New York City Debt Collection Defense Attorney

FDCPA claim against Cohen & Slamowitz for failing to disclose tax implications of paying reduced amount survives motion to dismiss

In honor of tax time, we bring you a case with an interesting tax twist.

In this case, Ellis v. Cohen & Slamowitz[1], from the US District Court, Northern District of New York, defendant Cohen & Slamowitz sent three dunning letters in quick succession to the consumer plaintiff, Mr. Ellis.

The first letter, on January 12, 2009, advised Ellis that his alleged debt had been referred to Cohen & Slamowitz for collection. The first letter also included a validation notice, which stated that unless the consumer disputed the validity of the debt within thirty days, the debt would be considered valid and, if the consumer disputed any part of the dept, Cohen & Slamowitz would mail verification to him.

On January 29, 2009, Cohen & Slamowitz sent Ellis a second letter, this one titled “Tax Season Special.” The letter stated that Cohen & Slamowitz was offering him a “savings of 30% off on the outstanding balance owed on [his] account,” if he paid Cohen & Slamowitz the reduced amount, $4,490.75, before February 25, 2009. The 30% reduction would theoretically save Mr. Ellis $1,924.61.

In a third letter, also dated January 29, 2009, Cohen & Slamowitz wrote Mr. Ellis and told him “our client has authorized us to commence suit against you.” The letter made no mention of the other two letters, or their contents.

Mr. Ellis sued under the Fair Dept Collection Practice Act (FDCPA) alleging, among other claims, that the second letter, which offered the 30% “discount,” was misleading and deceptive and violated 15 U.S.C. 1692e(2), 1692e(10) and 1692f.

The gravamen of Ellis’s claim was that, in offering the “discount,” Cohen & Slamowitz had failed to inform him of the IRS provision that requires that any debt over $600 that is forgiven must be reported as income on a federal tax return.

Not surprisingly, Cohen & Slamowitz claimed that the plaintiff’s argument stretched the FDCPA beyond its intended reach, and moved to dismiss this cause of action.

The court stated that it shared Cohen & Slamowitz’s concern about whether the FDCPA was meant to cover this specific practice, but nonetheless, it denied Cohen & Slamowitz’s motion to dismiss. As noted by the court, the taxes on the amount forgiven would, in essence, diminish the actual net value of the discount offered by Cohen & Slamowitz. The court concluded that Cohen & Slamowitz’s second letter may constitute a false and misleading practice under the FDCPA, and thus the cause of action survived a motion to dismiss.

-Sheril Stanford