In St. John v. Cach, LLC, the U.S. Court of Appeals for the Seventh Circuit recently issued an opinion holding that the Fair Debt Collection Practices Act (FDCPA) does not prohibit debt collectors from filing collection lawsuits without intending to proceed all the way through trial.

In its holding, the court recognized that litigation involves a cost-benefit analysis, and debt collectors should not be expected to "mechanically steer the proceedings toward trial with no regard for expense or efficiency." Companies engaged in debt collection litigation should consider the ruling in connection with their litigation strategy when deciding whether to file lawsuits against consumer debtors.

In this case, the debt collectors filed lawsuits in state court seeking to recover on the plaintiffs' delinquent credit card accounts. The debt collectors later moved to voluntarily dismiss the actions without prejudice prior to proceeding to trial. The plaintiffs did not deny owing the underlying debt or claim that the debt was not legally enforceable, but rather challenged the debt collectors' intent in filing the lawsuits.

FDCPA § 807(5) prohibits debt collectors from threatening to take an action that they do not intend to take in the course of collecting a debt. The plaintiffs alleged that the simple act of filing a lawsuit resulted in an implied representation or "threat" that the case would go to trial. However, the court held that, "the mere filing of a civil action does not include an implicit declaration that the plaintiff intends to advance the action all the way through trial. Litigation is inherently a process. And recovery through that process may be achieved in many ways, and at different stages, of which trial is often not the most cost-effective or desirable." The court concluded that, "debt collectors who sue to recover a debt are no different from any other plaintiff" and should not be held to a heightened standard in litigation. Otherwise, the court said, a collector would "effectively be barred from recourse to the courts, even when its claim is unquestionably legitimate, and even when no other recourse is left."

The court rejected calls by consumer advocates to treat debt collector litigants differently and according to a heightened litigation standard when they choose to litigate their claims. The court's decision also appears to contradict the position taken by the Consumer Financial Protection Bureau (CFPB) in its recent enforcement action against Frederick J. Hanna & Associates, a debt collection law firm. The CFPB alleged that the filing of lawsuits and their subsequent dismissal indicated that the law firm could not substantiate the debts and thus were a deceptive practice under the FDCPA.

Companies should carefully assess to what extent the Seventh Circuit's decision may be relied on during litigation in other jurisdictions and in the face of regulatory enforcement by the CFPB due to the CFPB's position in the Hanna case.

Members of Ballard Spahr's Consumer Financial Services Group regularly counsel clients engaged in consumer debt collections, including litigation, by originating creditors and by third-party debt collectors.


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