Sunday, April 25, 2010

Jerman v. Carlisle: Supreme Court Rules That A Legal Error Regarding The Requirements Of The FDCPA Cannot Be A “Bona Fide Error”

The FDCPA includes a “bona fide error” defense, which provides that a debt collector may not be held liable in any action brought under [the FDCPA] if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. 15 U.S.C. § 1692k(c). In Jerman v. Carlisle, _ S. Ct. _, 2010 WL 1558977 (Apr. 21, 2010), the United States Supreme Court held that the “bona fide error” defense does not apply to a violation resulting from a debt collector’s mistaken interpretation of the legal requirements of the FDCPA.

Although Jerman does not provide collectors with much to celebrate, the opinion is very narrow and leaves significant issues undecided. The Court expressly declined to decide whether a violation of the FDCPA that results from a collector’s mistaken interpretation of state law or a federal statute other than the FDCPA, would support the bona fide error defense. Id. at *4 n.4. Thus, the lower courts will need to sort out, for example, whether a collector’s erroneous interpretation of a state’s statute of limitations, or an incorrect interpretation of the Fair Credit Reporting Act, can give rise to a bona fide error defense. Jerman may help collectors facing claims for highly technical violations of the Act, as it strongly suggests that any good faith error of law by a collector can provide grounds for significantly reducing the amount of statutory damages or attorneys’ fees to be awarded to a plaintiff. Id. at *11. Jerman also confirms that any good faith factual mistake by a collector – not just a “clerical” error – can support a bona fide error defense. Id. at *7.

In Jerman, the defendants, a law firm and one of its attorneys, filed a complaint in state court seeking to foreclose on the plaintiff’s property. Id. at *4. They attached to the complaint a notice stating, inter alia, that the debt would be assumed valid unless the plaintiff disputed the debt “in writing” within thirty days of receiving the notice. Id. The district court held that the collector’s notice violated section 1692g(a)(3) of the FDCPA, but also held for defendants on the “bona fide error” defense, because the wording of the notice was based upon their error of law. Id. The Sixth Circuit affirmed the district court, but the Supreme Court reversed.

The Supreme Court rejected the argument that Congress only meant to impose liability on collectors who know that their conduct is unlawful, citing the “common maxim, familiar to all minds, that ignorance of the law will not excuse any person, either civilly or criminally. Id. at *5 (citations, internal quotation marks omitted). When Congress wants to provide a mistake of law defense, it generally does so explicitly. For example, the administrative-penalty provisions of the FTC Act only apply if a debt collector has acted with “actual knowledge or knowledge fairly implied on the basis of objective circumstances” that its conduct is prohibited by the Act, but the “bona fide error” defense does not contain similar language. Id. Given this, the Court inferred that Congress intended to allow consumers to recover for an FDCPA violation even when it results from a collector’s mistaken interpretation of the FDCPA, while reserving the more onerous provisions of the FTC Act to be imposed on collectors whose intentional actions reflected “knowledge fairly implied on the basis of objective circumstances” that they knew their conduct was prohibited. Id.

The Court also observed that the defense allows a collector to maintain “procedures” to avoid the error, and that a “procedure” is defined as “a series of steps followed in a regular orderly definite way. (Citation).” Id. at *7. The word “procedure” is thus “more naturally read to apply to processes that have mechanical or other such ‘regular orderly’ steps to avoid mistakes, for instance, the kind of internal controls a debt collector might adopt to ensure its employees do not communicate with consumers at the wrong time of day (citation), or make false representations as to the amount of the debt. (citation).” Id. Legal reasoning is not a “mechanical or strictly linear process,” said the Court, and therefore the “relevant procedures are ones that help to avoid errors like clerical or factual mistakes.” Id.

The Court noted that section 1692k(e) of the FDCPA provides separate protection from liability for “any act done or omitted in good faith in conformity with any advisory opinion of the [FTC].” Id. Congress apparently wanted the FTC to resolve ambiguities in the Act, and debt collectors would have no incentive to consult the FTC if the “bona fide error” defense provided immunity “for good faith reliance on private counsel.” Id.

Finally, the Court observed that Congress passed the FDCPA nine years after it had enacted the Truth In Lending Act (“TILA”), and Congress copied verbatim the language from TILA’s “bona fide error” defense into the FDCPA. Id. at *8. Three circuit courts had interpreted the language of the TILA statute to only extend to clerical errors. Id. While this may not have “settled” the meaning of TILA’s bona fide error defense, there was no reason to conclude that Congress disagreed with those interpretations when it passed the FDCPA. Id. The Court found “an inference that Congress understood the statutory formula it chose for the FDCPA consistent with Federal Court of Appeals interpretations of TILA.” Id.

The Court rejected the argument that its decision would lead to a “flood of lawsuits” against collection attorneys, or that it would create “an irreconcilable conflict between an attorney's personal financial interest and her ethical obligation of zealous advocacy on behalf of a client . . . .” Id. at *11. The Court observed that the FDCPA contains provisions designed to protect creditors and their attorneys. If an alleged violation is trivial, the actual damages “will likely be de minimus or even zero.” Id. Courts have discretion to reduce statutory damages “where a violation is based on a good faith error” of law. Id. Courts also have discretion to reduce the amount of attorneys’ fees below the lodestar in appropriate circumstances. Id. at *11, n. 16. Attorneys’ fees can be awarded to a collector defendant if the court finds that a plaintiff brought the case “in bad faith and for purpose of harassment.” Id. at *11. To the extent the FDCPA imposes constraints on a lawyer’s vigorous advocacy on behalf of a client, the Court found this “hardly unique in our law” citing, inter alia, a lawyer’s duties of professional conduct, and Rule 11 of the Federal Rules of Civil Procedure. Id. at *12.

The Court noted that Congress can amend the FDCPA if it believes that errors of law relating to the application of the Act should be included within the “bona fide error” defense. “This Court may not, however, read more into § 1692k(c) than the statutory language naturally supports. We therefore hold that the bona fide error defense in § 1692k(c) does not apply to a violation of the FDCPA resulting from a debt collector's incorrect interpretation of the requirements of that statute.” Id. at *13.

Saturday, April 10, 2010

When A Debt Is Not A "Debt" Under The FDCPA

Collectors should always remember that not every debt they are trying to collect qualifies as a “debt” as defined by the FDCPA. Even debts that you would normally assume are covered, like unpaid credit card accounts or residential telephone bills, are not necessarily covered. In order to prevail on an FDCPA claim, the plaintiff bears the burden of proving that they incurred a “debt” as defined by the Act. Never assume that they can meet this burden.

A “threshold issue” for any FDCPA case is whether the plaintiff incurred a “debt” as defined by the FDCPA. The Ninth Circuit stated this succinctly:

“Because not all obligations to pay are considered debts under the FDCPA, a threshold issue in a suit brought under the Act is whether or not the dispute involves a ‘debt’ within the meaning of the statute.”

Turner v. Cook, 362 F.3d 1219, 1226-27 (9th Cir. 2004) (alleged obligation to pay commercial tort judgment not a “debt” under FDCPA). The FDCPA has a very specific definition for what constitutes a “debt” covered by the Act, as follows:

“The term ‘debt’ means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether such obligation has been reduced to a judgment.”

15 U.S.C. § 1692a(5). To prevail, an FDCPA plaintiff must present evidence showing they incurred a debt “primarily for personal, family, or household purposes.” This may be more difficult than is seems.

Courts around the country have recognized that if there is no evidence the collector was attempting to collect a “debt” as defined by the FDCPA, there is no “debt collection” and no violation. See, e.g., Bloom v. I.C. System, Inc., 972 F.2d 1067, 1068-69 (9th Cir. 1992) (no “debt” under FDCPA where defendant sought to collect on loan used for business venture); First Gibraltar Bank, FSB v. Smith, 62 F.3d 133,135-36 (5th Cir. 1995) (FDCPA claims dismissed where defendant sought to collect obligation arising out of commercial transaction); Pollice v. National Tax Funding, LP, 225 F.3d 379, 401-02 (3d Cir. 2000) (property taxes not “debts” under the FDCPA); Staub v. Harris, 626 F.2d 275, 278 (3d Cir. 1980) (municipal taxes not “debts” under the FDCPA); Mabe v. GC Servs, Ltd., 32 F.3d 86, 88 (4th Cir. 1994) (child support obligations not “debts” under the FDCPA); Graham v. ACS, 2006 WL 2911780, *2 (D. Minn. 2006) (unpaid parking tickets not “debts” under FDCPA); Betts v. Equifax Credit Info. Servs., Inc., 245 F.Supp. 2d 1130, 1133-34 (W.D. Wash. 2003) (towing and impoundment fees not a “debt” under FDCPA).

Credit card debts deserve special attention here. A court cannot simply assume that every individual with an unpaid credit card must have incurred a “debt” covered by the FDCPA. To identify the nature of the debt, the starting point would be an examination of the charges reflected on the monthly credit card statements. Even if these statements can be obtained, the charges listed will not be self-explanatory or determinative of the issue. Personal credit cards are often used for business purposes, and those business charges are not covered by the FDCPA. A charge for airline tickets or a hotel room might be for business reasons. Charges at an electronics store might be for an office computer. Restaurant charges could be for a business dinner. Groceries could be for the office, and even a charge at a gas station could be for a business trip.

If the majority of the charges comprising the balance on a credit card are for business expenses, the debt was not incurred “primarily for personal, family or household” purpose, and there is no FDCPA claim. See, e.g., In Re Creditrust Corp., 283 B.R. 826, 830-31 (D. Maryland 2003) (attempts to collect credit card used for business purposes not covered by FDCPA); see also Bloom, 972 F.2d at 1068-69 (loan made to friend for business investment not a “debt”); First Gibraltar Bank, 62 F.3d at 136 (commercial obligation not covered by FDCPA); Ditty v. CheckRite, Ltd., 973 F. Supp. 1320, 1338 (D. Utah 1997) (three checks used for debtor’s painting business not covered); Fleet National Bank v. Baker, 263 F. Supp.2d 150, 154 (D. Mass. 2003) (commercial real estate loan not covered).

Personal credit cards can also be used to obtain cash advances, and that cash can be used a myriad of purposes that are not covered by the FDCPA. A cash advance might be used to finance a small business or to make a business loan to a friend. Or the card cash advance can be used to pay taxes, fines, or for child support obligations, none of which are covered by the FDCPA. A debtor would need to be deposed to determine whether the cash advance funds were used to incur a “debt” under the Act.

Similarly, telephones are often used for business purposes. This includes cell phones, and even land lines that are located in residences, which might be used for home businesses. To identify whether a “debt” was incurred, the starting point would be looking at the charges reflected on the monthly phone bills. If the bills can be obtained, the charges will not be self-explanatory. Once again, the debtor would need to be deposed in order to determine if each of the charges is properly characterized as business or personal.

While some unpaid obligations will always qualify as a “debt” under the FDCPA, many will not. Collectors should examine each case individually to determine whether a “debt” was incurred and whether the Act applies.

Tuesday, April 6, 2010

Why The Two-Year Statute Of Limitations In Section 415(a) of The FCA Does Not Apply To Telephone Bills

Consumer attorneys have argued that collection lawsuits filed to recover unpaid telephone bills are governed by the two-year statute of limitations found at section 415(a) of Federal Communications Act (“FCA”), 47 U.S.C. § 415(a), rather than the limitations periods established in the law of the state where the suit is filed. Armed with this theory, they have filed actions under the FDCPA, claiming that the collectors are improperly seeking to collect on time-barred debts. But section 415(a) of the FCA does not apply except in those extremely rare circumstances where a collector is seeking to recover charges imposed by a tariff. All telephone charges – both landline and cellular – have been detariffed since no later than 2001. The two-year limitations period from section 415(a) will almost never apply.

Section 415(a) provides that any claim for “lawful charges” by a carrier must be filed within two years of the date the claim accrues. It states: “All actions at law by carriers for recovery of their lawful charges, or any part thereof, shall be begun within two years from the time the cause of action accrues, and not after.” 47 U.S.C. § 415(a). But the only “lawful charges” covered by this limitations period are charges imposed by a carrier pursuant to a tariff filed with the Federal Communications Commission. See Castro v. Collecto, Inc., 668 F. Supp. 2d 950, 976-77 (W.D. Tex. Oct. 27, 2009) (“Castro II”) (“Under the ICA, and subsequently under the FCA, ‘lawful charges’ were those which were included in tariffs.”); see also 47 U.S.C. § 415(g) (“The term ‘overcharges’ as used in this section shall be deemed to mean charges for services in excess of those applicable thereto under the schedules of charges lawfully on file with the Commission.”).

Consumer attorneys may seek to rely on an earlier opinion issued by the same court. See Castro v. Collecto, Inc., 256 F.R.D. 534 (W.D. Tex. March 4, 2009) (“Castro I”). But Castro I is no longer good law. Months after Castro I was decided, after conducting an exhaustive review of the FCA and its legislative history, the same court reversed itself and held that the two-year statute of limitations in section 415(a) did not apply:

"Because the FCA's statutory scheme and legislative history manifestly evince that Congress did not intend to preempt a CMRS providers' state law remedies when the action does not touch on rates or entry market and because the FCC has eliminated the tariff requirement for such providers, the Court concludes section 415 does not apply to a CMRS provider who is attempting to collect a debt from a consumer and is not preemptive. Rather, the state law governing the debt collection action provides the applicable statute of limitations."

Castro II, 278 F. Supp. 2d at 978. Consumers may also rely on a district court case from Illinois which, relying on Castro I, certified a class action without analyzing the language or legislative history of section 415(a) the FCA. See Cotton v. Asset Acceptance, LLC, 2008 WL 2561103 (N.D. Ill. June 26, 2008). The Cotton decision is no longer persuasive in light of Castro II.

A state court collection complaint filed by a telephone company or its successor-in-interest will rarely, if ever, seek to recover “lawful charges” imposed under a tariff. Collectors typically assert common count claims arising under state law, such as account stated or book account. It is highly unlikely that any of these charges will be based upon tariffs, given that mandatory detariffing for landline charges occurred in 2001. See Frontline v. Sprint, 178 F. Supp. 2d 432, 434 (S.D.N.Y. 2001) (“On February 5, 2001, the F.C.C. issued public notice that all domestic tariffs must be cancelled by August 1, 2001. Common Carrier Bureau Extends Transition Period for Detariffing Consumer Domestic Long Distance Services, 16 F.C.C. Rcd. 2906 (2001).”). Cellular charges were detariffed years before that in 1993. See Castro II, 278 F. Supp. 2d at 977.

Once the FCC did away with tariffs, claims by carriers for unpaid telephone bills were to be governed by state law. See, e.g., Ting v. AT&T, 319 F.3d 1126, 1132 (9th Cir. 2003) (“Under mandatory detariffing, rather than having carriers file their rates, terms, and conditions with the FCC, the Commission required telecommunications carriers to establish contracts with consumers governing the rates, terms, and conditions of interstate long distance service.”).

Unless a consumer can allege and prove that a collector is seeking to recover “lawful charges” imposed pursuant to a tariff, the two-year limitations period found in section 415(a) will not apply. It will impossible for a consumer to prove this, unless the debt is for landline charges incurred prior to 2001, or cell phone charges incurred before 1993. In the absence of such charges, the state law statute of limitations will control.

Saturday, April 3, 2010

Are Communications With A Debtor's Lawyer Subject To The FDCPA?

If a collector is communicating with a debtor’s attorney instead of with the debtor, are the communications with the attorney subject to the FDCPA? The answer depends on what circuit you are in. The circuit courts have developed three different approaches to this issue, and several circuits still have not addressed the question.

In Sayyed v. Wolpoff & Abramson, 485 F.3d 226 (4th Cir. 2007), the Fourth Circuit held that the FDCPA does apply to communications between a debt collector and a debtor’s counsel. Id. at 232-33. The debtor in Sayeed alleged that statements made in the collector’s interrogatory responses and in a summary judgement motion – pleadings that had been served upon the debtor’s counsel in a collection lawsuit – violated the FDCPA. Id. at 228-29. The district court granted the defendant’s motion to dismiss, but the Fourth Circuit reversed.

The Sayyed court noted that the FDCPA defines “communication” broadly to include conveying information transmitted “indirectly” to a debtor, and that a “communication to debtor's counsel, regarding a debt collection lawsuit in which counsel is representing the debtor, plainly qualifies as an indirect communication to the debtor.” Id. at 232. The court reasoned that section 1692c(a)(2) of the Act, which mandates that when a debtor is represented, all communications must be made to a debtor’s attorney, is “but another indication that communications with a debtor's attorney with regard to the debt are "communications" as defined and regulated by the FDCPA – and that such communications must in fact be directed to the attorney under the terms of the statute.” Id. at 233.

Finally, the Sayyed court observed that the “communication” at issue in Heintz v. Jenkins, 514 U.S. 291 (1995), was a settlement letter between a collector and the debtor’s attorney. Sayeed, 485 F.3d at 233. According to Sayeed, the Supreme Court had “held” in Heintz that the debtor “had a cause of action under the FDCPA on the basis of statements contained within the letter to her counsel. (Citation). Thus, plainly, the FDCPA covers communications to a debtor’s attorney.” Id.

The Ninth Circuit considered Sayeed and came to the exact opposite result, holding that a communication with a debtor’s counsel is not governed by the FDCPA. See Guerrero v. RJM Acquisitions LLC, 499 F. 3d 926 (9th Cir. 2007). In Guerrero, the debtor argued that a letter sent to the debtor’s counsel, in response to a request for validation of the debt, was subject to the FDCPA. The district court agreed, and later awarded the debtor $2,545.00 in actual and statutory damages, along with $45,237.21 in attorneys fees. Id. at 932. The Ninth Circuit reversed, holding that the letter to the debtor’s counsel was not subject to the FDCPA:

"RJM argued before the court, and amici argued in its brief, that the Act's purpose is to protect unsophisticated debtors from abusive debt collectors, and once a consumer obtains this protection by procuring legal counsel, the Act's protections become superfluous and therefore its provisions no longer apply. We agree. The Act's language and underlying purposes recognize a distinction between a consumer and a consumer's legal counsel. They are distinct legal entities. We therefore hold that the letter directed to the consumer's attorney after receiving notice that the consumer disputed an alleged debt does not violate the Act."

Id. at 929. The Guerrero court noted that “All but one published federal decision to have given reasoned consideration to the question has determined that communications to a debtor's attorney are not actionable under the Act. (Citations).” Id. at 936. The Court rejected the notion that the Supreme Court had “ruled” in Heintz that the FDCPA necessarily applies to communications with a debtor’s counsel. The issue decided by Heintz was much narrower – “The issue before us is whether the term ‘debt collector’ in the [Act] applies to a lawyer who regularly, through litigation, tries to collect consumer debts.” Guerrero, 499 F. 3d att 937 (internal quotation marks omitted; alteration in original). The Guerrero court explained that it was not required to follow “what amounts to, at most, an implicit assumption” in the Heintz decision. Id. at 938.

Guerrero expressly rejected the holding of Sayeed. It noted that Sayeed “did not even acknowledge the great weight of authority holding to the contrary” and that it “relied upon the implicit assumption by the Supreme Court in Heintz, which we find inappropriate for the reasons just discussed.” Id. at 938. Guerrero notes that the language of section 1692c(a)(2) of the Act did not support Sayyed court’s reasoning and actually “cuts in the opposite direction, however, because it demonstrates that the Act contemplates different roles for, and different treatment of, attorneys and their debtor clients. Section 1692c(a)(2) actually reinforces our view that Congress treated attorneys as intermediaries between debtors and debt collectors, and that a debtor's attorney does not require the same protections as a debtor himself.” Id.

Yet another approach was adopted by the Seventh Circuit in Evory v. RJM Acquisitions Funding L.L.C., 505 F.3d 769 (7th Cir. 2007). The Evory court determined that the FDCPA does apply to communications made to a debtor’s counsel, but held that the “unsophisticated consumer” standard was not appropriate when evaluating those communications. Id. at 774. The Evory court fashioned a new standard for communications made to attorneys, holding that “a representation by a debt collector that would be unlikely to deceive a competent lawyer, even if he is not a specialist in consumer debt law, should not be actionable.” Id. at 775. The court noted that “false” statements may be more likely to mislead a competent attorney, since the attorney may be unable to discovery the falsity without an investigation that his client cannot afford to undertake. Id.

Given this three-way split between Sayeed, Guerrero and Evory on the issue of whether communications between a collector and a debtor’s counsel are covered by the FDCPA, it seems certain that debtors will continue to pursue this theory of recovery in circuits that have not adopted the Guerrero approach.

[Note: this post is an updated version of article that appeared in the September 2007 MAP Bulletin]