Debt collectors must navigate the murky waters of complying with many letter disclosure requirements. In a jurisdiction like New York, where the court dockets are chock full of FDCPA claims and the Department of Financial Services (NYDFS) established a set of debt collection rules, a collision of requirements is inevitable. In a recent decision, the Eastern District of New York was faced with this issue. 

In Polak v. Kirschenbaum & Phillips, P.C., 2018 WL 1189337 (E.D.N.Y. Feb. 16, 2018), the court denied a motion to dismiss a claim that a letter violates the FDCPA because it includes a disclosure that interest may accrue (as allegedly required by Avila) while also stating that zero interest accrued since charge off (as required by NYDFS).  

By denying the motion to dismiss, the court found that the allegations are sufficient to state a claim that including such a combination of disclosures makes the letter misleading.  Interestingly enough, the letter in question is exactly what consumer attorneys argued for in the Taylor v. Financial Recovery Services 2nd Circuit appeal. 

Read the decision here

Factual and Procedural Background 

Plaintiff incurred and defaulted on a credit card debt from Barclays Bank. After default, Barclays referred the account to defendant Kirschenbaum & Phillips, P.C. to collect the debt.  

Defendant sent a collection letter to plaintiff stating that “[t]he amount may vary from day to day, due to interest or other charges added to your account after the date of this letter.  Hence if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection.” The letter also included the NYDFS-required account itemization, stating that zero interest has accrued since charge off.

Plaintiff, represented by RC Law Group, brought this lawsuit alleging that the letter was false, deceptive, and misleading because it contained an interest disclosure and then also stated that zero interest has accrued since charge off. 

Defendant filed a motion to dismiss the claim. Sometime during the advocacy of this motion, likely to support the inclusion of the interest disclosure, defendant stated that statutory and contractual interest continued to accrue but that the creditor elected not to collect said interest.  

The court referred the motion to the magistrate, who issued the underlying opinion on February 16, 2018. The magistrate’s decision was adopted by the judge on March 6, 2018. 

Decision 

The court found that a combination of an Avila interest disclosure and a NYDFS itemization that states zero interest accrued since charge off is deceptive and misleading to consumers because the letter as a whole implies two opposing stances on whether or not interest is accruing. 

The court first declined to accept defendant’s argument that it should not be liable because it included the Avila safe harbor language in its letter. The court, just like the 7th Circuit in the recent Boucher v. Financial System of Green Bay, Inc. decision, found that simply including an interest disclosure does not protect the debt collector from liability if the circumstances do not warrant it. 

The court took issue with the defendants’ statements, both in the letter and while arguing the motion to dismiss, that interest was still accruing but the creditor was not collecting it.  The court found that by stating this, it is then misleading to state that $0.00 interest accrued since charge off since interest, according to defendant, was accruing. Due to this discrepancy, the court denied the motion to dismiss. 

Analysis

If your agency or firm is currently fighting the reverse Avila claims on accounts where interest is not accruing, take a good look at this case. The admission by defendant that interest continued to accrue but was not being collected by the creditor is interesting as many in the industry, including creditors and debt collectors alike, do not think this is an accurate representation of what actually occurs. However, since this admission matches the argument presented by appellant’s counsel in the Taylor appeal, this case provides excellent foresight to the Second Circuit of what could come from such a finding. 

In essence, the court here stated that if the required NYDFS itemization of interest accrued since charge off is zero, then the least sophisticated consumer assumes that interest is not accruing. Otherwise, the statement that interest is accruing would not be misleading to the consumer. Many times, since creditors do not charge interest on charged off accounts, the NYDFS itemization will include “zero.” Including an interest disclosure such as that pondered during the Taylor oral arguments would cause the exact issue seen here. 

Debt collectors are no strangers to the “damned if you do, damned if you don’t” position.  The Avila progeny of cases are a perfect example of a situation where well-intentioned debt collectors are penalized for genuinely trying to comply with mismatched requirements while plaintiffs’ counsel take advantage of the situation due to the unilateral attorneys’ fees provision in the FDCPA. With the Taylor appeal, the Second Circuit has the opportunity to stop the bleeding on the Avila issue and allow compliant debt collectors, who play a vital role in the financial ecosystem, to not drown in the legal costs associated with defending themselves against such claims.


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