### In the 

# United States Court of Appeals For the Seventh Circuit

____________________ No. 17

- 2134
A MY D UNBAR , Plaintiff

- Appellant ,

v.

K OHN L AW F IRM , S.C , et al., Defendant s

- Appellee s

.

____________________ Appeal from the United States District Co urt for the Eastern District of Wisconsin

. No. 17

- CV

- 88

— William E. Duffin , Magistrate J udge

.

____________________
No. 17

- 2165
T AMMY S MITH , Plaintiff

- Appellant ,

v.

W ELTMAN , W EINBERG & R EIS C OMPANY , LPA , Defendant

- Appellee

.

____________________ Appeal from the United States District Court for the Southern District of Illinois

. No. 3:16

- CV

- 1333

- NJR

- SCW

— Nancy J. Rosenstengel , Judge

.2 No s

. 17

- 2134 & 17

- 2165

____________________
A RGUED J ANUARY 18, 2018

— D ECIDED J ULY 19, 2018

____________________

Before S YKES and H AMILTON , Circuit Judges , and L EE , District Judge. 1
S YKES , Circuit Judge

. Amy Dunbar and Tammy Smith received collection letters offering to settle their debts at a significant di scount. Both letters included the warning: “This settlement may have tax consequences.” In separate suits Dunbar and Smith claimed that this statement is misleading in violation of the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692e, becaus e they were insolvent when they received the letters and therefore would not have incurred a tax liability for any discharged debts

. The courts below rejected that argument and dismissed the suits on the pleadings

. We consolidated the appeal s and

now affi rm . The challenged statement is n ot false or misleading because “may ” does not mean “will” and insolvent debtors m ight become solvent before settling their debt, triggering the possibility of tax consequences

. I. Background In January 2016 the Kohn Law Firm, S.C., a collection law firm, sent Amy Dunbar a letter seeking to collect a debt originally owed to a bank. The letter stated that the full balance due was $4,049.08 and offered to settle the debt for $2,631.90, but warned: “NOTICE: This sett lement may have

1 Of the Northern District of Illinois, sitting by designation.Nos. 17

- 2134 & 17

- 2165 3

tax consequences.” Dunbar was insolvent when she received the letter and filed for bankruptcy six months later.
That same month Weltman, Weinberg & Reis, also a collection law firm, sent Tammy Smith a collection letter seeking to collect a consumer credit

- card debt. The letter stated that the balance due was $4,319.69 and invited Smith to
contact the law firm to discuss satisfying her debt obligation for a reduced amount . L ike Dunbar’s letter, this letter warned : “This settlement may have ta x consequences.” Smith too was in solvent when she received the letter and filed for bankruptcy two months later. Dunbar and Smith filed separate actions under § 1692e

a lleging that the collection letters were misleading because they were insolvent and the refore would not have had to pay taxes on any discharged debt

. A magistrate judge and district judge, respectively, dismiss ed the cases for failure to state a claim. See F ED

. R. C IV

. P. 12(b)(6). Both judges conclud ed that alert ing debtors that a settlemen t “may” have tax consequences i s neither false nor misleading

. II. Discussion
The FDCPA makes it unlawful for a debt collector to use

“ any false, deceptive, or misleading representation or means in connection with the collection of [a] debt.” § 1692e. A n objective “uns ophisticated consumer” standard applies to § 1692e claims : W e ask “ whether a person of modest education and limited commercial savvy would be likely to be deceived ” by the debt collector’s representation. Evory v. RJM Acquisitions Funding L. L.C. , 505 F.3d 769, 774 (7th Cir. 2007). The objective test disregards “ bizarre ” or “idiosyncratic” interpretations of collection letters

. Gr uber v. Creditors’4 No s

. 17

- 2134 & 17

- 2165

Prot. Serv

. , Inc. , 742 F.3d 271, 274 (7th Cir. 2014) ; Durkin v. Equifax Check Serv s

. , Inc. , 406 F.3d 410, 414 (7th Cir. 2005). Acollection letter can be “literally true” and still be misleading, Gonzales v. Arrow Fin. Serv s ., LLC, 660 F.3d 1055, 1062 (9th Cir. 2011)

— for example, if it “leav[es] the door open” for a “false im pression, ” Fields v. Wilber Law Firm, P.C. , 383 F.3d 562, 566 (7th Cir. 2004).
Because this is a fact

- laden inquiry, dismissal on the pleadings is proper only in “ cases involving statements that plainly, on their face, are not misleading or deceptive.” Boucher v. Fin

. Sys

. of Green Bay, Inc. , 880 F.3d 362 , 366 (7th Cir. 2018) (quotation marks omitted)

. Our r eview is de novo. Gruber , 742 F.3d at 274. To begin, the statement at issue here

— “ this settlement may have tax consequences”

— is literally true

. T he discharge of a debt is generally considered taxabl e income. 26 U.S.C. § 61(a)(1 1 ). T here are some exceptions. Relevant here, the discharge of a debt is not taxable if it occurs while the taxpayer is insolvent, meaning that h is liabilities exceed the value of h is assets. Id. § 108(a)(1) (B), (d)(3). We accept, as we must, th at Dunbar and Smith were insolvent when they received the collection letters. No matter. A general ized
statement that a debt settlement “may” have tax consequences is true on its face

. A literally true statement may be misleading if it gives a false impression

. The plaintiffs argue that th e warning has this effect for two reasons . First, they contend that a debtor might read the tax

- consequences statement to mean that if he does not pay the full balance owed , the debt collector or creditor will report h im to the IRS

. But the challenged statement says nothing whatsoever about IRS reporting, so weNos. 17

- 2134 & 17

- 2165 5

can safely disregard t hat proposed reading as “bizarre” or “idiosyncratic

. ” 2 Gruber , 742 F.3d at 274

. Second, the plaintiffs insist that a debtor might read the reference to “tax consequences” to mean that he c ould incur

a tax liability if he settle s his debt for less than the full
amount due , and t h at ’ s contextually misleading because most recipients of debt

- collection letters are insolvent and therefore would incur no tax liability fro m a discharged debt. We ’re not persuaded

. A n unsophisticated consumer would not understand the word “may” to mean “will

. ” A nd an insolvent debtor can emerge from insolvency at a ny time.
Our decision in Taylor v. Cavalry Investment , L.L.C. , 365 F.3d 572 (7th Cir. 2004), is instructive on this point

. The collection letter there stated : “ [I] f applicable, your account may have or will accrue interest at a rate specified in your
cont ractual agreement with the original creditor.” Id. at 574. For one of the plaintiff s , the account continued to accrue intere st, but for the other two, the accounts were closed and the creditors stopped adding interest. Id. The plaintiffs argu ed that the st atement was false in violation of the FDCPA because two of the creditors were no longer adding interest

. Id. at 575. We called that argument “downright frivolous” because “[t]he letter didn’t say they would [add interest] , only that they might.” Id. S imilar ly here, it is n ot misleading to say that a debtor who settles a debt may incur

2 In some situations an entity that discharges a debt must file a 1099

- C form with the IRS. 26 U.S.C. § 6050P(a). No obligation to report exists if the principal debt forgiven falls below $600. 26 C.F.R. § 1.6050P

- 1(a)(1), (d)(2)

– (3); 26 U.S.C. § 6050P(b). The reporting obligation has no bearing on this case because the law

- firm collection letters d id not mention IRS report ing

.6 No s

. 17

- 2134 & 17

- 2165

a tax liability . The use of the word “may” signals only that tax consequences are possible in the case of some debtors, not that tax consequences are possible or likely ( much less certain) in this particular debtor’s circumst ances. Further, contrary to the plaintiffs’ argument, the tax

consequences warning does not give the false impression that debtors should pay their entire debt to avoid a tax liability . The letters are invitations to settle the debt and are clearly meant to en courage the debtor to take advantage of the discount offered. A rational debtor knows that income taxes are calculated as a percentage of income , and he would likewise understand that even if the discount counts as taxable income , the benefit would still outweigh the cost

. That makes it all the more implausible that th e tax

consequences warning would dupe a debtor into paying the full debt amount. The plaintiffs rely heavily on our decision in Lox v. CDA, Ltd. , 689 F.3d 818 (7th Cir. 2012) , but that case is easily distinguished . The debt

- collection letter there stated: “Our client may take legal steps against you [,] and if t he courts award [ judgment ] , the court could allow court costs and attorney [ ’s ] fees .” 689 F.3d at 820

– 21 (emphasis added). In reality, however, an award of attorney ’s f ees was impossible because the contract between the debtor and creditor did not provide for them

. Id. at 823

– 24. We found th is statement misleading because it implied that the debt collector could do something

— file a lawsuit to recover the debt plus attorney’s fees

— that it was not authorized to do

. Id. at 824

– 25. In contrast, the tax

- consequences statement at issue here is not misleading because it d oes not imply that the debt collector may or will do something it has no authority to do

.Nos. 17

- 2134 & 17

- 2165 7

The plaintiffs also rely on Gonzales v. Arrow Financial Services , 660 F.3d 1055 (9th Cir. 2011), but that case too is distinguishable. There the debt collector was co llecting on a p ortfolio of debts that were more than seven years old and therefore obsolete, which mean t none of them could be report ed to a credit bureau. Id

. at 1059. T he collection letter stated : “Upon receipt of the settlement amount and clearance of f unds, and if we are reporting the account, the appropriate credit bureaus will be notified that this account has been settled .” Id. The debt collector’s conditional language

— “ if we are reporting the account ”

— mad e the statement literally
true. Id. at 1062. But the statement impli ed that the debt collector could report the obsolete debts to a credit bureau ; t he Ninth Circuit found that implication misleading because there w ere no circumstance s under which it could do so

. Id. at 1063. Again our case is meaning fully different. T he tax

consequences warning does not imply that the debt collector can or will take an action it has no authority to take. Another distinguishing feature i n both Lox and Gonzales is that the conditions w ere static. There was no chance tha t the contract between the debtor and creditor in Lox would be rewritten to provide for attorney’s fees. Nor was there any possibility that the old, obsolete debts in Gonzales would suddenly become reportable to a credit bureau

. Solvency, on the other hand , is fluid. An insolvent debtor may become solven t before settl ing his debt

. So it is not misleading to say that a debt settlement “may” result in a tax liability

— not only because solvent recipients may face tax consequences but also bec ause insolvent recipients like Dunbar and Smith could become solvent before settling their debt s

.8 No s

. 17

- 2134 & 17

- 2165

Y et a nother reason Lox and Gonzales do not apply here i s that a debt collector has no reason or way to know whether an individual debtor is solvent or insolvent at a given time. In contrast, t he debt collector in Lox knew ( or could easily determine ) whether the contract between the creditor and debtor allowed for attorney ’s fees , and the debt collector in Gonzales was well aware that the debts it was collecting were obsolet e and therefore not reportable to credit bureaus

. Here, in contrast , a consumer would not expect a debt collector to know h is financial status and therefore would not expect a debt

- collection letter to be specially tailored to h is particular financial circumstances, whether solvent or insolvent

. The plaintiffs also invoke a handful of district

- court decisions , but all are inapplicable or unpersuasive. In Drennan v. Van Ru Credit Corp. , 950 F. Supp. 858 , 860 (N.D. Ill. 1996), the challenged collection l etter stated : “The legal review process may

... result in a recommendation to your creditor to file a lawsuit against you.” Drennan involved a particular subsection of § 1692e that makes it unlawful for debt collectors to “threat[en] to take any action ... tha t is not intended to be taken.” Id. (citing 15 U.S.C. § 1692e(5)). The district court denied a motion to dismiss because the complaint alleged that the debt collector had no intention of recommending that the creditor sue the debtor. Id. Any comparison to Drennan is entirely inapt ; the defendant s here are not accused of making a false threat. 3

3 The plaintiffs’ reliance on Federal Trade Commission commentary is misplaced for the same reason. The commentary in question discu sses when a debt collector is permitted to threaten possible action by it or a third party. Statements of General Policy or Interpretation, Staff Com-Nos. 17

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Next, the plaintiffs point to district

- court decisions finding collection letters misleading because they generalized that the debt collector was required to report settlements to the IRS without identifying the circumstances under which no such report was necessary. See Carlvin v. Ditech Fin. LLC , 237 F. Supp. 3d 753, 758 (N.D. Ill. 2017) (“Not only did [d] efendant’s statement fail to describe the specific exceptions that might apply, it failed to acknowledge the existence of any exceptions by asserting that [d] efendant was required to report any debt forgiveness.”) (internal quotation marks omitted) ; Good v. Nationwide Credit , Inc. , 55 F. Supp. 3d 742, 746

– 47 (E.D. P a . 2014) (holding that the statement that the creditor is “ required to file a form [ 1099

- C ] with the Internal Revenue Service for any cancelled debt of $600 or more” is not entirely accurate because it fails to notify the debtor of exceptions to the reporting requirement). N either case helps

our plaintiffs. Each involved a debt

- collection letter that mischaracterized a mere possibility as a certainty . That’s not

so here . T he law

- firm collection letters merely signaled as a general matter that tax consequences are a possib ility

. There’s nothing misleading about that. Finally , the plaintiffs hang their hat on Sledge v. Sands , 182 F.R.D. 255 (N.D. Ill. 1998). The collection letter there stated : “ [ U ] nder certain circumstances , cancellation or discharge of [a] debt may be considered income” by the IRS and state taxing authorities. Id. at 257 (emphase s added). The district court held that if a majority of debtors receiv ing th is

mentary on the F DCPA, 53 Fed. Reg. 50097, 50106 (Dec. 13, 1988). The statement in question here simply warn s that a settlement “may” have tax consequences; it does not say or imply that the debt collector or a third party may take an action against the debtor.10 No s

. 17

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- 2165

letter would not realize income for the discharged debt, then the st atement created a misleading impression in violat ion of the FDCPA. Id. at 260. Th is reasoning r ests on the f aulty assumption that a debtor receiving this letter would ignore the phrase “under certain circumstances” and mi sconstrue “may” to mean “will.” We do not find Sledge persuasive

. 4 In short, the § 1692e claims were properly dismissed on the pleadings . The tax

- consequen ces warning is literally true and not misleading under the objective “unsophisticated consumer” test

. A FFIRM ED

.

4 The plaintiffs also analogize to several FTC Act cases from the 1950s and 1960 s challenging deceptive advertisements promoting cure s for baldness and fatigue. See, e.g., Erickson v. FTC , 272 F.2d 318, 319

– 21 (7th Cir. 1959) ( involving an ad falsely claim ing “without qualification” that a product would cure baldness ); J.B. Williams Co. v. FTC , 381 F.2d 884, 890

– 91 (6th Cir. 1967) (involving an ad falsely claiming that a treat ment would cure fatigue in most cases); Keele Hair & Scalp Specialists, Inc. v. FTC , 275 F.2d 18, 19

– 20 (5th Cir. 1960) ( involving a s imilar ad falsely claiming that a product would cure baldness in 95% of cases ). These cases are irrelevant here. The collection letters in this case did not falsely claim that a debt settlement would result in tax liability in most or many

cases.