11th Circuit: Letter Offering to “Resolve” Out of Stat Account Contains Implicit Threat of Litigation, Requires Out of Stat Disclosure

On Friday, the Eleventh Circuit issued a ruling in Holzman v. Malcolm S. Gerald & Associates, Inc., No. 16-16511 (11th Cir. Apr. 5, 2019) highlighting an issue in collecting time-barred (commonly known as “out of stat”) debt: how can a debt collector communicate a settlement offer without implying a threat of litigation?

Unfortunately, the answer seems to be that it is impossible to do so without including a full disclosure identifying the legal status of the debt (e.g. that the debt collector cannot sue due to the age of the debt).

In this case, LVNV Funding, LLC purchased the consumer’s out of stat account and placed it with a debt collection agency. The agency sent a letter to the consumer stating that:

Malcolm S. Gerald and Associates wants to help you resolve your delinquent account with LVNV FUNDING LLC. We would like to offer you a balance reduction to 30% of the balance due listed above. We will be able to accept $260.85 as a reduced payment in full on your account. To take advantage of this offer, the reduced amount listed must be received in our office no later than 05/31/2015. We are not obligated to renew this offer.

The consumer filed a Fair Debt Collection Practices Act (FDCPA) claim alleging that this letter is deceptive and misleading because it implies that the consumer can be sued on the account even though the account’s age prohibits the debt collector and creditor from doing so. The district court dismissed the lawsuit, finding that the letter contained no threat of litigation. The Eleventh Circuit disagreed—and overruled the district court’s decision—finding that an implicit threat of litigation without the proper out of stat disclosure can also violate the FDCPA.

The Eleventh Circuit’s decision focuses primarily on the use of the word “resolve” in the letter, but also takes into account the letter’s wording as a whole. In its own words, the Eleventh Circuit found:

[B]y urging the debtor to "take advantage" of the offer, the letter might have caused an unsophisticated consumer to mistakenly believe that the debt was legally enforceable and that he had something to gain by accepting the offer, or to lose by declining it. In fact, the letter reinforces this impression by announcing a deadline, thus creating some urgency for the debtor to accept the offered terms by making payment. In this regard, the letter states that payment "must be received in our office no later than 5/31/2015" and that Defendants are "not obligated to renew" the offer. As Plaintiff points out, an unsophisticated reader might conclude from this language that he is being presented with an ultimatum, and that failure to make payment within the required time frame would result in negative consequences, such as legal action.

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insideARM Perspective

Currently, the rules regarding what, if any, disclosure is required for time-barred debts is a patchwork quilt across the country. Some states have verbatim disclosure requirements; some states are silent. In some of those silent states, the courts rule that some sort of disclosure is required (just like in this case). In other words, the requirements are all over the place, making this an excellent area for uniformity.

This Consumer Financial Protection Bureau (CFPB) seems to be headed in this exact direction. The CFPB is currently seeking comments on its desire to conduct a survey on debt collection letters. The letters in the survey contain one variable: the out of stat disclosure. This, along with the Bureau’s inclusion of out of stat disclosures in its outline of proposed rulemaking from back in 2016, indicates that a uniform, federal out of stat disclosure is on the horizon.  

Court decisions like the one above suggest that some sort of a disclosure is required when offering to settle a time-barred account since there is no choice of words that can accurately convey the concept of settling an account for less than the full balance without tripping the “threat of litigation” wire. Which disclosure should a debt collector use? Until the CFPB chimes in, it will depend on the jurisdiction. One thing seems certain: not including a disclosure, even in states that don’t explicitly require one, is problematic.