Law360 - August 14, 2014
In McLaughlin v. Phelan Hallinan & Schmeig LLP, the Third Circuit recently held that debtors are not required to dispute a debt under Section 1692g of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq., prior to filing suit with respect to that debt under the statute. The Third Circuit is the first federal appeals court to address this issue and, in doing so, it contradicted the decisions from several district courts.
Section 1692g(b) of the FDCPA provides that, if a “consumer notifies the debt collector in writing ... that the debt, or any portion of the debt, is disputed,” the debt collector must “cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt ... and a copy of such verification ... is mailed to the consumer by the debt collector.” Section 1692g(c) further provides that “the failure of a consumer to dispute the validity of a debt under this section may not be construed by any court as an admission of liability by the consumer.”
In McLaughlin, the borrower entered into a mortgage with CitiMortgage Inc. in October 2005 and subsequently became delinquent on his payments based on what was deemed to be a lender error. As a result of the default, CitiMortgage referred the account to Phelan Hallinan & Shmieg LLP. Phelan sent the borrower a notice dated June 7, 2010, which included information concerning the amount of debt owed as of May 18, 2010, including attorney’s fees and title search fees. In lieu of requesting verification of the debt from Phelan, McLaughlin filed a purported class action complaint alleging various violations of the FDCPA, including a claim that Phelan had violated Section 1692e by misrepresenting that they had performed legal services in connection with the loan prior to May 18, 2010.
The district court dismissed the complaint without prejudice, holding that McLaughlin could not bring suit under the FDCPA without first disputing the debt pursuant to the FDCPA’s debt validation procedure. McLaughlin filed an amended complaint, and the district court issued another opinion reiterating that McLaughlin was required to follow the debt validation procedure set forth in Section 1692g.
On appeal, the Third Circuit reversed the district court’s order and held that disputing the debt under Section 1692g is not a prerequisite to filing suit under the FDCPA. The circuit court held, “The statute’s text provides no indication that Congress intended to require debtors to dispute their debts under Section 1692g before filing suit under Section 1692e, and in fact, the statutory language suggests the opposite.”
The Third Circuit construed Section 1692g(c)’s prohibition of interpreting failure to dispute the debt as an admission of liability to mean that disputing the debt is optional, and suggested that it is no accident that the statute does not expressly require a debt validation request prior to filing suit. The circuit court also emphasized that the FDCPA is a “remedial statute,” which requires application of the “least sophisticated debtor” standard to communications between lenders and debtors. Thus, debtors should not be presumed to understand that disputing the debt under Section 1692g may be a prerequisite to filing suit under the statute, and should be permitted to file suit regardless of whether they dispute the debt before doing so. The court also cautioned that requiring debtors to dispute the debt prior to filing suit under the FDCPA would allow debt collectors to avoid liability for misleading statements on the sole basis that the debtor did not dispute the debt, which would frustrate the FDCPA’s purpose of ensuring that debt collectors act responsibly.
This decision is a notable departure from the position taken by several district courts, including the U.S. District Court for the Eastern District of Pennsylvania. For example, in Lorandeau v. Capital Collection Services, the plaintiff filed an action under the FDCPA related to a notice she received regarding debt she owed to Abington Memorial Hospital. The notice contained information regarding the plaintiff’s right to dispute the validity of the debt within 30 days of receipt of the notice. Although the plaintiff believed she did not owe the debt to Abington Memorial Hospital, she did not take any steps to confirm whether she owed the debt, and brought an action against the defendant for various violations of the FDCPA. The district court noted that, while the “least sophisticated debtor” standard is intended to protect consumers, it also presumes a “basic level of understanding and willingness to read with care.” The court held that because the plaintiff did not request validation of the debt or take any other action to contest the debt, she was precluded from bringing a claim based upon the defendant’s attempt to collect an invalid debt.
The U.S. District Court for the District of Connecticut took a similar position in Lindbergh v. Transworld Systems Inc., which highlighted some of the arguments in favor of requiring debtors to dispute the debt prior to filing suit under the FDCPA. In Lindbergh, the defendant was hired by a doctor’s office to send collection notices to patients owing debts to the doctor. The defendant sent a notice to the plaintiff including a statement notifying him of his right to dispute the debt under Section 1692g, but he did not respond. Instead, the plaintiff responded to a subsequent notice by claiming that collection of the debt was time barred and the defendant was therefore in violation of the FDCPA, and demanded $1,500 to avoid litigation. Shortly thereafter, the plaintiff brought an action against the defendant for violations of the FDCPA. The court questioned why the plaintiff chose to “impose the significant burden of litigation” on the parties and the court, “instead of simply following the cost-effective procedures provided by the FDCPA.” The court described the debt validation procedure as a method of avoiding litigation “except where a debt collector has behaved knowingly, or at least recklessly, in violation of the statute.”
In McLaughlin, the Third Circuit agreed that disputing the debt prior to filing suit may be a more time and cost-efficient approach in many cases, but did not consider these factors to be a basis for requiring debtors to do so. Rather, the circuit court noted that in the absence of such a requirement, these considerations would still serve as an incentive for debtors to voluntarily dispute the debt prior to filing suit. Ultimately, the arguments raised in the aforementioned cases were outweighed by the court’s focus on protecting consumers and holding debt collectors accountable for violations of the FDCPA.
Accordingly, the McLaughlin decision establishes that a debtor’s failure to dispute the debt pursuant to Section 1692g will not likely be a basis for dismissal of claims brought under Section 1692e of the FDCPA in the Third Circuit. Until other federal appellate courts have the opportunity to decide this issue, debt collectors and mortgage servicers should continue to be diligent in their compliance with the requirements of Section 1692g, but should also be prepared to defend against claims brought under the FDCPA that are not preceded by a request for debt validation.
The authors acknowledge editorial assistance from Francis X. Crowley.
"3rd Circ. Puts Debtors 1st In FDCPA Case," by Wayne Streibich and Louise Bowes appeared in the August 14, 2014 edition of Law360. To learn more, please click here or visit www.law360.com. Reprinted with permission from Law360.