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from Countrywide, it acknowledged that Jerman had in fact paid the debt in full, so the foreclosure suit was withdrawn.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.