After conducting a series of roundtable discussions with industry experts in Chicago, San Francisco and Washington, D.C., the FTC recently released its report entitled: "Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration." A copy of the report can be read and downloaded here:
FTC Report.Repairing A. Broken System.Protecting Consumers In Debt Collection Litigation And Arbitration -
The Executive Summary to the Report acknowledges the critical role that collectors play in the health of the economy. The FTC states: "Credit benefits consumers by allowing them to obtain goods and services without paying the entire cost at the time of purchase. This lets consumers make purchases they might not otherwise be able to afford, and allows them to benefit from goods and services immediately while paying for them over time. Because consumers sometimes fail to pay their creditors, debt collection plays a vitally important role in the consumer credit system. Debt collection benefits individual creditors, of course, who are repaid money they are owed. More importantly, however, by providing compensation to creditors when consumers do not repay their debts, the debt collection system helps keep credit prices low and helps ensure that consumer credit remains widely available."
Having said this, however, the balance FTC's report is highly critical of the debt collection industry generally, and critical of the collection litigation and arbitration process specifically. While the report made a splash when it was announced, it is unclear whether the FTC will actually play any significant role with respect to the issues the report has raised. Will the report be a catalyst for change, or much ado about nothing?
For example, many of the recommendations made by the FTC would require wholesale changes to the rules of civil procedure and substantive rules bearing on state court collection litigation -- changes that state legislatures would need to enact. States would need to be convinced that it made sense to pass an entirely new set of rules that would apply to debt collection cases only, as opposed to other forms of civil litigation. States may conclude, contrary to the implicit assumption in the FTC report, that their existing rules governing civil litigation already provide consumers with sufficient protections.
The FTC also seems fixated on the notion that collectors throughout the country are routinely filing lawsuits that seek to collect on time-barred debt, though the report does not cite to empirical studies to provide support for this belief. The report recommends that collectors be forced to notify consumers and courts when the debt at issue may be beyond the applicable limitations period, and that collectors should advise consumers that subsequent payments may restart the limitations period. The FTC does not explain why any litigant should be required to disclose the existence of a potential affirmative defense to its adversary, or why a potential statute of limitations defense should be highlighted in collection litigation, as opposed to various other affirmative defenses that the consumer might possess. The FTC, of course, has no ability to enact state legislation, and its ability to influence rule changes at the state court level is far from clear.
The report also makes a number of recommendations with respect to debt collection arbitration proceedings that appear to be at odds with the policies underlying the Federal Arbitration Act and decades of jurisprudence favoring the resolution of disputes through private arbitration. The report is highly-critical of creditors who include mandatory pre-dispute arbitration clauses in their customer agreements, though it acknowledges that such agreements are legally enforceable. The report suggests that consumer arbitration awards should include reasoned opinions from the arbitrators. Yet there would be no precedential value in those opinions, and they would likely serve to increase the number of subsequent challenges to the awards, contrary to goal of creating a simple, streamlined process for reaching final adjudications of disputes. The report notes that consumers often do not participate in arbitration proceedings, and that creditors prevail in the vast majority of cases. From this, and from other anecdotal evidence, the report suggests that consumers are not being adequately notified of the arbitration process, and that the process is inherently biased or unfair to consumers. The FTC report cites liberally to the unproven allegations of bias that have been leveled against consumer arbitration providers by litigants and consumer attorneys.
The FTC does not have the power to amend the FDCPA in order to implement any of the recommendations in its report. The FTC can make recommendations to Congress about potential changes to the FDCPA. But the new Bureau of Consumer Financial Protection (formed by the Dodd-Frank Act) will be given concurrent authority with the FTC to enforce the FDCPA, and only the Bureau will also have rule-making authority under the FDCPA. This means that the Bureau can issue regulations that will graft on top of the FDCPA, but the FTC cannot do so. The Bureau will also have other broad powers over the collection industry. All the FTC can do is issue opinion letters (it has only done this a few times since the FDCPA was enacted in 1977), and bring enforcement actions against collection companies.
The following recommendations are contained in the FTC's report:
"States should consider adopting measures to make it more likely that consumers will defend in litigation. Very few consumers defend or otherwise participate in debt collection litigation, resulting in courts entering default judgment against them. States should take steps to ensure that: (1) consumers receive adequate notice when actions have been commenced; and (2) the costs to consumers of participating in such actions are not prohibitively high."
"States should require collectors to include more information about the debt in their complaints. Complaints often do not contain sufficient information to allow consumers in their answers to admit or deny the allegations and assert affirmative defenses. To assist them in doing so, states should consider requiring that debt collection complaints include: (1) the name of the original creditor and the last four digits of the original account number; (2) the date of default or charge-off and the amount due at that time; (3) the name of the current owner of the debt; (4) the total amount currently owed on the debt; (5) the total amount owed broken down by principal, interest, and fees; and (6) the relevant terms of the underlying credit contract, if the contract itself is not attached to the complaint."
"States should take steps to make it less likely that collectors will sue on time-barred debt and that consumers will unknowingly waive statute of limitations defenses available to them. In circumstances where it is difficult to determine the correct statute of limitations, it would be advantageous if states developed more clear and uniform statutes of limitations. Consumers do not understand that in many states a statute of limitations constitutes an affirmative defense which may preclude collectors from successfully suing to collect, so they rarely assert this affirmative defense. These states should assign to collectors the burden of proving that debts are not time-barred and require that they include the date of default and the statute of limitations in their complaints. Consumers are not aware that collectors cannot lawfully sue to recover on time-barred debt. To prevent deception, collectors who seek to collect debt they know or should know is time-barred should disclose that they cannot lawfully sue the consumers. Consumers likewise do not know that in many states making a partial payment on a time-barred debt revives the entire debt for a new statute of limitations period. Collectors in these states should disclose to consumers that making a payment will revive such debt."
"Federal and state laws should be changed to prevent the freezing of a specified amount in a bank account into which a consumer has deposited funds that are exempt from garnishment. When banks freeze the accounts of consumers who receive government payments such as Social Security (which are exempt from garnishment), it may result in significant hardship for consumers, including many who are indigent. To alleviate such hardship, federal and state laws should be changed to limit the amount that banks can freeze in accounts receiving exempt funds."
"The Commission’s principal findings, conclusions, and recommendations relating to debt collection arbitration are:"
"Consumers should be given meaningful choice about arbitration. Consumers currently have little, if any, choice regarding mandatory pre-dispute arbitration provisions in contracts. Creditors should draft their consumer credit contracts in a way that ensures consumers are aware of their choice whether to arbitrate, and provides consumers with a reasonable method of exercising that choice. The public and private sectors should increase efforts to educate consumers, so that they have a basic understanding of arbitration and its consequences. They should evaluate whether, and under what conditions, options beyond the initial choice about arbitration must be offered in consumer credit contracts."
"Arbitration forums and arbitrators should eliminate bias and the appearance of bias. Especially in the wake of serious concerns relating to the conduct of NAF, arbitration forums should take significant and concrete steps to prevent bias and the appearance of bias. Forums should develop, adopt, and vigorously enforce standards prohibiting bias and the appearance of bias for themselves and their arbitrators. Forums should diversify their rosters of arbitrators, rotate matters randomly among arbitrators, and limit the number of matters each arbitrator handles. Forums should make the process and procedures they use for selecting arbitrators as transparent as possible."
"Arbitration forums should conduct proceedings in a manner which makes it more likely consumers will participate. Consumers frequently do not appear in arbitration proceedings. While it is not clear to what extent notification problems cause low participation rates, arbitration forums should adopt measures to increase the likelihood they have valid addresses for consumers, track and document delivery of notices, and use envelopes which make it clear that their contents are important while not disclosing consumer debts to third parties. Arbitration forums and arbitrators also should conduct a closer assessment of consumers’ assertions that they did not receive adequate notice."
"Arbitration forums should establish rules that limit the total cost to consumers of arbitrating a dispute to the cost that they would pay to defend against a similar proceeding in court."
"Arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated. Arbitrators rarely accompany awards with an opinion setting forth a statement of the law and an application of the law to the facts, which makes it difficult to understand the basis for the award. Arbitration forums should require that arbitrators issue reasoned opinions setting forth: (1) the law applied; (2) how the law was applied to the facts; and (3) how the amount of the award was calculated, including how the amount of principal, interest, and fees awarded was determined."
"Arbitration forums should make their process and results more transparent. For the public to assess the costs and benefits of arbitration, and for consumers to decide whether to agree to arbitration, the process used and the results reached must be more transparent. To promote such transparency, Congress should consider creating a nationwide system requiring arbitration forums to report and make public arbitration awards and decisions."
"The Commission will continue to closely monitor debt collection arbitration, and evaluate whether creditors and arbitration forums provide consumers with meaningful choice and fair process. As appropriate, the Commission will report its views on new debt collection arbitration models to policymakers, industry, consumer groups, and the general public."
Saturday, July 17, 2010
Sunday, June 13, 2010
Are You Liable For Your Process Server Under The FDCPA?
Consumers often assert FDCPA claims against collectors based upon alleged misstatements or misconduct by process servers while serving a state court summons and complaint. Thus, consumers may claim a process server was rude or abusive at the time of service, causing them to suffer emotional distress, or that a process server made false statements about the debt. These allegations are not sufficient to impose liability on the collector under the FDCPA.
The alleged conduct of the process server while serving the summons and complaint is not covered by the FDCPA. In fact, when it defined the term “debt collector” under the FDCPA, Congress specifically noted that the term “does not include . . . . any person while serving or attempting to serve legal process on any other person in connection with the judicial enforcement of any debt . . . .” See 15 U.S.C. § 1692a(6)(D). This is sometimes referred to as the “process server” exemption, which applies to "those individuals whose involvement in a debt collection communication was limited to serving the communication on the consumer – in effect, to being messengers[.]" Romea v. Heiberger & Assoc., 163 F.3d 111, 117 (2d Cir. 1998); see also S.Rep. No. 95-382, at 3-4 (1977), reprinted in 1977 U.S.C.C.A.N. 1695, 1697-98 ( The term debt collector is not intended to include ... process servers. ).
Given this exemption, any alleged improper conduct or statements made by a process server while serving or attempting to serve a complaint cannot give rise to FDCPA liability. Since there is no FDCPA liability for the process server’s statements or conduct, the debt collector cannot be held vicariously liable. See, e.g., Worch v. Wolpoff & Abramson, LLP, 477 F. Supp. 2d 1015,1018-19 (E.D. Mo. 2007) (process server who allegedly came to residence and “pounded on the door repeatedly and aggressively” to serve debtor was not subject to FDCPA; collection firm not vicariously liable for server’s alleged conduct); Federal Home Loan Mortgage Corp. v. Lamar, 2006 WL 2422903, *8-9 (N.D. Ohio Aug. 22, 2006) (process server allegedly involved in erratic car chase while serving debtor with complaint not liable under FDCPA; collection firm not vicariously liable).
This conclusion – that collectors are not liable for communications made by their process servers – is reinforced by provisions of section 1692c of the FDCPA. Although that section places important restrictions upon a collector’s ability to communicate with debtors and third parties, it provides exceptions for any communications made with the “express permission of a court of competent jurisdiction.” See, e.g., 15 U.S.C. § 1692c(a), (b) (listing restrictions on communications made at inconvenient times or places, with debtors represented by counsel, or at places of employment, but providing exception for communications permitted by “the express permission of a court of competent jurisdiction”). Collectors are not only permitted by the court to serve a summons and complaint on a debtor, they are required to do so consistent with state law. Thus, the service of the complaint by a process server falls within the exemption under section 1692c(a) and (b) of the FDCPA.
Similarly, even where a consumer has notified a collector in writing that the consumer refuses to pay the debt, or that he wants further communications by the collector to cease and desist, the FDCPA allows the collector to notify the consumer about “specified remedies” that the creditor or collector normally invoke and/or intend to invoke. See 15 U.S.C. § 1692c(c). The service of a state court complaint by a process server is notification that the creditor is seeking to invoke a remedy – judicial enforcement of the debt – and is exempt.
This article is not meant to provide a comprehensive analysis of a debt collector’s potential liability for “sewer service” by a process server. In situations where an FDCPA claim against a collector is based solely upon statements or conduct by a process server in connection with serving or attempting to serve a summons and complaint, however, the FDCPA simply does not apply.
The alleged conduct of the process server while serving the summons and complaint is not covered by the FDCPA. In fact, when it defined the term “debt collector” under the FDCPA, Congress specifically noted that the term “does not include . . . . any person while serving or attempting to serve legal process on any other person in connection with the judicial enforcement of any debt . . . .” See 15 U.S.C. § 1692a(6)(D). This is sometimes referred to as the “process server” exemption, which applies to "those individuals whose involvement in a debt collection communication was limited to serving the communication on the consumer – in effect, to being messengers[.]" Romea v. Heiberger & Assoc., 163 F.3d 111, 117 (2d Cir. 1998); see also S.Rep. No. 95-382, at 3-4 (1977), reprinted in 1977 U.S.C.C.A.N. 1695, 1697-98 ( The term debt collector is not intended to include ... process servers. ).
Given this exemption, any alleged improper conduct or statements made by a process server while serving or attempting to serve a complaint cannot give rise to FDCPA liability. Since there is no FDCPA liability for the process server’s statements or conduct, the debt collector cannot be held vicariously liable. See, e.g., Worch v. Wolpoff & Abramson, LLP, 477 F. Supp. 2d 1015,1018-19 (E.D. Mo. 2007) (process server who allegedly came to residence and “pounded on the door repeatedly and aggressively” to serve debtor was not subject to FDCPA; collection firm not vicariously liable for server’s alleged conduct); Federal Home Loan Mortgage Corp. v. Lamar, 2006 WL 2422903, *8-9 (N.D. Ohio Aug. 22, 2006) (process server allegedly involved in erratic car chase while serving debtor with complaint not liable under FDCPA; collection firm not vicariously liable).
This conclusion – that collectors are not liable for communications made by their process servers – is reinforced by provisions of section 1692c of the FDCPA. Although that section places important restrictions upon a collector’s ability to communicate with debtors and third parties, it provides exceptions for any communications made with the “express permission of a court of competent jurisdiction.” See, e.g., 15 U.S.C. § 1692c(a), (b) (listing restrictions on communications made at inconvenient times or places, with debtors represented by counsel, or at places of employment, but providing exception for communications permitted by “the express permission of a court of competent jurisdiction”). Collectors are not only permitted by the court to serve a summons and complaint on a debtor, they are required to do so consistent with state law. Thus, the service of the complaint by a process server falls within the exemption under section 1692c(a) and (b) of the FDCPA.
Similarly, even where a consumer has notified a collector in writing that the consumer refuses to pay the debt, or that he wants further communications by the collector to cease and desist, the FDCPA allows the collector to notify the consumer about “specified remedies” that the creditor or collector normally invoke and/or intend to invoke. See 15 U.S.C. § 1692c(c). The service of a state court complaint by a process server is notification that the creditor is seeking to invoke a remedy – judicial enforcement of the debt – and is exempt.
This article is not meant to provide a comprehensive analysis of a debt collector’s potential liability for “sewer service” by a process server. In situations where an FDCPA claim against a collector is based solely upon statements or conduct by a process server in connection with serving or attempting to serve a summons and complaint, however, the FDCPA simply does not apply.
Tuesday, June 1, 2010
Beating FDCPA Claims That Were Not Disclosed In Bankruptcy
Bankruptcy filings and FDCPA lawsuits are both rising steadily. If you have been sued in an FDCPA action by a consumer who recently filed for bankruptcy, you should pull the bankruptcy filings and carefully review the debtor’s petition. You may find that the consumer failed to properly disclose the claims they now seek to pursue against you. If so, the case is subject to a motion to dismiss. Consumers lack standing to assert claims based upon pre-petition conduct if the claims were not properly disclosed in the bankruptcy petition. See, e.g., Yack v. Washington Mutual Inc., 389 B.R. 91 (N.D. Cal. 2008) (granting motion to dismiss FDCPA class action where debtor failed to disclose claims in bankruptcy schedules).
The filing of a bankruptcy petition creates an “‘estate’” that consists of “‘all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case,’” including any causes of action the debtor may have. See Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001) (quoting 11 U.S.C. § 541(a)). Once a cause of action becomes part of the bankruptcy estate, “[o]nly the trustee . . . has the authority to prosecute and/or settle such causes of action.” Cain v. Hyatt, 101 B.R. 440, 442 (Bankr. E.D. Pa. 1989).
A debtor has an affirmative duty to schedule all property the debtor owns, including all legal claims. See 11 U.S.C. § 521(1). “Causes of action are separate assets which must be formally listed.” Cusano, 264 F.3d at 947. The importance of complete disclosure of a debtor’s assets cannot be overstated: “These matters are at the heart of the bankruptcy system . . . . The proper ‘operation of the bankruptcy system depends on honest reporting.’” In re Mohring, 142 B.R. 389, 394 (Bankr. E.D. Cal. 1992) (citation omitted); see also In re Colvin, 288 B.R. 477, 480 (Bankr. E.D. Mich. 2003) (“the disclosure obligations of consumer debtors are at the very core of the bankruptcy process and meeting these obligations is part of the price debtors pay for receiving the bankruptcy discharge”).
Courts have recognized that, “[f]ull and comprehensive disclosure is critical to the integrity of the bankruptcy process.” In re Rolland, 317 B.R. 402, 413 (Bankr. C.D. Cal. 2004). This “duty of candor . . . accrues from the time the facts that give rise to the potential claim are known.” Rose v. Beverly Health & Rehab. Servs., Inc., 356 B.R. 18, 25 (E.D. Cal. 2006) (emphasis added).
Debtors have a “paramount duty” to not only list all of their assets, but also to do so “carefully, completely and accurately,” using the appropriate schedules. See In re Mohring, 142 B.R. at 394 (emphasis added); see also Cusano, 264 F.3d at 945 (bankruptcy code places “affirmative duty” on debtor to schedule “assets and liabilities”). As the In re Mohring court explained:
“The basic rule is that schedules must be accurate and complete. And they must be corrected if they are incomplete. Thus, amendments are liberally permitted and can be demanded by the court. . . . Numerous cases hold that the debtor has a duty to prepare schedules carefully, completely, and accurately. . . . There are, however, no bright-line rules for how much itemization and specificity is required. What is required is reasonable particularization under the circumstances. The Official Forms themselves have generally been regarded as subject to a rule of substantial compliance.”
In re Mohring, 142 B.R. at 394-95 (citations omitted); see also In re Searles, 317 B.R. 368, 378 (9th Cir. B.A.P. 2004) (“Every debtor has a continuing duty to assure the accuracy and completeness of schedules. Postpetition discovery of rights that actually existed at the time of filing must be addressed in the schedules. This implies a duty to amend.”).
At the conclusion of the bankruptcy proceedings, if a claim was properly scheduled by the debtor, and was not otherwise administered by the trustee, the claim is “abandoned to the debtor.” 11 U.S.C. § 554(c). But if a debtor has failed “to properly schedule an asset, including a cause of action, that asset continues to belong to the bankruptcy estate” and the claim does not revert to the debtor. Cusano, 264 F.3d at 945-46.
A trustee cannot “abandon” a claim if the claim was never disclosed by the debtor. For this reason, in Stein v. United Artists Corp., 691 F.2d 885 (9th Cir. 1982), the Ninth Circuit held that “abandonment results only when the trustee knows of the existence of the property. . . . When the bankrupt fails to list an asset, he cannot claim abandonment because the trustee had no opportunity to pursue the claim.” Id. at 891 (affirming dismissal of debtor’s unscheduled antitrust claim). Similarly, in Cusano, the Ninth Circuit held that a debtor lacked standing to assert a claim for royalties that had not been scheduled by the debtor:
“Thus, if there was any outstanding balance due Cusano on the open book account when he filed for bankruptcy, he was under a duty to schedule it as a receivable or as a cause of action for unpaid royalties. His failure to do so vests the claim in the bankruptcy estate, where it remains.”
Cusano, 264 F.3d at 948.
The debtor lacks standing to pursue claims that were not properly disclosed. See Cusano, 264 F.3d at 945-48 (where a debtor fails to “properly schedule an asset, including a cause of action, that asset continues to belong to the bankruptcy estate” and does not revert to the debtor); see also Stein, 692 F.2d at 891 (debtor lacked standing to pursue antitrust claims that were not listed in bankruptcy).
Debtors may seek to reopen the bankruptcy proceedings to reacquire claims they failed to list, but the judicial estoppel doctrine should bar them. Judicial estoppel is “is an equitable doctrine that precludes a party from gaining an advantage by asserting one position, and then later taking to their benefit a clearly inconsistent position.” See Yack, 389 B.R. at 96 (citation omitted). In “the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in the debtor’s schedules or disclosure statements.” Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 783 (9th Cir. 2001); see also Hay v. First Interstate Bank, 978 F.2d 555, 557 (9th Cir. 1992) (failure to list a cause of action in bankruptcy schedule judicially estops prosecution of that claim). This is true “even if the discharge is later vacated.” Hamilton, 270 F.3d at 784.
Where a debtor failed to disclose their alleged claims, they are judicially estopped from seeking to re-acquire and assert them later. To hold otherwise would reward debtors for hiding assets from her creditors and the trustee, and would amount to a fraud on the bankruptcy court. See Latman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004) (surcharge remedy prevented “a fraud on the bankruptcy court” where plaintiffs knowingly failed to disclose assets that should have been listed on bankruptcy schedule).
For these reasons, collectors sued in FDCPA action should carefully review the bankruptcy filings of the debtor to determine if these defenses are available.
The filing of a bankruptcy petition creates an “‘estate’” that consists of “‘all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case,’” including any causes of action the debtor may have. See Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001) (quoting 11 U.S.C. § 541(a)). Once a cause of action becomes part of the bankruptcy estate, “[o]nly the trustee . . . has the authority to prosecute and/or settle such causes of action.” Cain v. Hyatt, 101 B.R. 440, 442 (Bankr. E.D. Pa. 1989).
A debtor has an affirmative duty to schedule all property the debtor owns, including all legal claims. See 11 U.S.C. § 521(1). “Causes of action are separate assets which must be formally listed.” Cusano, 264 F.3d at 947. The importance of complete disclosure of a debtor’s assets cannot be overstated: “These matters are at the heart of the bankruptcy system . . . . The proper ‘operation of the bankruptcy system depends on honest reporting.’” In re Mohring, 142 B.R. 389, 394 (Bankr. E.D. Cal. 1992) (citation omitted); see also In re Colvin, 288 B.R. 477, 480 (Bankr. E.D. Mich. 2003) (“the disclosure obligations of consumer debtors are at the very core of the bankruptcy process and meeting these obligations is part of the price debtors pay for receiving the bankruptcy discharge”).
Courts have recognized that, “[f]ull and comprehensive disclosure is critical to the integrity of the bankruptcy process.” In re Rolland, 317 B.R. 402, 413 (Bankr. C.D. Cal. 2004). This “duty of candor . . . accrues from the time the facts that give rise to the potential claim are known.” Rose v. Beverly Health & Rehab. Servs., Inc., 356 B.R. 18, 25 (E.D. Cal. 2006) (emphasis added).
Debtors have a “paramount duty” to not only list all of their assets, but also to do so “carefully, completely and accurately,” using the appropriate schedules. See In re Mohring, 142 B.R. at 394 (emphasis added); see also Cusano, 264 F.3d at 945 (bankruptcy code places “affirmative duty” on debtor to schedule “assets and liabilities”). As the In re Mohring court explained:
“The basic rule is that schedules must be accurate and complete. And they must be corrected if they are incomplete. Thus, amendments are liberally permitted and can be demanded by the court. . . . Numerous cases hold that the debtor has a duty to prepare schedules carefully, completely, and accurately. . . . There are, however, no bright-line rules for how much itemization and specificity is required. What is required is reasonable particularization under the circumstances. The Official Forms themselves have generally been regarded as subject to a rule of substantial compliance.”
In re Mohring, 142 B.R. at 394-95 (citations omitted); see also In re Searles, 317 B.R. 368, 378 (9th Cir. B.A.P. 2004) (“Every debtor has a continuing duty to assure the accuracy and completeness of schedules. Postpetition discovery of rights that actually existed at the time of filing must be addressed in the schedules. This implies a duty to amend.”).
At the conclusion of the bankruptcy proceedings, if a claim was properly scheduled by the debtor, and was not otherwise administered by the trustee, the claim is “abandoned to the debtor.” 11 U.S.C. § 554(c). But if a debtor has failed “to properly schedule an asset, including a cause of action, that asset continues to belong to the bankruptcy estate” and the claim does not revert to the debtor. Cusano, 264 F.3d at 945-46.
A trustee cannot “abandon” a claim if the claim was never disclosed by the debtor. For this reason, in Stein v. United Artists Corp., 691 F.2d 885 (9th Cir. 1982), the Ninth Circuit held that “abandonment results only when the trustee knows of the existence of the property. . . . When the bankrupt fails to list an asset, he cannot claim abandonment because the trustee had no opportunity to pursue the claim.” Id. at 891 (affirming dismissal of debtor’s unscheduled antitrust claim). Similarly, in Cusano, the Ninth Circuit held that a debtor lacked standing to assert a claim for royalties that had not been scheduled by the debtor:
“Thus, if there was any outstanding balance due Cusano on the open book account when he filed for bankruptcy, he was under a duty to schedule it as a receivable or as a cause of action for unpaid royalties. His failure to do so vests the claim in the bankruptcy estate, where it remains.”
Cusano, 264 F.3d at 948.
The debtor lacks standing to pursue claims that were not properly disclosed. See Cusano, 264 F.3d at 945-48 (where a debtor fails to “properly schedule an asset, including a cause of action, that asset continues to belong to the bankruptcy estate” and does not revert to the debtor); see also Stein, 692 F.2d at 891 (debtor lacked standing to pursue antitrust claims that were not listed in bankruptcy).
Debtors may seek to reopen the bankruptcy proceedings to reacquire claims they failed to list, but the judicial estoppel doctrine should bar them. Judicial estoppel is “is an equitable doctrine that precludes a party from gaining an advantage by asserting one position, and then later taking to their benefit a clearly inconsistent position.” See Yack, 389 B.R. at 96 (citation omitted). In “the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in the debtor’s schedules or disclosure statements.” Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 783 (9th Cir. 2001); see also Hay v. First Interstate Bank, 978 F.2d 555, 557 (9th Cir. 1992) (failure to list a cause of action in bankruptcy schedule judicially estops prosecution of that claim). This is true “even if the discharge is later vacated.” Hamilton, 270 F.3d at 784.
Where a debtor failed to disclose their alleged claims, they are judicially estopped from seeking to re-acquire and assert them later. To hold otherwise would reward debtors for hiding assets from her creditors and the trustee, and would amount to a fraud on the bankruptcy court. See Latman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004) (surcharge remedy prevented “a fraud on the bankruptcy court” where plaintiffs knowingly failed to disclose assets that should have been listed on bankruptcy schedule).
For these reasons, collectors sued in FDCPA action should carefully review the bankruptcy filings of the debtor to determine if these defenses are available.
Tuesday, May 18, 2010
Finding Guidance In Gorman: Examining A Furnisher’s Duty To Report Complete And Accurate Information And The Duty To Investigate Consumer Disputes
The Ninth Circuit’s decision in Gorman v. Wolpoff & Abramson, 584 F.3d 1147 (9th Cir. 2009) probably triggered more than a few groans from collectors who furnish information to consumer reporting agencies. In Gorman, the Ninth Circuit recognized a new cause of action arising under California law based upon a furnisher’s failure to report complete and accurate information. Although furnishers have always had this duty, which is established by section 1785.25(a) of the California Civil Code, previous decisions had held that consumer claims arising under the state statute were preempted by the Fair Credit Reporting Act.
Gorman thus adds another potential claim that can be asserted by California consumers against collectors who furnish information about their accounts. If there is a silver lining to Gorman, however, it is that the case provides furnishers with a reminder of the importance of the need to ensure they are reporting complete and accurate information, and some guidance on how they should handle disputes about the information they report.
In Gorman, the Court held, inter alia, that a consumer can pursue a private right of action, under section 1785.25(a) of the California Civil Code, against a furnisher who reports inaccurate or incomplete information to a consumer reporting agency. The consumer can also seek actual damages, punitive damages, attorney’s fees and injunctive relief, and can seek to pursue claims on behalf of a class of consumers, under sections 1785.25(g) and 1785.31 of the Code. See Gorman, 584 F. 3d at 1170-73. Although these Civil Code sections had been on the books for decades, they had not given rise to many claims against the collection industry, because a line of district court cases had held that the Fair Credit Reporting Act preempted the damage provisions found at sections 1785.25(g) and 1785.31 of the Civil Code. See, e.g., Lin v. Universal Card Services Corp., 238 F. Supp. 2d 1147 (N.D. Cal. 2002).
Furnishers already have a duty, arising under both federal and state law, to ensure that they submit accurate and complete information to consumer reporting agencies. See 15 U.S.C. § 1681s-2(a); Cal. Civ. Code § 1785.25(a). But courts have recognized that consumers cannot pursue damage claims under federal law for alleged violations of section 1681s-2(a) of the FCRA. Thus, the Gorman decision recognized a “new” cause of action against furnishers. Under Gorman, a consumer can now sue the furnisher under state law where the furnisher has submitted information “on a specific transaction or experience to any consumer credit reporting agency” if the consumer proves the furnisher “knows or should know the information is incomplete or inaccurate.” See Cal. Civ. Code § 1785.25(a).
All of this may sound depressing, but the good news is, there is likely nothing new that a furnisher needs to do in order to comply with Gorman. Furnishers should already have in place procedures for ensuring that the information they report is complete and accurate, consistent with their obligations under 16 C.F.R. § 660.3 (effective July 1, 2010). The federal agencies have published guidelines that furnishers must consider when developing policies and procedures to ensure the “accuracy” and “integrity” of the information they furnish, and the guidelines are designed to be flexible in order to reflect “the nature, size, complexity, and scope of the furnisher's activities.” See 16 C.F.R. Pt. 660, App A.
Thus, a furnisher who is complying with federal law should have no trouble defeating a claim asserted under section 1785.25(a) of the Civil Code. In fact, the Civil Code includes a defense, similar to the “bona fide error” defense in the FDCPA, which provides that the furnisher will not be liable if it “establishes by a preponderance of the evidence that, at the time of the failure to comply with this section, the furnisher maintained reasonable procedures to comply with those provisions.” See Cal. Civ. Code § 1785.25(g).
The Gorman case also provides some helpful guidance on how furnishers should go about investigating disputes they receive from consumers through the consumer reporting agencies. Most furnishers know that they must conduct a reasonable investigation of these disputes, but it is not always easy to determine exactly what you need to do in order to discharge your duty of investigation. Do you have the right procedures in place?
Although the reasonableness of furnisher’s investigation under section 1681s-2(b) of the FCRA would appear to be a question of fact, the Gorman court held that an investigation can be reasonable as a matter of law. See Gorman, 584 F.3d at 1157 (“Summary judgment is not precluded altogether on questions of reasonableness. It is appropriate when only one conclusion about the conduct's reasonableness is possible.”) (citations and quotation marks omitted).
A review of the holding in Gorman reveals some basic steps that a furnisher should follow to ensure that the investigation process is reasonable. A furnisher should:
1) individually review each dispute received from a consumer reporting agency,
2) analyze all information in its possession bearing on the dispute, and
3) update all the reporting on the account as appropriate.
A furnisher should not believe that it can conduct a reasonable investigation by treating every dispute in an identical fashion. Most furnishers receive electronic notice of disputes from consumer reporting agencies through the E-Oscar system. The description of the dispute is often cryptic, and is typically described using one or more standardized dispute codes. One of the disputes received by MBNA in the Gorman case simply stated “Claims Company Will Change” and nothing more. See Gorman, 584 F.3d at 1158. Even if the description of the dispute is sparse, however, the investigation conducted by the furnisher must be reasonable. A “superficial” investigation will not do; rather, a “fairly searching inquiry” is required. Id. at 1156.
Furnishers should read each ACDV carefully, because the scope of the duty to investigate under section 1681s-2(b) of the FCRA is delineated by the description of the dispute received from the consumer reporting agency. In addition to the standard dispute codes, ACDVs typically have a space entitled “FCRA Relevant Information,” which can be used to further describe the dispute. All sections of the ACDV should be read carefully. As the Gorman court noted,
[T]he reasonableness of the furnisher's investigation is measured by its response to the specific information provided by the CRA in the notice of dispute. The pertinent question is thus whether the furnisher's procedures were reasonable in light of what it learned about the dispute from the description in the CRA's notice of dispute.
Gorman, 584 F.3d at 1157 (citation omitted).
After the dispute has been reviewed, the furnisher must have in place a procedure for reviewing all information in its possession which might bear upon the dispute. Consumers often argue that a furnisher must go beyond a review the information contained in its own files. To date, however, no circuit court has extended the duty of investigation that far. For example, in Westra v. Credit Control of Pinellas, 409 F.3d 825 (7th Cir. 2005), the consumer argued the furnisher’s investigation was unreasonable because it never contacted the consumer directly. The Seventh Circuit rejected this, noting that “requiring a furnisher to contact every consumer who disputes a debt would be terribly inefficient and such action is not mandated by the FCRA.” Id. at 827.
Similarly, in Gorman, the consumer argued that MBNA’s investigation was unreasonable, because the bank had not contacted the merchant or the consumer, and had relied solely upon its internal account records. Gorman, 584 F. 3d at 1160. The Ninth Circuit noted that MBNA had properly consulted “the relevant information in its possession.” Id. at 1161. The bank reviewed its account notes, which showed it had previously investigated and rejected Gorman’s dispute. Id. The bank was not required to reinvestigate the dispute, particularly since no new information had been supplied by the consumer. The Court observed:
Congress could not have intended to place a burden on furnishers continually to reinvestigate a particular transaction, without any new information or other reason to doubt the result of the earlier investigation, every time the consumer disputes again the transaction with a CRA because the investigation was not resolved in his favor.
Id. at 1160.
If the furnisher does not even bother to review data in its own files which might bear on the dispute, however, the review will be deemed unreasonable. For example, in Johnson v. MBNA America Bank, 357 F.3d 426 (4th Cir. 2004), a woman disputed an MBNA account that appeared on her credit report. The dispute stated “consumer states belongs to husband only ... was never a signer on account. Was an authorized user.” Id. at 429. In response, MBNA reviewed its electronic notes, but did not attempt to ascertain if it still had records reflecting whether the plaintiff was a co-obligor on the account. The court upheld a jury’s finding that this investigation was unreasonable. Id. at 431.
Once the investigation is complete, the furnisher must review the information it is furnishing and make any appropriate updates to its reporting to the consumer reporting agency. See 15 U.S.C. § 1681s-2(b)(1). Thus a furnisher’s procedures should include steps to ensure that any new information uncovered by the investigation is reflected in future reporting. This does not mean that the furnisher must always agree with the consumer, or that you will automatically violates the FCRA if the updated information turns out to be wrong. See Gorman, 584 F.2d at 1161 (“An investigation is not necessarily unreasonable because it results in a substantive conclusion unfavorable to the consumer, even if that conclusion turns out to be inaccurate.”). But furnishers should be sure to review all information they are reporting on the account for accuracy. Continuing to report information about an account that is “materially misleading” – i.e., information that could have an “adverse effect” on credit decisions relating to the consumer – can support a claim under section 1681s-2(b) of the FCRA. Id. at 1163.
The Gorman decision recognizes a “new” cause of action for consumers, arising under section 1785.25(a) of the California Civil Code. But the case does not impose a new set of legal duties on furnishers. Furnishers have always had a responsibility under federal and state law to maintain procedures designed to ensure that the information they furnish to consumer reporting agencies is complete and accurate. As of July 2010, federal law mandates that furnishers must maintain written policies and procedures which explain how they will ensure the accuracy and integrity of the data that they submit. Thus, furnishers who continue to comply with their existing obligations should have much trouble in defeating the consumer claims that they may encounter under section 1785.25(a).
To comply with the duty of investigation under section 1681s-2(b) of the FCRA, and consistent with the Gorman decision, furnishers should establish procedures (preferably in writing) setting forth how each dispute received from a consumer reporting agency will be reviewed. Employees must be trained on how to read and understand all standard dispute codes used by the consumer reporting agencies, and to evaluate any additional “FCRA Relevant Information” that is supplied. All of the information in the furnisher’s files that might bear upon the dispute must be reviewed. Once the investigation is complete, all information that is being reported by the furnisher should be reviewed, and updated as appropriate.
[Note: This post reflects an article authored by Tomio Narita that originally appeared in the May/June 2010 Edition of "Collector's Ink" Magazine]
A copy of the full text of the Fair Credit Reporting Act as published by the Federal Trade Commission can be viewed and downloaded here:
FTC's.Complete.Text.of.FCRA.July.2009 -
Endnotes:
1. Section 1785.25(a) of the California Civil Code provides: “A person shall not furnish information on a specific transaction or experience to any consumer credit reporting agency if the person knows or should know the information is incomplete or inaccurate.”
2. Section 1785.25(g) of the California Civil Code provides: “A person who furnishes information to a consumer credit reporting agency is liable for failure to comply with this section, unless the furnisher establishes by a preponderance of the evidence that, at the time of the failure to comply with this section, the furnisher maintained reasonable procedures to comply with those provisions.”
3. Section 1785.31 of the California Civil Code provides that any consumer who suffers damages as a result of a violation of the title may seek actual damages for negligent violations (including court costs, loss of wages, attorney’s fees and pain and suffering), and in the case of wilful violations, may also seek punitive damages of not less than one hundred dollars ($100) and not more than five thousand dollars ($5,000) for each violation as the court deems proper. Consumers may also seek injunctive relief and may assert their claims in a class action.
4. The Ninth Circuit has held that there is no private right of action for breach of the duties set forth in section 1681s-2(a) of the FCRA, which includes the duty to furnish accurate information to consumer reporting agencies. See Nelson v. Chase Manhattan Mortgage Corp., 282 F.3d 1057, 1059-60 (9th Cir. 2002).
5. Section 1681s-2(b) of the FCRA provides that, after receiving a notice of dispute, the furnisher shall: (A) conduct an investigation with respect to the disputed information; (B) review all relevant information provided by the [CRA] pursuant to section 1681i(a)(2) ...;(C) report the results of the investigation to the [CRA]; (D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other [CRAs] to which the person furnished the information ...; and (E) if an item of information disputed by a consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation under paragraph (1) ... (i) modify ... (ii) delete[or] (iii) permanently block the reporting of that item of information [to the CRAs]. 15 U.S.C. § 1681s-2(b).
Gorman thus adds another potential claim that can be asserted by California consumers against collectors who furnish information about their accounts. If there is a silver lining to Gorman, however, it is that the case provides furnishers with a reminder of the importance of the need to ensure they are reporting complete and accurate information, and some guidance on how they should handle disputes about the information they report.
In Gorman, the Court held, inter alia, that a consumer can pursue a private right of action, under section 1785.25(a) of the California Civil Code, against a furnisher who reports inaccurate or incomplete information to a consumer reporting agency. The consumer can also seek actual damages, punitive damages, attorney’s fees and injunctive relief, and can seek to pursue claims on behalf of a class of consumers, under sections 1785.25(g) and 1785.31 of the Code. See Gorman, 584 F. 3d at 1170-73. Although these Civil Code sections had been on the books for decades, they had not given rise to many claims against the collection industry, because a line of district court cases had held that the Fair Credit Reporting Act preempted the damage provisions found at sections 1785.25(g) and 1785.31 of the Civil Code. See, e.g., Lin v. Universal Card Services Corp., 238 F. Supp. 2d 1147 (N.D. Cal. 2002).
Furnishers already have a duty, arising under both federal and state law, to ensure that they submit accurate and complete information to consumer reporting agencies. See 15 U.S.C. § 1681s-2(a); Cal. Civ. Code § 1785.25(a). But courts have recognized that consumers cannot pursue damage claims under federal law for alleged violations of section 1681s-2(a) of the FCRA. Thus, the Gorman decision recognized a “new” cause of action against furnishers. Under Gorman, a consumer can now sue the furnisher under state law where the furnisher has submitted information “on a specific transaction or experience to any consumer credit reporting agency” if the consumer proves the furnisher “knows or should know the information is incomplete or inaccurate.” See Cal. Civ. Code § 1785.25(a).
All of this may sound depressing, but the good news is, there is likely nothing new that a furnisher needs to do in order to comply with Gorman. Furnishers should already have in place procedures for ensuring that the information they report is complete and accurate, consistent with their obligations under 16 C.F.R. § 660.3 (effective July 1, 2010). The federal agencies have published guidelines that furnishers must consider when developing policies and procedures to ensure the “accuracy” and “integrity” of the information they furnish, and the guidelines are designed to be flexible in order to reflect “the nature, size, complexity, and scope of the furnisher's activities.” See 16 C.F.R. Pt. 660, App A.
Thus, a furnisher who is complying with federal law should have no trouble defeating a claim asserted under section 1785.25(a) of the Civil Code. In fact, the Civil Code includes a defense, similar to the “bona fide error” defense in the FDCPA, which provides that the furnisher will not be liable if it “establishes by a preponderance of the evidence that, at the time of the failure to comply with this section, the furnisher maintained reasonable procedures to comply with those provisions.” See Cal. Civ. Code § 1785.25(g).
The Gorman case also provides some helpful guidance on how furnishers should go about investigating disputes they receive from consumers through the consumer reporting agencies. Most furnishers know that they must conduct a reasonable investigation of these disputes, but it is not always easy to determine exactly what you need to do in order to discharge your duty of investigation. Do you have the right procedures in place?
Although the reasonableness of furnisher’s investigation under section 1681s-2(b) of the FCRA would appear to be a question of fact, the Gorman court held that an investigation can be reasonable as a matter of law. See Gorman, 584 F.3d at 1157 (“Summary judgment is not precluded altogether on questions of reasonableness. It is appropriate when only one conclusion about the conduct's reasonableness is possible.”) (citations and quotation marks omitted).
A review of the holding in Gorman reveals some basic steps that a furnisher should follow to ensure that the investigation process is reasonable. A furnisher should:
1) individually review each dispute received from a consumer reporting agency,
2) analyze all information in its possession bearing on the dispute, and
3) update all the reporting on the account as appropriate.
A furnisher should not believe that it can conduct a reasonable investigation by treating every dispute in an identical fashion. Most furnishers receive electronic notice of disputes from consumer reporting agencies through the E-Oscar system. The description of the dispute is often cryptic, and is typically described using one or more standardized dispute codes. One of the disputes received by MBNA in the Gorman case simply stated “Claims Company Will Change” and nothing more. See Gorman, 584 F.3d at 1158. Even if the description of the dispute is sparse, however, the investigation conducted by the furnisher must be reasonable. A “superficial” investigation will not do; rather, a “fairly searching inquiry” is required. Id. at 1156.
Furnishers should read each ACDV carefully, because the scope of the duty to investigate under section 1681s-2(b) of the FCRA is delineated by the description of the dispute received from the consumer reporting agency. In addition to the standard dispute codes, ACDVs typically have a space entitled “FCRA Relevant Information,” which can be used to further describe the dispute. All sections of the ACDV should be read carefully. As the Gorman court noted,
[T]he reasonableness of the furnisher's investigation is measured by its response to the specific information provided by the CRA in the notice of dispute. The pertinent question is thus whether the furnisher's procedures were reasonable in light of what it learned about the dispute from the description in the CRA's notice of dispute.
Gorman, 584 F.3d at 1157 (citation omitted).
After the dispute has been reviewed, the furnisher must have in place a procedure for reviewing all information in its possession which might bear upon the dispute. Consumers often argue that a furnisher must go beyond a review the information contained in its own files. To date, however, no circuit court has extended the duty of investigation that far. For example, in Westra v. Credit Control of Pinellas, 409 F.3d 825 (7th Cir. 2005), the consumer argued the furnisher’s investigation was unreasonable because it never contacted the consumer directly. The Seventh Circuit rejected this, noting that “requiring a furnisher to contact every consumer who disputes a debt would be terribly inefficient and such action is not mandated by the FCRA.” Id. at 827.
Similarly, in Gorman, the consumer argued that MBNA’s investigation was unreasonable, because the bank had not contacted the merchant or the consumer, and had relied solely upon its internal account records. Gorman, 584 F. 3d at 1160. The Ninth Circuit noted that MBNA had properly consulted “the relevant information in its possession.” Id. at 1161. The bank reviewed its account notes, which showed it had previously investigated and rejected Gorman’s dispute. Id. The bank was not required to reinvestigate the dispute, particularly since no new information had been supplied by the consumer. The Court observed:
Congress could not have intended to place a burden on furnishers continually to reinvestigate a particular transaction, without any new information or other reason to doubt the result of the earlier investigation, every time the consumer disputes again the transaction with a CRA because the investigation was not resolved in his favor.
Id. at 1160.
If the furnisher does not even bother to review data in its own files which might bear on the dispute, however, the review will be deemed unreasonable. For example, in Johnson v. MBNA America Bank, 357 F.3d 426 (4th Cir. 2004), a woman disputed an MBNA account that appeared on her credit report. The dispute stated “consumer states belongs to husband only ... was never a signer on account. Was an authorized user.” Id. at 429. In response, MBNA reviewed its electronic notes, but did not attempt to ascertain if it still had records reflecting whether the plaintiff was a co-obligor on the account. The court upheld a jury’s finding that this investigation was unreasonable. Id. at 431.
Once the investigation is complete, the furnisher must review the information it is furnishing and make any appropriate updates to its reporting to the consumer reporting agency. See 15 U.S.C. § 1681s-2(b)(1). Thus a furnisher’s procedures should include steps to ensure that any new information uncovered by the investigation is reflected in future reporting. This does not mean that the furnisher must always agree with the consumer, or that you will automatically violates the FCRA if the updated information turns out to be wrong. See Gorman, 584 F.2d at 1161 (“An investigation is not necessarily unreasonable because it results in a substantive conclusion unfavorable to the consumer, even if that conclusion turns out to be inaccurate.”). But furnishers should be sure to review all information they are reporting on the account for accuracy. Continuing to report information about an account that is “materially misleading” – i.e., information that could have an “adverse effect” on credit decisions relating to the consumer – can support a claim under section 1681s-2(b) of the FCRA. Id. at 1163.
The Gorman decision recognizes a “new” cause of action for consumers, arising under section 1785.25(a) of the California Civil Code. But the case does not impose a new set of legal duties on furnishers. Furnishers have always had a responsibility under federal and state law to maintain procedures designed to ensure that the information they furnish to consumer reporting agencies is complete and accurate. As of July 2010, federal law mandates that furnishers must maintain written policies and procedures which explain how they will ensure the accuracy and integrity of the data that they submit. Thus, furnishers who continue to comply with their existing obligations should have much trouble in defeating the consumer claims that they may encounter under section 1785.25(a).
To comply with the duty of investigation under section 1681s-2(b) of the FCRA, and consistent with the Gorman decision, furnishers should establish procedures (preferably in writing) setting forth how each dispute received from a consumer reporting agency will be reviewed. Employees must be trained on how to read and understand all standard dispute codes used by the consumer reporting agencies, and to evaluate any additional “FCRA Relevant Information” that is supplied. All of the information in the furnisher’s files that might bear upon the dispute must be reviewed. Once the investigation is complete, all information that is being reported by the furnisher should be reviewed, and updated as appropriate.
[Note: This post reflects an article authored by Tomio Narita that originally appeared in the May/June 2010 Edition of "Collector's Ink" Magazine]
A copy of the full text of the Fair Credit Reporting Act as published by the Federal Trade Commission can be viewed and downloaded here:
FTC's.Complete.Text.of.FCRA.July.2009 -
Endnotes:
1. Section 1785.25(a) of the California Civil Code provides: “A person shall not furnish information on a specific transaction or experience to any consumer credit reporting agency if the person knows or should know the information is incomplete or inaccurate.”
2. Section 1785.25(g) of the California Civil Code provides: “A person who furnishes information to a consumer credit reporting agency is liable for failure to comply with this section, unless the furnisher establishes by a preponderance of the evidence that, at the time of the failure to comply with this section, the furnisher maintained reasonable procedures to comply with those provisions.”
3. Section 1785.31 of the California Civil Code provides that any consumer who suffers damages as a result of a violation of the title may seek actual damages for negligent violations (including court costs, loss of wages, attorney’s fees and pain and suffering), and in the case of wilful violations, may also seek punitive damages of not less than one hundred dollars ($100) and not more than five thousand dollars ($5,000) for each violation as the court deems proper. Consumers may also seek injunctive relief and may assert their claims in a class action.
4. The Ninth Circuit has held that there is no private right of action for breach of the duties set forth in section 1681s-2(a) of the FCRA, which includes the duty to furnish accurate information to consumer reporting agencies. See Nelson v. Chase Manhattan Mortgage Corp., 282 F.3d 1057, 1059-60 (9th Cir. 2002).
5. Section 1681s-2(b) of the FCRA provides that, after receiving a notice of dispute, the furnisher shall: (A) conduct an investigation with respect to the disputed information; (B) review all relevant information provided by the [CRA] pursuant to section 1681i(a)(2) ...;(C) report the results of the investigation to the [CRA]; (D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other [CRAs] to which the person furnished the information ...; and (E) if an item of information disputed by a consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation under paragraph (1) ... (i) modify ... (ii) delete[or] (iii) permanently block the reporting of that item of information [to the CRAs]. 15 U.S.C. § 1681s-2(b).
Friday, May 7, 2010
Using The Rooker-Feldman Doctrine To Defeat FDCPA Claims
As collection attorneys know, consumers often do not pay close attention to the collection process until the creditor already has a judgment and counsel has an order that allows for garnishing the consumer’s wages or attaching their bank accounts. These post-judgment collection efforts can spawn FDCPA claims in federal court, where the consumers allege they were never served with the state court complaint, or that the state court judgment against them is somehow improper. FDCPA claims of this type, however, are barred by the Rooker-Feldman doctrine and are doomed to fail.
What exactly is the Rooker-Feldman doctrine anyway? As the Supreme Court recently observed, the Rooker-Feldman doctrine applies to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284 (2005). Thus, the Rooker-Feldman doctrine prevents litigants from attacking a state court judgment by filing a subsequent federal lawsuit, “no matter how erroneous or unconstitutional the state court judgment may be. (citations). Kelly v. Med-1 Solutions, LLC, 548 F.3d 600, 603 (7th Cir. 2008).
The Rooker-Feldman doctrine “applies not only to claims that were actually raised before the state court, but also to claims that are inextricably intertwined with state court determinations.” Id. (citation omitted). A claim filed by a consumer in federal court is “inextricably intertwined” with a state court decision if “the adjudication of the federal claims would undercut the state ruling or require the district court to interpret the application of state laws or procedural rules . . . .” Bianchi v. Rylaarsdam, 334 F.3d 895, 898 (9th Cir. 2003). Even a claim by a consumer that the state court judgment was obtained through “extrinsic fraud” is barred by the Rooker-Feldman doctrine. See Reusser v. Wachovia Bank, N.A., 515 F.3d 855, 859-60 (9th Cir. 2008).
The Kelly case provides an excellent example of how the Rooker-Feldman doctrine can bar an FDCPA claim. There, the plaintiffs’ FDCPA claims alleged that the state court judgments defendants had obtained included sums for attorneys’ fees that were not permitted by contract or law. See Kelley, 548 F.3d at 602. When defendants raised the Rooker-Feldman doctrine, plaintiffs argued their claims were not barred, because they were only challenging “defendants’ representations and requests related to attorney fees, and not the state court judgments granting those requests.” Id. at 604. The Kelly court rejected this argument, noting that the state court had determined the fees were proper, and the district court lacked jurisdiction to rule that the holding was erroneous:
“Because defendants needed to prevail in state court in order to capitalize on the alleged fraud, the FDCPA claims that plaintiffs bring ultimately require us to evaluate the state court judgments. We could not determine that defendants' representations and requests related to attorney fees violated the law without determining that the state court erred by issuing judgments granting the attorney fees.”
Id. at 605.
More recently, in Bryant v. Gordon & Wong Group, P.C., 681 F. Supp. 2d 1205 (E.D. Cal. 2010), appeal docketed, No. 10-15401 (9th Cir. Feb. 22, 2010), the plaintiff sued a collection law firm under the FDCPA, claiming he had never been served with the complaint in the state court collection action, and that “out of the blue” he discovered his checking and savings accounts had been garnished. See Bryant, 681 F. Supp. 2d at 1206. The court rejected the claim, noting that by “disputing the garnishment of his accounts, Plaintiff is inherently challenging the entry of default against him and the writ of execution that authorized the garnishment.” Id. at 1208. Summary judgment was granted for defendant under the Rooker-Feldman doctrine, because plaintiff’s claims were seeking to undermine the judgments entered against him in state court. The court held:
“The net effect is that Plaintiff is seeking to undermine the state court judgments. These judgments were rendered before the current district court proceeding, and any action by this Court in favor of Plaintiff on his FDCPA or RFDCPA claims would necessarily require review of those state court judgments. The Rooker-Feldman doctrine specifically bars this Court from doing so. If Plaintiff believes he has been wronged by the actions of the state court, he must turn to the state for remedy. This Court lacks jurisdiction to provide redress for Plaintiff's claims.”
Id.
The Rooker-Feldman doctrine is a key defense in cases like Kelly and Bryant, where a consumer is pursuing FDCPA claims that would undermine the validity of a state court judgment or its findings. The collector should move for summary judgment on the grounds that the district court lacks subject matter jurisdiction over the claims. See Bianchi, 334 F.3d at 898 (district court lacks subject matter jurisdiction if claims raised in federal action are inextricably intertwined with state court decision).
If a consumer has a problem with a state court judgment, he cannot attack the judgment or undermine it using the FDCPA and the federal courts. He must seek relief from the judgment utilizing the procedures available under state law. “A state litigant seeking review of a state court judgment must follow the appellate process through the state court system and then directly to the United States Supreme Court.” Kelley, 548 F.3d at 603.
What exactly is the Rooker-Feldman doctrine anyway? As the Supreme Court recently observed, the Rooker-Feldman doctrine applies to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284 (2005). Thus, the Rooker-Feldman doctrine prevents litigants from attacking a state court judgment by filing a subsequent federal lawsuit, “no matter how erroneous or unconstitutional the state court judgment may be. (citations). Kelly v. Med-1 Solutions, LLC, 548 F.3d 600, 603 (7th Cir. 2008).
The Rooker-Feldman doctrine “applies not only to claims that were actually raised before the state court, but also to claims that are inextricably intertwined with state court determinations.” Id. (citation omitted). A claim filed by a consumer in federal court is “inextricably intertwined” with a state court decision if “the adjudication of the federal claims would undercut the state ruling or require the district court to interpret the application of state laws or procedural rules . . . .” Bianchi v. Rylaarsdam, 334 F.3d 895, 898 (9th Cir. 2003). Even a claim by a consumer that the state court judgment was obtained through “extrinsic fraud” is barred by the Rooker-Feldman doctrine. See Reusser v. Wachovia Bank, N.A., 515 F.3d 855, 859-60 (9th Cir. 2008).
The Kelly case provides an excellent example of how the Rooker-Feldman doctrine can bar an FDCPA claim. There, the plaintiffs’ FDCPA claims alleged that the state court judgments defendants had obtained included sums for attorneys’ fees that were not permitted by contract or law. See Kelley, 548 F.3d at 602. When defendants raised the Rooker-Feldman doctrine, plaintiffs argued their claims were not barred, because they were only challenging “defendants’ representations and requests related to attorney fees, and not the state court judgments granting those requests.” Id. at 604. The Kelly court rejected this argument, noting that the state court had determined the fees were proper, and the district court lacked jurisdiction to rule that the holding was erroneous:
“Because defendants needed to prevail in state court in order to capitalize on the alleged fraud, the FDCPA claims that plaintiffs bring ultimately require us to evaluate the state court judgments. We could not determine that defendants' representations and requests related to attorney fees violated the law without determining that the state court erred by issuing judgments granting the attorney fees.”
Id. at 605.
More recently, in Bryant v. Gordon & Wong Group, P.C., 681 F. Supp. 2d 1205 (E.D. Cal. 2010), appeal docketed, No. 10-15401 (9th Cir. Feb. 22, 2010), the plaintiff sued a collection law firm under the FDCPA, claiming he had never been served with the complaint in the state court collection action, and that “out of the blue” he discovered his checking and savings accounts had been garnished. See Bryant, 681 F. Supp. 2d at 1206. The court rejected the claim, noting that by “disputing the garnishment of his accounts, Plaintiff is inherently challenging the entry of default against him and the writ of execution that authorized the garnishment.” Id. at 1208. Summary judgment was granted for defendant under the Rooker-Feldman doctrine, because plaintiff’s claims were seeking to undermine the judgments entered against him in state court. The court held:
“The net effect is that Plaintiff is seeking to undermine the state court judgments. These judgments were rendered before the current district court proceeding, and any action by this Court in favor of Plaintiff on his FDCPA or RFDCPA claims would necessarily require review of those state court judgments. The Rooker-Feldman doctrine specifically bars this Court from doing so. If Plaintiff believes he has been wronged by the actions of the state court, he must turn to the state for remedy. This Court lacks jurisdiction to provide redress for Plaintiff's claims.”
Id.
The Rooker-Feldman doctrine is a key defense in cases like Kelly and Bryant, where a consumer is pursuing FDCPA claims that would undermine the validity of a state court judgment or its findings. The collector should move for summary judgment on the grounds that the district court lacks subject matter jurisdiction over the claims. See Bianchi, 334 F.3d at 898 (district court lacks subject matter jurisdiction if claims raised in federal action are inextricably intertwined with state court decision).
If a consumer has a problem with a state court judgment, he cannot attack the judgment or undermine it using the FDCPA and the federal courts. He must seek relief from the judgment utilizing the procedures available under state law. “A state litigant seeking review of a state court judgment must follow the appellate process through the state court system and then directly to the United States Supreme Court.” Kelley, 548 F.3d at 603.
Saturday, May 1, 2010
Fighting Back With An Anti-SLAPP: Defeating FDCPA Cross-Complaints Using Your State's Anti-SLAPP Statute
Collection attorneys who file state court collection actions routinely face FDCPA cross-complaints filed by consumers. Many of these cross-complaints are of the “cookie cutter” variety, and they amount to little more than a list of legal conclusions about alleged FDCPA violations with no factual basis for the claims. Debtors file these cross-complaints solely to dissuade the creditor from continuing with the collection action. They know the cost of defending FDCPA cross-complaints can be substantial, and they hope the creditor or its attorney will pay the debtor’s attorney some money to dismiss the cross-complaint and go away. How can a collector turn the table in these cases?
One effective method for combating FDCPA cross-complaints filed in state court is the anti-SLAPP motion. Anti-SLAPP statutes are procedural devices designed to encourage early dismissal of lawsuits that have been filed solely to chill a person’s freedom of speech or petition (the acronym “SLAPP” stands for “Strategic Litigation Against Public Participation”). Although this article will focus on California’s anti-SLAPP statute, many other states have enacted similar legislation. In fact, according to a website sponsored by the Public Participation Project (see http://www.anti-slapp.org/?q=node/12), there are at least twenty-seven states that have enacted anti-SLAPP statutes.
In California, the anti-SLAPP statute is found at section 425.16(b) of the Code of Civil Procedure, which provides as follows:
“A cause of action against a person arising from any act of that person in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.”
Cal. Code Civ. Proc. § 425.16(b)(1).
The California legislature enacted the anti-SLAPP statute to provide “an efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims ‘arising from any act’ of the defendant ‘in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue . . . .’” Martinez v. Metabolife Int’l, Inc., 113 Cal. App. 4th 181, 186 (2003); accord Jarrow Formulas v. LaMarche, 31 Cal. 4th 728, 737 (2003) (explaining that § 425.16 “is a procedural device for screening out meritless claims”). The phrase “in furtherance of the person’s right of petition or free speech” is defined broadly:
As used in this section, ‘act in furtherance of a person’s right of petition or free speech under the United States or California Constitution in connection with a public issue’ includes: (1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law; (2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law; . . . .
Cal. Code Civ. Proc. § 425.16(e).
The California legislature and courts have dictated that section 425.16 “shall be construed broadly.” Id. § 425.16(a); Navellier v. Sletten, 29 Cal. 4th 82, 92 (2002)(rejecting narrow construction of the statute that “would contravene the Legislature's express command that section 425.16 ‘shall be construed broadly’”); Kibler v. Northern Inyo County Local Hosp. Dist., 39 Cal. 4th 192, 195-96 (2006). The Court explained why a broad construction was appropriate in Kibler:
Because these meritless lawsuits seek to deplete the defendant's energy and drain his or her resources, the Legislature sought to prevent SLAPPs by ending them early and without great cost to the SLAPP target.
Kibler, 39 Cal. 4th at 195 (citations and quotation marks omitted); see Martinez, 113 Cal. App. 4th at 186 (anti-SLAPP statute implemented to provide “efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims. . . ”).
In California, the court’s first step is to determine if the action is subject to a special motion to strike. If it is, the Court must then determine if the opposing party has established a probability of prevailing on his claim. See HMS Capital, Inc. v. Lawyers Title Co., 118 Cal. App. 4th 204, 211 (2004); Barak v. Quisenberry, 135 Cal. App. 4th 654, 661 (2006) (“In order to trigger a response from a plaintiff in a special motion to strike, a moving defendant need only demonstrate that the action arises out of protected First Amendment activity.”).
The first prong of the test will almost always be met with respect to a motion to strike an FDCPA cross-complaint. These pleadings generally target the allegations made in the collection complaint, and thus implicate the creditor’s right to petition. The California Supreme Court held that the “constitutional right to petition . . . includes the basic act of filing litigation.” Briggs v. Eden Council for Hope & Opportunity, 19 Cal. 4th 1106, 1115 (1999).
Once the creditor shows that the cross-complaint implicates its right to petition, the burden shifts to the debtor to “establish a probability of prevailing in the litigation.” To do so, the debtor will need to show that his cross-complaint is “both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by [him] is credited.” HMS Capital, 118 Cal. App 4th at 213 (internal quotation marks omitted). Evidence “that would be admissible at trial is required.” Id. at 212. Declarations submitted by the debtor “based upon ‘information and belief’” are not sufficient. Id.; see Evans v. Unkow, 38 Cal. App. 4th 1490, 1497-98 (1995). The Court considers “the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based.” Cal. Code Civ. Proc. § 425.16(b)(2); see Navellier, 29 Cal. 4th at 89. If the party opposing the motion has submitted sufficient evidence, the court “evaluate[s] the defendant’s evidence only to determine if it has defeated that submitted by the plaintiff as a matter of law.” HMS Capital, Inc., 118 Cal. App. 4th at 212.
California’s anti-SLAPP statute has a few additional features that make it particularly effective at fighting FDCPA cross-complaints. Once the motion is filed, there is a freeze on discovery. See Cal. Code Civ. Proc. § 425.16(g). This prevents the debtor and his counsel from arguing they are entitled to pursue expensive and time-consuming discovery in order to respond to the motion. They must defeat the motion with whatever evidence they have on hand, which is usually not much.
The other benefit to California’s anti-SLAPP motion is that the prevailing party is entitled to recover the attorneys’ fees and costs incurred in connection with the motion. See Cal. Code Civ. Proc. § 425.16(c) (“In any action subject to subdivision (b), a prevailing defendant on a special motion to strike shall be entitled to recover his or her attorney’s fees and costs.”). The prospect of having the cross-complaint quickly dismissed and then paying the creditor’s attorneys’ fees can act as a strong deterrent to frivolous FDCPA cross-complaints.
The laws governing anti-SLAPP motions may vary significantly in your state, and of course an anti-SLAPP motion is not appropriate in every case. But these motions can provide creditors and their counsel with a powerful tool for fighting back against frivolous FDCPA cross-complaints.
One effective method for combating FDCPA cross-complaints filed in state court is the anti-SLAPP motion. Anti-SLAPP statutes are procedural devices designed to encourage early dismissal of lawsuits that have been filed solely to chill a person’s freedom of speech or petition (the acronym “SLAPP” stands for “Strategic Litigation Against Public Participation”). Although this article will focus on California’s anti-SLAPP statute, many other states have enacted similar legislation. In fact, according to a website sponsored by the Public Participation Project (see http://www.anti-slapp.org/?q=node/12), there are at least twenty-seven states that have enacted anti-SLAPP statutes.
In California, the anti-SLAPP statute is found at section 425.16(b) of the Code of Civil Procedure, which provides as follows:
“A cause of action against a person arising from any act of that person in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.”
Cal. Code Civ. Proc. § 425.16(b)(1).
The California legislature enacted the anti-SLAPP statute to provide “an efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims ‘arising from any act’ of the defendant ‘in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue . . . .’” Martinez v. Metabolife Int’l, Inc., 113 Cal. App. 4th 181, 186 (2003); accord Jarrow Formulas v. LaMarche, 31 Cal. 4th 728, 737 (2003) (explaining that § 425.16 “is a procedural device for screening out meritless claims”). The phrase “in furtherance of the person’s right of petition or free speech” is defined broadly:
As used in this section, ‘act in furtherance of a person’s right of petition or free speech under the United States or California Constitution in connection with a public issue’ includes: (1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law; (2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law; . . . .
Cal. Code Civ. Proc. § 425.16(e).
The California legislature and courts have dictated that section 425.16 “shall be construed broadly.” Id. § 425.16(a); Navellier v. Sletten, 29 Cal. 4th 82, 92 (2002)(rejecting narrow construction of the statute that “would contravene the Legislature's express command that section 425.16 ‘shall be construed broadly’”); Kibler v. Northern Inyo County Local Hosp. Dist., 39 Cal. 4th 192, 195-96 (2006). The Court explained why a broad construction was appropriate in Kibler:
Because these meritless lawsuits seek to deplete the defendant's energy and drain his or her resources, the Legislature sought to prevent SLAPPs by ending them early and without great cost to the SLAPP target.
Kibler, 39 Cal. 4th at 195 (citations and quotation marks omitted); see Martinez, 113 Cal. App. 4th at 186 (anti-SLAPP statute implemented to provide “efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims. . . ”).
In California, the court’s first step is to determine if the action is subject to a special motion to strike. If it is, the Court must then determine if the opposing party has established a probability of prevailing on his claim. See HMS Capital, Inc. v. Lawyers Title Co., 118 Cal. App. 4th 204, 211 (2004); Barak v. Quisenberry, 135 Cal. App. 4th 654, 661 (2006) (“In order to trigger a response from a plaintiff in a special motion to strike, a moving defendant need only demonstrate that the action arises out of protected First Amendment activity.”).
The first prong of the test will almost always be met with respect to a motion to strike an FDCPA cross-complaint. These pleadings generally target the allegations made in the collection complaint, and thus implicate the creditor’s right to petition. The California Supreme Court held that the “constitutional right to petition . . . includes the basic act of filing litigation.” Briggs v. Eden Council for Hope & Opportunity, 19 Cal. 4th 1106, 1115 (1999).
Once the creditor shows that the cross-complaint implicates its right to petition, the burden shifts to the debtor to “establish a probability of prevailing in the litigation.” To do so, the debtor will need to show that his cross-complaint is “both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by [him] is credited.” HMS Capital, 118 Cal. App 4th at 213 (internal quotation marks omitted). Evidence “that would be admissible at trial is required.” Id. at 212. Declarations submitted by the debtor “based upon ‘information and belief’” are not sufficient. Id.; see Evans v. Unkow, 38 Cal. App. 4th 1490, 1497-98 (1995). The Court considers “the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based.” Cal. Code Civ. Proc. § 425.16(b)(2); see Navellier, 29 Cal. 4th at 89. If the party opposing the motion has submitted sufficient evidence, the court “evaluate[s] the defendant’s evidence only to determine if it has defeated that submitted by the plaintiff as a matter of law.” HMS Capital, Inc., 118 Cal. App. 4th at 212.
California’s anti-SLAPP statute has a few additional features that make it particularly effective at fighting FDCPA cross-complaints. Once the motion is filed, there is a freeze on discovery. See Cal. Code Civ. Proc. § 425.16(g). This prevents the debtor and his counsel from arguing they are entitled to pursue expensive and time-consuming discovery in order to respond to the motion. They must defeat the motion with whatever evidence they have on hand, which is usually not much.
The other benefit to California’s anti-SLAPP motion is that the prevailing party is entitled to recover the attorneys’ fees and costs incurred in connection with the motion. See Cal. Code Civ. Proc. § 425.16(c) (“In any action subject to subdivision (b), a prevailing defendant on a special motion to strike shall be entitled to recover his or her attorney’s fees and costs.”). The prospect of having the cross-complaint quickly dismissed and then paying the creditor’s attorneys’ fees can act as a strong deterrent to frivolous FDCPA cross-complaints.
The laws governing anti-SLAPP motions may vary significantly in your state, and of course an anti-SLAPP motion is not appropriate in every case. But these motions can provide creditors and their counsel with a powerful tool for fighting back against frivolous FDCPA cross-complaints.
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.
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.
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