Smith v. Weltman, Weinberg & Reis Co., L.P.A.

MOTION to Dismiss for Failure to State a Claim

S.D. Ill.January 31, 2017

Page 1 11028020v1 0994140 IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF ILLINOIS TAMMY SMITH, Plaintiffs, v. WELTMAN, WEINBERG & REIS CO., L.P.A., Defendant. ) ) ) ) ) ) ) ) ) Case No. 3:16-CV-1333 DEFENDANTS' MOTION TO DISMISS PURSUANT TO RULE 12(B)(6) AND MEMORANDUM IN SUPPORT NOW COMES Defendant, WELTMAN, WEINBERG & REIS CO., L.P.A. ("WWR") by and through its undersigned attorneys, David M. Schultz and Vitaly Libman of Hinshaw & Culbertson LLP, and for its Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6)and Memorandum in Support, states as follows: INTRODUCTION AND BACKGROUND This case arises from an alleged attempt to collect a debt from Plaintiff Tammy Smith ("Plaintiff"). The basis of the Plaintiff's claim derives from a letter (the "Letter") WWR allegedly sent on January 15, 2016. Complaint at ¶ 15. The Letter reflected an outstanding balance of $4,319.69. Complaint at Ex. A. Plaintiff claims that the Letter invited settlement discussions and then stated that a settlement "may have tax consequences" (the "Statement"). Complaint at ¶ 17. Plaintiff then asserts several conclusions of law meant to support her contention that a settlement would not have any tax consequences. Complaint at ¶¶ 18-21. Specifically, Plaintiff argues that because she was insolvent at the time the Letter was sent, as evidenced by her bankruptcy filing shortly thereafter, a discharge of indebtedness in a settlement would not have any tax consequences. Complaint at ¶¶ 20, 21 and 23. Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 1 of 11 Page ID #32 Page 2 11028020v1 0994140 However, by citing various laws that would require tax reporting by either the creditor or the debtor in a settlement, Plaintiff makes it apparent that a discharge of indebtedness does generally have tax consequences. She cites provisions regarding the creditor's requirement to report discharges above $600 and regarding a debtor's requirement to report a discharge of indebtedness as gross income. In addition, at the time the Letter was sent, there was no way for WWR to know whether the settlement would be less than $600 or whether an exception to Plaintiff's reporting, such as insolvency, applied. As a result, the Statement was true as a potential settlement may have resulted in tax consequences for several reasons. Yet, Plaintiff alleges that WWR violated the Fair Debt Collection Practices Act ("FDCPA") by including the Statement in the Letter. Plaintiff alleges that the Statement was misleading to the unsophisticated consumer because it suggested that failure to pay a debt in full could give rise to problems with the IRS. (Complaint at ¶¶ 25 and 26). But Plaintiff's contention is the very type of bizarre interpretation that the unsophisticated consumer test was meant to deter. Thus, this case should be dismissed because the Letter was neither false nor misleading to an unsophisticated consumer. LEGAL STANDARD Federal Rule of Civil Procedure 12(b)(6) authorizes dismissal if the complaint fails to set forth a claim upon which relief can be granted. When considering a Rule 12(b)(6) motion to dismiss, the court accepts as true all the well-pleaded facts alleged in the complaint and construes all reasonable inferences in favor of the non-moving party. See Killingsworth v. HSBC Bank, 507 F.3d 614, 618 (7th Cir.2007) (citing Savory v. Lyons, 469 F.3d 667, 670 (7th Cir.2006)); accord Murphy v. Walker, 51 F.3d 714, 717 (7th Cir.1995). To properly state a valid claim, the complaint must contain a “short and plain statement of the claim showing that the pleader is Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 2 of 11 Page ID #33 Page 3 11028020v1 0994140 entitled to relief.” Fed.R.Civ.P. 8(a)(2). “Detailed factual allegations” are not required, but the plaintiff must allege facts that, when “accepted as true ... ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). The Twombly Court stated that mere “labels and conclusions” or “formulaic recitation[s] of the elements of a cause of action will not do”; rather, the complaint's “[f]actual allegations must be enough to raise a right to relief above the speculative level.” 550 U.S. at 554. If the factual allegations are well-pled, the court assumes their veracity and then proceeds to determine whether they plausibly give rise to an entitlement to relief. See Id. at 679. A claim has facial plausibility when its factual content allows the court to draw a reasonable inference that the defendant is liable for the misconduct alleged. See Id. at 678. ARGUMENT Plaintiff has failed to state a claim for violation of the FDCPA under § 1692e. Plaintiff cannot recover under the FDCPA because the Statement was neither false nor misleading. To state a claim under § 1692e, Plaintiff must prove that WWR is a debtor collector who used a false, deceptive, or misleading representation or means in connection with the collection of a debt. Claims under § 1692e are analyzed under the unsophisticated consumer standard. Lox v. CDA, Ltd., 689 F.3d 818, 822 (7th Cir. 2012). ("Instead, we use the 'unsophisticated consumer' standard, as we do with all claims under § 1692e."). "Although the hypothetical unsophisticated consumer is not as learned in commercial matters as are federal judges, he is not completely ignorant either. Gruber v. Creditors' Prot. Serv., Inc., 742 F.3d 271, 273-74 (7th Cir. 2014). "On the one hand, the unsophisticated consumer may be uninformed, naive, or trusting, but on the other hand the unsophisticated consumer does possess rudimentary Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 3 of 11 Page ID #34 Page 4 11028020v1 0994140 knowledge about the financial world, is wise enough to read collection notices with added care, possesses ‘reasonable intelligence’ and is capable of making basic logical deductions and inferences.” Id. (citations and quotations omitted). "Additionally, while the unsophisticated consumer 'may tend to read collection letters literally, he does not interpret them in a bizarre or idiosyncratic fashion.'” Id. "If not even 'a significant fraction of the population would be misled' by the debt collector's letter, then dismissal is required." Id. "Any document can be misread. The Act is not violated by a dunning letter that is susceptible of an ingenious misreading, for then every dunning letter would violate it." White v. Goodman, 200 F.3d 1016, 1020 (7th Cir. 2000). 1. The Letter did not make any false statements. Upon review of the relevant tax statutes and regulations, the Statement was not false. The Complaint implicated two types of potential tax consequences; 1099C reporting and self- reporting of gross income. See Everett v. Fin. Recovery Servs., Inc., No. 116CV01806JMSMPB, 2016 WL 6948052, at *6 (S.D. Ind. Nov. 28, 2016) ("[Plaintiff] repeatedly equates tax consequences as being equal to the 1099C reporting threshold."); See also https://www.irs.gov/pub/irs-pdf/p4731.pdf (last visited January 24, 2017) ("The creditor is not required to issue a Form 1099-C if the canceled debt is under $600. However, the taxpayer may be required to report the canceled debt as income regardless of the amount.") Publication 4731 is hereby attached as Exhibit A. Both types of tax consequences had the potential to be implicated in the present case. "A Form 1099C is filed by the creditor when the creditor cancels debt over $600." Id.; See Complaint at ¶ 18; See also 26 U.S.C.A. § 6050Pand 26 C.F.R. § 1.6050P-1. Here, the debt identified in the Letter was in the amount of $4,319.69. Complaint at Exhibit A. That means that a settlement of the debt at issue could very well have resulted in a discharge of Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 4 of 11 Page ID #35 Page 5 11028020v1 0994140 indebtedness in excess of $600, which would require the debt owner to report such discharge to the IRS, i.e., a tax consequence. Hence, the Statement was not false since the 1099C reporting requirement clearly had the possibility of being triggered. A second tax consequence of a settlement would be the self-reporting of gross income by a debtor when debt is discharged. According to 26 U.S.C.A. § 61(a)(12), gross income means, among other things, all income from discharge of indebtedness. Consequently, as a general rule, a discharge of indebtedness would need to be reported to the IRS by a debtor as gross income. See https://www.irs.gov/taxtopics/tc431.html (last visited January 24, 2017) ("In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs."). Admittedly, there are various exceptions to the provision that a discharge of debt is taxable income, such as bankruptcy, insolvency or a debt dispute. Complaint at ¶ 21; see 26 U.S.C.A. § 108(a)(1)(A) and (B). However, this does not make the Statement false as its states the settlement may have tax consequences and the general rule is that such a settlement would have tax consequences. Therefore, it is logical and accurate to note that a settlement may have tax consequences since the general rule under the Internal Revenue Code is that it would. In sum, the statement at issue was an accurate statement of the potential for tax consequences since a settlement of Plaintiff's debt could have been over the $600 threshold and because Plaintiff would have had to report the discharge of any debt as gross income unless one of the exceptions was applicable. 2. The Letter did not make any deceptive or misleading statements. Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 5 of 11 Page ID #36 Page 6 11028020v1 0994140 Plaintiff's argument that the Statement was misleading and deceptive is the very sort of bizarre and idiosyncratic interpretation of a communication that the unsophisticated consumer test was meant to prevent. Even though the Statement was an accurate statement, Plaintiff still contends it was misleading by drawing inferences from the Statement that simply don't exist. In the Letter, WWR merely stated that a settlement "may have tax consequences." From this simple statement, Plaintiff alleged that an unsophisticated consumer would be misled and intimidated into thinking that failure to pay the debt will give rise to IRS problems, that if the consumer does not pay the entire amount she will be reported to the IRS and that unless the consumer is going to pay the entire amount she may have to pay taxes on the unpaid balanced. Complaint at ¶¶ 24 and 25. However, nowhere in the statement or Letter does WWR even imply that a settlement would have any negative tax impact or involve any adverse experience with the IRS. The Statement only informs the Plaintiff that there is a possibility that entering into a settlement could result in tax consequences, which as explained above, was an accurate and appropriate disclosure. In fact, the Letter read as whole appears to encourage Plaintiff to explore the possibility of a settlement rather than providing a threat meant to induce payment of the entire outstanding balance. The Letter states "we invite you to call us . . . to discuss utilizing your income tax refund as a source of funds to satisfy this obligation for a reduced amount." Complaint at Exhibit A. It goes on to state that "[w]e would like to offer you an opportunity to take advantage of the substantial savings available . . ." Id. The Letter ends with the Statement notifying the consumer that such a settlement "may have tax consequences." The Letter contains no language or inferences meant to coerce payment of the full amount of the balance or else suffer adverse problems with the IRS. Even the most unsophisticated consumer would read the Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 6 of 11 Page ID #37 Page 7 11028020v1 0994140 Letter as an offer to settle and the Statement as an informative disclosure that such settlement could have tax consequences the consumer should be aware of. There is no caselaw to support Plaintiff's interpretation of the Statement. Plaintiff's exact argument was rejected by the court in Everett, 2016 WL 6948052, at *6. The language at issue in Everett is identical to the present case. In Everett, the defendant offered three settlement options and then stated that "[t]his settlement may have tax consequences." 2016 WL 6948052, at *2. The plaintiff in that case alleged that defendant "needlessly and falsely invoke[ed] the possibility of tax consequences ha[ving] the natural effect of harassing her." Id. The Everett plaintiff further argued that "[d]efendants intended to elevate her concern over and response to the collection communication, increasing the likelihood of payment on the subject consumer debt.” Id. (internal quotations omitted). The Everett court rejected these arguments, finding that the tax consequences language "does not meet that standard, as it would not plausibly deceive or mislead even the unsophisticated consumer." Id. at 6. In another case out of the same district that involved 1099C disclosure language, the court found that the disclosure was not misleading where it contained clarifying language that "any settlement write-off of $600 or more may be reported . . ." Rhone v. AllianceOne Receivables Mgmt., Inc., No. 1:14-CV-02034-JMS, 2015 WL 4758786, at *4 (S.D. Ind. Aug. 12, 2015) (emphasis in original). The court in Rhone emphasized the use of the term "may" expressed to the debtor that a set outcome could befall a debtor in only certain circumstances. Id. Similarly here, WWR only informed Plaintiff that circumstances exist where a settlement could have tax consequences. Moreover, all cases that have found FDCPA violations related to tax disclosure language are easily distinguishable from the present case. In Foster v. Allianceone Receivables Mgmt., Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 7 of 11 Page ID #38 Page 8 11028020v1 0994140 Inc., the language at issue said “[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.” No. 15-CV-11108, 2016 WL 1719824, at *1 (N.D. Ill. Apr. 28, 2016). The defendant offered a write-off that was less than $600. Id. at *2. Consequently, the court held that "[i]t is plausible that 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.'” Id. In Balon v. Enhanced Recovery Co., Inc., the letter stated, in part, that “any indebtedness of $600.00 or more, which is discharged as a result of a settlement, may be reported to the IRS as taxable income pursuant to the Internal Revenue Code 6050 (P) and related federal law.” 190 F. Supp. 3d 385 (M.D. Pa. 2016). Again, the court found there was a plausible § 1692e claim where there the settlement of Plaintiffs debt “could not possibly have been reportable under the relevant exceptions.” Id. See Velez v. Enhanced Recovery Co., LLC, No. CV 16-164, 2016 WL 1730721, at *1 (E.D. Pa. May 2, 2016) (holding the statement "any indebtedness of $600.00 or more, which is discharged as a result of a settlement, may be reported to the IRS as taxable income" was plausibly misleading where the settlement amount offered was less than $600 and the debtor was "given a generally applicable rule with some, but not all, of the relevant exceptions"); Kaff v. Nationwide Credit, Inc., No. 13CV5413SLTVVP, 2015 WL 12660327, at *6 (E.D.N.Y. Mar. 31, 2015) (holding the disclosure regarding 1099C reporting was misleading because it did not disclose the exceptions to such reporting); Good v. Nationwide Credit, Inc., 55 F. Supp. 3d 742, 748 (E.D. Pa. 2014) (finding that the language describing the 1099 reporting requirement could mislead the consumer into thinking she might get in trouble for discharging a debt in an amount greater than $600); Wagner v. Client Servs., Inc., No. CIV.A. 08-5546, 2009 WL 839073, at *4 (E.D. Pa. Mar. 26, 2009) (denying the motion to dismiss because discovery Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 8 of 11 Page ID #39 Page 9 11028020v1 0994140 was needed to determine how much of the underlying debt was attributable to principle); Kuehn v. Cadle Co., No. 504CV432OC10GRJ, 2007 WL 1064306, at *6 (M.D. Fla. Apr. 6, 2007), aff'd, 335 F. App'x 827 (11th Cir. 2009) (holding a letter was misleading where it implied a debtor would be penalized by the IRS for not providing a tax identification number). Unlike in the cases above, in the present matter WWR did not gratuitously mention the possibility of a 1099C reporting where no possibility of such reporting existed or fail to provide exceptions to such reporting. WWR did not mention the 1099C reporting requirements at all. There was no reference to a $600 threshold that could confuse or mislead the debtor as in Foster, Balon, Velez, Kaff, Wagner and Good. The amount of the debt was well over $600 and, therefore, a 1099C may have been required as a settlement could possibly have exceeded the $600 threshold. Further, because the language in those cases was specific to the 1099C requirement, the courts did not consider additional tax consequences such as a consumer's self- reporting requirements for any discharged indebtedness. By reading the Letter, Plaintiff was merely made aware that there could be potential tax consequences from entering into the settlement, a completely accurate statement. As the unsophisticated consumer might not even consider her taxes when entering into a settlement, the Statement did not cause intimidation or coercion, but instead made sure the consumer was making an informed decision before pursing settlement. CONCLUSION This Court should dismiss the complaint in its entirety as Plaintiff has failed to state a claim for which relief can be granted. She has failed to state a claim under the FDCPA because the Statement was not false as it accurately stated the possibility of tax consequences from a potential settlement of the underlying debt. The Statement was also not misleading or deceptive Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 9 of 11 Page ID #40 Page 10 11028020v1 0994140 because even an unsophisticated consumer would not be misled into thinking that the Statement expressed anything but information of the possibility that a settlement could result in tax consequences. Consequently, the complaint should be dismissed with prejudice. WHEREFORE, the Defendant, WELTMAN, WEINBERG & REIS CO., L.P.A., prays that this Court dismiss Plaintiff's Complaint with prejudice and award it costs of suit and attorneys' fees, and such other relief deemed just and proper. Respectfully submitted, HINSHAW & CULBERTSON LLP /s/ Vitaly Libman Vitaly Libman David M. Schultz # 6197596 dschultz@hinshawlaw.com Vitaly Libman #6313357 vlibman@hinshawlaw.com Hinshaw & Culbertson LLP 222 North LaSalle Street Suite 300 Chicago, IL 60601-1081 Telephone: 312-704-3000 Facsimile: 312-704-3001 Attorneys for Defendant WELTMAN, WEINBERG & REIS CO., L.P.A. Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 10 of 11 Page ID #41 Page 11 11028020v1 0994140 CERTIFICATE OF SERVICE I hereby certify that on January 31, 2017, I electronically filed the DEFENDANTS' MOTION TO DISMISS PURSUANT TO RULE 12(B)(6) AND MEMORANDUM IN SUPPORT with the Clerk of the Court using the CM/ECF system which will send notification to all parties of record: /s/ Vitaly Libman Case 3:16-cv-01333-NJR-SCW Document 13 Filed 01/31/17 Page 11 of 11 Page ID #42 Publication 4731 Screening Sheet for Nonbusiness Credit Card Debt Cancellation If the taxpayer is in bankruptcy, the tax return is out of scope for the VITA/TCE Programs. Instructions: Use this Screening Sheet for taxpayers with Form 1099-C resulting from cancellation of nonbusiness credit card debt and to assist in identifying taxpayers with cancellation of credit card debt issues. Publication 4731 (Rev. 10-2015) Catalog Number 52643X Department of the Treasury Internal Revenue Service www.irs.gov Credit Card Debt 1 step Did the taxpayer receive Form 1099-C, Cancellation of Debt, or other documenta- tion (if less than $600) from a creditor and is the information shown on the form or document correct? Note: The creditor is not required to issue a Form 1099-C if the canceled debt is under $600. However, the taxpayer may be required to report the canceled debt as income regardless of the amount. YES - Go to Step 2 NO - Go to Step 6 2 step Was the credit card debt related to a business? YES - Go to Step 6 NO - Go to Step 3 3 step Does box 3 of Form 1099-C show any interest or was box 6 checked to indicate bankruptcy? Note: If the bankruptcy box is not checked but the taxpayer has subsequently filed bankruptcy, answer “yes.” YES - Go to Step 6 NO - Go to Step 4 4 step Was the taxpayer insolvent immediately before the cancellation of debt? Use the Insolvency Determination Worksheet in Publication 4012 and interview the taxpayer to determine if the taxpayer was insolvent immediately before the cancel- lation of debt. YES - Go to Step 6 NO - Go to Step 5 5 step The cancellation of nonbusiness indebtedness or cancellation of debt (the amount in box 2 of Form 1099-C or an amount less than $600 provided in other documentation) must be reported as ordinary income on Form 1040, line 21 (Other Income). No additional supporting forms or schedules are required for reporting income from canceled credit card debt. 6 step This tax issue is outside the scope of the volunteer programs. The taxpayer may qualify to exclude all or some of the discharged debt. However, the rules involved are complex. Refer the taxpayer to: • www.irs.gov for the most up-to-date information. • The Taxpayer Advocate Service (TAS): 1-877-777-4778, TTY/TDD 1-800-829-4059. TAS may help if the problem cannot be resolved through normal IRS channels. • A professional tax preparer. Case 3:16-cv-01333-NJR-SCW Document 13-1 Filed 01/31/17 Page 1 of 1 Page ID #43