[co-author: Anna Claire Turpin]
A recent case from a New York district court serves as a reminder that a single word in a debt collection letter may cause a wave of implications if enough further information is not supplied. In Leonard v. Capital Management Services, LP, 2019, No. 1:18-cv-90, 2019 U.S. Dist. LEXIS 18336 (W.D.N.Y. Feb. 4, 2019), a debt collection letter offering to settle the debt for less than the full balance included a statement that “[s]ettling a debt for less than the balance owed may have tax consequences and Discover may file a 1099-C form” (emphasis added). Because the total debt forgiveness would have been less than $600.00 and therefore did not meet the IRS threshold for reporting, the Plaintiff alleged that the language violated 15 U.S.C. §§1692e and 1692f.
The debt collector moved to dismiss, arguing that the letter was not false and that the 1099-C clause was true because it was not cast in mandatory language. Instead, the debt collector argued that the use of the word “may” in the statement did not imply that Discover or CMS would in fact file a 1099-C or take other actions that would create “tax consequences” with the IRS.
The court disagreed. While not concerned with the tax consequence language, the court took issue with the 1099-C clause. Despite the debt collector’s arguments to the contrary, the court held that the use of the word “may” did not insulate the statement from potential liability. The court concluded that the 1099-C clause stated a plausible claim because it did not provide any reference to nor clarify that the reporting requirements only applied where the $600.00 threshold was met. Without that clarification, the court concluded the least sophisticated consumer could reasonably believe that CMS or Discover might report the cancelled debt to the IRS.
The key take-away is that the use of generic conditional language is not a cure-all. In the case of 1099 language and to the extent conditional language is used, letters should be reviewed to insure they provide enough information as to the tax consequences to make clear the circumstances in which the tax reporting requirements may apply.
Anna Claire Turpin is a third year law student at Campbell University and a graduate of James Madison University. Turpin is currently a law clerk with Smith Debnam’s Consumer Financial Services Litigation and Compliance group.
