7th Cir. Says Dunning Letter’s Language that Debt Collector “May” Issue 1099-C Could Be Misleading

In Heredia v. Capital Mgmt. Servs., L.P., No. 19-1296, 2019 U.S. App. LEXIS 33444, at *4 (7th Cir. Nov. 8, 2019), the Court of Appeals for the 7th Circuit held that a debt collector’s reference to the possibility of issuing a 1099-C was materially misleading, at the pleadings stage.

The language at the crux of this lawsuit is the part of the sentence which contains the following six words: “Discover may file a 1099C form.” (We will refer to this as the “1099C Clause.”) That statement does not occur in a vacuum, but rather, it is the clause that follows on the heels of the one stating that “[s]ettling a debt for less than the balance owed may have tax consequences.” (We will refer to this as the “Tax Consequences Clause.”) The question presented by this lawsuit is whether the 1099C Clause violated the FDCPA.  Heredia alleged that CMS violated sections 1692e and 1692f of the FDCPA.  . . .As is often the case, a good place to begin our legal analysis is with that which is settled. Recently, in Dunbar, 896 F.3d at 762, we evaluated a very similar tax consequences clause. That clause stated, “NOTICE: This settlement may have tax consequences.” Id. at 764. We held that this “tax-consequences warning is literally true and not misleading under the objective ‘unsophisticated consumer’ test,” and thus did not violate the FDCPA. Id. at 768. This was so even though the debtors at issue in that particular case were insolvent and would not have had to pay taxes on any discharged debt. Id. at 764. We noted that the word “may” does not mean “will,” and that therefore the statement is true on its face. Id. at 765. We also found that the clause was not misleading because, among other reasons, an insolvent debtor can become solvent at any moment and “a debt collector has no reason or way to know whether an individual debtor is solvent or insolvent at a given time.” Id. at 766. In other words, by saying “may” rather than “will,” the debt collector described an accurate scenario. Settlement may or may not have tax consequences depending on the financial situation of the debtor, and that information is only in the hands of the debtor herself, and not the debt collector.  Information about filing a 1099C form, on the other hand, is information within the knowledge of the creditor. This makes the 1099C Clause materially different than the tax consequences clause at issue in Dunbar. Only the debtor knows whether, given her financial situation as a whole, she will have to pay taxes on the forgiven debt. The creditor, however, knows whether it will have to file a 1099C form or not. The Internal Revenue Service requires a creditor to file a 1099C form if it has forgiven at least $600 in principal. 26 C.F.R. § 1.6050P-1(a) & (d)(2)-(3); 26 U.S.C. § 6050P. The creditor knows for certain whether it is offering to forgive more or less than $600 in principal. The debtor, on the other hand, may have a difficult time determining how much she owes in principal versus interest, as the dunning letter may not identify the amount of each. This was certainly the case in CMS’s letter. Although we know that Heredia owed a balance of $1,892.43, even now as the case has wound its way to this court, we still do not have a clear statement about the amount of principal that CMS was willing to forgive. To summarize the law, it is permissible for a creditor to make a “may” statement if there is any possibility that an event might happen. Dunbar, 896 F.3d at 765 (“An unsophisticated consumer would not understand the word ‘may’ to mean ‘will.'”). And thus Dunbar holds that it is permissible for a creditor to say, “Settling a debt for less than the balance owed may have tax consequences.” Id. at 768. On the other hand, it is impermissible for a creditor to make a “may” statement about something that is illegal or impossible. And so, for example, a creditor may not state that “a court could allow . . . attorney fees” where the contract between the debtor and creditor did not provide for them. Lox v. CDA, Ltd., 689 F.3d 818, 824, 826 (7th Cir. 2012). Nor may a creditor state that late charges might apply when legally, they could not. Boucher v. Fin. Sys. of Green Bay, Inc., 880 F.3d 362, 367 (7th Cir. 2018). Although it is not technically illegal or impossible for Discover to file a 1099C form with the IRS if the amount is under $600, “a collection letter can be literally true” and still misleading. Dunbar, 896 F.3d at 765. Heredia alleges, and the defendants do not dispute, that Discover would never file a 1099C form with the IRS unless required to do so by law—that is, unless it was forgiving $600 or more of principal. In the case of the November 11, 2016 letter, Discover would never file a 1099C form regardless [*9]  of which settlement offer Heredia accepted, because in no circumstances would Discover be forgiving at least $600 in principal (the amounts it would be forgiving would be $548.80, $454.18, or $359.56 in combined interest and principal, depending on which option Heredia chose). In regard to the November 11 letter, therefore, Heredia could plausibly allege that it is, in fact, misleading to state that Discover may file a Form 1099C, when it never would. And unlike the situation in Dunbar, the debt collector has within its own knowledge all of the information it needs in order to know whether such a form will or will not be required. In this case, CMS was sending out individualized form letters with settlement offers tailored to each recipient’s debt. It had both the knowledge (or at least the ability to acquire the knowledge) and capability to include the 1099C Clause in situations in which it would be forgiving at least $600 in principal and to exclude the clause for less than $600. This was not true in the Dunbar case, where the debt collector could not have known whether any particular debtor would have a tax liability or not. The district court relied on the reasoning of the Dunbar [*10]  case without recognizing the material distinction between the Tax Consequences Clause and the 1099C Clause. Heredia v. Capital Mgmt. Servs., L.P., No. 17-C-284, 2019 U.S. Dist. LEXIS 9936, 2019 WL 288122, at *4 (E.D. Wis. Jan. 22, 2019); R. 43 at 9. Moreover, the language is misleading in a material way. The reference to a report to the IRS may instill angst in the unsophisticated debtor. The district court focused on whether the 1099C Clause might cajole a debtor into paying more of the debt to avoid the economic consequences of tax liability, without considering the psychological coercion that a threat to involve the IRS might have on such a consumer. See, e.g. Schultz v. Midland Credit Mgmt., Inc., 905 F.3d 159, 162 (3d Cir. 2018) (agreeing with plaintiffs that by including the language about reporting to the IRS, the debt collector presented a false or misleading view of the law designed to intimidate the plaintiffs into paying the outstanding debts).  Our decision is in line with this recent decision of the Third Circuit in Schultz. The collection letter at issue in that case stated, “We will report forgiveness of debt as required by IRS regulations. Reporting is not required every time a debt is canceled or settled, and might not be required in your case.” Id. at 161. The Schultz court held that such language, even with the conditional statement that not all debt would be reported, “presented a false or misleading view of the law—one designed to scare or intimidate the [debtors] into paying the outstanding debts listed on the debt collection letters even though [the debt collector] knew that any discharge of the [debtor’s] debt would not result in a report to the IRS.” Id. at 162. See also Foster v. AllianceOne Receivables Mgmt., Inc., No. 15-cv-11108, 2016 U.S. Dist. LEXIS 56958, 2016 WL 1719824, at *1, 2 (N.D.Ill. Apr. 28, 2016) (finding the “mention of the IRS in a situation where there is no set of circumstances in which the IRS would be involved could mislead ‘a person of modest education and limited commercial savvy,'” even where the dunning letter listed the balance on the account as $718.96 and stated, “[p]lease be advised that any settlement which waives $600.00 or more in principal of a debt may be reported to the Internal Revenue Service by our client.”); Good v. Nationwide Credit, Inc., 55 F. Supp. 3d 742, 744, 748-49 (E.D. Pa. 2014) (drawing all reasonable inferences in favor of the plaintiffs and finding the following language deceptive and misleading: “[The Creditor] is required to file a form 1099C with the Internal Revenue Service for any cancelled debt of $600 or more” where the creditor offered to allow the plaintiff to settle his $613 debt for $183.90). CMS does point to one district court opinion in which the court found that a 1099C clause [*12]  was not misleading, but in that case the dunning letter combined two pieces of information—first, the amount of debt, which was clearly under $600, and second the statement that “any settlement write-off of $600 or more may be reported to the Internal Revenue Service by our client.” Rhone v. AllianceOne Receivables Mgmt., Inc., No. 1:14-CV-02034-JMS, 2015 U.S. Dist. LEXIS 106186, 2015 WL 4758786, at *2 (S.D. Ind. Aug. 12, 2015). This type of letter arguably places the knowledge back in the hands of the debtor by allowing the debtor to determine, from the face of the letter, whether the conditional reporting will or will not happen in that particular instance. Moreover, and importantly, we cannot make any predictions about whether this court would find the language at issue in any of these district court opinions misleading in light of our currently evolving precedent.