiff filed a motion to reconsider, which led the trial court to grant him leave to amend his class complaint, thereby availing him of a chance to reinstate his class allegations. Only hours after the decision, LVNV’s lawyer sent a fax to the plaintiff’s attorney offering to pay the plaintiff “(1) statutory damages in the amount of $1,000 to satisfy his remaining individual claim under the FDCPA, (2) costs incurred on his individual claim, (3) a reasonable attorney’s fee, and (4) ‘any other reasonable relief’ in the event the court concluded that more was necessary.” This offer was contingent on the plaintiff not reinstating his class action allegations. The plaintiff did not respond to the fax before filing his amended class complaint and amended motion for class certification, two days later. LVNV again sent the same settlement terms.

     LVNV then sought dismissal of the case under Rule 12(b)(1) arguing that the settlement offered rendered the plaintiff’s individual claim moot and simultaneously had the effect of rending the plaintiff an inadequate class representative under Rule 23(a)(4). The district court found that the initial settlement offer provided for the “complete recovery of [the plaintiff’s] individual claim” and thereby mooted the plaintiff’s individual claim. Because it was made prior to the amended motion for class certification, the settlement offer rendered the plaintiff an inadequate class representative by removing “a personal stake in the litigation.” By rendering the plaintiff’s individual claim moot and removing a key requirement to class certification, LVNV contended that the plaintiff’s case failed to meet Article III standing requirements.

     As in McMahon, in Delgado, the defendant Capital Management Services (CMS) sent a letter to the plaintiff to attempt to collect a time-barred debt. It also did not disclose when the debt was incurred. Also like McMahon, the Delgado letter offered a settlement that would actually put the recipient in a worse position: because no debt could be collected anyway. Delgado filed suit against CMS using the same lawyer as the plaintiff in McMahon. CMS sought dismissal of the case and the trial court denied the motion. In reaching its conclusion, the trial court relied on views from the FTC, the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, and the Office of the Comptroller of the Currency. Those agencies had argued in other cases that when “collecting on a time barred debt a debt collector must inform the consumer that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would revive the collector’s ability to sue to collect the balance.” This is a view that had been rejected by both the Third and Eighth Circuits. Those circuits have held “that sending dunning letters for time-barred debts does not violate the FDCPA unless the letter is accompanied by a threat of litigation.” The trial court also determined that the reference in the letter to Delgado “of a possible ‘settlement’ of the debt [was] deceptive, because it implied that a legally enforceable obligation to pay the debt existed.”

          Both the McMahon and Delgado decisions were appealed.

     The first issue addressed on appeal was whether the McMahon plaintiff’s case had been rendered moot. In answering the issue, the court turned to a series of decisions from the Supreme Court: Genesis Healthcare Corp. v. SymczykU.S. Parole Commission v. Geraghty, and Deposit Guaranty National Bank, Jackson, Mississippi v. Roper. The Symczyk decision was a Fair Labor Standards Act (FLSA) case. An important difference between a class action under the FDCPA and what would appear from an outside observer as a class action under the FLSA is that the FLSA is actually not a class action, but rather, what is called, a collective action. The primary difference is that a class action for damages under Rule 23(b)(3) presumes class membership for persons and thus requires them to opt-out of the class. A collective action under the FLSA has no such presumption. It requires members to opt-in to the action.

     In Symczyk, the plaintiff received an offer of settlement from the defendant for “full statutory damages in the amount of $7500, plus ‘such reasonable attorneys’ fees, costs and expenses as the Court may determine.’” The plaintiff did not accept the offer prior to its withdrawal. The offer was made before any other would-be plaintiff had opted into the action. Even though the plaintiff did not accept the offer, the trial court ruled her claim was moot, “because the [defendant] had offered her everything she could possibly receive as an individual.” On appeal, the Third Circuit reversed the trial court, but the final say was that of the Supreme Court, which agreed with the trial court.

     Noteworthy in Smyczyk was that the Supreme Court rejected the plaintiff’s reliance on Rule 23 – i.e. class action – precedent, declaring that FLSA collective actions are “fundamentally different” from Rule 23 class actions. The Court thereby distinguished Smyczyk from a prior a decision: Geraghty. In Geraghty, the Supreme Court “held that a Rule 23 class has a status separate from that of the named plaintiff, and that a live controversy sometimes continues to exist even after the named plaintiff’s claim becomes moot (as there), and even if class certification has been denied.”

     The Seventh Circuit, having analyzed the relevant Supreme Court precedent, turned its attention to a handful of prior Seventh Circuit decisions. In one of those opinions, Damasco v. Clearwire Corp., the court “clarified an important point about the timing of class-certification motions and efforts to pick off a putative class representative.” Specifically, that a defendant could try to pick off a class rep prior to a motion for class certification. This is a much more rigid approach then that used by other circuits that require that a “would-be representative need only file for class certification without undue delay after receiving an offer to settle” to avoid having his individual claim rendered moot. In Damasco, the court identified a means by which a named plaintiff could avoid this dilemma: “move to certify the class at the same time that the complaint is filed.”

     Let us take a step back from the case for a second. Though this approach once made sense, it no longer does. Prior to the 2001 when the Seventh Circuit decided Szabo v. Bridgeport Machines, Inc., this was a very standard procedure. However, it is no longer viable because of Szabo and subsequent Supreme Court decisions that adopted its view. Rule 23 used to be very much a procedural rule with strong guidance to avoid any determinations on the merits of a case prior to ruling on class certification. This is no longer the case after Szabo. Now, courts are instructd to conduct a rigorous analysis and to examine the merits to the extent that they implicate determining class certification elements. Though the rule is that the court is limited in its ability to peek into the merits, it still is required to do so to an extent. Thus, a plaintiff who files class certification papers concurrently with his complaint cannot develop a sufficient factual record on the merits to meet his burden in his initial brief. Consequently, he must do so in his reply brief, after the defendant has filed its response brief in opposition to class certification. This creates the inherent dilemma of arguments arising first in a reply brief that otherwise forecloses a defendant’s ability to respond to the evidence/arguments. The defendant will invariably argue that this is unfair sandbagging and demand a leave to file a surreply brief. The ultimate product is five briefs instead of three, motions to receive leave to file the last two briefs, and needless delay. This approach creates the kind of needless internal complexity that Judge Posner – the former chief judge for the Seventh Circuit – has spent well over a decade realing against.

     After looking at a more recent Seventh Circuit case – Scott v. Westlake Services LLC – the court concluded that the McMahon plaintiff’s claims were not mooted. In reaching the conclusion the court, somewhat cryptically recognized that the offer was not a full resolution of the matter and, implicitly, therefore it was not sufficient to moot the plaintiff’s claims. The court also, without noting it as an alternative grounds for finding the claims still alive, recognized that:

McMahon was diligent in pursuing his class claims: he filed his amended complaint and his new motion to certify the class just two days after the court gave him leave to do so. Had McMahon tried to appeal from the original denial of class certification, even assuming that LVNV’s offer was comprehensive enough to moot his case, he would have been in exactly the same position as the Roper plaintiff. We conclude, therefore, that McMahon’s decision to reject LVNV’s settlement offer did not moot his interest in the case for purposes of his ability to serve as a class representative.

It appears that the plaintiff’s claims survived based on either grounds of reasoning, but the court does not make this point entirely clear.

     With the issue of mootness out of the way, the court turned to the substantive FDCPA issue: whether a collection letter after the statute of limitations had run requires a threat of litigation to be actionable under the FDCPA. Here is where the Seventh Circuit split from its sister circuits – the Third and Eighth Circuits. The FDCPA “prohibits the use of ‘any false, deceptive, or misleading representation or means in connection with the collection of any debt.’” The FDCPA as includes a nonexclusive list of what meets this requirement. Needless to say, this scenario is not specifically addressed in the enumerated list. The FDCPA also prohibit “debt collectors from using ‘unfair or unconscionable means to collect or attempt to collect any debt.’” In determining whether a representation is “misleading,” the court views the letter from “the perspective of an ‘unsophisticated consumer.’”

     In the Seventh Circuit, a letter can be misleading even if it is not intentionally contradictory. Of further importance is that judges are required to forego their intuitions on the issue and recognize that the level of sophistication “span[s] the entire range of abilities.” Utilizing this view, the court found that the standard argued by the FTC and CFPB is well-reasoned and should be adopted, even if it has been rejected elsewhere. In rejecting the guidance of the Third and Eighth Circuits, the court stated:

With respect, however, we have concluded that the statute cannot bear the reading that those courts have given it. In their view, if a dunning letter on a time-barred debt states that the collector could sue but promised not to, that letter would not violate the FDCPA, since no litigation was actually threatened (and indeed was expressly rejected). On its face, that may seem reasonable, but closer examination reveals why it is not. The plain language of the FDCPA prohibits not only threatening to take actions that the collector cannot take, but also the use of any false, deceptive, or misleading representation, including those about the character or legal status of any debt. If a debt collector stated that it could sue on a timebarred debt but was promising to forbear, that statement would be a false representation about the legal status of that debt.

Because the determination of whether a representation is misleading is a question of fact usually to be decided by a jury, the court could not say as a matter of law that the letters were misleading.

     Two additional points of note. First, though may of our more sophisticated readers might well think it necessary to check and see if this case is reviewed en banc – i.e. by the a panel comprised of all active Seventh Circuit judges – the court noted that the opinion had been circulated and “[n[o judge in regular active service wishes to hear the case en banc.” Second, the court identified a way for debt collectors to avoid this problem in the future.

Our decision today does not require debt collectors to conduct additional research. If a debt collector does not know whether the debt submitted for collection is timebarred, 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. If the collector is a third-party collecting on behalf of the original creditor, 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. If the collector has purchased the debt from the original creditor, 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. . . . Finally, if the collector is a third party acting on behalf of a debt buyer, it should be able to get the relevant information from the party on whose behalf it is acting.

     Join us again next time for further discussion of developments in the law.


*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, clients or otherwise, should act or refrain from acting on the basis of any content included herein without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue.

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