Third Circuit Holds Debtors Need Not Dispute Debt Before Filing Suit Under FDCPA

by Blank Rome LLP
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Consumer Finance Litigation

In McLaughlin v. Phelan Hallinan & Schmeig, LLP, the United States Court of Appeals for the Third Circuit recently held that debtors are not required to notify a debt collector in writing regarding a disputed debt as a prerequisite to filing a lawsuit under Section 1692g of the Fair Debt Collection Practices Act (“FDCPA”). 2014 U.S. App. LEXIS 12028 (3d. Cir. June 26, 2014).

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 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”). 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 disputing the debt, 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.

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 Court held, “The statute’s text provides no indication that Congress intended to require debtors to dispute their debts under § 1692(g) before filing suit under § 1692e, and in fact, the statutory language suggests the opposite.” The Court construed Section 1692g(b)’s prohibition of interpreting failure to dispute the debt as an admission of liability to mean that disputing the debt is optional. The 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.

Thus, 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.

Mr. Streibich would like to thank our associate, Louise Bowes, for her assistance in developing this Alert.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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