The Statute of Limitations, Consumer Debt
and the Interplay of State Law
Generally, the FDCPA does not directly regulate substantive state law, such as state law pertaining to contracts, state collection law, or when attorney’s fees and costs can be obtained.
Likewise, the FDCPA normally does not affect state procedural law, such as those laws relating to when the filing and prosecution of a lawsuit is permitted; it does not regulate which state law defenses may be raised. In other words, the FDCPA does not superimpose any federal substantive or procedural requirements that “trump” state law. (But see 15 U.S.C. § 1692i relating to where venue of a collection action is proper.)
Rather, the FDCPA generally provides only that, on the one hand, if state law is not violated, then the FDCPA is not violated.
On the other hand, if state law is violated because, for example, the amount sought by a debt collector is neither authorized by agreement “nor permitted by law,” then the FDCPA is likewise violated. See, e.g. FDCPA, 15 U.S.C. § 1692f(1), §1692e(2), § 1692e(5), § 1692e(10); Newman v. CheckRite, 912 F.Supp. 1354, 1376 (E.D. Cal. 1995); West v. Costen, 558 F.Supp. 564, 573 (W.D. Va. 1983).
Before it may be determined that the FDCPA has been violated by collection activity, one must normally first determine whether the collector has violated state law in its debt collection practices by making threats to seek remedies through collection or litigation to which it is not entitled. See Newman, supra, 912 F.Supp. at 1376.
Consequently, an initial question to be determined is whether a collection agency violates state law by filing suit or otherwise collecting time-barred obligation.
In most states, expiration of the statute does not eliminate a creditor/debt collector’s right to pursue payment of unpaid debt. Therefore, in most states, a debt collector is free to request or demand payment on an unpaid account even if the statute of limitations has expired.
An initial question to be determined is whether a collection agency violates state law by filing suit or otherwise collecting time-barred obligation.
As noted, most states, such as California, adhere to the rule that the expiration of the statutory period within which an action can be commenced does not extinguish the obligation sued upon. Mitchell v. County Sanitation Dist., 150 Cal.App.2d 366, 370-372 (1957).
This is because the statute of limitations arises under the California law of procedure, and, thus, a statute of limitations “affects only the remedy sought, but ‘not the substantive right or obligation’” sued upon. Adams v. Paul, 11 Cal.4th 583, 597 (1995); accord Davis v. Mills, 194 U.S. 451 (1904); Freyermuth v. Credit Bureau Svcs., Inc., supra, 248 F.3d at 771; Huertas v. Galaxy Asset Mgmt., supra, 642 F.3d at 33-34; Gervais v. Riddle & Assoc., P.C., 479 F.Supp.2d 270, 273 (D.Conn. 2007); Shorty v. Capital One Bank, supra, 90 F.Supp.2d at 1332.
Justice Joyce Kennard of the California Supreme Court wrote on this subject: “[A] cause of action is not extinguished or impaired by the mere passage of time and the maintenance of the claim is not precluded simply by the running of the statutory period.” Adams, supra, 11 Cal.4th at 597 (emphasis added).
A statute of limitations affects the remedy only; “it gives the debtor a personal privilege that he may or may not choose to exercise.” 3 Witkin, California Procedure § 413, p. 521 (4th ed. 1996). And, since the statute of limitations is a personal privilege, it may be waived at the option of the one entitled to assert it; if the statute is not affirmatively pled or asserted by a defendant, its benefits are waived. Adams, supra, 11 Cal.4th at 597.
Put another way, under the common law, if a defendant does not affirmatively invoke or assert the procedural defense of the statute of limitations, the defense is waived or forfeited. Minton v. Cavaney, 56 Cal.2d 576, 581 (1961). Under such circumstances, a plaintiff normally has every right to pursue the claim on the merits, regardless of whether the action is otherwise untimely. Adams, supra, 11 Cal.4th at 597. “Thus, unless the defendant properly invokes the statute of limitations as a defense, the expiration of the statute of limitations does not affect even the remedy.” Ibid.
Notwithstanding that most states have historically permitted collection, and even suit, on time-barred obligations, this has changed slowly over the last 30 years with the advent of the FDCPA and similar state statutes applicable to consumer (non-business) debt.
Starting in 1987, with the case of Kimber v. Federal Financial Corp., 668 F.Supp. 1480 (M.D. Ala. 1987), the district court early on first addressed whether the threat to, and actual filing of, a collection suit on time-barred debt violated the FDCPA.
In Kimber, the debtor incurred a debt to a retail store that became overdue in September of 1975. In 1976, the debt was purchased by the Federal Financial Corporation (“FFC”). In 1984, FFC assigned the account to an attorney for collection. In 1985, during a telephone call with the attorney’s office, the debtor was informed the now-10-year-old debt needed to be paid, and she was threatened with a collection suit. She refused to pay; suit was actually filed by FFC in Alabama state court.
The debtor answered the complaint and raised the statute of limitations as a defense. The state court dismissed the case as untimely because the longest possible limitations period (6 years) had long expired by the time the action was filed in 1985.
Subsequently, the debtor filed an action in federal court under the FDCPA, claiming that FFC’s filing of a clearly time-barred lawsuit violates §§ 1692e and 1692f of the FDCPA, as unfair, unconscionable and deceptive means of collecting the debt. The court agreed. Kimber, supra, 668 F.Supp. at 1487. The court wrote, in pertinent part:
The court agrees with Kimber that a debt collector’s filing of a lawsuit on a debt that appears time barred without the debt collector having first determined after reasonable inquiry that the limitations period has been or should be tolled is an unfair and unconscionable means of collecting the debt. . .” (Kimber, supra, 668 F.Supp. at 1487.)
The district court explained its reasoning as follows:
[T]ime barred lawsuits are, absent tolling, unjust and unfair as a matter of public policy, and this is no less true in the consumer context. As with any defendant sued on a stale claim, the passage of time, not only dulls the consumer’s memory of the circumstances and validity of the debt, but heightens the probability that she will no longer have personal records detailing the status of the debt. Ibid.
Significantly, the Kimber court rejected any argument “the statute of limitations is an affirmative defense which is waived if not raised [and] a [collector] plaintiff may not be penalized for knowingly filing a time barred suit.” Id., at 1488. The court’s wholly unconvincing rationale for rejecting this argument was that Rule 11 of the Federal Rules of Civil Procedure permitted the imposition of sanctions against an attorney who knowingly filed a time barred suit in federal court. Ibid.
Since Kimber, numerous federal courts have weighed in on this issue.
In Freyermuth v. Credit Bureau Svcs, Inc., 248 F.3d 767, 771 (8th Cir. 2001), for example, the Eighth Circuit held the expiration of the statute of limitations did not eliminate the debt, but only the remedies available (including filing suit). Collection activity could proceed.
Freyermuth states: “In the absence of a threat of litigation or actual litigation, no violation of the FDCPA has occurred when a debt collector attempts to collect on a potentially time-barred debt that is otherwise valid.” Accord Shorty v. Capital One Bank, 90 F.Supp.2d 1330, 1332 (D. N.M. 2000); Walker v. Cash Flow Consultant, Inc., 200 F.R.D. 613, 616 (N.D. Ill. 2001.)
But even where the “threat” of litigation is not express or direct, an implied threat may violate the FDCPA. See, e.g., Huertas, supra, 641 F.3d at 33-34; Perretta v. Capital Acquisitions and Mgmt. Co., 2003 WL 21383757 (N.D. Cal. 2003) (FDCPA claim stated where collection letter stated that failure to work with collector could lead to “further steps being taken”); Stepney v. Outsourcing Solutions, Inc., 1997 WL 722972 at *4-5 (N.D. Ill. 1997) (FDCPA claim stated where collection letter stated if debt paid “no further collection action” would be taken).
Thus, while the mere attempt to collect a voluntary payment on an out-of-statute debt may not violate the FDCPA, threatening the consumer implicitly or expressly, directly or indirectly, with a lawsuit concerning a debt the collector either knew or should have known was beyond the statute of limitations has been found to violate the FDCPA. These courts have found that the act of threatening or filing lawsuits on debts that are beyond the statute of limitations violate, inter alia, 15 U.S.C. § 1692f(1). Courts have also found that threatening to take legal action when the debt has gone beyond the statutory time limit constitutes a false representation of the status of a debt, in violation of § 1692e(2)(A), § 1692e(5) and/or 1692e(10).