The FTC recently released its 162-page report entitled "The Structure and Practices of the Debt Buying Industry" which describes a comprehensive study conducted by the FTC over a three-year period using data obtained from the nation’s largest debt buyers. Many will view the Report as another chance to engage in debt buyer bashing, which has become a favorite pastime for mainstream media and consumer advocates.
A close read of the Report, however, reveals that it contains absolutely zero evidence that any debt buyer has engaged in any of the headline-grabbing collection abuses that we always read about. There was no evidence presented that any of the debt buyers used inaccurate information when collecting debts, no evidence that they have sued or threatened to sue anyone on time-barred debts, and no evidence regarding the validity of any dispute raised by any consumer. When you finish reading the Report, you may be tempted to ask yourself: "Where’s The Beef??"
• No Evidence That Debt Buyers Use Inaccurate Information.
There is absolutely zero evidence contained in the Report that any debt buyer has purchased or used inaccurate data in the collection process. Indeed, the FTC expressly and repeatedly admits this at multiple places in the Report, making clear that it did not attempt to assess the accuracy of any of the data used by debt buyers. In the Introduction to the Report, for example, the FTC says: "Another limitation of the study is that the FTC did not directly assess the accuracy of the information that debt buyers used in collecting purchased debts or filing lawsuits on this debt." See Report at 2.
Later, when discussing the purchase and sale agreements that are largely drafted by debt sellers, the FTC concedes the point again, stating: "As noted above, contracts commonly stated that debts were sold ‘as is and with all faults.’ However, the fact that debts were generally sold ‘as is’ does not necessarily mean that errors or inaccuracies were or were not prevalent. The study did not test the accuracy of the information conveyed by debt sellers to debt buyers. Accordingly, the study does not permit any conclusions to be drawn as to the prevalence of errors or inaccuracies in debts generally sold ‘as is.’" Report at 25 (emphasis added).
When discussing the data that debt buyers receive from sellers, the FTC emphasized that the data provided absolutely no evidence that debt buyers obtained or used inaccurate information, stating: "The data the FTC obtained and analyzed, however, are subject to two important limitations. First, the data evaluated did not include information about debt collection litigation actions, and, therefore, the Commission can neither make findings nor offer conclusions as to the sufficiency and accuracy of information debt buyers have or offer in connection with matters in litigation. Second, the study did not directly evaluate the accuracy of the information that debt buyers obtained but instead focused on what types of information debt buyers obtained, as well as when and how they obtained it." Report at 34 (emphasis added).
In other words, even though the FTC spent three years analyzing debt buyer data from thousands of portfolios containing nearly 90 million consumer accounts, the FTC Report does not identify a single instance where a debt buyer purchased or used inaccurate data.
No Evidence That Debt Buyers Sue Or Threaten To Sue On Time-Barred Debt
Although the FTC repeated its concern that "consumers will be subject to a default judgment on a time-barred debt" the Report itself provides zero evidence that this has occurred. None of the data supplied by the debt buyers established that they had threatened to file suit or had actually filed suit on debts after the statute of limitations expired. In fact, the FTC never asked the debt buyers to provide information on this point. This is expressly conceded in the Report, which states: "The information the FTC received in response to its 6(b) orders did not permit the agency to assess how often debt buyers filed actions in court to recover on debts that were beyond the statute of limitations or the effect of such actions on consumers." Report at 46.
No Evidence Of The Validity Of Any Consumer Dispute
The report makes much of the fact that there is a 3.2% consumer dispute rate on debt buyer accounts, which translates into one million disputes per year. But the FTC did not perform any type of qualitative analysis of those disputes in order to determine whether they had any merit. Consumers who actually owe their debts may dispute them for a variety of reasons, including because they do not remember the account, they do not recognize the name of the debt buyer, they have ignored the power of compounding interest, or because the cannot pay or simply want to delay paying debts that they know they owe. Thus, although the Report tracks the dispute rate, it says nothing about whether any of the consumers do, or do not, owe the amount that the debt buyers were seeking to collect. And, as previously noted, the Report could not make this type of assessment, because it made no attempt to determine if the debt buyers’ data about what was owed was accurate or inaccurate.
The FTC Report actually includes a few passages that are helpful to debt buyers. For example, the FTC acknowledges the important role that debt collection plays in the economy, stating: "Like other contracts, credit contracts are of little value if the parties cannot enforce them. . . . Debt collection reduces the amounts that creditors lose from debts, both directly (by collecting on the debts) and indirectly (by making it more likely that consumers will incur debt only if they can and will repay it). By reducing the losses that creditors incur in providing credit, debt collection also allows creditors to provide more credit at lower prices – that is, at lower interest rates." Report at 11.
In addition, although media reports often emphasize that debt buyers pay "pennies on the dollar" for the accounts, suggesting they must make super-competitive profits, the Report points out the fallacy of this logic. The debt buyers paid on average 4 cents a dollar for the accounts that were analyzed for the Report, but the FTC noted these prices do not guarantee high profits, stating: "It is important to note, however, that although the price paid by debt buyers for debts is low relative to their face value, it does not necessarily follow that the profit from collecting on those debts will be high. First, debt buyers do not recover the face value of all of the debts that they purchase. Debt buyers typically do not attempt collections on all accounts they purchase, do not usually realize recoveries on every account for which collections are attempted, and do not typically recover the full face value on accounts for which they do realize recoveries. Second, debt buyers, like any other debt collectors, also incur substantial costs in collecting on debts." Report at 23.
The FTC Report should be read and understood in its proper context. It simply does not provide any evidence that any debt buyer has engaged in any improper collection practices.
Tuesday, February 5, 2013
Wednesday, December 12, 2012
Fighting FDCPA Class Actions: Challenging The Adequacy Of The Class Representative
The number
of class actions filed against the credit and collection industry continues to
rise, and FDCPA class actions remains a favorite among consumer attorneys. Although it is easy for a consumer to file a
class action, getting a class certified is no walk in the park. The consumer bears the burden of proving that
all of the requirements of Rule 23 of the Federal Rules of Civil Procedure have
been satisfied, and this includes proving that they are an adequate class
representative. When faced with an FDCPA
class action, collectors should not overlook potential challenges to the class
representative. An early and thorough
assessment of the named plaintiff in an FDCPA class action could provide a key
to your defense.
Before focusing on the adequacy
requirement, here’s a brief overview of the standards governing class
actions. Remember that when a motion for
class certification is filed, the consumer has the burden of proof. The Court must deny the motion unless the
consumer can provide evidence to satisfy all four elements of Rule 23(a) of the
Federal Rules of Civil Procedure, and at least one of the subsections of Rule
23(b). See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 614 (1997). The consumer has the burden of “affirmatively
demonstrat[ing] compliance with the four prerequisites of Rule 23(a).” Bennett
v. Nucor Corp., 656 F.3d 802, 814 (8th Cir. 2011). The consumer’s adequacy to serve as class
representative is one of the four requirements of Rule 23(a).
With this background, let’s focus on the adequacy requirement more specifically. What exactly does it take to be an adequate class representative? Rule 23(a)(4) of the Federal Rules of Civil Procedure provides that a consumer must show “that the representative parties will fairly and adequately protect the interests of the class.” What does this mean? The Supreme Court has held that the adequacy analysis of Rule 23(a) “serves to uncover conflicts of interest between named parties and the class they seek to represent.” Amchem Prods., Inc., 521 U.S. at 625. For this reason, a court should deny certification if the named class representative is subject to a unique defense that may distract from the litigation. See Hanon v. DataProds. Corp., 976 F.2d 497, 508 (9th Cir. 1992) (denying class certification; “Hanon’s unique background and factual situation require him to prepare to meet defenses that are not typical of the defenses which may be raised against other members of the proposed class.”).
Experienced consumer attorneys often
have a standard motion for class certification that they use in every
case. But the court cannot simply rubber
stamp a consumer’s motion and certify the class. The Supreme Court has held that no class may
be certified until the district court conducts a “rigorous analysis” of the
evidence to determine if it supports each element of Rule 23. See
General Tel. Co. Of Southwest v. Falcon, 457 U.S. 147, 161 (1982)
(reversing certification order: class action “may only be certified if the
trial court is satisfied, after a rigorous analysis, that the prerequisites of
Rule 23(a) have been satisfied.”); see
also Zinser v. Accufix Research Institute, Inc., 253 F.3d 1180, 1186 (9th
Cir. 2001) (affirming denial of certification:
“Before certifying a class, the trial court must conduct a ‘rigorous
analysis’ to determine whether the party seeking certification has met the
prerequisites of Rule 23. (citation).”); Avritt
v. Reliastar Life Ins. Co., 615 F.3d 1023, 1029 (8th Cir. 2010) (affirming
denial of certification: “In making its
determination, the district court must undertake a ‘rigorous analysis’ that
includes examination of what the parties would be required to prove at
trial.”).
Consumer attorneys often argue that
the merits of their claim should not be considered in the context of a motion
for class certification. But the Supreme
Court has recognized that the “class determination generally involves
considerations that are enmeshed in the factual and legal issues comprising the
plaintiff’s cause of action,” and that “sometimes it may be necessary for the court
to probe behind the pleadings before coming to rest on the certification
question.” Falcon, 457 U.S. at 160 (citations omitted). The Supreme Court recently reiterated this
point, and emphasized that “Rule 23 does not set forth a mere pleading standard,”
but rather, “[a] party seeking class certification must affirmatively
demonstrate his compliance with the Rule – that is, he must be prepared to
prove that there are in fact
sufficiently numerous parties, common questions of law or fact, etc.” Wal-Mart
Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2550-52 (2011) (citation
omitted).
With this background, let’s focus on the adequacy requirement more specifically. What exactly does it take to be an adequate class representative? Rule 23(a)(4) of the Federal Rules of Civil Procedure provides that a consumer must show “that the representative parties will fairly and adequately protect the interests of the class.” What does this mean? The Supreme Court has held that the adequacy analysis of Rule 23(a) “serves to uncover conflicts of interest between named parties and the class they seek to represent.” Amchem Prods., Inc., 521 U.S. at 625. For this reason, a court should deny certification if the named class representative is subject to a unique defense that may distract from the litigation. See Hanon v. DataProds. Corp., 976 F.2d 497, 508 (9th Cir. 1992) (denying class certification; “Hanon’s unique background and factual situation require him to prepare to meet defenses that are not typical of the defenses which may be raised against other members of the proposed class.”).
What about a consumer that cannot
remember anything during their deposition?
Or a consumer with poor credibility?
They will not make a strong class representative. Courts have denied certification in FDCPA
actions where the class representative lacks credibility or has a bad memory. See,
e.g., Savino v. Computer Credit, Inc., 164 F.3d 81, 87 (2d Cir. 1998)
(FDCPA class representative not credible: “The fact that Savino offered
differing accounts about the letters that form the very basis for his lawsuit
surely would create serious concerns as to his credibility at any trial.”); Dotson v. Portfolio Recovery Assocs., LLC,
2009 WL 1559813, **3-4 (E.D. Pa. June 3, 2009) (FDCPA plaintiff gave false
testimony and had a bad memory: “Because plaintiff is unable to provide
credible testimony, he cannot adequately protect the interests of absent
members of the proposed class.”).
How about a consumer who does not
know what claims she is pursuing and has no idea what is happening in the
litigation? She won’t make a good class
representative either. Courts have
denied certification where the class representative is not familiar with the
claims asserted, has not been actively involved in the litigation, or has
delegated the entire case to their attorneys for handling. See, e.g., Levine v. Berg, 79 F.R.D. 95, 98 (S.D.N.Y. 1978)
(“Plaintiff's deposition testimony reveals an alarming adversity to unearthing
the facts relevant to her claim, as well as a total reliance on her counsel, to
whom she ‘gave . . . the case and . . . figured whatever he had to do, he
did.’”); Burkhalter Travel Agency v. MacFarms
Int’l, Inc., 141 F.R.D. 144, 154 (N.D. Cal. 1991) (class representative
could not identify defendants and was unfamiliar with scope of class he
represented: “As plaintiff’s counsel would be acting on behalf of an
essentially unknowledgeable client, certifying a class with Specialty as its
representative would risk a denial of due process to the absent class
members.”); Efros v. Nationwide Corp.,
98 F.R.D. 703, 707-08 (S.D. Ohio 1983) (plaintiff gave “unfettered discretion”
to her attorneys and her deposition revealed “glaring lack of familiarity with
the facts of this litigation”); Lubin v.
Sybedon Corp. 688 F. Supp. 1425, 1462 (S.D. Cal. 1988) (class
representative’s unfamiliarity with case was “alarming” where he testified, inter alia, that “he had never read or
seen either the original complaint or the amended complaint, that he did not
even recognize the names of many of the defendants, [and] that he
misunderstands the nature of the complaint’s fraud allegations”); Kelly v. Mid-America Racing Stables, Inc.,
139 F.R.D. 405, 409 (W.D. Ok. 1990) (“these plaintiffs are inadequate
representatives because of their almost total lack of familiarity with the
facts of their case. Indeed, what the plaintiffs know appears to come entirely
from their counsel.”).
In sum, do not assume that the
consumer who has sued you can adequately represent the class. Collectors faced with FDCPA class actions
should conduct an early and continuing assessment of whether the case can meet
all of the requirements of Rule 23. During
this process, they should not forget to develop evidence relating to the
adequacy of the class representative.
Not everyone will qualify.
Thursday, August 16, 2012
The CFPB's Plans For The Collection Industry
If you are a collection professional working
for a creditor, debt buyer, collection agency or collection law firm, and you
have not yet added the website for the Consumer Financial Protection Bureau (CFPB) to the favorites on
your web browser, it is high time that you do so. The CFPB has been publishing lots of
information this year, and has laid out some details of how it plans to
directly or indirectly regulate virtually all aspects of the collection
industry. This article is hardly
comprehensive, but here are a few highlights.
On February 17, 2012, the CFPB published its Proposed Rule
Defining Larger Participants in Certain Consumer Financial Product and Service
Markets. Entities in the debt collection market that
generate $10 million in annual receipts from consumer collection activities
would be deemed a “larger participant” in the market. This “larger participant” designation would subject
those entities to direct supervision by the CFPB. The Bureau estimated that approximately 175
collection entities would qualify as “larger participant” under the Proposed
Rule. As of the date of this writing,
the CFPB has not published a Final Rule relating to larger participants in the
debt collection market. If your company
does not meet the $10 million “larger participant” threshold, however, you
should not feel left out in the cold.
The CFPB has several other methods that it plans to employ to supervise or
otherwise regulate members of the collection industry, and some of them are
discussed below.
On March 20, 2012, the CFPB issued its first Annual Report to
Congress on the Fair Debt Collection Practices Act. In it, the CFPB explains that it now has
primarily responsibility for administering the FDCPA, including rulemaking and
supervisory authority, and that it now shares overall enforcement authority
with the FTC and other federal agencies.
The CFPB emphasizes its belief that “consumer complaint data provides
useful insight into the acts and practices of debt collectors” and that it will
continue the FTC’s practice of gathering consumer complaints about members of
the collection industry through its website, via telephone, mail, faxes and by
referral from other agencies.
On April 13, 2012, the CFPB released its Bulletin 2012-03
relating to Service Providers. In
it, the CFPB explains its position that it not only has the power to supervise
and examine banks and non-banks, but it also may supervise and examine “service
providers” for those entities. A
“service provider” is any entity that “provides a material service to a covered
person in connection with the offering or provision by that person of a
consumer financial product or service.”
It therefore appears that the CFPB believes that it has the power to
supervise and examine virtually any entity operating in the consumer collection
industry. In addition, the CFPB makes
clear in the Bulletin that it expects all supervised banks and nonbanks to
ensure that their service providers implement effective processes to comply
with all statutes and regulations governing the collection process to avoid
unwarranted risks to consumers. Thus,
the CFPB expects supervised entities to conduct due diligence on all service
providers to ensure they understand and can comply with the laws, to review the
compliance policies and procedures used by their service providers and their
training and oversight practices, to include contractual provisions with
service providers designed to ensure compliance, to establish monitoring
processes designed to determine compliance by service providers, and to take
prompt action, including termination, to address any problems identified by the
monitoring process.
On May 25, 2012, the CFPB published its Proposed Procedural
Rules to Establish Supervisory Authority Over Certain Nonbank Covered Persons
Based on Risk Determination. Here, the CFPB
sets out the method by which it will supervise any nonbank covered person who
the Bureau has reasonable cause to believe “is engaging, or has engaged, in
conduct that poses risks to consumers” in connection with consumer financial
products or services. Generally
speaking, the CFPB will serve the company with a notice explaining why it has
reasonable cause to believe the company presents a risk to consumers. If the company disagrees, it will have 20
days to file a written response under penalty of perjury explaining why it
feels the CFPB is mistaken and why it should not be subject to
supervision. The response must be
accompanied by all records and documents that support the company’s position. The company may also make a request for the
opportunity to supplement that response verbally. In the alternative, the company can simply
agree to consent to supervision by the CFPB.
It seems clear that the consumer complaints that the CFPB plans to
compile concerning members of the collection industry will be the genesis for
the CFPB’s determination of its “reasonable cause to believe” that an entity
presents risks to consumers.
If you have been worried about how your
attorney-client privileged documents are going to be handled when the CFPB has
arrived, keep worrying. On July 5, 2012,
the CFPB issued its Final Rule on
Confidential Treatment of Privileged Information. In it, the CFPB makes clear that if it asks a
supervised or regulated entity for documents or information – even if it “may
be subject to one or more statutory or common law privileges, including the
attorney-client privilege and attorney work product protection” – it will
expect the documents and information to be produced. The CFPB claims that you should not worry
about this, however, because in its opinion, giving privileged documents and
information to the CFPB will not result in a waiver of the attorney-client
privilege. It is unclear whether the
CFPB is correct on this point, however, and legislation designed to clarify the
issue has not been passed as of the date of this writing. The CFPB also states that it will not
“routinely” share the confidential information it gets from you with law
enforcement agencies, including State Attorneys General, but that it reserves
the right to do so in some circumstances.
It should be clear that debt collection will
be a major focus of the CFPB now that the agency is up and running. Collection professionals should watch for
more CFPB rules, guidance, enforcement actions and other developments in the
coming months.
Saturday, June 9, 2012
Only "Material" Disputes Support A Claim Under Section 1692e(8) Of The FDCPA
When a consumer disputes their debt, an accepted and conservative practice is for the data furnisher to promptly report the dispute to the consumer reporting agencies. But under what circumstances will the failure to report a dispute give rise to a violation of section 1692e(8) of the FDCPA? For example, what if a consumer or their attorney simply calls or writes and states "I dispute this" without providing the collector with any substantive information regarding the basis for the dispute? Does the collector violate section 1692e(8) if it fails to report that "dispute" to the consumer reporting agencies? The answer must be "no." Where a consumer has not identified any legitimate basis for disputing their responsibility for the debt as reported by the collector, a blanket statement that they "dispute" the debt, without more, is not sufficient to support a section 1692e(8) claim.
The FDCPA is sometimes referred to as a "strict liability" statute, but this is not entirely true. There are a number of provisions of the Act – and section 1692e(8) is one of them – which require a consumer to provide evidence of knowledge or intent by the collector. Section 1692e(8) prohibits a collector from communicating or threatening to communicate false credit information to any person, but only where the collector knows or should know that the credit information is false. See 15 U.S.C. § 1692e(8) (prohibits the collector from: "Communicating or threatening to communicate to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.").
The knowing failure to communicate that a "disputed" debt is disputed is a violation of section 1692e(8). Id; see also Brady v. The Credit Recovery Co., 160 F.3d 64, 67 (1st Cir. 1998) (section 1692e(8) "requires a debt collector who knows or should know that a given debt is disputed to disclose its disputed status to persons inquiring about a consumer's credit history.") (emphasis added); Sunga v. Rees Broome, 2010 WL 1138319, *4 (E.D. Va. Mar.18, 2010) (dismissing section 1692e(8) claim: "Under the express terms of § 1692e(8), Plaintiff must allege sufficient factual allegations supporting the finding that Defendant knew or should have known that the debt amount as stated in the demand letter was false.").
Thus, if the collector knows that the debt is subject to a true "dispute" it may not knowingly transmit "false" credit information about the debt to consumer reporting agencies. But what exactly would make the credit information "false" within the meaning of the FDCPA? We know that not all "false" statements by a collector will violate the FDCPA. To the contrary, courts around the country have recognized that an allegedly false or misleading statement does not violate the FDCPA unless the statement is "material." See, e.g., Donohue v. Quick Collect, Inc., 592 F.3d 1027, 1033-34 (9th Cir. 2010) (no violation of sections 1692e and 1692f of the FDCPA where collection complaint sought correct amount of debt, even though the elements comprising the total were not accurately described); Hahn v. Triumph Partnerships LLC, 557 F.3d 755, 757-58 (7th Cir. 2009) (letter that accurately stated total amount due did not violate sections 1692e or e(2) of the FDCPA: "The statute is designed to provide information that helps consumers to choose intelligently, and by definition immaterial information neither contributes to that objective (if the statement is correct) nor undermines it (if the statement is incorrect)."); Wahl v. Midland Credit Mgmt., Inc., 556 F.3d 643, 646 (7th Cir. 2009) (letter describing debt, which included interest applied by original creditor, as the "principal" amount owed to collector did not violate section 1692e: "If a statement would not mislead the unsophisticated consumer, it does not violate the FDCPA - even if it is false in some technical sense."); Miller v. Javitch, Block & Rathbone, 561 F.3d 588, 596 (6th Cir. 2009) (collection complaint that described an unpaid credit card debt as "money loaned" did not violate section 1692e); Peters v. General Serv. Bureau, Inc., 277 F.3d 1051, 1055-56 (8th Cir. 2002) (even "literally false" statements may not violate the Act, if they are merely "susceptible of an ingenious misreading.").
Thus, if the collector accurately reports the amount of the debt, the failure to report an unsubstantiated dispute made by the consumer is not "material" and does not violate section 1692e(8). A "material" misstatement is one that is "genuinely misleading." Donohue, 592 F.3d at 1034. As the Ninth Circuit has made clear, "In assessing FDCPA liability, we are not concerned with mere technical falsehoods that mislead no one, but instead with genuinely misleading statements that may frustrate a consumer’s ability to intelligently choose his or her response." Donohue, 592 F.3d at 1034 (emphasis added).
The consumer must provide the collector with information showing they have a legitimate, good faith dispute concerning the amount of the debt as reported to the consumer reporting agencies. If the consumer does so, the collector’s subsequent failure to report the dispute to the consumer reporting agencies may be knowingly and "materially" false in violation of section 1692e(8). By contrast, if the consumer has not provided information showing that they have a meritorious dispute, then the collector’s failure to subsequently report the debt as "disputed" would be, at best, a "mere technical falsehood" that does not violate the FDCPA. Donohue, 592 F.3d at 1034
This reading of section 1692e(8) of the FDCPA is completely consistent with cases interpreting the Fair Credit Reporting Act ("FCRA"). For example, in Gorman v. Wolpoff & Abramson, 584 F.3d 1147, 1163 (9th Cir. 2009), the Ninth Circuit held that a furnisher’s failure to report a "meritless dispute" to a consumer reporting agency would not violate section 1681s-2(b) of the FCRA. To prevail under section 1681s-2(b), a consumer must show that the failure to report the dispute was "misleading in such a way and to such and extent that it can be expected to adversely affect credit decisions." Id. (citations, quotation marks omitted). Only a "material" or "bona fide" dispute by a consumer about their debt can support a valid claim for relief. The Gorman Court stated:
In other words, a furnisher does not report "incomplete or inaccurate" information within the meaning of § 1681s-2(b) simply by failing to report a meritless dispute, because reporting an actual debt without noting that it is disputed is unlikely to be materially misleading. It is the failure to report a bona fide dispute, a dispute that could materially alter how the reported debt is understood, that gives rise to a furnisher's liability under § 1681s-2(b).
The holding in Gorman dovetails with decisions of courts around the country which have also required consumers to prove a material dispute in order to prevail under section 1681s-2(b) of the FCRA. See Chiang v. Verizon New England Inc., 595 F.3d 26, 37-38 (1st Cir. 2010) (affirming judgment for furnisher on section 1681s-2(b) claim where consumer failed to prove "actual inaccuracy" in credit report); Noel v. First Premier Bank, 2012 WL 832992, *10 (M.D. Pa. March 12, 2012) (granting motion to dismiss consumer’s section 1681s-2(b) claim because "absent a bona fide dispute, Defendant had no obligation to mark the account disputed"); Saunders v. Branch Banking & Trust Co. of Va., 526 F.3d 142, 150 (4th Cir. 2008) (affirming jury verdict for consumer where reporting of the debt without mention of the consumer’s dispute might have been "misleading in such a way and to such an extent that it can be expected to have an adverse effect.").
There is no reason to believe that Congress wanted a consumer "dispute" to be treated one way under the FCRA and another way under the FDCPA. Under the FCRA, a collector may deem a dispute to be "frivolous or irrelevant" if the consumer fails to provide the collector with sufficient information to investigate. See 15 U.S.C. § 1681s–2 (a)(8)(F)(i)(I); 16 C.F.R. § 660.4(f). The same standard must hold true under the FDCPA. At the Noel Court observed, "Rather than being fair and equitable to the consumer, a system which allows a consumer to inflate his credit score and thus derive a benefit from filing a frivolous dispute allows the consumer to do an end-run on the purpose of the statutory scheme." Noel, 2012 WL 832992, *7 (citation omitted).
In sum, to prevail on a claim under section 1692e(8) of the FDCPA, the consumer must prove the collector knew or should have known that it was reporting "false" credit information. The "false" information must be "materially" false, meaning that it is inaccurate in a way that could have an improper adverse effect on the consumer. If the consumer has not provided the collector with specific information demonstrating that they have a bona fide dispute about the amount the collector is reporting to the consumer reporting agencies, then the collector’s subsequent failure to report the account as "disputed" is not knowingly false and does not support a section 1692e(8) claim.
The FDCPA is sometimes referred to as a "strict liability" statute, but this is not entirely true. There are a number of provisions of the Act – and section 1692e(8) is one of them – which require a consumer to provide evidence of knowledge or intent by the collector. Section 1692e(8) prohibits a collector from communicating or threatening to communicate false credit information to any person, but only where the collector knows or should know that the credit information is false. See 15 U.S.C. § 1692e(8) (prohibits the collector from: "Communicating or threatening to communicate to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.").
The knowing failure to communicate that a "disputed" debt is disputed is a violation of section 1692e(8). Id; see also Brady v. The Credit Recovery Co., 160 F.3d 64, 67 (1st Cir. 1998) (section 1692e(8) "requires a debt collector who knows or should know that a given debt is disputed to disclose its disputed status to persons inquiring about a consumer's credit history.") (emphasis added); Sunga v. Rees Broome, 2010 WL 1138319, *4 (E.D. Va. Mar.18, 2010) (dismissing section 1692e(8) claim: "Under the express terms of § 1692e(8), Plaintiff must allege sufficient factual allegations supporting the finding that Defendant knew or should have known that the debt amount as stated in the demand letter was false.").
Thus, if the collector knows that the debt is subject to a true "dispute" it may not knowingly transmit "false" credit information about the debt to consumer reporting agencies. But what exactly would make the credit information "false" within the meaning of the FDCPA? We know that not all "false" statements by a collector will violate the FDCPA. To the contrary, courts around the country have recognized that an allegedly false or misleading statement does not violate the FDCPA unless the statement is "material." See, e.g., Donohue v. Quick Collect, Inc., 592 F.3d 1027, 1033-34 (9th Cir. 2010) (no violation of sections 1692e and 1692f of the FDCPA where collection complaint sought correct amount of debt, even though the elements comprising the total were not accurately described); Hahn v. Triumph Partnerships LLC, 557 F.3d 755, 757-58 (7th Cir. 2009) (letter that accurately stated total amount due did not violate sections 1692e or e(2) of the FDCPA: "The statute is designed to provide information that helps consumers to choose intelligently, and by definition immaterial information neither contributes to that objective (if the statement is correct) nor undermines it (if the statement is incorrect)."); Wahl v. Midland Credit Mgmt., Inc., 556 F.3d 643, 646 (7th Cir. 2009) (letter describing debt, which included interest applied by original creditor, as the "principal" amount owed to collector did not violate section 1692e: "If a statement would not mislead the unsophisticated consumer, it does not violate the FDCPA - even if it is false in some technical sense."); Miller v. Javitch, Block & Rathbone, 561 F.3d 588, 596 (6th Cir. 2009) (collection complaint that described an unpaid credit card debt as "money loaned" did not violate section 1692e); Peters v. General Serv. Bureau, Inc., 277 F.3d 1051, 1055-56 (8th Cir. 2002) (even "literally false" statements may not violate the Act, if they are merely "susceptible of an ingenious misreading.").
Thus, if the collector accurately reports the amount of the debt, the failure to report an unsubstantiated dispute made by the consumer is not "material" and does not violate section 1692e(8). A "material" misstatement is one that is "genuinely misleading." Donohue, 592 F.3d at 1034. As the Ninth Circuit has made clear, "In assessing FDCPA liability, we are not concerned with mere technical falsehoods that mislead no one, but instead with genuinely misleading statements that may frustrate a consumer’s ability to intelligently choose his or her response." Donohue, 592 F.3d at 1034 (emphasis added).
The consumer must provide the collector with information showing they have a legitimate, good faith dispute concerning the amount of the debt as reported to the consumer reporting agencies. If the consumer does so, the collector’s subsequent failure to report the dispute to the consumer reporting agencies may be knowingly and "materially" false in violation of section 1692e(8). By contrast, if the consumer has not provided information showing that they have a meritorious dispute, then the collector’s failure to subsequently report the debt as "disputed" would be, at best, a "mere technical falsehood" that does not violate the FDCPA. Donohue, 592 F.3d at 1034
This reading of section 1692e(8) of the FDCPA is completely consistent with cases interpreting the Fair Credit Reporting Act ("FCRA"). For example, in Gorman v. Wolpoff & Abramson, 584 F.3d 1147, 1163 (9th Cir. 2009), the Ninth Circuit held that a furnisher’s failure to report a "meritless dispute" to a consumer reporting agency would not violate section 1681s-2(b) of the FCRA. To prevail under section 1681s-2(b), a consumer must show that the failure to report the dispute was "misleading in such a way and to such and extent that it can be expected to adversely affect credit decisions." Id. (citations, quotation marks omitted). Only a "material" or "bona fide" dispute by a consumer about their debt can support a valid claim for relief. The Gorman Court stated:
In other words, a furnisher does not report "incomplete or inaccurate" information within the meaning of § 1681s-2(b) simply by failing to report a meritless dispute, because reporting an actual debt without noting that it is disputed is unlikely to be materially misleading. It is the failure to report a bona fide dispute, a dispute that could materially alter how the reported debt is understood, that gives rise to a furnisher's liability under § 1681s-2(b).
The holding in Gorman dovetails with decisions of courts around the country which have also required consumers to prove a material dispute in order to prevail under section 1681s-2(b) of the FCRA. See Chiang v. Verizon New England Inc., 595 F.3d 26, 37-38 (1st Cir. 2010) (affirming judgment for furnisher on section 1681s-2(b) claim where consumer failed to prove "actual inaccuracy" in credit report); Noel v. First Premier Bank, 2012 WL 832992, *10 (M.D. Pa. March 12, 2012) (granting motion to dismiss consumer’s section 1681s-2(b) claim because "absent a bona fide dispute, Defendant had no obligation to mark the account disputed"); Saunders v. Branch Banking & Trust Co. of Va., 526 F.3d 142, 150 (4th Cir. 2008) (affirming jury verdict for consumer where reporting of the debt without mention of the consumer’s dispute might have been "misleading in such a way and to such an extent that it can be expected to have an adverse effect.").
There is no reason to believe that Congress wanted a consumer "dispute" to be treated one way under the FCRA and another way under the FDCPA. Under the FCRA, a collector may deem a dispute to be "frivolous or irrelevant" if the consumer fails to provide the collector with sufficient information to investigate. See 15 U.S.C. § 1681s–2 (a)(8)(F)(i)(I); 16 C.F.R. § 660.4(f). The same standard must hold true under the FDCPA. At the Noel Court observed, "Rather than being fair and equitable to the consumer, a system which allows a consumer to inflate his credit score and thus derive a benefit from filing a frivolous dispute allows the consumer to do an end-run on the purpose of the statutory scheme." Noel, 2012 WL 832992, *7 (citation omitted).
In sum, to prevail on a claim under section 1692e(8) of the FDCPA, the consumer must prove the collector knew or should have known that it was reporting "false" credit information. The "false" information must be "materially" false, meaning that it is inaccurate in a way that could have an improper adverse effect on the consumer. If the consumer has not provided the collector with specific information demonstrating that they have a bona fide dispute about the amount the collector is reporting to the consumer reporting agencies, then the collector’s subsequent failure to report the account as "disputed" is not knowingly false and does not support a section 1692e(8) claim.
Monday, February 20, 2012
Can The CFPB Make Debt Collectors Reveal Their Attorney-Client Privileged Documents?
Does the Consumer Financial Protection Bureau (CFPB) have the power to tell debt collectors to turn over their attorney-client privileged communications? The answer may depend on who you ask. The CFPB claims to have the right to obtain privileged documents from all “supervised institutions” as well as from any “service provider” (such as a law firm or collection agency) who performs material services for a supervised institution. Thus, the Bureau effectively believes it can obtain the privileged documents of any debt collector in the country. Really?
Lets look at what the CFPB has said about this. In January 2012, the CFPB issued guidance concerning its plans to collect information from the institutions it will supervise. The Bureau said it will not allow supervised institutions to refuse to produce documents to it on the grounds that they contain information covered by the attorney-client privilege. See CFPB Bulletin 12-01 http://1.usa.gov/y551lH According to the CFPB, reviewing privileged documents can be “efficient” – in fact it “may often be the most efficient means for a supervisor to assess and understand an issue” – so the Bureau will feel free to request privileged materials from supervised institutions “as appropriate.” Id. According to the CFPB, you should not worry about this, because if you turn over your privileged information to the Bureau, this will not result in a waiver of the attorney-client privilege. Id. Don’t you find that comforting?
Are debt collectors expected to seek candid legal advice about how to comply with the FDCPA and other consumer protection laws, only to find that their attorney’s privileged communications will be turned over to the CFPB? Regardless of how you might feel about debt collectors, the attorney-client privilege is not something that federal regulators should be allowed to trample on.
The Supreme Court has repeatedly recognized that the attorney-client privilege is essential to the proper functioning of our system of justice, noting that it is “the oldest of the privileges for confidential communications known to the common law.” See Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). The purpose of the privilege is to promote compliance with the law, i.e., “to encourage full and frank communication between attorneys and their clients, and thereby promote broader public interests in the observance of law and administration of justice.” Id. The privilege simply will not work unless the client and the lawyer can be certain that their communications will not be disclosed. See, e.g., Hunt v. Blackburn, 128 U.S. 464, 470 (1888) (noting that the privilege “is founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure.”).
Why should debt collectors care about the CFPB’s desire to obtain privileged documents? After all, those “supervised institutions” regulated by the CFPB are just the really huge banks, mortgage companies, and securities firms, right? Wrong. The CFPB recently issued a proposed rule to define “larger participants” in the market for consumer debt collection, i.e., the entities who will be subject to the Bureau’s supervisory powers. See Docket No. CFPB-2012-0005 http://1.usa.gov/A6C2Bs The CFPB wants a “larger participant” to be any consumer debt collector who has more than $10 million in “annual receipts.” Id. The Bureau estimates that this will bring approximately 175 entities, or the largest 4 percent of consumer collection firms, within the definition. Id.
So this means that the other 96 percent of consumer debt collection companies can just ignore this and go back to sleep, right? Wrong. The CFPB made a point of stating, in footnote 4 of its discussion about the proposed rule, that its supervisory authority also extends to “service providers” of any covered entity. Id. The Bureau states: “Service providers to consumer debt collectors and consumer reporting agencies may include firms such as data aggregators, law firms, data and record suppliers, account maintenance services, call centers, software providers, and developers of credit scoring algorithms.” Id.
Surely collection law firms should not be concerned about the CFPB coming after their client’s privileged documents, right? Wrong again. The Bureau specifically noted that plans to exercise supervisory authority over collection law firms. Id. The Bureau’s summary of the proposed rule regarding “larger participants” states: “Collection attorneys and law firms also play a key role in the consumer debt collection market. They sometimes are the primary (or only) debt collector with which the consumer will interact. . . . By one estimate, approximately one in 20 delinquent accounts gets referred to a law firm that specializes in debt collection.” Id.
What is an attorney supposed to do if the CFPB comes knocking, asking for their clients’ privileged documents? The attorney likely has an ethical duty to resist the Bureau's request. In fact, Rule 1-6 of the American Bar Association’s Model Rules of Professional Conduct, which has been adopted by virtually every state, provides that a lawyer must not reveal information relating to the representation of a client, unless the client gives informed consent. This make sense, because the attorney-client privilege is completely worthless unless the attorney and the client can depend on confidential information remaining confidential. See, e.g., Upjohn, 449 U.S. at 393 (“if the purpose of the attorney-client privilege is to be served, the attorney and client must be able to predict with some degree of certainty whether particular discussions will be protected. An uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all.”).
The CFPB has no business regulating the practice of law, nor should it interfere with the attorney-client privilege. The regulation of the practice of law is a job for the states and the courts, not the agencies of the federal government. See, e.g., American Bar Association v. Federal Trade Commission, 430 F.3d 457,471 (D.C. Cir. 2005) (“It is undisputed that the regulation of the practice of law is traditionally the province of the states. Federal law may not be interpreted to reach into areas of State sovereignty unless the language of the federal law compels the intrusion.”) (citations omitted); Leis v. Flynt, 439 U.S. 438, 442 (1979) (“Since the founding of the Republic, the licensing and regulation of lawyers has been left exclusively to the States and the District of Columbia within their respective jurisdictions. The States prescribe the qualifications for admission to practice and the standards of professional conduct. They also are responsible for the discipline of lawyers.”).
If the CFPB wants to encourage compliance with the laws while advancing its consumer protection goals, it should do so without infringing upon the attorney-client privilege of the debt collectors that it regulates. The Supreme Court has recognized that the attorney-client privilege should be read broadly, because a narrow view of the privilege “not only makes it difficult for corporate attorneys to formulate sound advice when their client is faced with a specific legal problem, but also threatens to limit the valuable efforts of corporate counsel to ensure their client's compliance with the law. In light of the vast and complicated array of regulatory legislation confronting the modern corporation, corporations, unlike most individuals, constantly go to lawyers to find out how to obey the law, particularly since compliance with the law in this area is hardly an instinctive matter.” See Upjohn, 449 U.S. at 392 (citations omitted). The CFPB can hardly expect debt collectors to seek out candid legal advice about compliance when the Bureau reserves the right to examine all privileged communications as part of its supervisory powers.
Lets look at what the CFPB has said about this. In January 2012, the CFPB issued guidance concerning its plans to collect information from the institutions it will supervise. The Bureau said it will not allow supervised institutions to refuse to produce documents to it on the grounds that they contain information covered by the attorney-client privilege. See CFPB Bulletin 12-01 http://1.usa.gov/y551lH According to the CFPB, reviewing privileged documents can be “efficient” – in fact it “may often be the most efficient means for a supervisor to assess and understand an issue” – so the Bureau will feel free to request privileged materials from supervised institutions “as appropriate.” Id. According to the CFPB, you should not worry about this, because if you turn over your privileged information to the Bureau, this will not result in a waiver of the attorney-client privilege. Id. Don’t you find that comforting?
Are debt collectors expected to seek candid legal advice about how to comply with the FDCPA and other consumer protection laws, only to find that their attorney’s privileged communications will be turned over to the CFPB? Regardless of how you might feel about debt collectors, the attorney-client privilege is not something that federal regulators should be allowed to trample on.
The Supreme Court has repeatedly recognized that the attorney-client privilege is essential to the proper functioning of our system of justice, noting that it is “the oldest of the privileges for confidential communications known to the common law.” See Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). The purpose of the privilege is to promote compliance with the law, i.e., “to encourage full and frank communication between attorneys and their clients, and thereby promote broader public interests in the observance of law and administration of justice.” Id. The privilege simply will not work unless the client and the lawyer can be certain that their communications will not be disclosed. See, e.g., Hunt v. Blackburn, 128 U.S. 464, 470 (1888) (noting that the privilege “is founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure.”).
Why should debt collectors care about the CFPB’s desire to obtain privileged documents? After all, those “supervised institutions” regulated by the CFPB are just the really huge banks, mortgage companies, and securities firms, right? Wrong. The CFPB recently issued a proposed rule to define “larger participants” in the market for consumer debt collection, i.e., the entities who will be subject to the Bureau’s supervisory powers. See Docket No. CFPB-2012-0005 http://1.usa.gov/A6C2Bs The CFPB wants a “larger participant” to be any consumer debt collector who has more than $10 million in “annual receipts.” Id. The Bureau estimates that this will bring approximately 175 entities, or the largest 4 percent of consumer collection firms, within the definition. Id.
So this means that the other 96 percent of consumer debt collection companies can just ignore this and go back to sleep, right? Wrong. The CFPB made a point of stating, in footnote 4 of its discussion about the proposed rule, that its supervisory authority also extends to “service providers” of any covered entity. Id. The Bureau states: “Service providers to consumer debt collectors and consumer reporting agencies may include firms such as data aggregators, law firms, data and record suppliers, account maintenance services, call centers, software providers, and developers of credit scoring algorithms.” Id.
Surely collection law firms should not be concerned about the CFPB coming after their client’s privileged documents, right? Wrong again. The Bureau specifically noted that plans to exercise supervisory authority over collection law firms. Id. The Bureau’s summary of the proposed rule regarding “larger participants” states: “Collection attorneys and law firms also play a key role in the consumer debt collection market. They sometimes are the primary (or only) debt collector with which the consumer will interact. . . . By one estimate, approximately one in 20 delinquent accounts gets referred to a law firm that specializes in debt collection.” Id.
What is an attorney supposed to do if the CFPB comes knocking, asking for their clients’ privileged documents? The attorney likely has an ethical duty to resist the Bureau's request. In fact, Rule 1-6 of the American Bar Association’s Model Rules of Professional Conduct, which has been adopted by virtually every state, provides that a lawyer must not reveal information relating to the representation of a client, unless the client gives informed consent. This make sense, because the attorney-client privilege is completely worthless unless the attorney and the client can depend on confidential information remaining confidential. See, e.g., Upjohn, 449 U.S. at 393 (“if the purpose of the attorney-client privilege is to be served, the attorney and client must be able to predict with some degree of certainty whether particular discussions will be protected. An uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all.”).
The CFPB has no business regulating the practice of law, nor should it interfere with the attorney-client privilege. The regulation of the practice of law is a job for the states and the courts, not the agencies of the federal government. See, e.g., American Bar Association v. Federal Trade Commission, 430 F.3d 457,471 (D.C. Cir. 2005) (“It is undisputed that the regulation of the practice of law is traditionally the province of the states. Federal law may not be interpreted to reach into areas of State sovereignty unless the language of the federal law compels the intrusion.”) (citations omitted); Leis v. Flynt, 439 U.S. 438, 442 (1979) (“Since the founding of the Republic, the licensing and regulation of lawyers has been left exclusively to the States and the District of Columbia within their respective jurisdictions. The States prescribe the qualifications for admission to practice and the standards of professional conduct. They also are responsible for the discipline of lawyers.”).
If the CFPB wants to encourage compliance with the laws while advancing its consumer protection goals, it should do so without infringing upon the attorney-client privilege of the debt collectors that it regulates. The Supreme Court has recognized that the attorney-client privilege should be read broadly, because a narrow view of the privilege “not only makes it difficult for corporate attorneys to formulate sound advice when their client is faced with a specific legal problem, but also threatens to limit the valuable efforts of corporate counsel to ensure their client's compliance with the law. In light of the vast and complicated array of regulatory legislation confronting the modern corporation, corporations, unlike most individuals, constantly go to lawyers to find out how to obey the law, particularly since compliance with the law in this area is hardly an instinctive matter.” See Upjohn, 449 U.S. at 392 (citations omitted). The CFPB can hardly expect debt collectors to seek out candid legal advice about compliance when the Bureau reserves the right to examine all privileged communications as part of its supervisory powers.
Saturday, January 28, 2012
The Limits On Direct And Vicarious Liability Under The FDCPA
Consumers and their attorneys are constantly seeking to expand the pool of potential FDCPA defendants using principles of vicarious liability. Debt buyers are being sued based on the conduct of their agencies and law firms. Lawyers and agency owners are being sued based on the conduct of their clients and their collectors. Even original creditors, who are not subject to the FDCPA, are being drawn into FDCPA litigation under various theories of recovery. What are the limits of vicarious liability under the FDCPA? How can debt collectors avoid liability for the conduct of others?
Limits on Direct Liability
Before examining vicarious liability under the FDCPA, it is important to remember that Congress significantly limited the scope of direct liability under the Act. For example, generally speaking, the Act applies only to “debt collectors” who regularly attempt to collect debts that are “due another.” For this reason, original creditors are not subject to the FDCPA (except in very limited circumstances). See, e.g., Perry v. Stewart Title Co., 756 F.2d 1197, 1208 (5th Cir.1985) ( The legislative history of section 1692a(6) indicates conclusively that a debt collector does not include the consumer's creditors . . . or an assignee of a debt, as long as the debt was not in default at the time it was assigned.”). Because original creditors are not subject to the FDCPA, courts have recognized they may not be held vicariously liable for the FDCPA violations of the debt collectors they retain. See Wadlington v. Credit Acceptance Corp., 76 F.3d 103, 108 (6th Cir. 1996) (assignee of auto loan not vicariously liable for FDCPA violations of its attorneys: “We do not think it would accord with the intent of Congress, as manifested in the terms of the Act, for a company that is not a debt collector to be held vicariously liable for a collection suit filing that violates the Act only because the filing attorney is a ‘debt collector.’”).
Courts have recognized that shareholders, officers or employees of a corporate debt collector may not be directly liable under the FDCPA, unless the plaintiff can meet the strict requirements necessary to pierce the corporate veil. See, e.g., White v. Goodman, 200 F.3d 1016, 1019 (7th Cir. 2000) (FDCPA claim filed against shareholder of agency was frivolous: “The Fair Debt Collection Practices Act is not aimed at the shareholders of debt collectors operating in the corporate form unless some basis is shown for piercing the corporate veil, which was not attempted here.”) (citation omitted); Pettit v. Retrieval Masters Creditor Bureau, Inc., 211 F.3d 1057 (7th Cir. 2000) (president and largest shareholder of agency not personally liable: “the extent of control exercised by the officer or shareholder is irrelevant to determining his liability under the FDCPA.”). But see Kistner v. Law Office of Michael P. Margelefsky, LLC, 518 F.3d 433, 437-38 (6th Cir. 2008) (sole member of LLC may be held liable under FDCPA if he plays a significant role in directing the firm’s debt collection activities).
Even someone who is a “debt collector” under the statute must engage in some sort of prohibited conduct with respect to the debtor in order to be directly, as opposed to vicariously, liable under the FDCPA. The Act allows a plaintiff to seek actual damages and “additional damages” but only where the defendant collector has “fail[ed] to comply” with a “provision of this title” and has done so “with respect to” the plaintiff. See 15 U.S.C. § 1692k(a) (“[A]ny debt collector who fails to comply with any provision of this subchapter with respect to any person is liable to such person in an amount equal to the sum of . . . .”). Thus, if the consumer cannot prove that the collector “failed to comply” with the FDCPA, he may not recover any of the remedies provided by the Act from that collector.
Where a violation occurs, the FDCPA places significant limits on the collector’s liability. In an individual action, a plaintiff may recover actual damages, but courts have consistently held that “additional damages” are limited to a maximum of $1,000 “per proceeding” and not $1,000 “per violation.” See, e.g., Wright v. Finance Servs. of Norwalk, Inc., 22 F.3d 647, 650-51 (6th Cir. 1994) (additional damages limited to $1,000 even though defendant committed fourteen violations: “Congress certainly knows how to write statutes that make each separate violation subject to a separate penalty, or even that make each separate day of a violation a separate offense subject to a separate penalty.”) (citations omitted); Harper v. Better Bus. Servs., Inc., 961 F.2d 1561, 1563 (11th Cir. 1992) (additional damages limited to $1,000 even though defendant committed seven violations: “The FDCPA does not on its face authorize additional statutory damages of $1,000 per violation of the statute, of $1,000 per improper communication, or of $1,000 per alleged debt. If Congress had intended such limitations, it could have used that terminology.”).
There are also strict limits on liability in FDCPA class actions, where the statute caps the “additional damages” to the class at the lesser of $500,000 or one percent of the “net worth” of any collector who “fails to comply” with a provision of the Act. See 15 U.S.C. § 1692k(a)(2)(B). The term “net worth” means the “book net worth” or “balance sheet net worth” of the collector, calculated using GAAP, not the “fair market value” of the collector. See Sanders v. Jackson, 209 F.3d 998, 1001-02 (7th Cir. 2000) (the “primary purpose of the net worth provision is a protective one. It ensures that defendants are not forced to liquidate their companies in order to satisfy” a damage award).
If a violation is established, the court does not automatically award the maximum possible additional damages. In fact, it may award zero damages. One famous example is Jerman v. Carlisle, where the plaintiff prevailed in an FDCPA class action in the United States Supreme Court, but was awarded zero damages upon remand. See Jerman v. Carlisle, et al., 2011 WL 1434679 (N.D. Ohio Apr. 14, 2011). The Jerman court observed that the FDCPA sets “no minimum damages” and that statutory damages are “not automatic.” Id. at *11. It agreed that “where there are no actual damages and no evidence of an intent to engage in abusive and deceptive debt collection practices, additional damages are not warranted.” Id.
Limits On Vicarious Liability
If a collector is not directly liable, when may it be held vicariously liable? The scope of vicarious liability turns on proof that the defendant exercised control over another debt collector’s conduct. “[T]o be liable for the actions of another, the principal must exercise control over the conduct or activities of the agent." Clark v. Capital Credit & Collection Servs., Inc., 460 F.3d 1162, 1173 (9th Cir. 2006) (citation omitted). In Clark, the Ninth Circuit affirmed summary judgment for an attorney, because there was no evidence that he exercised control over the actions of his client. Id.
A collection company will generally be held liable for its employees’ FDCPA violations, using principles of respondeat superior, if the violations occurred within the course and scope of their employment. See Pettit v. Retrieval Masters Creditor Bureau, Inc., 211 F.3d 1057, 1059 (7th Cir. 2000) (“[T]he debt collection company answers for its employees' violations of the statute. With vicarious or respondeat superior liability, the debt collection company and its managers have the proper incentives to adequately discipline wayward employees, as well as to instruct and train employees to avoid actions that might impose liability.”) (citations omitted).
A collector will not, however, be held vicariously liable for the FDCPA violations of its collection attorney if the collector did not exercise control over the attorney. See, e.g., Cassady v. Union Adjustment Co., 2008 WL 4773976, *6 (N.D. Cal. Oct 27, 2008) (summary judgment granted where “no evidence upon which a reasonable trier of fact could conclude that Union exercised control over Zee Law Group.”). But see Fox v. Citicorp Credit Servs., Inc., 15 F.3d 1507, 1516 (9th Cir. 1994) (collector may be vicariously liable under § 1692i of FDCPA where its attorney sues in wrong venue).
Similarly, a debt buyer will not be held vicariously liable for the FDCPA violations of its collection agency where there is no evidence the debt buyer exercised control over the conduct that led to the violation. See, e.g., Scally v. Hilco Receivables, LLC, 392 F. Supp. 2d 1036, 1040 (N.D. Ill. 2005) (“Scally offers no facts suggesting that Hilco controlled either the mechanisms or the content of MRS's contact with debtors, other than to outline general principles by which MRS would abide: i.e., observing the requirements of the FDCPA.”).
Nor will a collector be vicariously liable under the FDCPA for the conduct of vendors, such as process servers or letter companies, if the vendors are not subject to the Act. See, e.g., Worch v. Wolpoff & Abramson, LLP, 477 F. Supp. 2d 1015,1018-19 (E.D. Mo. 2007) (process server who “pounded on the door repeatedly and aggressively” to serve debtor not subject to FDCPA; collection firm not vicariously liable); Federal Home Loan Mortgage Corp. v. Lamar, 2006 WL 2422903, **8-9 (N.D. Ohio Aug. 22, 2006) (process server allegedly involved in an erratic car chase while serving debtor not liable under FDCPA; collection firm not vicariously liable); see also Laubach v. Arrow Serv. Bureau, Inc., 987 F. Supp. 625 (N.D. Ill. 1997) (letter vendor that printed and mailed letters for collector clients not “debt collector” under FDCPA).
A general partner can be held vicariously liable for the actions of the partnership if the partner exercised sufficient control over the firm’s collection activities. See Pollice v. National Tax Funding, L.P., 225 F.3d 379, 405 (3rd Cir. 2000) (“In light of the general partner's role in managing the affairs of the partnership, we see no reason why the general partner should not be responsible for conduct of the partnership which violates the FDCPA.”); see also Miller v. McCalla, Raymer et al., 214 F.3d 872 (7th Cir. 2000) (“the liability of a partnership is imputed to the partners, and so the plaintiff was entitled to sue the partners as well as the partnership.”).
The difference between direct and vicarious liability can be particularly significant in FDCPA class actions filed against multiple defendants. Consumer attorneys will often argue that the exposure in such cases is the sum of the net worth of all the collectors. But if one or more of the collectors has been sued solely under a theory of vicarious liability, there is no basis for seeking one percent of that collector’s net worth. Rather, the class would be limited to recovery of one percent of the net worth of the collector who actually violated the Act with respect to the plaintiff and the class. Once those damages are assessed, the other defendants may or may not be jointly responsible for payment of those damages under principles of vicarious liability.
Collectors named in FDCPA actions should closely examine the claims to determine whether they are alleged to have directly violated the Act, or if their liability is based solely on vicarious liability principles. This answer may significantly alter the approach taken when defending the action.
Limits on Direct Liability
Before examining vicarious liability under the FDCPA, it is important to remember that Congress significantly limited the scope of direct liability under the Act. For example, generally speaking, the Act applies only to “debt collectors” who regularly attempt to collect debts that are “due another.” For this reason, original creditors are not subject to the FDCPA (except in very limited circumstances). See, e.g., Perry v. Stewart Title Co., 756 F.2d 1197, 1208 (5th Cir.1985) ( The legislative history of section 1692a(6) indicates conclusively that a debt collector does not include the consumer's creditors . . . or an assignee of a debt, as long as the debt was not in default at the time it was assigned.”). Because original creditors are not subject to the FDCPA, courts have recognized they may not be held vicariously liable for the FDCPA violations of the debt collectors they retain. See Wadlington v. Credit Acceptance Corp., 76 F.3d 103, 108 (6th Cir. 1996) (assignee of auto loan not vicariously liable for FDCPA violations of its attorneys: “We do not think it would accord with the intent of Congress, as manifested in the terms of the Act, for a company that is not a debt collector to be held vicariously liable for a collection suit filing that violates the Act only because the filing attorney is a ‘debt collector.’”).
Courts have recognized that shareholders, officers or employees of a corporate debt collector may not be directly liable under the FDCPA, unless the plaintiff can meet the strict requirements necessary to pierce the corporate veil. See, e.g., White v. Goodman, 200 F.3d 1016, 1019 (7th Cir. 2000) (FDCPA claim filed against shareholder of agency was frivolous: “The Fair Debt Collection Practices Act is not aimed at the shareholders of debt collectors operating in the corporate form unless some basis is shown for piercing the corporate veil, which was not attempted here.”) (citation omitted); Pettit v. Retrieval Masters Creditor Bureau, Inc., 211 F.3d 1057 (7th Cir. 2000) (president and largest shareholder of agency not personally liable: “the extent of control exercised by the officer or shareholder is irrelevant to determining his liability under the FDCPA.”). But see Kistner v. Law Office of Michael P. Margelefsky, LLC, 518 F.3d 433, 437-38 (6th Cir. 2008) (sole member of LLC may be held liable under FDCPA if he plays a significant role in directing the firm’s debt collection activities).
Even someone who is a “debt collector” under the statute must engage in some sort of prohibited conduct with respect to the debtor in order to be directly, as opposed to vicariously, liable under the FDCPA. The Act allows a plaintiff to seek actual damages and “additional damages” but only where the defendant collector has “fail[ed] to comply” with a “provision of this title” and has done so “with respect to” the plaintiff. See 15 U.S.C. § 1692k(a) (“[A]ny debt collector who fails to comply with any provision of this subchapter with respect to any person is liable to such person in an amount equal to the sum of . . . .”). Thus, if the consumer cannot prove that the collector “failed to comply” with the FDCPA, he may not recover any of the remedies provided by the Act from that collector.
Where a violation occurs, the FDCPA places significant limits on the collector’s liability. In an individual action, a plaintiff may recover actual damages, but courts have consistently held that “additional damages” are limited to a maximum of $1,000 “per proceeding” and not $1,000 “per violation.” See, e.g., Wright v. Finance Servs. of Norwalk, Inc., 22 F.3d 647, 650-51 (6th Cir. 1994) (additional damages limited to $1,000 even though defendant committed fourteen violations: “Congress certainly knows how to write statutes that make each separate violation subject to a separate penalty, or even that make each separate day of a violation a separate offense subject to a separate penalty.”) (citations omitted); Harper v. Better Bus. Servs., Inc., 961 F.2d 1561, 1563 (11th Cir. 1992) (additional damages limited to $1,000 even though defendant committed seven violations: “The FDCPA does not on its face authorize additional statutory damages of $1,000 per violation of the statute, of $1,000 per improper communication, or of $1,000 per alleged debt. If Congress had intended such limitations, it could have used that terminology.”).
There are also strict limits on liability in FDCPA class actions, where the statute caps the “additional damages” to the class at the lesser of $500,000 or one percent of the “net worth” of any collector who “fails to comply” with a provision of the Act. See 15 U.S.C. § 1692k(a)(2)(B). The term “net worth” means the “book net worth” or “balance sheet net worth” of the collector, calculated using GAAP, not the “fair market value” of the collector. See Sanders v. Jackson, 209 F.3d 998, 1001-02 (7th Cir. 2000) (the “primary purpose of the net worth provision is a protective one. It ensures that defendants are not forced to liquidate their companies in order to satisfy” a damage award).
If a violation is established, the court does not automatically award the maximum possible additional damages. In fact, it may award zero damages. One famous example is Jerman v. Carlisle, where the plaintiff prevailed in an FDCPA class action in the United States Supreme Court, but was awarded zero damages upon remand. See Jerman v. Carlisle, et al., 2011 WL 1434679 (N.D. Ohio Apr. 14, 2011). The Jerman court observed that the FDCPA sets “no minimum damages” and that statutory damages are “not automatic.” Id. at *11. It agreed that “where there are no actual damages and no evidence of an intent to engage in abusive and deceptive debt collection practices, additional damages are not warranted.” Id.
Limits On Vicarious Liability
If a collector is not directly liable, when may it be held vicariously liable? The scope of vicarious liability turns on proof that the defendant exercised control over another debt collector’s conduct. “[T]o be liable for the actions of another, the principal must exercise control over the conduct or activities of the agent." Clark v. Capital Credit & Collection Servs., Inc., 460 F.3d 1162, 1173 (9th Cir. 2006) (citation omitted). In Clark, the Ninth Circuit affirmed summary judgment for an attorney, because there was no evidence that he exercised control over the actions of his client. Id.
A collection company will generally be held liable for its employees’ FDCPA violations, using principles of respondeat superior, if the violations occurred within the course and scope of their employment. See Pettit v. Retrieval Masters Creditor Bureau, Inc., 211 F.3d 1057, 1059 (7th Cir. 2000) (“[T]he debt collection company answers for its employees' violations of the statute. With vicarious or respondeat superior liability, the debt collection company and its managers have the proper incentives to adequately discipline wayward employees, as well as to instruct and train employees to avoid actions that might impose liability.”) (citations omitted).
A collector will not, however, be held vicariously liable for the FDCPA violations of its collection attorney if the collector did not exercise control over the attorney. See, e.g., Cassady v. Union Adjustment Co., 2008 WL 4773976, *6 (N.D. Cal. Oct 27, 2008) (summary judgment granted where “no evidence upon which a reasonable trier of fact could conclude that Union exercised control over Zee Law Group.”). But see Fox v. Citicorp Credit Servs., Inc., 15 F.3d 1507, 1516 (9th Cir. 1994) (collector may be vicariously liable under § 1692i of FDCPA where its attorney sues in wrong venue).
Similarly, a debt buyer will not be held vicariously liable for the FDCPA violations of its collection agency where there is no evidence the debt buyer exercised control over the conduct that led to the violation. See, e.g., Scally v. Hilco Receivables, LLC, 392 F. Supp. 2d 1036, 1040 (N.D. Ill. 2005) (“Scally offers no facts suggesting that Hilco controlled either the mechanisms or the content of MRS's contact with debtors, other than to outline general principles by which MRS would abide: i.e., observing the requirements of the FDCPA.”).
Nor will a collector be vicariously liable under the FDCPA for the conduct of vendors, such as process servers or letter companies, if the vendors are not subject to the Act. See, e.g., Worch v. Wolpoff & Abramson, LLP, 477 F. Supp. 2d 1015,1018-19 (E.D. Mo. 2007) (process server who “pounded on the door repeatedly and aggressively” to serve debtor not subject to FDCPA; collection firm not vicariously liable); Federal Home Loan Mortgage Corp. v. Lamar, 2006 WL 2422903, **8-9 (N.D. Ohio Aug. 22, 2006) (process server allegedly involved in an erratic car chase while serving debtor not liable under FDCPA; collection firm not vicariously liable); see also Laubach v. Arrow Serv. Bureau, Inc., 987 F. Supp. 625 (N.D. Ill. 1997) (letter vendor that printed and mailed letters for collector clients not “debt collector” under FDCPA).
A general partner can be held vicariously liable for the actions of the partnership if the partner exercised sufficient control over the firm’s collection activities. See Pollice v. National Tax Funding, L.P., 225 F.3d 379, 405 (3rd Cir. 2000) (“In light of the general partner's role in managing the affairs of the partnership, we see no reason why the general partner should not be responsible for conduct of the partnership which violates the FDCPA.”); see also Miller v. McCalla, Raymer et al., 214 F.3d 872 (7th Cir. 2000) (“the liability of a partnership is imputed to the partners, and so the plaintiff was entitled to sue the partners as well as the partnership.”).
The difference between direct and vicarious liability can be particularly significant in FDCPA class actions filed against multiple defendants. Consumer attorneys will often argue that the exposure in such cases is the sum of the net worth of all the collectors. But if one or more of the collectors has been sued solely under a theory of vicarious liability, there is no basis for seeking one percent of that collector’s net worth. Rather, the class would be limited to recovery of one percent of the net worth of the collector who actually violated the Act with respect to the plaintiff and the class. Once those damages are assessed, the other defendants may or may not be jointly responsible for payment of those damages under principles of vicarious liability.
Collectors named in FDCPA actions should closely examine the claims to determine whether they are alleged to have directly violated the Act, or if their liability is based solely on vicarious liability principles. This answer may significantly alter the approach taken when defending the action.
Wednesday, November 16, 2011
NARCA Urges The United States Supreme Court To Overturn Lesher And To Reject The "Meaningful Involvement" Doctrine
The FDCPA prohibits collection lawyers from making materially false or misleading statements to consumers or to third parties when collecting consumer debts. But the FDCPA was not designed to regulate the practice of law. The Act does not define when an attorney is acting “as an attorney” or in a “legal capacity” for his client, and when he is not. The statute was not meant to be used by courts and consumer attorneys as a vehicle for dictating the interactions between a collection attorney and his client.
For these reasons, the National Association of Retail Collection Attorneys (“NARCA”) recently filed an amicus brief in the United States Supreme Court in Law Offices Of Mitchell N. Kay, P.C. v. Darwin Lesher, Case No. 11-492, urging the Court to grant the firm’s petition for writ of certiorari and to reverse the decision issued by Third Circuit Court of Appeals, Lesher v. Law Offices of Mitchell N. Kay, 650 F.3d 993 (3d Cir. 2011).
In Lesher, the Third Circuit interpreted the FDCPA in a way that improperly interferes with the attorney-client relationship. The defendant law firm in Lesher had sent polite settlement letters to a consumer which made no reference to litigation. The Lesher Court found that the settlement letters violated the FDCPA, however, and its ruling arguably held that attorney cannot act “as an attorney” for his client, nor act in a “legal capacity” for his client, unless the attorney has reviewed the consumer’s file and has determined that the consumer is a “candidate for legal action.” See Lesher, 650 F. 3d at 1003. But the law firm was, in fact, representing its client, and there was no evidence that the client was unhappy with the level of review conducted by the firm before the letters were sent.
The FDCPA does not dictate the steps that an attorney must take in order to properly represent his client. The Act does not define when an attorney is acting “as an attorney” or in a “legal capacity” for a client. There is nothing in the FDCPA stating that a creditor can only hire a lawyer to communicate on its behalf after the creditor has decided that the consumer is a “candidate for legal action.” The Lesher ruling effectively prevents creditors from engaging an attorney to notify a consumer that he is a candidate for settlement short of litigation. But there is nothing to suggest that when Congress passed the FDCPA, it wanted to prohibit all communications between collection attorneys and consumers prior to the time that the client has decided to file suit.
NARCA also urged the Court to expressly reject the so-called “meaningful involvement” doctrine that has been adopted some circuit courts. See, e.g., Clomon v. Jackson, 988 F.2d 1314, 1320-21 (2d Cir. 1993); Avila v. Rubin, 84 F.3d 222, 228-29 (7th Cir. 1996). Although the FDCPA prohibits the use of collection letters which falsely state they are from an attorney (see 15 U.S.C. § 1692e(3)), there is no “meaningful involvement” requirement in the FDCPA, nor any basis for using the Act to regulate the manner in which an attorney must review his client’s files before communicating with a consumer. See 15 U.S.C. §§ 1692-1692p.
Lawyers should certainly be involved in all of the legal work they do for their clients. But the level of involvement, the scope of the work to be performed, and the steps the attorney must take to get the job done, are things that must be left for the lawyer and the client to decide. The FDCPA is not the mechanism for determining what is “meaningful” legal work, and what is not. The judiciary and the states, not Congress, regulate the professional standards for the bar and oversee the conduct of attorneys when they interact with clients. See, e.g., Paul E. Iacono Structural Eng’r, Inc. v. Humphrey, 722 F.2d 435, 439 (9th Cir. 1983) (“[T]he regulation of lawyer conduct is the province of the courts, not Congress.”).
Of course, Congress may properly prohibit collection attorneys from making false statements in letters sent to consumers. But the FDCPA should not be read expansively in a manner that would allow judges, juries and consumers to second-guess the quantum and quality of the review performed by a collection attorney on behalf of his client. A collection lawyer, working in conjunction with his client, must be allowed to decide what amount of attorney involvement, if any, is appropriate before a settlement letter is sent on behalf of the client to the consumer.
A copy of NARCA’s motion for leave to file the amicus brief, and the amicus brief, can be found here:
Amicus Brief of NARCA.USSCT.Mitchell.N.Kay.v.Lesher
For these reasons, the National Association of Retail Collection Attorneys (“NARCA”) recently filed an amicus brief in the United States Supreme Court in Law Offices Of Mitchell N. Kay, P.C. v. Darwin Lesher, Case No. 11-492, urging the Court to grant the firm’s petition for writ of certiorari and to reverse the decision issued by Third Circuit Court of Appeals, Lesher v. Law Offices of Mitchell N. Kay, 650 F.3d 993 (3d Cir. 2011).
In Lesher, the Third Circuit interpreted the FDCPA in a way that improperly interferes with the attorney-client relationship. The defendant law firm in Lesher had sent polite settlement letters to a consumer which made no reference to litigation. The Lesher Court found that the settlement letters violated the FDCPA, however, and its ruling arguably held that attorney cannot act “as an attorney” for his client, nor act in a “legal capacity” for his client, unless the attorney has reviewed the consumer’s file and has determined that the consumer is a “candidate for legal action.” See Lesher, 650 F. 3d at 1003. But the law firm was, in fact, representing its client, and there was no evidence that the client was unhappy with the level of review conducted by the firm before the letters were sent.
The FDCPA does not dictate the steps that an attorney must take in order to properly represent his client. The Act does not define when an attorney is acting “as an attorney” or in a “legal capacity” for a client. There is nothing in the FDCPA stating that a creditor can only hire a lawyer to communicate on its behalf after the creditor has decided that the consumer is a “candidate for legal action.” The Lesher ruling effectively prevents creditors from engaging an attorney to notify a consumer that he is a candidate for settlement short of litigation. But there is nothing to suggest that when Congress passed the FDCPA, it wanted to prohibit all communications between collection attorneys and consumers prior to the time that the client has decided to file suit.
NARCA also urged the Court to expressly reject the so-called “meaningful involvement” doctrine that has been adopted some circuit courts. See, e.g., Clomon v. Jackson, 988 F.2d 1314, 1320-21 (2d Cir. 1993); Avila v. Rubin, 84 F.3d 222, 228-29 (7th Cir. 1996). Although the FDCPA prohibits the use of collection letters which falsely state they are from an attorney (see 15 U.S.C. § 1692e(3)), there is no “meaningful involvement” requirement in the FDCPA, nor any basis for using the Act to regulate the manner in which an attorney must review his client’s files before communicating with a consumer. See 15 U.S.C. §§ 1692-1692p.
Lawyers should certainly be involved in all of the legal work they do for their clients. But the level of involvement, the scope of the work to be performed, and the steps the attorney must take to get the job done, are things that must be left for the lawyer and the client to decide. The FDCPA is not the mechanism for determining what is “meaningful” legal work, and what is not. The judiciary and the states, not Congress, regulate the professional standards for the bar and oversee the conduct of attorneys when they interact with clients. See, e.g., Paul E. Iacono Structural Eng’r, Inc. v. Humphrey, 722 F.2d 435, 439 (9th Cir. 1983) (“[T]he regulation of lawyer conduct is the province of the courts, not Congress.”).
Of course, Congress may properly prohibit collection attorneys from making false statements in letters sent to consumers. But the FDCPA should not be read expansively in a manner that would allow judges, juries and consumers to second-guess the quantum and quality of the review performed by a collection attorney on behalf of his client. A collection lawyer, working in conjunction with his client, must be allowed to decide what amount of attorney involvement, if any, is appropriate before a settlement letter is sent on behalf of the client to the consumer.
A copy of NARCA’s motion for leave to file the amicus brief, and the amicus brief, can be found here:
Amicus Brief of NARCA.USSCT.Mitchell.N.Kay.v.Lesher
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