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

Friday, August 26, 2011

Why Your FDCPA Plaintiff May Lack Standing To Sue You

Thousands of FDCPA lawsuits are filed in federal courts across the country each year, and in most cases, the plaintiff has not suffered any actual damages resulting from the alleged violation. Most consumers are pursuing only statutory damages, which are capped at $1,000, while their attorneys seek thousands more in fees as compensation for proving technical violations of the Act that have caused no harm to their clients. Unfortunately, the courts have made these “no injury” cases easy to pursue by repeatedly ruling that consumers do not need to prove “actual damages” under the FDCPA in order to recover statutory damages and attorney’s fees. But are these decisions correct? Probably not, and there is a case pending before the Supreme Court that may help clarify that all plaintiffs in “no injury” cases lack standing to sue.

But first, what exactly is “standing” and why should anybody care about it? Standing is the most basic component of any federal court case. Standing is the plaintiff’s key to the courthouse door – he must demonstrate that he has it in order to get in, and he must maintain it during the entire course of his lawsuit against you. If the plaintiff lacks standing at any time during the suit, then there is no real “case or controversy” worthy of the court’s time, and the court lacks jurisdiction to proceed.

The standing doctrine has its roots in the Constitution. Article III of the Constitution limits the judicial authority of the federal courts to “cases” and “controversies.” See U.S. Const. art. III, § 2; see also Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 471 (1982) (the existence of a “case” or “controversy” is a “bedrock requirement” of federal court jurisdiction); Simon v. Eastern Ky. Welfare Rights Org., 426 U.S. 26, 37 (1976) (“No principle is more fundamental to the judiciary's proper role in our system of government than the constitutional limitation of federal court jurisdiction to actual cases or controversies.”).

The Supreme Court developed the doctrine of “standing” to ensure that only true “cases or controversies” can proceed in federal court. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). “In essence the question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues.” Warth v. Seldin, 422 U.S. 490, 498 (1975) (standing is “a threshold issue in every federal case, determining the power of the court to entertain the suit.”).

What is the test used to determine who has standing to sue, and who does not? The Supreme Court has explained that the “irreducible constitutional minimum” requirements of standing include proof that the plaintiff has suffered “injury-in-fact” resulting from the unlawful conduct – meaning the plaintiff suffered “an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical.” Lujan, 504 U.S. at 560.

Put simply, if a plaintiff has not suffered “injury in fact” as a result of the alleged FDCPA violation, then he lacks standing to sue you. The “injury in fact” test for standing “requires more than an injury to a cognizable interest. It requires that the party seeking review be himself among the injured.” Lujan, 504 U.S. at 563 (emphasis supplied); see also Raines v. Byrd, 521 U.S. 811, 819 (1997) (“We have consistently stressed that a plaintiff's complaint must establish that he has a personal stake in the alleged dispute, and that the alleged injury suffered is particularized as to him.”) (emphasis supplied); Warth, 422 U.S. at 498 (“The Art. III judicial power exists only to redress or otherwise to protect against injury to the complaining party, even though the court's judgment may benefit others collaterally. A federal court's jurisdiction therefore can be invoked only when the plaintiff himself has suffered some threatened or actual injury resulting from the putatively illegal action . . ..”) (emphasis supplied); Valley Forge, 454 U.S. at 473 (Article III’s standing requirements prevent “the conversion of courts of the United States into judicial versions of college debating forums.”).

If “injury in fact” is so critical to proving standing, then why have so many courts allowed FDCPA plaintiffs to pursue cases when they have suffered no actual harm? Courts have repeatedly held that a plaintiff may recover statutory damages under the FDCPA without alleging or proving any actual damages resulting from the violation. But most courts have reached this conclusion without addressing the decisions of the Supreme Court governing standing.

The first circuit court to do this was the Ninth Circuit in Baker v. G.C. Servs. Corp., 677 F.2d 775, 780-81 (9th Cir. 1982). The plaintiff in Baker challenged the contents of a collection letter, and the district court determined letter violated sections 1692e and 1692g of the FDCPA. See id. at 777. Even though the court held that plaintiff suffered no actual damages resulting from the letter, it awarded him $100 in statutory damages, plus attorneys’ fees. Id. The Ninth Circuit affirmed, noting there is “no indication in the statute that [an] award of statutory damages must be based on proof of actual damages.” Id. at 780. But the Baker court never addressed whether a consumer who had not alleged or proved actual damages stemming from an FDCPA violation had standing.

After Baker, other circuit courts held that plaintiffs may pursue claims for statutory damages under the FDCPA without proving any actual damages. Like Baker, however, most of these courts made their rulings without addressing the Supreme Court’s decisions on Article III standing. See, e.g., Keele v. Wexler, 149 F.3d 589, 593-94 (7th Cir. 1998); Miller v. Wolpoff & Abramson, L.L.P., 321 F.3d 292, 307 (2d Cir. 2003); Carroll v. Wolpoff & Abramson, 53 F.3d 626, 629 (4th Cir. 1995); Harper v. Better Business Servs, Inc., 961 F.2d 1561, 1563 (11th Cir. 1992). One court did address the standing issue directly, and ruled that a consumer who suffers no actual damages still has standing based solely upon their claim for statutory damages. See Robey v. Shapiro, Marianos & Cejda, LLC, 434 F.3d 1208, 1212 (10th Cir. 2006).

So where does this leave us? A case now pending in the Supreme Court may help clarify things. In Edwards v. First American Corp., 610 F.3d 514 (9th Cir. 2010), the Ninth Circuit allowed a consumer to pursue a claim for statutory damages under the Real Estate Settlement Procedures Act (RESPA), even though there was no allegation the consumer was overcharged as a result of the violation. Id. at 517-18. The Supreme Court has granted certiorari and it will address whether Article III standing exists in these circumstances. See First American Financial Corp. v. Edwards, _ S. Ct. _, 2011 WL 2437037 (U.S. June 20, 2011).

Edwards may help clarify that plaintiffs who sue under consumer protection statutes like the FDCPA must plead and prove that they have suffered actual damages in order to demonstrate standing to sue. Congress can pass laws that provide consumers with a new cause of action, but Congress does not have the power to erase Article III's minimum standing requirements. See Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 100 (1979) (“In no event, however, may Congress abrogate the Art. III minima: A plaintiff must always have suffered a distinct and palpable injury to himself . . . that is likely to be redressed if the requested relief is granted.”) (internal quotation marks and citations omitted); see also Summers, 129 S.Ct. at 1151 (“Unlike redressability, however, the requirement of injury in fact is a hard floor of Article III jurisdiction that cannot be removed by statute.”) (emphasis added); Valley Forge, 454 U.S. at 488, n.24 (“Neither the Administrative Procedure Act, nor any other congressional enactment, can lower the threshold requirements of standing under Art. III.”); Simon, 426 U.S. at 39 (“broadening the categories of injury that may be alleged in support of standing is a different matter from abandoning the requirement that the party seeking review must himself have suffered an injury.”) (citation omitted).

ACA International has filed an amicus curiae brief in the Edwards case, urging the Court to reverse the Ninth Circuit. A copy of the brief can be downloaded here:

ACA International's Amicus Brief In First American Financial Corp v. Edwards -

A decision in the Edwards case is not expected until 2012, and the Edwards opinion may or may not address the specific FDCPA issues raised here. But FDCPA defendants should still evaluate today whether the plaintiff who has filed suit has standing to do so. If the consumer has not suffered any “injury in fact” as a result of alleged FDCPA violation, they lack standing and the case should be dismissed.

Saturday, July 23, 2011

Using Dukes In FDCPA Class Actions: How Wal-Mart Stores, Inc. v. Dukes Can Help FDCPA Defendants Defeat Class Certification

Any debt collector faced with an FDCPA class action should read the Supreme Court’s recent decision in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011) with care, because it provides a framework for potential challenges to class certification in FDCPA cases. Dukes was not an FDCPA case, of course – it was a class action alleging that Wal-Mart had violated Title VII by employing a discretionary pay and promotion system that discriminated against women. But Dukes provides a powerful reminder that class actions should only be certified in those rare cases where, after a rigorous analysis of the record, the court is satisfied that the plaintiff has met each of the detailed requirements for certification. Dukes will also help FDCPA defendants oppose class certification based upon the lack of “commonality” of the claims of the class members.

To figure out how Dukes might impact your particular case, start with some class action basics. Dukes reiterated that a class action is an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only and that in order to “justify a departure from that rule, a class representative must be part of the class and possess the same interest and suffer the same injury as the class members.” See Dukes, 131 S.Ct at 2550 (citations, quotation marks omitted). In federal courts, the certification process is governed by Rule 23 of the Federal Rules of Civil Procedure, which places important limits on class actions. Rule 23 is designed to “ensure that the named plaintiffs are appropriate representatives of the class whose claims they wish to litigate” and its requirements “effectively limit the class claims to those fairly encompassed by the named plaintiff’s claims.” Id. (citations, quotation marks omitted).

Under Rule 23(a) of the Federal Rules of Civil Procedure, the party seeking certification must demonstrate that: (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. See Dukes, 131 S.Ct. at 2548. If the requirements of Rule 23(a) can be satisfied, the plaintiff must also demonstrate that the proposed class satisfies at least one of the three requirements listed in Rule 23(b). Id.

Plaintiffs often argue that a court should never consider the merits of the claim when deciding whether to certify a class, but Dukes reminds us that this is not true. Dukes confirms that "sometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question, and that class certification is proper only if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied, . . . . Frequently that rigorous analysis will entail some overlap with the merits of the plaintiff's underlying claim. That cannot be helped. The class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff's cause of action.” Id. at 2551-52 (citations, quotation marks omitted).

The plaintiffs in Dukes could not meet the requirements of Rule 23(a). Specifically, the Supreme Court reiterated that proving “commonality” – i.e., establishing the requisite “questions of law or fact common to the class” under Rule 23(a) – requires a plaintiff to submit evidence that “the class members have suffered the same injury.” Id. at 2551 (citation omitted, emphasis added). “This does not mean merely that they have all suffered a violation of the same provision of law.” Id. Instead, proof of “commonality” requires evidence “that all of their claims can productively be litigated at once.” Id. (emphasis added). In other words, the claims of the class “must depend upon a common contention” and that common contention “must be of such a nature that it is capable of classwide resolution - which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” Id.

The Dukes Court explained that while identification of questions that are common to the class may be easy, the key inquiry when deciding to certify a class is whether proceeding on a classwide basis will generate common answers:

"What matters to class certification . . . is not the raising of common questions' - even in droves - but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities within the proposed class are what have the potential to impede the generation of common answers."

Id. (italics in original, emphasis added, citation omitted). The Dukes Court held that litigation of the claims of the class members would not generate common answers, because the reasons for Wal-Mart’s employment decision would vary for each class member:

"Here respondents wish to sue about literally millions of employment decisions at once. Without some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members' claims for relief will produce a common answer to the crucial question why was I disfavored."

Id. at 2552 (italics in original).

With Dukes as the backdrop, ask yourself whether the named plaintiff in your FDCPA class action can show “commonality” under Rule 23. Have the members of the class suffered the same injury? Often the answer is “no” because the class members may have incurred different alleged injuries based upon varying factors that may or may not be related to the alleged FDCPA violation. Can all of the class members claims be productively litigated at once in the same case? Do all of their claims depend on one common contention, the resolution of which will be central to the validity of all of their claims? Will litigating the case on a classwide basis make sense because it is apt to generate common answers to the same questions? Once again, the answer to these questions is often “no” because the resolution of each of class members’ claims will turn upon a disparate set of facts and circumstances, or because the defendant may have a different defense to the purported class members’ claims.

Like the plaintiffs in Dukes, many FDCPA plaintiffs will not be able to demonstrate “commonality” because resolution of claims of the proposed class members will turn upon thousands of individualized fact patterns. If the claims of the class members cannot be productively litigated at the same time, then under Dukes, class certification should be denied.

Sunday, July 3, 2011

Lesher And “Legal Capacity” - The Third Circuit Grafts A New Concept Into The FDCPA With Lesher v. Mitchell N. Kay

If collection attorneys were looking for guidance on how to draft their collection letters without violating the FDCPA, the decision of the Third Circuit Court of Appeals in Lesher v. The Law Offices Of Mitchell N. Kay, _ F.3d _, 2011 WL 2450964 (3d Cir. 2011) definitely will not help them. In Lesher, the Court held that settlement letters sent on a law firm’s letterhead “raise[d] the specter of potential legal action” and were therefore false and misleading under section 1692e of the FDCPA, because the firm was not acting in a “legal capacity” when the letters were sent. See id. at *9. The term “legal capacity” is not defined by the FDCPA, however, and the Court did not explain exactly when an attorney is, or is not, acting in a “legal capacity” for his client.

The Lesher decision also held that the use of the disclaimer approved by the Second Circuit in Greco v. Trauner, Cohen & Thomas, 412 F.3d 360 (2d Cir. 2005), i.e., “[a]t this point in time, no attorney with this firm has personally reviewed the particular circumstances of your account” on the back of the letters was not sufficient to inform the debtor that the firm was “acting solely as a debt collector and not in any legal capacity in sending the letters.” See Lesher, at *8.

In Lesher, the defendant sent two letters stating that the firm was “handl[ing]” the account and had been authorized to make a settlement proposal. Id. at *1. Neither letter was signed by an attorney, and neither contained any references to legal action if the settlement offer was not accepted. Id. Both letters stated, on the reverse side, that “no attorney with this firm has personally reviewed the particular circumstances of your account.” Id. There was nothing in the letters suggesting that the firm would initiate a lawsuit or otherwise escalate the matter if the debtor did not accept the settlement offer.

Despite this, the Third Circuit held that “the least sophisticated debtor, upon receiving these letters, may reasonably believe that an attorney has reviewed his file and has determined that he is a candidate for legal action.” Id. at *8. The Court held the letters falsely implied “that an attorney, acting as an attorney, is involved in collecting Lesher's debt.” Id. (emphasis added). The Lesher Court concluded: “[W]e believe that it was misleading and deceptive for the Kay Law Firm to raise the specter of potential legal action by using its law firm title to collect a debt when the firm was not acting in its legal capacity when it sent the letters.” Id. at *9 (emphasis added).

Thus, under Lesher, a collection attorney who is not “acting as an attorney” nor acting in a “legal capacity” must take extra care when sending a settlement letter to a consumer. But when, exactly, is a collection lawyer “acting as an attorney” or acting in a “legal capacity” for his client, consistent with Lesher? Can an attorney act in a “legal capacity” for his client before any decision has been made about whether to file a lawsuit? Is a lawyer “acting as an attorney” even when he is offering to settle a debt without initiating litigation? The Lesher Court does not explain the terms or provide any guidance, and there is nothing in the language of the FDCPA that defines either term.

The FDCPA prohibits collection attorneys from making materially false or misleading statements in their communications with consumers. The Act does not regulate the practice of law, however, nor does it govern the workflow and interaction between an attorney and his creditor client. But the Lesher Court did exactly that, holding that the defendant was not acting in a “legal capacity” for its client at the moment in time when the letters were sent.

The FDCPA should not be used as a vehicle for federal courts to regulate the practice of law. There is nothing in the language in the FDCPA which suggests that Congress wanted courts to use it to define or otherwise intrude upon the attorney-client relationship. See, e.g., American Bar Ass’n v. Federal Trade Comm’n, 430 F.3d 457, 467 (D.C. Cir. 2005) (rejecting argument that Congress intended the FTC to regulate attorneys using the privacy provisions of the Gramm-Leach Bliley Act: “[Congress] does not . . . hide elephants in mouseholes. (citation)”).

The Lesher decision is wrong. It unfairly penalizes an attorney for sending two truthful, non-threatening settlement letters to a consumer. It improperly interferes with the practice of law. It creates further confusion for an industry that is sorely in need of clarity. Lesher does not explain when an attorney is “acting as an attorney” and when he is not. Nor should any federal court utilize the FDCPA to do so.

Sunday, April 24, 2011

Zero Damages: A Pyrrhic Victory For Plaintiffs In Jerman v. Carlisle

You would think that if an FDCPA plaintiff takes her case all the way to the United States Supreme Court and wins, she would recover the maximum amount of damages that the statute allows, right? Wrong.

After winning just the second FDCPA case to ever reach the highest court, Jerman v. Carlisle, et al, 130 S. Ct. 1605 (2010), plaintiff Karen Jerman was remanded to the district court, where she was promptly awarded zero damages for herself, and zero damages for the class of consumers she had been representing for five years. See Jerman v. Carlisle, et al., 2011 WL 1434679 (N.D. Ohio April 14, 2011). For those of you who are keeping score at home, in the only other FDCPA case to make it to the United States Supreme Court, the plaintiff also won, but later came up empty-handed when the case was remanded. See Jenkins v. Heintz, 124 F. 3d 824 (7th Cir. 1997) (on remand, defendant attorneys prevailed on the “bona fide error” defense).

So what exactly is going on here? Is there a Supreme Court curse for FDCPA plaintiffs that we ought to know about? Not really. A closer look at the district court’s decision on remand in Jerman shows that it is consistent with recent FDCPA rulings that reject claims based on highly-technical readings of the statute where nobody is harmed. The district court in Jerman carefully examined the record, applied the five-factor test established by Congress for evaluating statutory damages, and properly determined that Ms. Jerman and her class were entitled to recover nothing.

In Jerman, the defendants, a law firm and one of its attorneys, had filed a complaint in state court on behalf of Countrywide Home Loans, Inc., seeking to foreclose on Jerman’s property. See Jerman, 2011 WL 1434679, at *1. The defendants attached a “Notice” to the complaint, stating, inter alia, that the mortgage debt would be assumed valid unless Jerman disputed the debt “in writing.” Id. Ms. Jerman’s lawyer sent a letter disputing the debt, and when the defendants sought verification from Countrywide, it acknowledged that Jerman had in fact paid the debt in full, so the foreclosure suit was withdrawn. Id. In other words, the section 1692g notice and dispute process worked exactly as Congress designed it.

Apparently unsatisfied with this result, however, Jerman then filed an FDCPA class action against the law firm and its attorney, alleging that the Notice violated the Act by stating the debt would be assumed valid unless she submitted a dispute “in writing.” Id. The district court held that the Notice violated section 1692g(a)(3) of the FDCPA, but also ruled in favor of defendants on the “bona fide error” defense, because the wording used in the Notice resulted from their error of law. Id. The Sixth Circuit affirmed that ruling, but on this narrow legal point, the Supreme Court reversed. It held that the “bona fide error” defense does not apply to a violation of the Act which results from a defendant’s incorrect interpretation of the legal requirements of the FDCPA. Id. at *2.

So if the Supreme Court held in favor of Ms. Jerman, how exactly did she and the class end up with an award of zero damages? On remand, the parties filed cross-motions for summary judgment on the issue of damages. Id. Jerman claimed she was entitled to the maximum amount of statutory damages, $1,000.00, and that the class should also recover the maximum amount, which was one percent of the defendants’ net worth, or $13,052.35. Id. After considering each of the five factors set forth by Congress in section 1692k(b)(2) of the FDCPA, however, the district court held that Jerman and the class should take nothing. Here are the factors the court considered:

1. The frequency and persistence of noncompliance by the debt collector. The district court held that Defendants’ noncompliance was neither frequent nor persistent, because Defendants had only sent one Notice to Jerman and each class member. Id. at *5. It rejected Jerman’s argument that the conduct was frequent and persistent because the Notice had been sent to 4,211 class members within the year preceding the suit, and had been used by the firm for several years before that. The court noted that “there is no evidence that anyone was badgered or harassed” by Defendants, and observed that Defendants could not have known the Notice violated the FDCPA until the court ruled against them. Id. at *4. The court also held that the “frequency and persistence” of the Defendants’ conduct cannot be measured just by adding up the number of consumers who received the Notice, or this would make the term “number of persons adversely affected” – another factor that must be weighed in the damage analysis – superfluous. Id. at *4-5.

2. The Nature Of The Noncompliance. Although the nature of the Defendants’ noncompliance was not necessarily “trivial” the court found there was no evidence that anyone was harmed by the letters, so this factor did not weigh in favor of either party when assessing statutory damages. Id. at *6-7.

3. The Resources Of The Debt Collector. The court found that consideration of the defendants’ resources weighed in favor of the plaintiff. The net worth of Defendants was $1,305,225.17, and thus the maximum amount of statutory damages that could be awarded was $1,000 for Jerman and $13,052.25 for the class. Id. at *7. Defendants argued that even a nominal award of statutory damages would unjustly punish them, given their good faith and the lack of any harm. Id. The court noted, however, that even the maximum award “would not have a severe impact on the Law Firm’s ability to operate” and that statutory damages can be awarded even in the absence of actual damages. Id.

4. The Number Of Persons Adversely Affected. The court held that Jerman had failed to show any person had been “adversely” effected by the Notice, so this factor weighed in favor of Defendants. Id. at *8. There was no evidence that Jerman or any member of the class had suffered any actual damage, nor was there evidence to support Jerman’s argument that consumers may have been intimidated into waiving their dispute rights. Id.

5. The Extent To Which The Debt Collector’s Noncompliance Was Intentional. The court held that Defendants had relied in good faith upon their interpretation of the requirements of the FDCPA, and there was no evidence that Defendants’ noncompliance was intentional. Id. at *8-9. The court had already ruled that Defendants acted in good faith, and that ruling had not been disturbed by the Supreme Court on appeal. Id. at *10.

In reaching its conclusion that zero damages was appropriate, the court observed that the FDCPA sets “no minimum damages” and that statutory damages are therefore “not automatic.” Id. at *11. It agreed with Defendants’ argument 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.

At the time of this writing, the district court has not yet addressed whether Jerman is entitled to recover her attorney’s fees. It would appear that she is facing an uphill battle. Attorneys fees may only be awarded in any “successful” action, pursuant to section 1692k(a)(3). Given that Jerman failed to prove that any consumer was harmed and recovered zero damages for herself and the class, she may have difficulty showing that her lawsuit was a success.

Monday, April 4, 2011

Why Courts Have Read Section 1692d Of The FDCPA Narrowly To Prohibit Only Outrageous Language

Debt collectors are being sued in courts across the country for allegedly violating the FDCPA by making harassing and abusive phone calls to consumers. No clear rules exist on what constitutes harassing or abusive language, however, and the language of the FDCPA does not shed much light on this subject.

Section 1692d provides that collectors may not engage in “any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt.” See 15 U.S.C. § 1692d. In addition, section 1692d(2) of the Act prohibits debt collectors from using “obscene or profane language or language the natural consequence of which is to abuse the hearer or reader.” Id. at § 1692d(2). But what exactly does this mean? When has a collector stepped over the line from making an appropriate demand for payment into harassing or abusive conduct?

Surprisingly few circuit courts have interpreted section 1692d of the FDCPA, but the courts that have done so have construed it very narrowly. The leading case is Jeter v. Credit Bureau, Inc., 760 F.2d 1168 (7th Cir. 1985), where the Seventh Circuit held that a letter stating that an account would be referred for legal action, and that this “may cause you embarrassment, inconvenience and further expense,” did not violate section 1692d. Id. at 1178-79. The description of the potential impact of a lawsuit was a “true statement” and did not create a “tone of intimidation.” Id. at 1179. The statement did not violate section 1692d(2), because that subsection was “meant to deter offensive language which is at least akin to profanity or obscenity. Such offensive language might encompass name-calling, racial or ethnic slurs, and other derogatory remarks which are similar in their offensiveness to obscene or profane remarks.” Id. at 1178. It was no surprise, therefore, in Horkey v. J.V.D.B. & Associates, Inc., 333 F. 3d 769 (7th Cir. 2003), when the Seventh Circuit affirmed a trial court ruling that section 1692d(2) was violated. There, after the debtor explained she could not discuss the debt a work, the collector called back and left a message with a coworker stating “tell Amanda to stop being such a [expletive] bitch.” Id. at 773.

More recently, the Sixth Circuit held in Harvey v. Great Seneca Fin. Corp., 453 F.3d 324 (6th Cir. 2006), that “the filing of a debt-collection lawsuit without the immediate means of proving the debt does not have the natural consequence of harassing, abusing, or oppressing a debtor” and thus does not violate section 1692d. Id. at 330. As the Harvey Court observed: “Any attempt to collect a defaulted debt will be unwanted by a debtor, but employing the court system in the way alleged by Harvey cannot be said to be an abusive tactic under the FDCPA.” Id. at. 330-31.

District courts have also read section 1692d narrowly, recognizing that it prohibits “only oppressive and outrageous conduct,” and that it was “not intended to shield even the least sophisticated recipients of debt collection activities from the inconvenience and embarrassment that are natural consequences of debt collection.” Beattie v. D.M. Collections, Inc., 754 F. Supp. 383, 394 (D. Del. 1991) (attempts to collect debt from wrong individuals did not violate section 1692d); see also Bieber v. Associated Collection Servs., Inc., 631 F. Supp. 1410, 1471 (D. Kan. 1986) (asking if debtor had hired a bankruptcy attorney did not violate section 1692d: “[Section 1692d] prohibits a debtor's tender sensibilities only from oppressive and outrageous conduct. Some inconvenience to the debtor is a natural consequence of debt collection.”); Shuler v. Ingram & Assocs., 710 F. Supp. 2d 1213, 1222 (N.D. Ala. 2010) ( references to potential garnishment and liens were “probably unpleasant” but were not sufficient to support a claim: “Courts have construed narrowly the type of conduct that violates § 1692d( 2).”)).

Given that section 1692d only prohibits outrageous language and conduct, courts have held that laughing at a debtor during a collection call is not sufficient to support a section 1692d claim. See, e.g., Bassett v. I.C. Sys., Inc., 715 F. Supp. 2d 803, 809 (N.D. Ill. 2010) (laughing may be “rude” but does not amount to a section 1692d violation); Gallagher v. Gurstel, Staloch & Chargo, P.A., 645 F. Supp. 2d 795, 799 (D. Minn. 2009) (laughing is not even “remotely comparable” to type of conduct that violates section 1692d).

In addition, courts have held that calling a debtor a “liar” does not violate section 1692d. See, e.g., Bassett, 715 F. Supp. 2d at 809 (calling debtor “liar” and accusing him of making excuses to avoid payment did not violate section 1692d(2)); Guarjardo v. GC Servs., LP, 2009 WL 3715603 (S.D. Tex. Nov. 3, 2009) (calling debtor “liar,” demanding “payment in full within 24 hours or else,” and saying “I can tell the kind of life you live by the fact that you don’t pay your bills on time” not enough to prove section 1692d claim); Mammen v. Bronson & Migliacco, LLP, 715 F. Supp. 2d 1210, 1218 (M.D. Fla. 2009) (telling debtor “You’re lying, this is your account and you have to pay it” and hanging up not sufficient to prove a section 1692d claim); Montgomery v. Florida First Financial Group, Inc., 2008 WL 3540374 (M.D. Fla. Aug. 12, 2008) (calling debtor a “liar” and her mother a liar not enough to prove section 1692d claim).

Some courts have held that yelling at a debtor is not a violation of section 1692d. See, e.g., Kelemen v. Professional Collection Sys., 2011 WL 31396 (M.D. Fla. Jan. 4, 2011) (telling debtor to “pay your damn bills” was rude but not obscene or profane under section 1692d(2); noting that profane means “importing an imprecation of divine vengeance or implying divine condemnation or irreverence toward God or holy things.”); Unterreiner v. Stoneleigh Recovery Assocs., LLC, 2010 WL 2523257, *1 (N.D. Ill. June 17, 2010) (screaming at debtor, saying you owe “all kinds of money” and asking “how could you go and max out a card like that?” was “rude and unpleasant” but did not state a section 1692d claim); Thomas v. LDG Fin. Servs. LLC, 463 F. Supp. 2d 1370, 1373 (N.D. Ga. 2006) (yelling at debtor “Georgia is a garnishable state” and hanging up did not violate section 1692d).

Debt collectors should always treat consumers with dignity and respect during the collection process. As courts throughout the country have recognized, however, section 1692d of the FDCPA is narrow in scope, and only prohibits the use of truly outrageous language – such as profanity, racial or ethnic slurs or other derogatory remarks – which has the natural tendency to harass, oppress or abuse the listener.

Sunday, February 20, 2011

Caveat Creditor: Why Creditors Must Be Wary Of California’s Rosenthal Act And The FDCPA

Should creditors care about the FDCPA? For the most part, original creditors – including banks, credit card issuers, finance companies, telecommunications companies, payday lenders, and other entities that extend credit directly to consumers – do not operate as “debt collectors” as defined by the FDCPA. For this reason, when creditors are trying to collect money from their own customers, they may not pay much attention to the requirements of the FDCPA, or the myriad of cases that have interpreted the statute. But ignoring the FDCPA is not a good idea for creditors who want to collect money from customers located in California.

Any creditor who attempts to collect a consumer debt from a California consumer likely qualifies as a “debt collector” under California’s debt collection statute – the Rosenthal Act. See Cal. Civ. Code § 1788.2(c) (“debt collector” includes anyone “who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection.”). The Rosenthal Act not only includes its own set of requirements regulating debt collection, but also incorporates by reference most of the requirements of the FDCPA. See Cal. Civ. Code §1788.17. Thus, a creditor who fails to comply with the FDCPA while collecting from a California resident may be violating California law.

There are two significant exceptions to section 1788.17 of the Rosenthal Act: creditors do not need to provide consumers with the “mini-Miranda” notice required by section 1692e(11) of the FDCPA, nor must creditors send consumers the validation notice mandated by section 1692g of the FDCPA. See Cal. Civ. Code § 1788.17. But the remaining substantive provisions of the FDCPA, as well as the remedies provided by section 1692k(a)(3) of the Act, apply to creditors who collect in California. Id.

The FDCPA can be an awkward fit when it is applied to creditors collecting from their own customers. Despite this, courts will often rely on the reasoning employed by FDCPA decisions when evaluating Rosenthal Act claims filed against creditors. See, e.g., Reyes v. Wells Fargo Bank, N.A., 2011 WL 30759 (N.D. Cal. Jan. 3, 2011) (using “least sophisticated debtor” standard to evaluate Rosenthal Act claims against creditor); Thompson v. Chase Bank, N.A., 2010 WL 1329061, at *3 (S.D. Cal. March 30, 2010) (refusing to dismiss Rosenthal Act claims alleging that collection calls made on Easter Sunday, Memorial Day and Mothers’ Day were at “inconvenient” or “unusual” times).

Creditors, like traditional debt collectors, must be aware of the volume and pattern of their collection phone calls. Creditors obviously have a legitimate need to contact their delinquent customers by phone to make payment arrangements. But the Rosenthal Act, like the FDCPA, prohibits creditors from placing telephone calls repeatedly or continuously with the intent to annoy the person called. See Cal. Civ. Code §§ 1788.11(d), 1788.11(e). Is there a limit on how many call attempts a creditor can make?

To date, there are no clear answers, because the reported decisions have involved calls placed by traditional debt collectors, not by creditors. But we can expect that the courts will be guided by the reasoning used in FDCPA cases, considering not only the volume of the calls, but also the calling pattern and the individual facts of the case. See e.g., Arteaga v. Asset Acceptance, 733 F. Supp. 2d 1218, 1229 (E.D. Cal. 2010) (summary judgment for debt collector; evidence of “daily” calls not sufficient to support claim for intent to harass under FDCPA or section 1788.11 of the Rosenthal Act); Rucker v. Nationwide Credit, Inc., 2011 WL 25300 (E.D. Cal. Jan. 5, 2011) (refusing to dismiss claims under FDCPA or sections 1788.11(d), (e) of Rosenthal Act where collector allegedly placed 80 calls to consumer in one year).

Will courts utilize the Foti line of cases when evaluating the content of voice mail messages left by creditors? The reasoning of the Foti decisions likely will not make sense when applied to a creditor’s voice mails messages, and to date, there are no published decisions on the issue. But creditors should consider that California courts have held that a debt collector’s failure to properly identify itself in a voice mail message can violate both the FDCPA and the Rosenthal Act. See, e.g., Hosseinzadeh v. M.R.S. Associates, Inc., 387 F. Supp. 2d 1104,1117-18 (N.D. Cal. 2005) (collector’s failure to properly identify itself in voice mail messages violated FDCPA and Rosenthal Act); Joseph v. J.J. Mac Intyre, L.L.C., 238 F. Supp. 2d. 1158, 1168 (N.D. Cal. 2002) (same, denying motion to dismiss).

Most creditors have procedures in place for dealing with consumers who are represented by attorneys. When a consumer notifies the creditor in writing that she has retained an attorney, the Rosenthal Act prohibits the creditor from initiating communications directly with the consumer – “other than statements of account” – in an attempt to collect the debt. See Cal. Civ. Code § 1788.14(c). But what if the creditor mails a monthly statement directly to a represented consumer, and the statement includes language noting that the account is delinquent? Unfortunately, the Rosenthal Act does not define the term “statements of account” and the courts in California are split on this issue. See, e.g., Marcotte v. GE Capital Services, 709 F. Supp. 2d 994 (S.D. Cal. 2010) (granting judgment on the pleadings; monthly billing statements sent directly to represented consumer did not violate section 1788.17 of Rosenthal Act); Moya v. Chase Cardmember Service, 661 F. Supp. 2d 1129 (N.D. Cal. 2009) (denying motion to dismiss claim that monthly statements sent to represented consumer violated section 1788.14 of Rosenthal Act).

Should creditors be concerned about facing Rosenthal Act class actions? Section 1788.30 of the Rosenthal Act does not allow for class actions, and in fact, it specifically limits consumers to pursuing claims “only in an individual action.” See Cal. Civ. Code §§ 1788.30(a), 1788.30(b). Under section 1788.17 of the Rosenthal Act, however, creditors are “subject to the remedies” of section 1692k of the FDCPA. A number of courts have held that consumers may pursue class actions under the Rosenthal Act. See, e.g. Abels v. JBC Legal Group, P.C., 227 F.R.D. 541 (N.D. Cal. 2005) (granting motion to certify Rosenthal Act class action); Gonzalez v. Arrow Financial Services LLC, 489 F. Supp. 2d 1140 (S.D. Cal. 2007) (denying motion to decertify Rosenthal Act class action).

The Rosenthal Act allows consumers to recover any actual damages they sustain by reason of the violation. See Cal. Civ. Code § 1788.30(a). Unlike the FDCPA, however, the Rosenthal Act is not a strict liability statute. Statutory penalties ranging from $100 to $1000 may be recovered, but only where the consumer demonstrates the defendant “willfully and knowingly” violated the Rosenthal Act. See Cal. Civ Code § 1788.30(b).

If a willful and knowing violation is shown, are the statutory damages limited to $1000 per action, as in FDCPA cases, or may the consumer recover $1000 per violation? The better-reasoned decisions hold that the consumer is limited to $1000 per action. See, e.g., Scott v. Federal Bond and Collection Service, Inc., 2011 WL 176846, at *3 (N.D. Cal. Jan 19, 2011) (Rosenthal Act statutory damages limited to $1000 per action); Marseglia v. JP Morgan Chase Bank, 2010 WL 4595549 (S.D. Cal. Nov. 12, 2010) (same). One California court, however, refused to grant a creditor’s motion to strike portions of a Rosenthal Act complaint that sought $1000 per violation. See Hamberg v. JP Morgan Chase Bank, 2010 WL 2523947 (S.D. Cal. June 22, 2010).

What about defenses? Like the FDCPA, the Rosenthal Act includes a “bona fide error” defense, which allows a creditor to prove that any violation was not intentional, and occurred notwithstanding maintenance of procedures reasonably adapted to avoid the violation. See Cal. Civ. Code § 1788.30(e). The Rosenthal Act also has a “right to cure” defense, which permits a creditor, within 15 days of discovering any violation which is “able to be cured” or after written notice of any such violation, to notify the debtor of the violation and to make any adjustments or corrections necessary to cure the violation. See Cal. Civil Code § 1788.30(d).

The Rosenthal Act has been around for decades, and the statute has always applied to creditors. During the past few years, however, the Rosenthal Act has become a favorite of consumer attorneys, and the trend appears likely to continue. Creditors with customers in California must be aware that, in light of section 1788.17 of the Rosenthal Act, any attempts to collect in California must comply with the Rosenthal Act and the FDCPA.