On March 15, 2017, a United State District Court Judge ruled that the following statement in a letter was not a violation of the Fair Debt Collection Practices Act (FDCPA): “This settlement may have tax consequences. Please consult your tax advisor.”  The case is Remington v. Financial Recovery Services, Inc., et al. (Case No. 3:16-865, U.S. District Court, CT). 

Background 

Defendant Financial Recovery Services, Inc. (FRS), a debt collector, in an attempt to collect a personal credit card debt in the amount of $822.39, sent plaintiff a letter. In the letter, FRS offered plaintiff three settlement options to pay off the debt, and further noted: “This settlement may have tax consequences. Please consult your tax advisor.” 

Plaintiff, through her attorney, Joanne Faulkner, filed a lawsuit under the FDCPA, alleging that the letter’s reference to potential tax consequences is false, deceptive, and misleading—that it “suggests that the consumer could be in trouble with a tax authority if she did not pay in full rather than settle,” that it “creates a false sense of urgency,” that it was “meant to make the consumer nervous, worried, or upset,” and that the reference to potential tax consequences from a settlement was a “ploy to get the consumer to pay the account instead of a [sic] paying for tax advice.”   

A copy of the Complaint can be found here

Defendants moved to dismiss plaintiff’s FDCPA complaint for lack of standing and failure to state a claim upon which relief can be granted. 

The Court’s Opinion

The case was heard by the Honorable Jeffrey Alker Meyer, United States District Court Judge.

The court first addressed the issue of whether plaintiff had standing to bring the claim -- specifically, “whether plaintiff could show (1) an ‘injury in fact,’ (2) a sufficient ‘causal connection between the injury and the conduct complained of,’ and (3) a likelihood that the injury ‘will be redressed by a favorable decision.”

Judge Meyer considered the Supreme Court ruling in Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1548 (2016). He wrote,

“An injury in fact must be both “concrete and particularized,” as well as “actual or imminent, not conjectural or hypothetical.” An injury is concrete if it “actually exists,” though it need not be a “tangible” injury (e.g., incurring damages or suffering a physical injury), because Congress may create “intangible” injuries through statute. An injury is particularized if a plaintiff shows that a defendant’s “actions (or inactions) injured her in a way distinct from the body politic.” Strubel v. Comenity Bank, 842 F.3d 181, 188 (2d Cir. 2016). 

Judge Meyer determined that the plaintiff had the requisite standing to bring the case. 

Next, Judge Meyer turned to defendant’s argument that the complaint failed to state a claim upon which relief could be granted.  

Judge Meyer wrote: 

“To state a claim under the FDCPA, plaintiff must allege that she is a “consumer,” that defendants are “debt collectors,” and that defendants used “false, deceptive, or misleading representation[s] or means in connection with the collection of any debt.” 15 U.S.C. § 1692e; see Altman v. J.C. Christensen & Assocs., Inc., 786 F.3d 191, 194 (2d Cir. 2015). Defendants dispute only whether as a matter of law the letter’s claim about potential tax consequences of a settlement was false, deceptive, or misleading. 

Whether a collection letter is false, deceptive, or misleading under the FDCPA must be evaluated from the perspective of the least sophisticated consumer. As the Seventh Circuit has observed, the least sophisticated consumer “isn’t a dimwit. She may be uninformed, naïve, and trusting, . . . but she has rudimentary knowledge about the financial world, and is capable of making basic logical deductions and inferences. 

Defendants’ statement in the letter to plaintiff that “this settlement may have tax consequences” is not false. The acceptance of defendants’ proposed settlement may result in cancellation of indebtedness, and cancellation of indebtedness in any amount may constitute taxable income. Because defendants’ statement in the letter that “this settlement may have tax consequences” is an accurate statement of the law, it does not violate the FDCPA. See Everett v. Fin. Recovery Servs., Inc., 2016 WL 6948052  at *6 (concluding that identical language is not actionable under the FDCPA). 

Defendants advised plaintiff of settlement options and then truthfully advised plaintiff that such settlement options “may” have tax consequences. It would take a bizarre or idiosyncratic interpretation by the least sophisticated consumer to conclude that this true statement violates the FDCPA. 

Defendants’ motion to dismiss is GRANTED.” 

A copy of the Ruling granting defendant’s motion to dismiss can be found here

insideARM Perspective 

This is the second court to rule that this language is not an FDCPA violation. The court referenced the Everett case. insideARM wrote about that case on January 17, 2017. In that case a United States District Court Judge for the Southern District of Indiana came to the same conclusion regarding the exact same language. 

Defendant in this case was represented by attorney John Rossman from Moss & Barnett in Minneapolis.  (Moss & Barnett also represented the defendant in the Everett case.) insideARM contacted Mr. Rossman for his thoughts on this decision. He commented,

“During oral argument on our motion to dismiss, I explained to the Court that it is my personal opinion that a debt collector is not required to provide a tax consequence disclosure.  However, many creditors require that debt collectors provide these disclosures.  Further, the disclosure by FRS in this case –- which does not reference 1099-C or any dollar limit – is accurate according to the tax code and does not violate the FDCPA.  Clearly the Court agreed with the common sense of this approach.  This is certainly an area where guidance and a safe harbor from the CFPB would be a great benefit to consumers and debt collectors alike.“

This is a positive result for the ARM industry on an issue that has no uniform answer.  Many credit grantor clients have required third party agencies to make 1099(c) disclosures in communications with consumers. Those disclosures lead to lawsuits.  Opinions from various courts have not been consistent. For a review of several such cases see the insideARM FDCPA resources page. It would be helpful if the CFPB, the Treasury Department/IRS, or both would provide some clear guidance and safe harbor language on the issue.

Our favorite language from the decision: “The least sophisticated consumer “isn’t a dimwit. She may be uninformed, naïve, and trusting...but she has rudimentary knowledge about the financial world, and is capable of making basic logical deductions and inferences.”


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