In a Fair Debt Collection Practices Act (FDCPA) case, a Federal Judge has declined to dismiss a lawsuit claiming that a 1099(c) disclosure in an initial letter was a false, deceptive, or misleading statement regarding potential tax consequences in relation to a proposed settlement of a debt. The Memorandum Opinion in case, Velez v. Enhanced Recovery Company, LLC (Case No. 16-164, U.S. District Court, Eastern District of Pennsylvania) was filed on May 2, 2016. A copy of the opinion can be found here.

The Litigation

The Plaintiff in the case, Radamed Velez, brought suit alleging that defendant Enhanced Recovery Company, LLC (“ERC”) violated the FDCPA by sending him a collection notice with a false, deceptive, or misleading statement regarding potential tax consequences in relation to a proposed settlement of his debt. ERC moved to dismiss the case pursuant to Federal Rule of Civil Procedure 12(b)(6). Editor’s Note: A Rule 12(b)(6) motion is a request by a party to dismiss a lawsuit for “failure to state a claim upon which relief can be granted.”

Factual Background

On August 3, 2015, ERC sent Velez a communication in connection with a consumer debt in the amount of $692.70 owed to TD Bank USA, N.A./Target. The Letter offered to settle the debt for $554.16. The Letter also stated, “In addition, 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 Arguments

Velez claimed that the above Statement was false, deceptive, and misleading. Plaintiff’s argument was that IRS Regulation 1.6050P requires applicable entities to report cancellations or discharges of debt under certain circumstances, but only when the forgiveness exceeds $600.00, and does not require reporting the discharge of a settlement. Velez argument was that since ERC would not have settled the $692.70 obligation for $92.70, there would never have been a debt cancellation exceeding the threshold in this case, and so the statement that the discharged debt “may be reported” was misleading and deceptive.

Additionally, the Velez claimed that applicable entities only report the amount of debt discharged if it exceeds the threshold, but whether that amount is income or taxable income are separate determinations not made by ERC or its clients.  Finally, Velez argued that that the statement needlessly injects the IRS into the collection process, creates confusion, would cause the least sophisticated consumer to believe that he might have to pay a certain amount to avoid IRS reporting, and negatively influences a consumer considering bankruptcy.

ERC argued that the statement was not false because it accurately reflects the controlling statute and regulation, and was neither deceptive nor misleading, and was not material.

The Opinion

Stewart Dalzell, Senior United States District Judge for the Eastern District of Pennsylvania decided that the case should not be dismissed and that plaintiff suit should proceed.

He wrote:

“We will deny ERC’s motion to dismiss because the amended complaint states a facially plausible claim to relief under Section 1692e of the FDCPA.”

Accepting the amended complaint’s well-pled factual allegations as true, Velez’s settlement of this alleged debt, and ERC’s cancellation thereof, could not possibly have been reportable under the relevant exceptions. If, in fact, under the circumstances of this case, there could not possibly have been a reportable event, then the statement would be false.”

The least sophisticated debtor, given a generally applicable rule with some, but not all, of the relevant exceptions thereto, might be misled into thinking that there will be adverse tax consequences for settling a debt for less than the total amount due. The conditional “may” of the Statement does not remove from the realm of possibility that the least sophisticated debtor might be deceived into thinking that ERC 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.”

InsideARM Perspective

Yet another ARM firm is caught in the “no-win” scenario of including so-called 1099(c) disclosures in a letter to a consumer. Earlier this week insideARM wrote about a similar case and an a podcast by the Moss & Barnett law firm.

The lesson learned from these two cases and the podcast? Any 1099(c) disclosure has the potential to be deemed “misleading” to the “least sophisticated consumer.”


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