A letter sent to collect a time-barred debt that makes a settlement offer can, even without a threat of legal action, violate the Fair Debt Collection Practices Act's (FDCPA) general prohibition against a debt collector's use of "any false, deceptive, or misleading representation or means in connection with the collection of a debt," the U.S. Court of Appeals for the Third Circuit has ruled. The decision is a reminder of the need for debt collectors to review with counsel scripts, letters, and other communications used to collect time-barred debts.

In Tatis v. Allied Interstate, LLC, a debt collector sent the plaintiff a letter that stated the creditor "is willing to accept payment in the amount of $128.99 in settlement of this debt." (The full amount of the debt was $1,289.86.) At the time the letter was sent, the New Jersey statute of limitations applicable to debt collection actions had run. The plaintiff filed a class action alleging that the letter violated the FDCPA because the debt collector had falsely represented the legal status of the debt in violation of 15 U.S.C. §1692e(2)(A), made false threats to take actions that cannot legally be taken in violation of 15 U.S.C. §§1692e, 1692e(5), and used false representations and/or deceptive means to collect the debt in violation of 15 U.S.C. §1692e(10). Reading the Third Circuit's 2011 decision in Huertas v. Galaxy Management to hold that an attempt to collect a time-barred debt does not violate the FDCPA unless it is accompanied by a threat of legal action, the district court granted the debt collector’s motion to dismiss.

In vacating the district court's decision, the Third Circuit limited its holding in Huertas to alleged violations of §1692e(2)(A) (which was the only FDCPA claim made by the plaintiff in Huertas). The Third Circuit stated that "Huertas stands for the proposition that debt collectors do not violate 15 U.S.C. §1692e(2)(A) [by falsely representing the legal status of a debt] when they seek voluntary repayment of stale debts, so long as they do not threaten or take legal action." Observing that "the FDCPA sweeps far more broadly than the specific provision found in §1692e(2)(A)" by prohibiting "'any false, deceptive, or misleading representation' associated with debt-collection practices," the Third Circuit held that the words "settlement of the debt" in a collection letter could mislead the least-sophisticated debtor into thinking that such words "referred to the creditor's ability to enforce the debt in court rather than a mere invitation to settle the account." (emphasis provided)

The Third Circuit's holding relied in part on the Court's survey of multiple dictionaries that define "settle" to refer not only to the settlement of an account but also to the avoidance or resolution of litigation. It also relied on decisions of the Fifth, Sixth, and Seventh Circuits holding that a settlement offer in connection with the collection of a time-barred debt can violate the FDCPA without a threat of litigation. The Third Circuit stated that it was "persuaded that [these circuits'] considered view is the best interpretation of the FDCPA," observing that "adding a 'threat of litigation' requirement to all time-barred debt collection efforts curtails the reach of the Act by excising conduct otherwise covered by the terms 'deceptive' or 'misleading.'"

Despite vacating the district court's decision, the Third Circuit emphasized that it was not holding that the use of the word "settlement" is misleading as a matter of federal law, and stated that "standing alone, settlement offers and attempts to obtain voluntary repayments of stale debts do not necessarily constitute deceptive or misleading practices." The Court further stated that it was not imposing "any specific mandates on the language debt collectors must use, such as requiring them to explicitly disclose that the statute of limitations has run."

Instead, the Third Circuit observed that its holding was based on the specific language used by the debt collector and cautioned that debt collection letters attempting to obtain repayment of time-barred debts "when read in their entirety must not deceive or mislead the least-sophisticated debtor into believing that she has a legal obligation to pay a time-barred debt."

Attorneys in Ballard Spahr's Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt-collection laws and defend clients in FDCPA lawsuits and enforcement matters. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.


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