Is it illegal for a debt collector to attempt to collect a debt that is no longer valid and enforceable as a matter of law?

On April 11, 2011, the United States Court of Appeals for the Third Circuit affirmed the decision of the District Court dismissing a consumer’s claims against his debtors.  Huertas v. Galaxy Asset Management, LLC, No. 10-2532, CITATION.

Consumer Hector Huertas sued credit card companies, Asset Management Professionals (“AMP”) and Applied Card Bank (“ACB”), for violations of the Fair Debt Collection Practices Act (“FDCPA”) and New Jersey Consumer Fraud Act (“NJCFA”).  Huertas alleged that ACB transferred a “false debt” – a debt upon which New Jersey’s six-year statute of limitations had run – in violation of NJCFA and that AMP was seeking to collect that “false debt” in violation of the FDCPA and improperly obtained his credit report in violation of the Fair Credit Reporting Act (“FCRA”) which imposes civil liability upon a person that willfully obtains a consumer credit report for any purpose not authorized by the FRCA.

AMP and ACB moved to dismiss Huertas’ complaint on the ground that he failed to state claims against AMP and ACB.  The United States District Court for the District of New Jersey granted the motions of AMP and ACB and dismissed Huertas’ complaint against each entity.  The District Court reasoned that while the expiration of the statute of limitations made the debt unenforceable, the debt was not extinguished.  As a result, neither ACB’s assignment of the debt nor AMP’s efforts to collect the debt violated the law.

Huertas appealed the dismissal of his complaint to the United States Court of Appeals for the Third Circuit.  On appeal, Huertas claimed that the District Court erred in concluding that the expiration of the statute of limitations did not extinguish the debt.  The Court of Appeals agreed with the District Court and held that Huertas still owed the debt as it was not extinguished as a matter of law.  Thus, Huertas failed to state claims against ACB or AMP regarding the validity of the debt.

According to the Court of Appeals, Huertas’ FDCPA claim against AMP “turns on whether a debt collector may attempt to collect upon a timebarred debt without violating the statute.”  Id.  The court acknowledged that the issue was one of first impression for it, but noted that the majority of courts faced with a similar situation have held that “when the expiration of the statute of limitations does not invalidate a debt, but merely renders it unenforceable, the FDCPA permits a debt collector to seek voluntary repayment of the time-barred debt so long as the debt collector does not initiate or threaten legal action in connection with its debt collection efforts.”  Id.; see also Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 771 (8th Cir. 2001); Wallace v. Capital One Bank, 168 F.Supp.2d 526, 527-29 (D.Md. 2001); Shorty v. Capital One Bank, 90 F.Supp.2d 1330, 1331-33 (D.N.M. 2000).  It is the “threatening 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.”  Id. citing Beattie v. D.M. Collections, Inc., 754 F.Supp. 383, 393 (D.Del. 1991).  Thus, whether AMP violated the FDCPA turned on whether its letter to Huertas of February 11, 2009 “threatened litigation.”  Id.

AMP’s letter to Huertas advised that the account was reassigned; requested Huertas call to “resolve this issue”; included a privacy notice; and advised Huertas that unless the debt alleged was disputed within thirty days, AMP would assume that the debt was valid.  Finally, the letter contained the following language at the bottom, in bold capital letters, “THIS IS AN ATTEMPT TO COLLECT A DEBT.”  The court held that, “even the least sophisticated consumer would not understand AMP’s letter to explicitly or implicitly threaten litigation … Since it is appropriate for a debt collector to request voluntary repayment of a time-barred debt, it would be unfair if debt collectors were found to violate the FDCPA both if they include the mandated language (because inclusion would threaten suit) and if they do not (because failure to include a mandatory notice violates the statute).”  Id.  Thus, the court held that Huertas failed to state claim against AMP for violation of the FDCPA based upon AMP’s letter and affirmed the dismissal of Huertas’ complaint against AMP on the ground that it violated the FDCPA.

The court also held that AMP did not violative the FRCA when it obtained Huertas’ credit report.  The FRCA expressly permits distribution of a consumer report to an entity that “intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer.”  Id.; see also 15 U.S.C. §1681(a)(3)(A).  Since Huertas sought and received credit from ACB and accumulated credit card debt, AMP was permitted to access Huertas’ credit report for the purposes of collecting on his delinquent accounts.  Such access is permitted under 15 U.S.C. §1681(a)(3)(A).

The court similarly dismissed Huertas’ claims against AMP and ACB based upon the NJCFA and Racketeering Influenced and Corrupt Organization (“RICO”).  The court held that Huertas failed to state a NJCFA claim because “the reach of the [NJCFA] is intended to encompass only consumer transactions involving the marketing and sale of merchandise or services.”  Id.  Huertas seeks to recover for ACB’s transfer of his debt to a third party and AMP’s attempts to collect on the account – actions not covered by the NJCFA.  The court similarly reasoned that Huertas failed to allege facts sufficient to state a claim under RICO as there was no evidence “that [Huertas] was deprived of the benefit of his bargain under that contract.”  Id.  In summary, the Court of Appeals affirmed the decision of the District Court that dismissed all of Huertas’ claims against AMP and ACB.

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