Fair Debt Collection Practices Act and the ‘Overshadowing’ Demand Letter – Part II of II

Part II – 5.5.14 12:14 p.m.

In Vincent v. Chuhak & Tecson 2014 WL 1612697 (N.D.Ill. 2014) the Court denied the Firm’s motion to dismiss the plaintiffs’ FDCPA claims because it was at least plausible that the Firm’s demand letter was confusing and contradictory to the “unsophisticated consumer.”  All that’s required for a plaintiff to survive a Rule 12(b)(6) motion is that a Complaint allege facts that plausibly state a valid claim. 

The Court first noted that Section 1692g of the Act requires a debt collector, within five days of initial communication with a consumer, to provide a written “validation notice.”  The validation notice must contain (1) a statement that unless the consumer disputes the validity of the debt within 30 days after receipt of the notice, the debt will be assumed valid; and (2) a statement notifying the consumer that if he disputes the debt in writing within that 30-day period, the debt collector will obtain verification of the debt and mail a copy of it to the consumer.  The FDCPA cautions that collection activities and communications must not “overshadow” or be “inconsistent” with the disclosure requirements of the validation notice. 15 U.S.C. § 1692g(b); Vincent, *1.

In determining whether a creditor’s demand letter satisfies the FDCPA’s validation strictures, the court applies the “unsophisticated consumer” standard.  Whether a demand letter is confusing under the unsophisticated consumer standard is a fact-based inquiry decided on a case-by-case basis.  But if it’s plain from a reading of the demand letter that a significant fraction of the population wouldn’t be misled, the demand letter complies with the FDCPA.

The Northern District held that the Firm’s demand letter was confusing because there was an “apparent” contradiction between (a) allowing the unit owner to contest the validity of the debt, and (b) simultaneously stating that if the unit owner didn’t pay within 30 days, his right to possession of the condo would end. Vincent, *2-3. 

What Should Have the Demand Letter Said?

The Firm’s demand letter would satisfy the FDCPA if it included “safe harbor” language that explained the letter’s apparent inconsistencies.  The model “safe harbor” language suggested by the Seventh Circuit (a so-called “Bartlett letter”) provides that (1) the creditor doesn’t have to wait until the end of the thirty-day period before suing to collect this debt; but (2) if the debtor requests proof of the debt or of the name and address of the original creditor within that thirty-day period, (3) the creditor must suspend its collection efforts, and stop any litigation based on the debt.  Vincent, *3; Bartlett v. Heibl, 128 F.3d 497 (7th Cir. 1997).

The Court also rejected the Firm’s argument that the letter complied with the FDCPA because the 30-day letter was required by the Illinois Forcible statute.  735 ILCS 5/9-104.1 (30-demand notice on delinquent unit owner  requirement).  The Court held that when sending a demand letter to a debtor, the Firm still has a duty under the FDCPA to explain how the debt collector’s rights fit with the consumer’s.  And since the Firm failed to do this (reconcile the creditor’s and consumer’s rights), the Firm’s demand letter violated the Act and the plaintiffs’ FDCPA claims survived dismissal.

Notes: The case provides some much-needed guidance on the contents of a proper demand letter under the FDCPA in a delinquent condo assessment case.  In my practice, I always recommend that my association (or landlord) clients serve the 30-day (or 5-day) notice.  That way, the unit owner or tenant can’t claim a FDCPA violation since the landlord likely won’t qualify as a “debt collector” under the FDCPA (i.e. the landlord’s main business is renting properties; not collecting debts).  

Shocking! The Company That Owes You $ Dissolved: The Illinois Corporate ‘Survival’ Statute

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The Illinois corporate “survival” statute, 805 ILCS 5/12.80, allows a plaintiff to sue a dissolved corporation for up to five years after the corporation’s existence ends.  So, if a corporation was dissolved on April 29, 2014, a plaintiff who had a claim against the corporation prior to April 29, 2014, has through April 29, 2019 to file suit against that dissolved corporation. 

Any recovery would attach to corporate (as opposed to individual shareholder) assets.  And because the survival act is a legislative creation, its timing requirements are strictly construed and only relaxed in limited circumstances. 

The five-year claims period tries to strike a balance between protecting injured plaintiffs and setting a definite chronological end point for a dissolved corporation’s liability.

Michigan Indiana Condominium Association v. Michigan Place, LLC, 2014 IL App (1st) 123764 presents a recent example of a court’s rigid application of and the harsh results flowing from the five-year corporate survival period in a construction dispute involving various contractors.

In 2011, the plaintiff sued the general contractor for latent defects nine years after construction was complete.  The general contractor in turn filed third-party contribution claims against two masonry subcontractors in 2012.  Both subcontractor defendants were long defunct.  One subcontractor dissolved in 2003; the other, in 2006. 

The subcontractors moved to dismiss the general contractor’s claims under Code Section 2-619, arguing that the claims were time-barred since they were filed (in 2012) after the five-year survival period expired.  The trial court agreed and dismissed the contractor’s third-party claims.

Held: Affirmed.

In upholding the trial court’s dismissal of the general contractor’s third-party complaint, the First District stated the governing corporate law principles: 

– A corporation only exists under the express laws of the State in which it was created; 

– The right to sue a dissolved corporation (and the right of a dissolved corporation to sue) is limited to the time established by the legislature;

 – Corporation dissolution has the same legal effect as the death of a natural person;

 – Corporate survival actions are based on the legislative determination that corporate creditors should be able to sue a dissolved corporation and apply any corporate property to the debt;

 – Once the five-year survival period lapses, the corporation’s “life” also ends and no lawsuit can be filed against the corporation after the survival period expires;

– A dissolved corporation can be served with process through the Illinois Secretary of State (805 ILCS 5/1.01)

(¶¶ 12-13).

In certain situations, courts have relaxed the five-year survival period for public policy reasons.  Key exceptions to the five-year rule concern (1) actions involving minor plaintiffs; and (2) where there is an element of corporate misconduct and resulting unfairness.  (¶¶ 18-21).

  Here, since neither exception applied, the Court held that the survival act’s plain language dictated dismissal of the contractor’s third-party complaint.

 The Court recognized that barring the contractor’s claims was harsh since the contractor’s right to sue expired before it even knew it had claims against the defunct subcontractors. 

Yet because the statutory language was clear, the Court held that it was required to strictly apply the five-year survival rule and time-bar the contractor’s third-party action. (¶¶ 22-23). 

To bolster its decision, the Court noted that in legal and medical malpractice cases, courts strictly apply statutory repose periods (4 years for medical malpractice; 6 years for legal malpractice) that often doom injured plaintiff’s cases.  (¶ 24).  This gave the Court added precedential support for its rejection of the contractor’s third-party claims. 

Take-away: This case presents a good summary of the philosophical underpinnings and statement of the law governing actions by and against dissolved corporations.

Michigan Place also underscores that extending or relaxing a repose or survival period is a legislative (not a judicial) function.

‘Perpetual’ Sales Distribution Contract Is Terminable At Will; It’s Too Indefinite

 

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The First District recently considered whether a contract that could only be ended on both parties’ written consent was too indefinite and “perpetual” to be enforceable.  In Rico Industries v. TLC Group, Inc., 2014 IL App (1st) 131522, the parties entered into a sales contract where plaintiff would sell products to Wal-Mart through defendant – the retailing monolith’s exclusive distributor.  The agreement could only be terminated by the parties’ mutual agreement.  About five years into the contract, the plaintiff decided to sever the relationship and filed a declaratory judgment action seeking a court ruling that the contract was too indefinite to be enforced.  Defendant  countered by filing a motion for judgment on the pleadings that the contract was enforceable and also sought money damages for sales commission it claimed it was owed from the plaintiff.  The trial court agreed with the defendant distributor and entered judgment in its favor.  Plaintiff appealed.

Held: reversed.  Contract that can only be terminated on consent of both parties is too indefinite to be enforced.  The contract is terminable at will.

Q: Why?

A: In Illinois, perpetual contracts violate public policy because they are too indefinite.  A private contract will not be declared void and against public policy unless it clearly violates the constitution, Illinois statutes or caselaw or if the contract is injurious to the public welfare.  Rico, ¶¶ 15-17.  And even though Illinois safeguards freedom of contract, contracts of indefinite duration are terminable at the will of the parties because perpetual contracts are disfavored.  (¶¶ 18-19).

The courts’ stated reason for invalidating perpetual contracts is because “forever is a long time” and that businesses don’t stay viable for very long.  Because of the short shelf-life of many commercial enterprises, never-ending contracts violate Illinois public policy, which prefers contracts with definite start and ending dates.  A contract without a specific end date or terminating event, could conceivably never end.  (¶¶ 27-34).

Take-away: A good result for those that like contractual certainty.  The case’s lesson is that contracts should have a specific start and end date to avoid future disputes of enforceability and definiteness.  Rico also illustrates that contracts with permissive, equivocal termination provisions will likely be deemed perpetual and therefore void on public policy grounds.  Prudent contract drafting dictates that parties should formalize start dates, end dates, as well as termination methods and events.

 

 

 

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