In an opinion issued on May 19, 2016, the U.S. Court of Appeals for the Seventh Circuit ruled that debt collectors do not run afoul of the Fair Debt Collection Practices Act’s (FDCPA) prohibition on deceptive threats if collectors file a lawsuit against a consumer without the intention to go to trial.
The Seventh Circuit’s opinion comes roughly six months after the decision in the Consumer Financial Protection Bureau’s (CFPB) suit against debt collection law firm Hanna & Associates, in which a federal court found that collectors may not bring a lawsuit unless they have verified the underlying debt. This new opinion serves to further clarify what conduct constitutes the types of deceptive conduct banned by the FDCPA.
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The Seventh Circuit’s ruling stems from three consumers that brought suit against three debt collection agencies for violating the FDCPA’s broad prohibition on false, deceptive or misleading representations threatening to take action that collectors do not intend to actually take. 15 U.S.C. § 1692e(5). In each case, the agency had previously filed suit against the consumer in state court. The consumers argued in their lawsuits, however, that the suits against them violated the FDCPA because the agencies never had the intention of proceeding to trial; rather, the consumers alleged that the suits were brought solely to obtain a default judgment or settlement. The proof, the consumers argued, was the fact that each debt collector later moved for voluntary dismissal of their lawsuits.
The lower courts dismissed the consumers’ suits. The Seventh Circuit affirmed this dismissal, agreeing that the agencies’ lawsuits do not run afoul of the FDCPA. First, the Seventh Circuit pointed out that in each case, the consumers in fact owed the debts at issue. Second, the Seventh Circuit found that since litigation itself is inherently a process, filing a complaint does not imply that the collector intends to go to trial. The Seventh Circuit noted that the consumers failed to allege that the agencies represented anywhere in their complaints that the collectors intended to go to trial. The Court opined that trial is often not the most cost-effective or desirable resolution process, and that a plaintiff in any lawsuit is entitled to adjust its strategy at any stage of that process.
This opinion, taken together with the Hanna opinion from December 2015, provides some clarity as to under what circumstances a debt collector is permitted to bring a lawsuit to collect on a debt. Taken together, a debt collector has to have accurate documentation that verifies and substantiates the debt before filing a complaint that has been reviewed by an attorney, but the collector does not need to intend to go to trial. Put another way, a debt collector may bring a lawsuit with goal of driving the consumer to settlement – so long as an attorney has reviewed the supporting documentation and made a good faith determination that the debt is valid and substantiated.
While this opinion and that in Hanna provide practical guidance to our industry, forward-looking compliance professionals may still wonder if the Seventh’s Circuit is actually consistent with Hanna, and what this means for future cases alleging debt collectors’ conduct to be deceptive. In both cases, the courts teased out what inferences the least sophisticated consumer (the applicable standard under the FDCPA) would draw from debt collection lawsuits. To avoid being accused of violating the FDCPA, collectors should continue to ensure their behavior at all time is in good faith, and consider the implications that will be perceived by borrowers.