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  • 2nd Circuit: Owner personally liable for debt collection companies’ violations

    Courts

    On January 11, the U.S. Court of Appeals for the 2nd Circuit affirmed a district court’s decision that two individual co-owners were jointly and severally liable for nearly $11 million for debt collection activities conducted by their companies (corporate defendants) that violated the Federal Trade Commission Act (FTCA) and the FDCPA. According to the opinion, the corporate defendants misrepresented that they were investigators calling from a “fraud unit” or a “fraud division,” falsely accused debtors of committing check fraud, threatened consumers with criminal prosecution if the debts were not paid, and contacted friends, family, employers, or co-workers, “telling them that the debtors owed a debt, had committed a crime in failing to pay it, and faced possible legal repercussions.” The district court held that the co-owners were personally liable for the $10,852,368 calculated by the FTC, which represented the total amount received by the corporate defendants from consumers as a result of their actions. One of the co-owners appealed the decision that he was personally liable and argued that the district court erred in determining the amount of equitable monetary relief.

    On appeal, the 2nd Circuit agreed with the district court that the co-owner “had both sufficient authority over the [c]orporate [d]efendants, and knowledge of their practices, to be held individually liable for their misconduct as a matter of law.” The court also upheld the disgorgement amount, reasoning that the FTC’s process to determine the amount was entitled to a presumption of reliance because it was based on the submission of more than 500 consumer complaints concerning the corporate defendants’ debt collection practices, aggressive collection scripts, and audio recordings of twenty-one of the twenty-five debt collectors “falsely telling consumers that the employees were law enforcement personnel or ‘processors.’” Moreover, the court noted that the co-owner failed to submit proof that the corporate defendants earned some or all of their revenue through lawful means.

    Courts Second Circuit Appellate FTCA FDCPA Debt Collection

  • District Court: New Jersey licensing requirements apply to debt collector

    Courts

    On February 11, the U.S. District Court for the District of New Jersey denied a motion to dismiss a putative class action against a debt collector and its legal counsel, holding that the plaintiff debtor made a plausible claim under the FDCPA that the debt collector was required by New Jersey’s Consumer Financing Licensing Act (NJCFLA) to be licensed as a consumer lender. According to the opinion, the plaintiff had defaulted on his credit card debt and, nine years later, received a letter from the defendant’s legal counsel seeking payment of the balance due. The plaintiff filed a proposed class action arguing that the letter violated the FDCPA because the debt collector had not been licensed with the New Jersey Department of Banking and Insurance prior to purchasing the debt, and therefore lacked the authority to collect on the debt. The defendant debt collector moved to dismiss the complaint, claiming, among other things, that it was exempt from the licensing requirements because it did not qualify as a “consumer loan business” under the NJCFLA. The debt collector argued that it never exceeded the state’s interest rate cap and therefore was exempt from the licensing requirements. However, the plaintiff argued that the defendant’s licensing violation arose from a second part of the “consumer loan business” definition, under which the licensing requirements apply because the defendant “directly or indirectly engag[es] . . . in the business of buying. . . notes.” The district court agreed with the plaintiff, stating that “[t]his statutory language does not narrow the category of lenders falling under that definition according to the interest rates that they charge.”

    Courts Debt Collection FDCPA Licensing State Issues Consumer Lending

  • District Court denies debt collector’s arbitration request

    Courts

    On February 11, the U.S. District Court for the District of New Jersey denied a motion by a debt collector and its managers to compel arbitration, concluding that discovery was needed in order to determine whether an arbitration clause applied to the plaintiffs’ claims regarding FDCPA violations. According to the opinion, the plaintiffs filed a proposed class action alleging that the debt collection company’s collection letters violated the FDCPA because they did not “properly identify the name of the current creditor to whom the debt is owed.” The debt collectors moved to compel arbitration, arguing that the debts described in the plaintiffs’ amended complaint arose pursuant to credit card agreements that include an arbitration clause, and submitted a declaration from an employee of the servicing entity for the credit card issuer, with credit card account terms and conditions, including arbitration clauses, as an attachment. The court denied the motion, noting that the Fed. R. Civ. P. 12(b)(6) standard requires that the amended complaint “establish with clarity that the parties have agreed to arbitrate,” and in this instance, no arbitration clause was cited. The court denied the motion to compel pending further development of the factual record by plaintiffs conducting discovery on the issue.

    Courts Arbitration Civil Procedure FDCPA Debt Collection

  • District Court temporarily stops debt collection operation at FTC’s request

    Courts

    On February 8, the FTC announced that the U.S. District Court for the Western District of North Carolina had issued a temporary restraining order and asset freeze regarding a debt collection operation allegedly collecting phantom debts. According to the FTC, the debt collection operation deceptively claimed to be attorneys, or to be affiliated with attorneys, to pressure consumers into paying debts which they did not owe, including threatening legal action if they did not pay, in violation of the FTC Act and the FDCPA. The order names 10 companies and six individuals as defendants and temporarily prohibits the defendants from, among other things, (i) misrepresenting information as it relates to collection efforts; (ii) threatening to take unlawful action; (iii) communicating with third parties without having obtained prior consent, other than to determine a consumer’s location; and (iv) failing to provide consumers with written debt information five days after initial contact.

    Courts FTC FDCPA Debt Collection FTC Act

  • 7th Circuit holds arithmetic does not affect a debt’s character under the FDCPA

    Courts

    On February 7, the U.S. Court of Appeals for the 7th Circuit held that arithmetic does not affect a debt’s “character” under the FDCPA, reversing the district court’s judgment against a debt collector. A debt collector reported to a credit bureau that the debtor had nine unpaid bills of $60, rather than one aggregate debt of $540. The debtor filed suit, arguing that the debt collector violated the FDCPA’s prohibition on making a “false representation” about “the character, amount, or legal status of any debt.” The district court agreed with the debtor, determining that the debt collector should have reported the amount in the aggregate and imposing a $1,000 penalty for the violation.

    On appeal, the 7th Circuit noted a lack of authoritative or persuasive guidance discussing whether aggregation of all amounts owed to a creditor “concerns the ‘character’ of a debt” under the FDCPA. The appeals court concluded that the number of specific transactions between a debtor and a creditor “does not affect the genesis, nature, or priority of the debt” and, therefore, does not concern its character. Moreover, the court noted that “‘amount’ rather than the word ‘character’ is what governs reporting the debt’s size”; otherwise, there would be no distinction in the FDCPA’s prohibition on false representations about the “character, amount, or legal status” of a debt. Because it was undisputed that the debtor incurred nine debts of $60 each to a single creditor, the debt collector did not misstate the “character” of the debt under the FDCPA.

    Courts Seventh Circuit Appellate FDCPA Debt Collection Credit Report

  • District Court holds debt collector’s actions not harassment or abuse under FDCPA

    Courts

    On January 30, the U.S. District Court for the Eastern District of Arkansas granted a debt collector’s motion for summary judgment, finding that no reasonable jury could conclude the debt collector’s conduct gave “rise to an intent to annoy, harass, or oppress” under the FDCPA. According to the opinion, the debt collector mistakenly had assigned the plaintiff’s phone number to a debtor in its system. The collector contacted the plaintiff five times between July 2016 and May 2017, after which the plaintiff informed the collector several times that she was not the intended recipient of the calls; despite placing the plaintiff on its Do Not Call list, the collector proceeded to contact the plaintiff again. The plaintiff filed suit against the debt collector alleging violations of various state laws and the FDCPA’s prohibition on engaging in conduct to “harass, oppress, or abuse any person in connection with the collection of a debt” and from using any “unfair or unconscionable means to collect or attempt to collect any debt.”

    The debt collector moved for summary judgment, and the court determined that no reasonable jury could conclude the conduct gave rise to a violation, noting that the actions of the collector were a “far cry from the type of conduct Congress held up as harassment or abuse” in the FDCPA. Specifically, the court concluded that calling twice after being verbally asked to stop does not give rise to an intent to annoy, abuse, or harass as Congress chose to make it a per se violation to communicate after written requests to stop, but not any cease request. The court similarly rejected plaintiff’s claim that the collector’s conduct was unfair or unconscionable under the FDCPA.

    Courts Debt Collection FDCPA

  • District Court: Bank originating mortgage loans is not a debt collector under FDCPA

    Courts

    On January 23, the U.S. District Court for the Middle District of Florida dismissed a putative class action suit, ruling that a national bank did not qualify as a debt collector under the FDCPA. According to the order, the three plaintiffs defaulted on loans that were originated (or acquired via merger) by the bank. The loans were ultimately satisfied by the proceeds of related short sales of the plaintiffs’ homes. Following the satisfaction of the loans, the bank sent the plaintiffs letters that stated it would not report any negative information regarding the plaintiffs’ loans to the credit bureaus or charge any late fees for a period of 90 days due to the plaintiffs’ residences being located in a FEMA-declared disaster area. The plaintiffs alleged that these letters violated the FDCPA and the Florida Consumer Collection Practices Act (FCCPA) because the bank “systematically misrepresent[ed] the status” of the plaintiffs’ satisfied loans as well as the plaintiffs’ “obligations under the loans.” The bank moved to dismiss arguing, among other things, that the FDCPA claims should be dismissed because the bank—as originator and owner of the loans—is not a debt collector under the FDCPA, and the complaint failed to contain any allegations supporting the assertion that the bank’s principal purpose as a business is the collection of debts. Moreover, the bank argued that the letters were sent purely for informational purposes, and as such, did not constitute an attempt to collect a debt under the FDCPA or FCCPA.

    The court agreed with the bank, finding that the bank was “exempt from the definition of a debt collector” due to its status as the originator of the loans, and dismissed the FDCPA claims with prejudice. The court also dismissed plaintiffs’ FCCPA claims, finding that it lacked original jurisdiction over these claims because the plaintiffs failed to file a motion for class certification within 90 days of filing the complaint, as required under local rules.

    Courts Mortgage Origination Debt Collection FDCPA State Issues

  • New York enacts law covering collection of family member debts

    State Issues

    On December 28, the New York governor signed S3491A, which amends the state’s general business law to add a section prohibiting principal creditors and/or debt collection agencies from making any representations that a person is required to pay the debt of a family member in a way that contravenes the FDCPA or that misrepresent the person’s obligation to pay such debts. The amendment defines “debt collection agency” as “a person, firm or corporation engaged in business, the principal purpose of which is to regularly collect or attempt to collect debts: (a) owed or due or asserted to be owed or due to another; or (b) obtained by, or assigned to, such person, firm or corporation, that are in default when obtained or acquired by such person, firm or corporation.” The law is effective 90 days after enactment.

    State Issues State Legislation Debt Collection Vicarious Liability FDCPA

  • District Court dismisses non-borrower action against mortgage servicer

    Courts

    On January 11, the U.S. District Court for the Northern District of Mississippi granted a mortgage servicer’s motion to dismiss a lawsuit with prejudice brought by a homeowner’s widow alleging violations of, among other claims, TILA, RESPA, and FDCPA, for failing to include a credit-life-insurance provision in the loan note. According to the opinion, the plaintiff sued the mortgage servicer and mortgage originator after her husband passed and the servicer initiated foreclosure proceedings. The plaintiff argued that her husband, who was the sole borrower, and the mortgage originator had an oral agreement to include a credit-life-provision in the mortgage loan note but the originator failed to include it. The mortgage servicer moved to dismiss the action arguing, among other things, that the plaintiff lacked standing to bring the action. Upon review, the court agreed with the mortgage servicer, determining that the plaintiff lacks standing under TILA, RESPA, and the FDCPA because she was neither an “obligor” nor “borrower” on the loan even though she  was identified as a “borrower” on the Deed of Trust. Moreover, the court rejected the plaintiff’s alternative claim that she is a third-party beneficiary with standing to sue under the laws, finding that no valid contract existed as to the credit-life-insurance policy and therefore, the plaintiff could not claim to be a beneficiary of a non-existent contract. The court also dismissed the plaintiff’s other state law and fraud claims, finding she failed to provide sufficient facts to make the claims plausible.

    Courts Foreclosure FDCPA TILA RESPA Mortgage Servicing

  • 6th Circuit holds elements of Michigan foreclosure process are collection efforts under FDCPA

    Courts

    On January 11, the U.S. Court of Appeals for the 6th Circuit held that a debt collector should not allow the essential elements of a Michigan foreclosure to proceed after receiving a dispute letter under the FDCPA. According to the opinion, in September 2016, a debt collector sent a notice to a mortgage debtor informing the homeowner it intended to foreclose on the property, and two weeks later it began the Michigan state foreclosure process. After the process began, and within 30 days of receiving the debt collection notice, the mortgage debtor sent a certified dispute letter to the collector, challenging the validity of the debt. After receiving the dispute letter, the debt collector posted a foreclosure notice on the property and published notices in the newspaper. The debt collector never sent the mortgage debtor a verification of the debt. The mortgage debtor filed suit against the debt collector alleging violations of, among other things, the FDCPA. The district court granted summary judgment for the debt collector, holding that as a matter of law, the FDCPA did not require that the debt collector verify the debt and that it had “cease[d] collection of the debt” pursuant to the statute. The mortgage debtor appealed, arguing the district court (i) erred in its decision to end discovery and consider summary judgment, and (ii) erred in its interpretation of the FDCPA and its finding that the collector ceased collection efforts.

    On appeal, the 6th Circuit rejected the mortgage debtor’s arguments that summary judgment was granted while there were outstanding discovery motions, concluding the debtor provided no evidence the debt collector failed to comply with discovery requests and noted that most of the motions were filed after discovery period expired. As for the FDCPA appeal, the court reversed the district court’s decision, concluding that, as a matter of law, the debt collector was required to intervene and stop the foreclosure actions that were put into motion prior to receiving the dispute letter. The appellate court agreed with the debtor that the newspaper advertisement and posted notice are necessary elements of the Michigan foreclosure process and therefore constituted “collection activity” under the FDCPA. Regardless of whether the debt collector personally took any actions after receiving the dispute letter, the appellate court concluded the debt collector had the responsibility to cancel any elements of the Michigan foreclosure process until it obtained sufficient verification of the debt.

    Courts Sixth Circuit Appellate FDCPA State Issues Foreclosure Debt Collection

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