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Dunbar v. Kohn Law Firm SC

United States District Court, E.D. Wisconsin

May 5, 2017

AMY DUNBAR, Plaintiff,
KOHN LAW FIRM SC, et al., Defendants.


          WILLIAM E. DUFFIN, U.S. Magistrate Judge

         I. Procedural History

         Plaintiff Amy Dunbar filed this lawsuit on January 19, 2017, alleging violations of the Fair Debt Collection Practices Act (FDCPA). (ECF No. 1.) On February 14, 2017, the defendants, Encore Capital Group Inc., Kohn Law Firm SC, Midland Credit Management Inc., and Midland Funding LLC, moved to dismiss the complaint. (ECF No. 17.) Dunbar filed an amended complaint on March 7, 2017 (ECF No. 21), and the defendants moved to dismiss it on March 21, 2017 (ECF No. 22). Dunbar responded to the most recent motion to dismiss (ECF No. 24) and the defendants replied (ECF No. 26). The motion is ready for resolution. All parties have consented to the full jurisdiction of a magistrate judge. (ECF Nos. 19, 20.) The court has jurisdiction pursuant to 28 U.S.C. § 1331.

         II. Facts

         On January 29, 2016, Kohn Law Firm sent Dunbar a debt collection letter on behalf of Midland Funding. (ECF No. 21, ¶ 27.) The letter stated that the amount owed was $4, 049.08 but offered to settle the debt for $2, 631.90. (ECF No. 21, ¶¶ 28, 29.) The letter also stated, “NOTICE: This settlement may have tax consequences.” (ECF No. 21, ¶ 30; see also ECF No. 21-1 (debt collection letter).)

         According to Dunbar, “Referring to tax consequences in a collection letter is intimidating and misleading, suggesting to the unsophisticated consumer that failure to pay the debt will give rise to problems with the Internal Revenue Service (‘IRS').” (ECF No. 21, ¶ 41.) She asserts that it suggests that, “[u]nless the consumer pays the entire amount that the defendant alleges is owed on the alleged debt, the consumer could be reported to the IRS” and “[u]nless the consumer pays the entire amount the letter alleges is owed for the debt, the consumer is going to have to pay taxes on the unpaid balance.” (ECF No. 21, ¶ 42.) She further alleges that there are various ways under the Internal Revenue Code by which a person may discharge a significant debt without it resulting in “tax consequences.” (ECF No. 21, ¶¶ 34-40.) For example, if the debtor is insolvent, no taxable income results from discharge. (ECF No. 21, ¶ 37.) Also, reporting is not required of the discharge of a debt that constitutes interest or other non-principal or of the discharge of principal of not more than $600. (ECF No. 21, ¶ 35.)

         Dunbar alleges that the defendants “violated 15 U.S.C. §§ 1692e, 1692e(2) and 1692e(10) by representing in [the letter] that ‘This settlement may have tax consequences.'” (ECF No. 21, ¶ 45.)

         III. Motion to Dismiss

          “To state a claim, a complaint must first provide ‘a short and plain statement of the claim showing that the pleader is entitled to relief.'” Bonnstetter v. City of Chi., 811 F.3d 969, 973 (7th Cir. 2016) (quoting Fed.R.Civ.P. 8(a)(2)). “A pleader's responsibility is to state a claim for relief that is plausible on its face.” Huri v. Office of the Chief Judge of the Circuit Court of Cook Cnty., 804 F.3d 826, 832-33 (7th Cir. 2015). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-57 (2007)). In deciding a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim the court may consider only the pleadings. See Rule 12(d). The pleadings here include the amended complaint and the letter Dunbar appended to it. Williamson v. Curran, 714 F.3d 432, 436 (7th Cir. 2013); see also Fed. R. Civ. P. 10(c) (“ A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes.”). The court accepts all well-pleaded facts in the amended complaint as true and draws all reasonable inferences in favor of the non-moving party. Huri, 804 F.3d at 832-33.

         IV. The Fair Debt Collection Practices Act

The purposes of the FDCPA are “to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.” 15 U.S.C. § 1692(e). To accomplish those purposes, the Act provides in sweeping terms: “A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.” 15 U.S.C. § 1692e.

Pantoja v. Portfolio Recovery Assocs., LLC, 2017 U.S. App. LEXIS 5432, 5-6 (7th Cir. Mar. 29, 2017).

         V. Analysis

         The discharge of a debt constitutes gross income under the Internal Revenue Code. 26 U.S.C. § 61(a)(12). If the discharge is of $600 or more, the discharging entity must file a 1099-C with the IRS. 26 U.S.C. § 6050P; 26 C.F.R. § 1.6050P-1. “[I]ndebtedness means any amount owed to an applicable entity, including stated principal, fees, stated interest, penalties, administrative costs and fines.” 26 C.F.R. § 1.6050P-1. However, a discharging creditor is not required to report “[t]he discharge of an amount of indebtedness that is interest ….” 26 C.F.R. § 1.6050P-1(d)(2). There are other exceptions to the general requirement that creditors discharging debts greater than $600 must report those discharges to the IRS. 26 C.F.R. § 1.650P-1(d). Regardless of whether the creditor is required to report the discharge by way of a 1099-C, the debtor may be required to report the discharge as income. See IRS Publication 4731, Screening Sheet for Nonbusiness Credit Card Debt Cancellation, available at (last visited May 5, 2017). However, there are exceptions, including if the debtor is insolvent immediately before the discharge of the ...

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