Schultz v. Midland Credit Mgmt., Inc., Case No. 17-2244

• Decision Date: 24 September 2018
• Docket Number: Case No. 17-2244
• Citation: 905 F.3d 159
• Parties: Robert A. SCHULTZ, Jr.; Donna Schultz, on behalf of themselves and those similarly situated, Appellants v. MIDLAND CREDIT MANAGEMENT, INC.; John Does 1-10
• Court: U.S. Court of Appeals — Third Circuit

905 F.3d 159

Robert A. SCHULTZ, Jr.; Donna Schultz, on behalf of themselves and those similarly situated, Appellants

v.MIDLAND CREDIT MANAGEMENT, INC.; John Does 1-10

Case No. 17-2244

United States Court of Appeals, Third Circuit.

Argued January 23, 2018

Opinion Filed: September 24, 2018

Cary L. Flitter, Esq., Andrew M. Milz, Esq. [ARGUED], Flitter Milz, 450 North Narberth Avenue, Suite 101, Narberth, PA 19072, Yongmoon Kim, Esq., Kim Law Firm, 411 Hackensack Avenue, Suite 701, Hackensack, NJ 07601, Counsel for Plaintiffs-Appellants Robert A. Schultz, Jr. and Donna Schultz

Han Sheng Beh, Esq., Ellen B. Silverman, Esq., Hinshaw & Culbertson, 800 Third Avenue, 13th Floor, New York, NY 10022, Joel D. Bertocchi, Esq., David M. Schultz, Esq. [ARGUED], Hinshaw & Culbertson, 151 North Franklin Street, Suite 2500, Chicago, IL 60606, Counsel for Defendant-Appellee Midland Credit Management, Inc.

Before: HARDIMAN, VANASKIE, and SHWARTZ, Circuit Judges

OPINION OF THE COURT

VANASKIE, Circuit Judge.

The question before us in this matter is whether a statement in a debt collection letter to the effect that forgiveness of the debt may be reported to the Internal Revenue Service constitutes a violation of the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq . The District Court concluded that the statement found in dunning letters sent by Appellee Midland Credit Management Inc., ("Midland") to Appellants Robert A. Schultz, Jr., and his wife, Donna (the "Schultzes") could not constitute a violation of the FDCPA, and dismissed their putative class action complaint. We disagree, and hold that the statement in question may violate the FDCPA. Accordingly we will reverse the dismissal of this action and remand for further proceedings.

I.

On four dates in 2015—July 21, August 24, September 2, and October 23—Midland sent letters to Robert Schultz, Jr., attempting to collect three separate outstanding debts that had been outsourced to Midland for collection after Robert had defaulted on them. On August 24 and October 23, 2015, Midland sent Donna Schultz separate letters likewise attempting to collect a separate outstanding debt from her. None of the Schultzes debts exceeded $600. Each letter offered to settle the amount of indebtedness for less than the full amount owing.¹ Four of the letters noted that "[i]f you pay your full balance we will report your account as Paid in Full. If you pay less than your full balance, we will report your account as Paid in Full for less than the full balance." (App. 24, 30, 32, 36). All of the aforementioned letters contained the following language: "We are not obligated to renew this offer. We will report forgiveness of debt as required by IRS regulations. Reporting is not required every time a debt is canceled or settled, and might not be required in your case." (App. 17). Since the Department of the Treasury only requires an entity or organization to report a discharge of indebtedness of $600 or more to the IRS, and because each of the debts linked to the Schultzes was less than $600, the Schultzes claimed that the inclusion of the foregoing language was "false, deceptive and misleading" in violation of the FDCPA, (App. 18), which broadly prohibits the use of any false, deceptive, or misleading representation in connection with the collection of any debt. See 15 U.S.C. § 1692e.

On July 20, 2016, the Schultzes filed a putative class action complaint on behalf of themselves and others similarly situated asserting violations of the FDCPA. Midland moved pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss on the ground that the Schultzes failed to plead a plausible violation of the FDCPA. The District Court granted Midland's motion on May 8, 2017, concluding that the Schultzes indeed failed to plausibly allege a violation of the FDCPA because the language set forth in the dunning letters was not "deceptive" or "otherwise violative of the FDCPA." (App. 8). In the District Court's view, the language:

[did] not threaten the reader of the letter with a legal action that cannot be taken, nor [did] the letter include any false or deceptive statements designed to enhance its ability to collect the outstanding debt. Rather, Defendant's letter, when read in its entirety by the least sophisticated consumer, [could] only have one interpretation. That interpretation is simply that, in certain circumstances, debt settlement and/or discharge] may be reportable to the IRS, not all settlements and/or discharges are reportable, and that the subject statement may not be applicable to the reader.

(App. 8-9).² The Schultzes timely appealed the District Court's ruling to our Court.

II.

The District Court had subject matter jurisdiction under 28 U.S.C. § 1331. We have jurisdiction pursuant to 28 U.S.C. § 1291. We afford plenary review to a district court's order granting a motion to dismiss for failure to state a claim. Black v. Montgomery Cty ., 835 F.3d 358, 364 (3d Cir. 2016).

III.

Congress enacted the FDCPA in 1977 after noting the "abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors."

15 U.S.C. § 1692(a) ; see also Brown v. Card Serv. Ctr ., 464 F.3d 450, 453 (3d Cir. 2006). The Act's purpose is twofold: It seeks not only to eliminate abusive practices by debt collectors, but also "to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged." Brown, 464 F.3d at 453 (quoting 15 U.S.C. § 1692(e) ).

The portion of the FDCPA relevant here, § 1692e, states that "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." The section goes on to describe the following as violations of the FDCPA:

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

...

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

Id. §§ 1692e(5), (10). Whether a collection letter is "false, deceptive, or misleading" under § 1692e is determined from the perspective of the "least sophisticated debtor." Brown , 464 F.3d at 453. In Brown , we articulated the standard for deception under § 1692e as follows:

The least sophisticated debtor standard requires more than simply examining whether particular language would deceive or mislead a reasonable debtor because a communication that would not deceive or mislead a reasonable debtor might still deceive or mislead the least sophisticated debtor. This lower standard comports with a basic purpose of the FDCPA: as previously stated, to protect all consumers, the gullible as well as the shrewd, the trusting as well as the suspicious, from abusive debt collection practices.

Id. at 454 (citations and internal quotation marks omitted). The plaintiff's burden is low under this objective standard. She need not prove that she was confused or misled, but only that the least sophisticated consumer would be. Jensen v. Pressler & Pressler , 791 F.3d 413, 419 (3d Cir. 2015).

On appeal, the Schultzes argue that by including the language, "[w]e will report forgiveness of debt as required by IRS regulations," Midland presented a false or misleading view of the law—one designed to scare or intimidate the Schultzes into paying the outstanding debts listed on the debt collection letters even though Midland knew that any discharge of the Schultzes' debt would not result in a report to the IRS. We agree.

Here, the reporting requirement under the Internal Revenue Code is wholly inapplicable to the Schultzes' debts because none of them totaled $600 or more, and IRS regulations clearly state that only discharges of debt of $600 or more "must" be included on a Form 1099-C and filed with the IRS. See 26 C.F.R. § 1.6050P-1(a).³ By including the reporting language on collection letters addressing debts of less than $600, we believe that the least sophisticated debtor might be persuaded into thinking that the discharge of any portion of their debt, regardless of amount discharged, may be reportable.

Midland argues that, in order to conclude that a consumer would be misled by this statement, one would have to read the first sentence in isolation while paying no attention to the second qualifying statement—i.e. , that "[r]eporting is not required every time a debt is canceled or settled, and might not be required in your case." (App. 17). However, even with this qualifying statement, the least sophisticated debtor could be left with the impression that reporting could occur. Indeed, this is precisely what happened in the Schultzes' case—there was no possibility of IRS reporting in light of the fact that the debt was less than $600, but use of the conditional "might" suggested that reporting was a possibility.

Midland argues that if we were to adopt the Schultzes' interpretation of the language contained in the letters, we would essentially give credence to a "bizarre or idiosyncratic" interpretation of the letters, which does not preserve "a quotient of reasonableness and ... a basic level of understanding and willingness to read with care." Wilson v. Quadramed Corp ., 225 F.3d 350, 354–55 (3d Cir. 2000). For Midland, the use of the conditional "might" should signal to the least sophisticated debtor that only under certain circumstances will reporting occur. The problem with this argument, however, is that, for the Schultzes, under no set of circumstances will reporting ever occur. As we held in Brown, even if the language in a letter is true, it can still be deceptive where "it can be reasonably read to have two or more different meanings, one of which is inaccurate." 464 F.3d at 455 (citation omitted). And the facts here are not so different than those in Brown, such that our holding here should be different. In Brown , a debt collector suggested that if a debtor did not pay her outstanding debt within...