US District Court in Illinois Finds Disclosure of Potential Tax Consequences for Settling an Account is Misleading to Consumer

Another ARM firm is caught in the “no-win” scenario of including so-called 1099(c) disclosures in a letter to a consumer.

A Memorandum and Opinion in the case, Foster v. Allianceone Receivables Management, LLC (Case No. 15-cv-11108, U.S. District Court, Northern District of Illinois) was issued on April 28, 2016, denying a motion by Allianceone to dismiss a FDCPA 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

Plaintiff incurred a debt from Capital One Bank (USA), N.A. (“Capital One”). Allianceone sent Plaintiff a single collection letter (“Letter”) on or about March 9, 2015, advising that its client, Capital One, had referred her debt to AllianceOne for collection. The letter listed the balance on the Capital One account as $718.96 and stated, “[p]lease be advised that any settlement which waives $600.00 or more in principal of a debt may be reported to the Internal Revenue Service by our client.” The letter also stated that the Defendant was authorized to reduce the amount owed in exchange for a settlement payment in the amount of $467.32.

Plaintiff, Latonia M. Foster (“Plaintiff”), filed suit against AllianceOne Receivables Management, Inc. (“AllianceOne” or “Defendant”) on December 10, 2015. The Complaint alleges that AllianceOne violated Section 1692e of the Fair Debt Collection Practices Act (“FDCPA”).

On January 6, 2016, Defendant filed a Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6).

The Arguments Made and The Court’s Analysis

Plaintiff’s Complaint alleged that the Letter sent by AllianceOne violated Section 1692e of the FDCPA because it contained false or misleading representations. Specifically, Plaintiff alleged that the Defendant included language regarding the Internal Revenue Service (“IRS”) in an attempt to intimidate her.

Section 1692e provides:

A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:

(2) The false representation of –

(A) the character, amount, or legal status of any debt; . . .

(5) The threat to take any action that cannot legally be taken or that is not intended to be taken.

(10) The use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.

Allianceone had argued that the language in question was not misleading because even an unsophisticated consumer would know that the offered debt write-off did not meet the $600 threshold mentioned in the Letter. They also argued that the language was an accurate statement of the law and that it was immaterial because it did not apply to Plaintiff.

Plaintiff argued that the language is not an accurate statement because there are exceptions to the IRS reporting requirement. Plaintiff also argued that including any language regarding the IRS is a “collection ploy designed to deceive or mislead” the consumer into thinking that the IRS could be involved in their debt where there is no set of circumstances in which the IRS would be involved.

The court agreed with the Plaintiff’s position, stating:

“It is plausible that mention of the IRS in a situation where there is no set of circumstances in which the IRS would be involved could mislead “a person of modest education and limited commercial savvy.” As a consumer may forego his or her rights related to the disputed debt, by settling the matter without negotiation due to this deception, the statement in question is material. Accepting the Complaint’s well-pleaded factual allegations as true and drawing all reasonable inferences in Plaintiff’s favor, Plaintiff alleges sufficient facts to state a plausible claim for relief.

For the reasons discussed above, Defendant’s Motion to Dismiss [8] is denied.”

insideARM Perspective

Just last month insideARM published an excellent short article by attorney John Rossman with the headline Get Sued If You Do . . . Get Sued If You Don’t: The Debt Collector’s Conundrum . The article also contained a link to a podcast of the Moss & Barnett “Debt Collection Drill” on the very issue involved in this case.

Many financial institutions are requiring ARM firms to include 1099(c) disclosures in their initial letters to consumers.  It is not clear from the pleadings whether the Allianceone client in this case mandated that they include the language in the letter sent to the Plaintiff. But, if so, companies like Allianceone are put in an untenable position. Follow client direction on 1099(c) disclosures and get sued or decide not to include 1099(c) language in letters and risk alienation or loss of a client.  That is a tough call to make.

Let’s hope that IF any clients require 1099(c) language be included in the letter that they will indemnify ARM firms for their expenses incurred in defending cases like this.