A. Latest Trends in FDCPA Time-Barred Debt Litigation

Many federal courts have issued decisions holding that suing, or even collecting (without suit), on time-barred debt may violate the FDCPA under a variety of theories, such as: collection under such circumstances is unconscionable (15 U.S.C. § 1692f), is neither authorized, nor permitted by law (id.), or is misleading in various ways (§ 1692e(2), § 1692e(5) and § 1692e(10)).

The trend of these decisions can be gleaned from the following cases:

• Filgueiras v. Portfolio Recovery Assocs., Inc., 2016 WL 1626958 (D. N.J. April 25, 2016) (While appropriate for a debt collector to request voluntary repayment of a time-barred debt, if the statute of limitations is unclear, a letter that presents “settlement options” is potentially misleading, and states a prima facie FDCPA claim, and motion to dismiss reversed; another letter that stated “settlement in full,” however, did not violate FDCPA where debtor was notified “because of age of your debt, we will not sue you for it”) But see Tatis v. Allied Interstate, LLC, 2016 WL 5660431 (9/29/2016).


• Buchanan v. Northland Group, Inc., 776 F.3d 393, 395 (6th Cir. 2015) (Settlement offer made on time-barred debt; this settlement offer creates confusion to the least sophisticated debtor; the use of the term “settlement offer” falsely implies that payment could be compelled through litigation.”)


• McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1020, 1021 (7th Cir. 2014) (“If the debt collector uses language in its dunning letter that would mislead an unsophisticated consumer into believing that the debt is legally enforceable, regardless of whether the letter actually threatens litigation, the collector has violated the FDCPA.”)


• Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 33-34 (3rd Cir. 2011) (FDCPA not violated by collection activity on time-barred debt where letter merely asked the debtor to “resolve” the issue, but did not provide for or offer a “settlement”)


• Larsen v. JBC Legal Corp., P.C. 533 F.Supp.2d 290, 301-03 (E.D. N.Y. 2008) (threatening legal action on time-barred debt violates FDCPA)


• Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 771 (8th Cir. 2001) (“[I]n 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.”)


• Wallace v. Capital One Bank, 168 F.Supp.2d 526, 527-29 (D. Md. 2001) (debt validation notices that were silent as to whether debt was time barred but which did not threaten collection action did not violate FDCPA)


• Shorty v. Capital One Bank, 90 F.Supp.2d 1330, 1331-33 (D.N.M. 2000) (sending a debt validation notice regarding time-barred debt, without more, does not misrepresent the status of the debt and does not violate the FDCPA)


• Beattie v. D.M. Collections, Inc., 754 F.Supp. 383, 393 (D. Del. 1991) (“[T]hreatening of a lawsuit which the debt collector knows or should know is unavailable or unwinnable by reason of a legal bar such as the statute of limitations is the kind of abusive practice the FDCPA was intended to eliminate.”)


• Kimber v. Fed. Fin. Corp., 668 F.Supp. 1480, 1487 (M.D. Ala. 1987) (“[A] debt collector’s filing of a lawsuit on a debt that appears to be time barred, without the debt collector having first determined after a reasonable inquiry that that limitations period has been or should be tolled, is an unfair and unconscionable means of collecting the debt.”)

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. 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). 

In other words, the expiration of the 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, Summary of California Law: 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.

Under the common law, if a defendant does not affirmatively invoke or assert the affirmative, 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 Consultants, 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 non-specified “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 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),² § 1692e(5)³ and/or 1692e(10).⁴

___________________________________

15 U.S.C. § 1692f(1) prohibits: “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”

²15 U.S.C. § 1692e(2)(A) prohibits:  “[t]he false representation of the character, amount or legal status of the debt.”

³15 U.S.C. § 1692e(5) prohibits:  “[t]he threat to take any action that cannot legally be taken or that is not intended to be taken.”

___________________________________

For example, in Buchanan v. Northland Group, Inc., supra, 776 F.3d at 395, the debt collector made a “settlement offer” in its collection demand letter. The debt, however, was time barred. The Court found that making a “settlement” offer implied that the debt could have been successfully sued upon or enforced, and, hence, the offer impermissibly and misleadingly threatened the debtor under the FDCPA. 

In McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1021-1022 (7th Cir. 2014), the Court of Appeals for the Seventh Circuit determined the collection letter violated the FDCPA because it offered to “settle” an out-of-statute debt, but failed to disclose the fact the debt was beyond the applicable statute of limitations. The court observed that:

[A] settlement offer on a time-barred debt implies that the creditor could successfully sue on the debt. If unsophisticated consumers believe either that the settlement offer is their chance to avoid court proceedings where they would be defenseless, or if they believe that the debt is legally enforceable at all, they have been misled, and the debt collector has violated the FDCPA.

The court concluded:

[I]f a debt collector does not know whether the debt submitted for collection is time barred, it would be easy to include general language about the possibility [in collection letters].

Id.; accord Filgueiras, supra, 2016 WL 1626958 at *11.

McMahon thus suggests that the settlement offer may not have violated the FDCPA if the collector had included a disclosure regarding the debt’s out-of-statute status.

In summarizing the decisions of McMahon and Buchanan, the district court in Filgueiras, supra, recently observed:

 [I]t is plausible that the legal status of the debt has been misrepresented in violation of the FDCPA since “it is plausible that an unsophisticated consumer would believe a letter that offers to ‘settle’ a debt implies that the debt is legally enforceable[. . .]”  McMahon, 744 F.3d at 1020; see also Buchanan, 776 F.3d at 399 (“[A] ‘settlement offer’ with respect to a time-barred debt may falsely imply that payment could be compelled through litigation.”). . . “Without disclosure [of the legal status of the debt], a well-meaning debtor could inadvertently dig herself into an even deeper hold.”  Buchanan, 776 F.3d at 399; see also McMahon, 744 F.3d at 2021 (a collection letter that offers settlement on a time-barred debt “makes things worse, not better, since a gullible consumer who made a partial payment would inadvertently have reset the limitations period and made herself vulnerable to a suit on the full amount. That is why those offers [of settlement] only reinforced the misleading impression that the debt was legally enforceable.”).

It is readily evident that the specific language used in collection letters is now being scrutinized carefully by the courts with respect to collection activity related to time-barred debt. Courts are showing increasing concern that the failure to disclose that the debt is beyond the statute may mislead a debtor into the belief that she may be sued, or into making a partial payment, thus reviving an expired statute of limitations.

The Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) have each taken the position that it should be the obligation of the collector, creditor or the debt buyer to affirmatively disclose to the consumer that the debt being collected is beyond the statute of limitations so as to ensure the least sophisticated consumer is not misled. 

In amicus curiae briefs filed in support of the plaintiff consumers in both the Buchanan and McMahon, supra, appeals, the FTC and CFPB argued that use of the term “settlement” offer in those collection letters on out-of-statute debt, without disclosure of this status, violated the FDCPA.

It is clear the positions of FTC and CFPB are that even in the absence of express or implied threat of litigation, a FDCPA § 1692e claim is stated where the collector uses the term “settle,” or a similar term, in connection with collection on a time-barred debt.  See also FTC, Repairing a Broken System:  Protecting Consumers in Debt Collection Litigation and Arbitration (July 2010), http://1.usa.gov/buF50z (“Broken System”); FTC, The Structure and Practices of the Debt Buying Industry (Jan. 2013), http://1.usa.gov.Z0EjxZ (“Structure & Practices”); FTC, Collecting Consumer Debts: The Challenges of Change (Feb. 2009), http://1.usa.gov/3ZLwb (“Challenges”).

On its website, as of April 30, 2016, the CFPB gives a seemingly balanced view:

In most states, debt collectors can still attempt to collect debts after the statute of limitations expires. They can try to get you to pay the debt by sending you letters or calling you as long as they do not violate the law while doing so. 

Even if the statute of limitations has expired, a court may still award a judgment against you if you don’t show up and raise the statute of limitations as a defense.

Ordinarily, it is the responsibility of the person being sued to point out that the statute of limitations has expired. For example, you may need to show that there has been no activity on the account for a certain number of years.

Tip:  If you are sued, it is a good idea to talk to an attorney. It is important to know you can defend yourself if you believe the statute of limitations has expired on your debts.

Several courts have held that a collector who sues or threatens suit on a time-barred debt violates the FDCPA.

But as shown in the following passage, the CFPB and the FTC go further:

[A]ctual or threatened litigation is not a necessary predicate for an FDCPA violation in the context of time-barred debt.  Rather, a debt collector violates the statute whenever its communications tend to deceive or mislead “the least sophisticated consumer,” whom the FDCPA was enacted to protect.  Depending on the circumstances, a settlement offer can erroneously lead unsophisticated consumers to believe a debt is enforceable in court even if the offer is unaccompanied by any clearly implied threat of litigation.

Another possible concern for debt collectors, as well as creditors collecting out-of-statute debts, is a potential for claims that such a collection practice constitutes an “unfair, deceptive or abusive act or practice” (UDAAP) under the regulations implementing the Dodd-Frank Act. Under Dodd-Frank, the CFPB has the authority to prohibit collection practices that it deems to constitute a UDAAP. Both the CFPB and the FTC have engaged in regulatory actions against debt collectors related to demands for payment after the applicable statute of limitations has expired; some of these actions have alleged violations of UDAAP as well as the FDCPA. 

In sum, neither the CFPB nor the FTC has asserted that the collection of out-of-statute debts is illegal in and of itself; rather, these regulators have brought enforcement actions against debt collectors that demand payment of out-of-statute debts through express or implicit threats of litigation, but fail to disclose the debt’s out-of-statute status. 

D. State Law and Time-Barred Debt

As noted above, virtually all states follow the rule that expiration of the statute does not extinguish the creditor’s substantive rights (Mississippi and Wisconsin are exceptions), and seemingly all states permit at least a request for voluntary payment.

But whenever consumer debt is at issue, collectors must proceed cautiously.

Collectors must examine their state law before engaging in collection activities after the statute of limitations has expired. Some states  (1) do not permit a suit on consumer debt after the statute of limitations has expired, or (2) they explicitly require affirmative disclosures when attempting to collect consumer out-of-statute debts.

The laws of every state are beyond this presentation.  Laws in certain states, however, are provided herein by way of example:

On January 1, 2014, California’s Fair Debt Buying Practices Act (FDBPA)  went into effect.  See Cal. Civ. Code §§ 1788.50, et seq. The statute prohibits the filing of a lawsuit, or the initiation of arbitration by a debt buyer on purchased debt where the statute of limitations has expired.  Cal. Civ. Code § 1788.56.  

Note:  These same restrictions do not appear to apply to third-party debt collectors who are not suing on purchased debt. See Cal. Civ. Code §§ 1788.1, et seq.

The California FDBPA also requires disclosure by the collector to the consumer as to whether the statute of limitations on the purchased debt in question has, or has not, expired; if expired, the debt purchaser must disclose as follows:  “The law limits how long you can be sued on a debt.  Because of the age of your debt, we will not sue you for it, and we will not report it to any credit reporting agency.”  See Cal. Civ. Code §§ 1788.53(d)(1)-(3).

In New Mexico, the New Mexico Admin. Code § 12.2.12.9(b) provides the following disclosure must be given: 

This debt may be too old for you to be sued on it in court.  If it is too old, you can’t be required to pay it through a lawsuit.  You can renew the debt and start the time for filing of a lawsuit against you to collect the debt if you do any of the following:  make any payment of the debt; sign a paper in which you admit that you owe the debt, or in which you make a new promise to pay; sign a paper in which you give up (“waive”) your right to stop the debt collector from suing you in court to collect the debt.

Finally, New York State regulations provide for the following mandatory disclosure:

Your creditor or debt collector believes that the legal time limit (statute of limitations) for suing you to collect this debt may have expired.  It is a violation of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq., to sue to collect on a debt for which the statute of limitations has expired. However, if the creditor sues you to collect on this debt, you may be able to prevent the creditor from obtaining a judgment against you. To do so, you must tell the court that the statute of limitations has expired.

Even if the statute of limitations has expired, you may choose to make payments on the debt.  However, be aware:  if you make a payment on the debt, admit to owing the debt, promise to pay the debt, or waive the statute of limitations on the debt, the time period in which the debt is enforceable in court may start again.

23 N.Y. Comp. Codes & Regs. § 1.3 (2014).

The states of Connecticut, Massachusetts, Mississippi, North Carolina, West Virginia, Wisconsin and New York City also all have statutory law or regulations applicable to collectors or debt purchasers restricting the collection of out-of-statute debt and requiring disclosures.

F. Calculating the Statute of Limitations

A state-by-state synopsis of the various statutes of limitations on various debts, contracts and obligations is beyond the scope of this presentation. 

Calculating the applicable statute of limitations on a particular debt is usually, but not always, the easy part of a statute of limitations analysis.  The more troublesome issue is determining when the statute of limitations accrues, and thus expires. 

For contractual type debt, this is not always easy to figure because the creditor may forebear declaring a default for various business reasons, even though payment is overdue.

Credit card debt is a good example:  The office of the Comptroller of the Currency has specific rules when an unpaid credit card must be “charged off” by a financial institution. This date (180 days after the last payment) may or may not coincide with the date of breach. 

Moreover, even where there has been a default on payment, partial payments may have been made reviving or resetting a new statute accrual date.

There may have been “tolling” of the statute for other reasons, such as the debtor had moved out of state.  The debtor may be estopped to assert the statute for other reasons.

G. Collectiion Do's and Don'ts Regarding Time-Barred Debt

When collecting debts beyond the statute of limitations, collectors must be aware (see above) of the laws of the particular jurisdiction in which they are collecting that either prohibit the practice, or that require certain notices and disclosures. 

Collectors must also consider recent federal court cases on the issue and determine whether disclosure of the out-of-statute status of a debt may be necessary. 

Collectors must be careful not to make any statements that could be construed to be a threat to take legal action that cannot be taken, as such threats may violate the FDCPA.

An agency May want to implement the policies and procedures for screening debt that is placed for collection to determine whether (1) the debt is clearly “fresh” or within the statute, (2) the debt is clearly “out” of statute, and (3) the debt is not clearly time barred (uncertain status). 

Each category of debt should be categorized and marked as such in the collection software, and collectors should be trained to note this such that their “talk-offs” with debtors are adjusted accordingly.

Collection letters should be modified accordingly as well. Collection letters that refer to settlement, or suggest similar resolution, where the statute on the debt has expired present the risk of a potential violation of the FDCPA.

Even where the threat of suit is only implied, the risk of violation rises dramatically.  Collection letters with common violations may expose the collection agency to a class action. See Phillips v. Asset Acceptance, 736 F.3d 1076 (7th Cir. 2013); Luther v. Convergent Outsourcing, Inc., 2016 WL 1698396 (E.D. Mich. April 28, 2016).

To the extent possible, the collector should attempt to have the referring creditor client contractually vouch that the debt being forwarded for collection is within the statute, and to explain what procedures it uses to make this determination. 

Collectors may rely, for purposes of asserting a bona fide error defense and in other ways, on the reasonable representations of their clients as to the status of the debt or reasonable screening procedures. See Clark v. Capital Credit & Collection Servs., 460 F.3d 1162 (9th Cir. 2006); Ducrest v. Alco Collections, 931 F. Supp. 459, 462 (M.D. La. 1996).

For debt purchasers, where the debt is not assigned, but bought, and the debt is very old, the risk/reward in collecting on such debt is skewed toward riskiness. Although the United States Supreme Court, last term, held that debt purchasers are not regulated by the FDCPA (Hansen v. Santander Consumers USA, Inc., 137 S.Ct. 1718, 1722 (2017)), sending that debt to a third-party collector will implicate the FDCPA.  Moreover, state law, such as California’s FDBPA, would still apply. 

Collectors who collect on purchased debt should never sue on out-of-statute debt. They should also revise and edit their collection letters carefully to avoid even a hint that their collection activity will proceed to suit. Threatening remedies or amounts only available upon a successful suit and judgment should be avoided.  See 15 U.S.C. § 1692e(5)

Collection communications must be tailored to avoid misrepresenting the status of the debt or the debt buyer's potential remedies against the consumer. It is clear that the CFBP, the FTC and state legislatures are paying particular attention to debt purchaser communications and collection practices.

For portfolios made up of old debt, it may be wise to include in every collection letter that the debt is too old to sue upon, and the collector will not sue if not paid.

It may be prudent to disclose if any part of the debt is paid, it may reset the statute of limitations.