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.
Sunday, April 25, 2010
Saturday, April 10, 2010
When A Debt Is Not A "Debt" Under The FDCPA
Collectors should always remember that not every debt they are trying to collect qualifies as a “debt” as defined by the FDCPA. Even debts that you would normally assume are covered, like unpaid credit card accounts or residential telephone bills, are not necessarily covered. In order to prevail on an FDCPA claim, the plaintiff bears the burden of proving that they incurred a “debt” as defined by the Act. Never assume that they can meet this burden.
A “threshold issue” for any FDCPA case is whether the plaintiff incurred a “debt” as defined by the FDCPA. The Ninth Circuit stated this succinctly:
“Because not all obligations to pay are considered debts under the FDCPA, a threshold issue in a suit brought under the Act is whether or not the dispute involves a ‘debt’ within the meaning of the statute.”
Turner v. Cook, 362 F.3d 1219, 1226-27 (9th Cir. 2004) (alleged obligation to pay commercial tort judgment not a “debt” under FDCPA). The FDCPA has a very specific definition for what constitutes a “debt” covered by the Act, as follows:
“The term ‘debt’ means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether such obligation has been reduced to a judgment.”
15 U.S.C. § 1692a(5). To prevail, an FDCPA plaintiff must present evidence showing they incurred a debt “primarily for personal, family, or household purposes.” This may be more difficult than is seems.
Courts around the country have recognized that if there is no evidence the collector was attempting to collect a “debt” as defined by the FDCPA, there is no “debt collection” and no violation. See, e.g., Bloom v. I.C. System, Inc., 972 F.2d 1067, 1068-69 (9th Cir. 1992) (no “debt” under FDCPA where defendant sought to collect on loan used for business venture); First Gibraltar Bank, FSB v. Smith, 62 F.3d 133,135-36 (5th Cir. 1995) (FDCPA claims dismissed where defendant sought to collect obligation arising out of commercial transaction); Pollice v. National Tax Funding, LP, 225 F.3d 379, 401-02 (3d Cir. 2000) (property taxes not “debts” under the FDCPA); Staub v. Harris, 626 F.2d 275, 278 (3d Cir. 1980) (municipal taxes not “debts” under the FDCPA); Mabe v. GC Servs, Ltd., 32 F.3d 86, 88 (4th Cir. 1994) (child support obligations not “debts” under the FDCPA); Graham v. ACS, 2006 WL 2911780, *2 (D. Minn. 2006) (unpaid parking tickets not “debts” under FDCPA); Betts v. Equifax Credit Info. Servs., Inc., 245 F.Supp. 2d 1130, 1133-34 (W.D. Wash. 2003) (towing and impoundment fees not a “debt” under FDCPA).
Credit card debts deserve special attention here. A court cannot simply assume that every individual with an unpaid credit card must have incurred a “debt” covered by the FDCPA. To identify the nature of the debt, the starting point would be an examination of the charges reflected on the monthly credit card statements. Even if these statements can be obtained, the charges listed will not be self-explanatory or determinative of the issue. Personal credit cards are often used for business purposes, and those business charges are not covered by the FDCPA. A charge for airline tickets or a hotel room might be for business reasons. Charges at an electronics store might be for an office computer. Restaurant charges could be for a business dinner. Groceries could be for the office, and even a charge at a gas station could be for a business trip.
If the majority of the charges comprising the balance on a credit card are for business expenses, the debt was not incurred “primarily for personal, family or household” purpose, and there is no FDCPA claim. See, e.g., In Re Creditrust Corp., 283 B.R. 826, 830-31 (D. Maryland 2003) (attempts to collect credit card used for business purposes not covered by FDCPA); see also Bloom, 972 F.2d at 1068-69 (loan made to friend for business investment not a “debt”); First Gibraltar Bank, 62 F.3d at 136 (commercial obligation not covered by FDCPA); Ditty v. CheckRite, Ltd., 973 F. Supp. 1320, 1338 (D. Utah 1997) (three checks used for debtor’s painting business not covered); Fleet National Bank v. Baker, 263 F. Supp.2d 150, 154 (D. Mass. 2003) (commercial real estate loan not covered).
Personal credit cards can also be used to obtain cash advances, and that cash can be used a myriad of purposes that are not covered by the FDCPA. A cash advance might be used to finance a small business or to make a business loan to a friend. Or the card cash advance can be used to pay taxes, fines, or for child support obligations, none of which are covered by the FDCPA. A debtor would need to be deposed to determine whether the cash advance funds were used to incur a “debt” under the Act.
Similarly, telephones are often used for business purposes. This includes cell phones, and even land lines that are located in residences, which might be used for home businesses. To identify whether a “debt” was incurred, the starting point would be looking at the charges reflected on the monthly phone bills. If the bills can be obtained, the charges will not be self-explanatory. Once again, the debtor would need to be deposed in order to determine if each of the charges is properly characterized as business or personal.
While some unpaid obligations will always qualify as a “debt” under the FDCPA, many will not. Collectors should examine each case individually to determine whether a “debt” was incurred and whether the Act applies.
A “threshold issue” for any FDCPA case is whether the plaintiff incurred a “debt” as defined by the FDCPA. The Ninth Circuit stated this succinctly:
“Because not all obligations to pay are considered debts under the FDCPA, a threshold issue in a suit brought under the Act is whether or not the dispute involves a ‘debt’ within the meaning of the statute.”
Turner v. Cook, 362 F.3d 1219, 1226-27 (9th Cir. 2004) (alleged obligation to pay commercial tort judgment not a “debt” under FDCPA). The FDCPA has a very specific definition for what constitutes a “debt” covered by the Act, as follows:
“The term ‘debt’ means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether such obligation has been reduced to a judgment.”
15 U.S.C. § 1692a(5). To prevail, an FDCPA plaintiff must present evidence showing they incurred a debt “primarily for personal, family, or household purposes.” This may be more difficult than is seems.
Courts around the country have recognized that if there is no evidence the collector was attempting to collect a “debt” as defined by the FDCPA, there is no “debt collection” and no violation. See, e.g., Bloom v. I.C. System, Inc., 972 F.2d 1067, 1068-69 (9th Cir. 1992) (no “debt” under FDCPA where defendant sought to collect on loan used for business venture); First Gibraltar Bank, FSB v. Smith, 62 F.3d 133,135-36 (5th Cir. 1995) (FDCPA claims dismissed where defendant sought to collect obligation arising out of commercial transaction); Pollice v. National Tax Funding, LP, 225 F.3d 379, 401-02 (3d Cir. 2000) (property taxes not “debts” under the FDCPA); Staub v. Harris, 626 F.2d 275, 278 (3d Cir. 1980) (municipal taxes not “debts” under the FDCPA); Mabe v. GC Servs, Ltd., 32 F.3d 86, 88 (4th Cir. 1994) (child support obligations not “debts” under the FDCPA); Graham v. ACS, 2006 WL 2911780, *2 (D. Minn. 2006) (unpaid parking tickets not “debts” under FDCPA); Betts v. Equifax Credit Info. Servs., Inc., 245 F.Supp. 2d 1130, 1133-34 (W.D. Wash. 2003) (towing and impoundment fees not a “debt” under FDCPA).
Credit card debts deserve special attention here. A court cannot simply assume that every individual with an unpaid credit card must have incurred a “debt” covered by the FDCPA. To identify the nature of the debt, the starting point would be an examination of the charges reflected on the monthly credit card statements. Even if these statements can be obtained, the charges listed will not be self-explanatory or determinative of the issue. Personal credit cards are often used for business purposes, and those business charges are not covered by the FDCPA. A charge for airline tickets or a hotel room might be for business reasons. Charges at an electronics store might be for an office computer. Restaurant charges could be for a business dinner. Groceries could be for the office, and even a charge at a gas station could be for a business trip.
If the majority of the charges comprising the balance on a credit card are for business expenses, the debt was not incurred “primarily for personal, family or household” purpose, and there is no FDCPA claim. See, e.g., In Re Creditrust Corp., 283 B.R. 826, 830-31 (D. Maryland 2003) (attempts to collect credit card used for business purposes not covered by FDCPA); see also Bloom, 972 F.2d at 1068-69 (loan made to friend for business investment not a “debt”); First Gibraltar Bank, 62 F.3d at 136 (commercial obligation not covered by FDCPA); Ditty v. CheckRite, Ltd., 973 F. Supp. 1320, 1338 (D. Utah 1997) (three checks used for debtor’s painting business not covered); Fleet National Bank v. Baker, 263 F. Supp.2d 150, 154 (D. Mass. 2003) (commercial real estate loan not covered).
Personal credit cards can also be used to obtain cash advances, and that cash can be used a myriad of purposes that are not covered by the FDCPA. A cash advance might be used to finance a small business or to make a business loan to a friend. Or the card cash advance can be used to pay taxes, fines, or for child support obligations, none of which are covered by the FDCPA. A debtor would need to be deposed to determine whether the cash advance funds were used to incur a “debt” under the Act.
Similarly, telephones are often used for business purposes. This includes cell phones, and even land lines that are located in residences, which might be used for home businesses. To identify whether a “debt” was incurred, the starting point would be looking at the charges reflected on the monthly phone bills. If the bills can be obtained, the charges will not be self-explanatory. Once again, the debtor would need to be deposed in order to determine if each of the charges is properly characterized as business or personal.
While some unpaid obligations will always qualify as a “debt” under the FDCPA, many will not. Collectors should examine each case individually to determine whether a “debt” was incurred and whether the Act applies.
Tuesday, April 6, 2010
Why The Two-Year Statute Of Limitations In Section 415(a) of The FCA Does Not Apply To Telephone Bills
Consumer attorneys have argued that collection lawsuits filed to recover unpaid telephone bills are governed by the two-year statute of limitations found at section 415(a) of Federal Communications Act (“FCA”), 47 U.S.C. § 415(a), rather than the limitations periods established in the law of the state where the suit is filed. Armed with this theory, they have filed actions under the FDCPA, claiming that the collectors are improperly seeking to collect on time-barred debts. But section 415(a) of the FCA does not apply except in those extremely rare circumstances where a collector is seeking to recover charges imposed by a tariff. All telephone charges – both landline and cellular – have been detariffed since no later than 2001. The two-year limitations period from section 415(a) will almost never apply.
Section 415(a) provides that any claim for “lawful charges” by a carrier must be filed within two years of the date the claim accrues. It states: “All actions at law by carriers for recovery of their lawful charges, or any part thereof, shall be begun within two years from the time the cause of action accrues, and not after.” 47 U.S.C. § 415(a). But the only “lawful charges” covered by this limitations period are charges imposed by a carrier pursuant to a tariff filed with the Federal Communications Commission. See Castro v. Collecto, Inc., 668 F. Supp. 2d 950, 976-77 (W.D. Tex. Oct. 27, 2009) (“Castro II”) (“Under the ICA, and subsequently under the FCA, ‘lawful charges’ were those which were included in tariffs.”); see also 47 U.S.C. § 415(g) (“The term ‘overcharges’ as used in this section shall be deemed to mean charges for services in excess of those applicable thereto under the schedules of charges lawfully on file with the Commission.”).
Consumer attorneys may seek to rely on an earlier opinion issued by the same court. See Castro v. Collecto, Inc., 256 F.R.D. 534 (W.D. Tex. March 4, 2009) (“Castro I”). But Castro I is no longer good law. Months after Castro I was decided, after conducting an exhaustive review of the FCA and its legislative history, the same court reversed itself and held that the two-year statute of limitations in section 415(a) did not apply:
"Because the FCA's statutory scheme and legislative history manifestly evince that Congress did not intend to preempt a CMRS providers' state law remedies when the action does not touch on rates or entry market and because the FCC has eliminated the tariff requirement for such providers, the Court concludes section 415 does not apply to a CMRS provider who is attempting to collect a debt from a consumer and is not preemptive. Rather, the state law governing the debt collection action provides the applicable statute of limitations."
Castro II, 278 F. Supp. 2d at 978. Consumers may also rely on a district court case from Illinois which, relying on Castro I, certified a class action without analyzing the language or legislative history of section 415(a) the FCA. See Cotton v. Asset Acceptance, LLC, 2008 WL 2561103 (N.D. Ill. June 26, 2008). The Cotton decision is no longer persuasive in light of Castro II.
A state court collection complaint filed by a telephone company or its successor-in-interest will rarely, if ever, seek to recover “lawful charges” imposed under a tariff. Collectors typically assert common count claims arising under state law, such as account stated or book account. It is highly unlikely that any of these charges will be based upon tariffs, given that mandatory detariffing for landline charges occurred in 2001. See Frontline v. Sprint, 178 F. Supp. 2d 432, 434 (S.D.N.Y. 2001) (“On February 5, 2001, the F.C.C. issued public notice that all domestic tariffs must be cancelled by August 1, 2001. Common Carrier Bureau Extends Transition Period for Detariffing Consumer Domestic Long Distance Services, 16 F.C.C. Rcd. 2906 (2001).”). Cellular charges were detariffed years before that in 1993. See Castro II, 278 F. Supp. 2d at 977.
Once the FCC did away with tariffs, claims by carriers for unpaid telephone bills were to be governed by state law. See, e.g., Ting v. AT&T, 319 F.3d 1126, 1132 (9th Cir. 2003) (“Under mandatory detariffing, rather than having carriers file their rates, terms, and conditions with the FCC, the Commission required telecommunications carriers to establish contracts with consumers governing the rates, terms, and conditions of interstate long distance service.”).
Unless a consumer can allege and prove that a collector is seeking to recover “lawful charges” imposed pursuant to a tariff, the two-year limitations period found in section 415(a) will not apply. It will impossible for a consumer to prove this, unless the debt is for landline charges incurred prior to 2001, or cell phone charges incurred before 1993. In the absence of such charges, the state law statute of limitations will control.
Section 415(a) provides that any claim for “lawful charges” by a carrier must be filed within two years of the date the claim accrues. It states: “All actions at law by carriers for recovery of their lawful charges, or any part thereof, shall be begun within two years from the time the cause of action accrues, and not after.” 47 U.S.C. § 415(a). But the only “lawful charges” covered by this limitations period are charges imposed by a carrier pursuant to a tariff filed with the Federal Communications Commission. See Castro v. Collecto, Inc., 668 F. Supp. 2d 950, 976-77 (W.D. Tex. Oct. 27, 2009) (“Castro II”) (“Under the ICA, and subsequently under the FCA, ‘lawful charges’ were those which were included in tariffs.”); see also 47 U.S.C. § 415(g) (“The term ‘overcharges’ as used in this section shall be deemed to mean charges for services in excess of those applicable thereto under the schedules of charges lawfully on file with the Commission.”).
Consumer attorneys may seek to rely on an earlier opinion issued by the same court. See Castro v. Collecto, Inc., 256 F.R.D. 534 (W.D. Tex. March 4, 2009) (“Castro I”). But Castro I is no longer good law. Months after Castro I was decided, after conducting an exhaustive review of the FCA and its legislative history, the same court reversed itself and held that the two-year statute of limitations in section 415(a) did not apply:
"Because the FCA's statutory scheme and legislative history manifestly evince that Congress did not intend to preempt a CMRS providers' state law remedies when the action does not touch on rates or entry market and because the FCC has eliminated the tariff requirement for such providers, the Court concludes section 415 does not apply to a CMRS provider who is attempting to collect a debt from a consumer and is not preemptive. Rather, the state law governing the debt collection action provides the applicable statute of limitations."
Castro II, 278 F. Supp. 2d at 978. Consumers may also rely on a district court case from Illinois which, relying on Castro I, certified a class action without analyzing the language or legislative history of section 415(a) the FCA. See Cotton v. Asset Acceptance, LLC, 2008 WL 2561103 (N.D. Ill. June 26, 2008). The Cotton decision is no longer persuasive in light of Castro II.
A state court collection complaint filed by a telephone company or its successor-in-interest will rarely, if ever, seek to recover “lawful charges” imposed under a tariff. Collectors typically assert common count claims arising under state law, such as account stated or book account. It is highly unlikely that any of these charges will be based upon tariffs, given that mandatory detariffing for landline charges occurred in 2001. See Frontline v. Sprint, 178 F. Supp. 2d 432, 434 (S.D.N.Y. 2001) (“On February 5, 2001, the F.C.C. issued public notice that all domestic tariffs must be cancelled by August 1, 2001. Common Carrier Bureau Extends Transition Period for Detariffing Consumer Domestic Long Distance Services, 16 F.C.C. Rcd. 2906 (2001).”). Cellular charges were detariffed years before that in 1993. See Castro II, 278 F. Supp. 2d at 977.
Once the FCC did away with tariffs, claims by carriers for unpaid telephone bills were to be governed by state law. See, e.g., Ting v. AT&T, 319 F.3d 1126, 1132 (9th Cir. 2003) (“Under mandatory detariffing, rather than having carriers file their rates, terms, and conditions with the FCC, the Commission required telecommunications carriers to establish contracts with consumers governing the rates, terms, and conditions of interstate long distance service.”).
Unless a consumer can allege and prove that a collector is seeking to recover “lawful charges” imposed pursuant to a tariff, the two-year limitations period found in section 415(a) will not apply. It will impossible for a consumer to prove this, unless the debt is for landline charges incurred prior to 2001, or cell phone charges incurred before 1993. In the absence of such charges, the state law statute of limitations will control.
Saturday, April 3, 2010
Are Communications With A Debtor's Lawyer Subject To The FDCPA?
If a collector is communicating with a debtor’s attorney instead of with the debtor, are the communications with the attorney subject to the FDCPA? The answer depends on what circuit you are in. The circuit courts have developed three different approaches to this issue, and several circuits still have not addressed the question.
In Sayyed v. Wolpoff & Abramson, 485 F.3d 226 (4th Cir. 2007), the Fourth Circuit held that the FDCPA does apply to communications between a debt collector and a debtor’s counsel. Id. at 232-33. The debtor in Sayeed alleged that statements made in the collector’s interrogatory responses and in a summary judgement motion – pleadings that had been served upon the debtor’s counsel in a collection lawsuit – violated the FDCPA. Id. at 228-29. The district court granted the defendant’s motion to dismiss, but the Fourth Circuit reversed.
The Sayyed court noted that the FDCPA defines “communication” broadly to include conveying information transmitted “indirectly” to a debtor, and that a “communication to debtor's counsel, regarding a debt collection lawsuit in which counsel is representing the debtor, plainly qualifies as an indirect communication to the debtor.” Id. at 232. The court reasoned that section 1692c(a)(2) of the Act, which mandates that when a debtor is represented, all communications must be made to a debtor’s attorney, is “but another indication that communications with a debtor's attorney with regard to the debt are "communications" as defined and regulated by the FDCPA – and that such communications must in fact be directed to the attorney under the terms of the statute.” Id. at 233.
Finally, the Sayyed court observed that the “communication” at issue in Heintz v. Jenkins, 514 U.S. 291 (1995), was a settlement letter between a collector and the debtor’s attorney. Sayeed, 485 F.3d at 233. According to Sayeed, the Supreme Court had “held” in Heintz that the debtor “had a cause of action under the FDCPA on the basis of statements contained within the letter to her counsel. (Citation). Thus, plainly, the FDCPA covers communications to a debtor’s attorney.” Id.
The Ninth Circuit considered Sayeed and came to the exact opposite result, holding that a communication with a debtor’s counsel is not governed by the FDCPA. See Guerrero v. RJM Acquisitions LLC, 499 F. 3d 926 (9th Cir. 2007). In Guerrero, the debtor argued that a letter sent to the debtor’s counsel, in response to a request for validation of the debt, was subject to the FDCPA. The district court agreed, and later awarded the debtor $2,545.00 in actual and statutory damages, along with $45,237.21 in attorneys fees. Id. at 932. The Ninth Circuit reversed, holding that the letter to the debtor’s counsel was not subject to the FDCPA:
"RJM argued before the court, and amici argued in its brief, that the Act's purpose is to protect unsophisticated debtors from abusive debt collectors, and once a consumer obtains this protection by procuring legal counsel, the Act's protections become superfluous and therefore its provisions no longer apply. We agree. The Act's language and underlying purposes recognize a distinction between a consumer and a consumer's legal counsel. They are distinct legal entities. We therefore hold that the letter directed to the consumer's attorney after receiving notice that the consumer disputed an alleged debt does not violate the Act."
Id. at 929. The Guerrero court noted that “All but one published federal decision to have given reasoned consideration to the question has determined that communications to a debtor's attorney are not actionable under the Act. (Citations).” Id. at 936. The Court rejected the notion that the Supreme Court had “ruled” in Heintz that the FDCPA necessarily applies to communications with a debtor’s counsel. The issue decided by Heintz was much narrower – “The issue before us is whether the term ‘debt collector’ in the [Act] applies to a lawyer who regularly, through litigation, tries to collect consumer debts.” Guerrero, 499 F. 3d att 937 (internal quotation marks omitted; alteration in original). The Guerrero court explained that it was not required to follow “what amounts to, at most, an implicit assumption” in the Heintz decision. Id. at 938.
Guerrero expressly rejected the holding of Sayeed. It noted that Sayeed “did not even acknowledge the great weight of authority holding to the contrary” and that it “relied upon the implicit assumption by the Supreme Court in Heintz, which we find inappropriate for the reasons just discussed.” Id. at 938. Guerrero notes that the language of section 1692c(a)(2) of the Act did not support Sayyed court’s reasoning and actually “cuts in the opposite direction, however, because it demonstrates that the Act contemplates different roles for, and different treatment of, attorneys and their debtor clients. Section 1692c(a)(2) actually reinforces our view that Congress treated attorneys as intermediaries between debtors and debt collectors, and that a debtor's attorney does not require the same protections as a debtor himself.” Id.
Yet another approach was adopted by the Seventh Circuit in Evory v. RJM Acquisitions Funding L.L.C., 505 F.3d 769 (7th Cir. 2007). The Evory court determined that the FDCPA does apply to communications made to a debtor’s counsel, but held that the “unsophisticated consumer” standard was not appropriate when evaluating those communications. Id. at 774. The Evory court fashioned a new standard for communications made to attorneys, holding that “a representation by a debt collector that would be unlikely to deceive a competent lawyer, even if he is not a specialist in consumer debt law, should not be actionable.” Id. at 775. The court noted that “false” statements may be more likely to mislead a competent attorney, since the attorney may be unable to discovery the falsity without an investigation that his client cannot afford to undertake. Id.
Given this three-way split between Sayeed, Guerrero and Evory on the issue of whether communications between a collector and a debtor’s counsel are covered by the FDCPA, it seems certain that debtors will continue to pursue this theory of recovery in circuits that have not adopted the Guerrero approach.
[Note: this post is an updated version of article that appeared in the September 2007 MAP Bulletin]
In Sayyed v. Wolpoff & Abramson, 485 F.3d 226 (4th Cir. 2007), the Fourth Circuit held that the FDCPA does apply to communications between a debt collector and a debtor’s counsel. Id. at 232-33. The debtor in Sayeed alleged that statements made in the collector’s interrogatory responses and in a summary judgement motion – pleadings that had been served upon the debtor’s counsel in a collection lawsuit – violated the FDCPA. Id. at 228-29. The district court granted the defendant’s motion to dismiss, but the Fourth Circuit reversed.
The Sayyed court noted that the FDCPA defines “communication” broadly to include conveying information transmitted “indirectly” to a debtor, and that a “communication to debtor's counsel, regarding a debt collection lawsuit in which counsel is representing the debtor, plainly qualifies as an indirect communication to the debtor.” Id. at 232. The court reasoned that section 1692c(a)(2) of the Act, which mandates that when a debtor is represented, all communications must be made to a debtor’s attorney, is “but another indication that communications with a debtor's attorney with regard to the debt are "communications" as defined and regulated by the FDCPA – and that such communications must in fact be directed to the attorney under the terms of the statute.” Id. at 233.
Finally, the Sayyed court observed that the “communication” at issue in Heintz v. Jenkins, 514 U.S. 291 (1995), was a settlement letter between a collector and the debtor’s attorney. Sayeed, 485 F.3d at 233. According to Sayeed, the Supreme Court had “held” in Heintz that the debtor “had a cause of action under the FDCPA on the basis of statements contained within the letter to her counsel. (Citation). Thus, plainly, the FDCPA covers communications to a debtor’s attorney.” Id.
The Ninth Circuit considered Sayeed and came to the exact opposite result, holding that a communication with a debtor’s counsel is not governed by the FDCPA. See Guerrero v. RJM Acquisitions LLC, 499 F. 3d 926 (9th Cir. 2007). In Guerrero, the debtor argued that a letter sent to the debtor’s counsel, in response to a request for validation of the debt, was subject to the FDCPA. The district court agreed, and later awarded the debtor $2,545.00 in actual and statutory damages, along with $45,237.21 in attorneys fees. Id. at 932. The Ninth Circuit reversed, holding that the letter to the debtor’s counsel was not subject to the FDCPA:
"RJM argued before the court, and amici argued in its brief, that the Act's purpose is to protect unsophisticated debtors from abusive debt collectors, and once a consumer obtains this protection by procuring legal counsel, the Act's protections become superfluous and therefore its provisions no longer apply. We agree. The Act's language and underlying purposes recognize a distinction between a consumer and a consumer's legal counsel. They are distinct legal entities. We therefore hold that the letter directed to the consumer's attorney after receiving notice that the consumer disputed an alleged debt does not violate the Act."
Id. at 929. The Guerrero court noted that “All but one published federal decision to have given reasoned consideration to the question has determined that communications to a debtor's attorney are not actionable under the Act. (Citations).” Id. at 936. The Court rejected the notion that the Supreme Court had “ruled” in Heintz that the FDCPA necessarily applies to communications with a debtor’s counsel. The issue decided by Heintz was much narrower – “The issue before us is whether the term ‘debt collector’ in the [Act] applies to a lawyer who regularly, through litigation, tries to collect consumer debts.” Guerrero, 499 F. 3d att 937 (internal quotation marks omitted; alteration in original). The Guerrero court explained that it was not required to follow “what amounts to, at most, an implicit assumption” in the Heintz decision. Id. at 938.
Guerrero expressly rejected the holding of Sayeed. It noted that Sayeed “did not even acknowledge the great weight of authority holding to the contrary” and that it “relied upon the implicit assumption by the Supreme Court in Heintz, which we find inappropriate for the reasons just discussed.” Id. at 938. Guerrero notes that the language of section 1692c(a)(2) of the Act did not support Sayyed court’s reasoning and actually “cuts in the opposite direction, however, because it demonstrates that the Act contemplates different roles for, and different treatment of, attorneys and their debtor clients. Section 1692c(a)(2) actually reinforces our view that Congress treated attorneys as intermediaries between debtors and debt collectors, and that a debtor's attorney does not require the same protections as a debtor himself.” Id.
Yet another approach was adopted by the Seventh Circuit in Evory v. RJM Acquisitions Funding L.L.C., 505 F.3d 769 (7th Cir. 2007). The Evory court determined that the FDCPA does apply to communications made to a debtor’s counsel, but held that the “unsophisticated consumer” standard was not appropriate when evaluating those communications. Id. at 774. The Evory court fashioned a new standard for communications made to attorneys, holding that “a representation by a debt collector that would be unlikely to deceive a competent lawyer, even if he is not a specialist in consumer debt law, should not be actionable.” Id. at 775. The court noted that “false” statements may be more likely to mislead a competent attorney, since the attorney may be unable to discovery the falsity without an investigation that his client cannot afford to undertake. Id.
Given this three-way split between Sayeed, Guerrero and Evory on the issue of whether communications between a collector and a debtor’s counsel are covered by the FDCPA, it seems certain that debtors will continue to pursue this theory of recovery in circuits that have not adopted the Guerrero approach.
[Note: this post is an updated version of article that appeared in the September 2007 MAP Bulletin]
Tuesday, March 30, 2010
Verification of Debts Under Section 1692g(b) of the FDCPA
Consumers and their counsel often argue that a debt collector has not properly “verified” a debt under section 1692g(b) of the FDCPA unless the collector has provided the consumer with detailed evidence of the debt, like a signed contract, charge slips, monthly account statements or other documentary evidence showing the details of the debt. But this is not what the law requires. The standard for debt validation is actually very minimal. A collector can discharge its duty to verify a debt simply by sending the debtor a written notice confirming that the amount the collector is demanding is what the creditor claims is owed. Nothing further is required.
The FDCPA provides that when a collector receives a written request for verification of the debt within thirty days of the date the consumer receives the section 1692g notice, the collector must stop further collection efforts until verification of the debt is mailed to the consumer. Section 1692g(b) of the FDCPA provides in relevant part as follows: “[T]he debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or a copy of a judgment, . . . and a copy of such verification or judgment, . . . is mailed to the consumer by the debt collector.” See 15 U.S.C. § 1692g(b).
The statute does not define the term “verification of the debt” and this can leave collectors wondering about exactly what is required of them. The circuit courts that have addressed this issue have held that a collector can satisfy its duty to verify the debt under section 1692g(b) of the FDCPA by providing the debtor written confirmation of the amount that the creditor claims is owed. See Clark v. Capital Credit & Collection Services, Inc., 460 F. 3d 1162, 1173-1174 (9th Cir. 2006); Chaudhry v. Gallerizzo, 174 F.3d 394, 406 (4th Cir. 1999).
As the Chaudhry court observed, Congress did not implement the verification requirements of section 1692g(b) as a mechanism to allow consumers to demand that collectors provide them detailed evidence of the debt. The goal of section 1692g(b) was much more modest:
Consistent with the legislative history, verification is only intended to eliminate the ... problem of debt collectors dunning the wrong person or attempting to collect debts which the consumer has already paid. (Citation). There is no concomitant obligation to forward copies of bills or other detailed evidence of the debt.
See Chaudhry, 174 F. 3d at 406. In Clark, the Ninth Circuit followed Chaudhry, and rejected the consumer’s argument that in order to verify a debt, a collector must provide copies of bills or other detailed evidence. The Clark court stated:
[V]erification of a debt involves nothing more than the debt collector confirming in writing that the amount being demanded is what the creditor is claiming is owed.
See Clark, 460 F.3d at 1173-74 (citations omitted).
Collectors may find that providing consumers with further documentation of the debt, beyond the minimum verification requirements, will assist them in their collection efforts. But their failure to do so will not run afoul of section 1692g(b) of the FDCPA.
The FDCPA provides that when a collector receives a written request for verification of the debt within thirty days of the date the consumer receives the section 1692g notice, the collector must stop further collection efforts until verification of the debt is mailed to the consumer. Section 1692g(b) of the FDCPA provides in relevant part as follows: “[T]he debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or a copy of a judgment, . . . and a copy of such verification or judgment, . . . is mailed to the consumer by the debt collector.” See 15 U.S.C. § 1692g(b).
The statute does not define the term “verification of the debt” and this can leave collectors wondering about exactly what is required of them. The circuit courts that have addressed this issue have held that a collector can satisfy its duty to verify the debt under section 1692g(b) of the FDCPA by providing the debtor written confirmation of the amount that the creditor claims is owed. See Clark v. Capital Credit & Collection Services, Inc., 460 F. 3d 1162, 1173-1174 (9th Cir. 2006); Chaudhry v. Gallerizzo, 174 F.3d 394, 406 (4th Cir. 1999).
As the Chaudhry court observed, Congress did not implement the verification requirements of section 1692g(b) as a mechanism to allow consumers to demand that collectors provide them detailed evidence of the debt. The goal of section 1692g(b) was much more modest:
Consistent with the legislative history, verification is only intended to eliminate the ... problem of debt collectors dunning the wrong person or attempting to collect debts which the consumer has already paid. (Citation). There is no concomitant obligation to forward copies of bills or other detailed evidence of the debt.
See Chaudhry, 174 F. 3d at 406. In Clark, the Ninth Circuit followed Chaudhry, and rejected the consumer’s argument that in order to verify a debt, a collector must provide copies of bills or other detailed evidence. The Clark court stated:
[V]erification of a debt involves nothing more than the debt collector confirming in writing that the amount being demanded is what the creditor is claiming is owed.
See Clark, 460 F.3d at 1173-74 (citations omitted).
Collectors may find that providing consumers with further documentation of the debt, beyond the minimum verification requirements, will assist them in their collection efforts. But their failure to do so will not run afoul of section 1692g(b) of the FDCPA.
Wednesday, March 24, 2010
Why Foti Raises Serious Problems Under The First Amendment
I. Introduction
In Foti v. NCO Financial Systems, Inc., 424 F. Supp. 2d 643 (S.D.N.Y. 2006) (“Foti”), the District Court for the Southern District of New York held that if a debt collector leaves a message on a debtor’s answering machine that merely invites a return phone call, the message amounts to a “communication” within the meaning of the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 et seq. (the “FDCPA” or the “Act”). The court also held that the voicemail message must state it is from a “debt collector” in order to comply with section 1692e(11) of the Act. See Foti, 424 F. Supp. 2d at 669.
The FDCPA was designed to protect a debtor’s privacy, however, so the Act generally prohibits collectors from communicating information about a debt to third parties. See, e.g., 15 U.S.C. § 1692c(b). Given that parties other than the debtor (such as a roommate, parent or guest) may retrieve or hear a collector’s voice mail message, any message which states that it is from a “debt collector” necessarily puts the collector at risk of violating the prohibition on third party disclosure set forth in section 1692c(b) of the Act.
The Foti court was wrong. A debt collector’s use of a truthful, non-threatening voicemail message that requests a return phone call constitutes a valid form of commercial speech, and is therefore entitled to protection under the First Amendment. By holding that such a message is a “communication” under the FDCPA, the Foti court interpreted the Act in a manner that unreasonably restricts valid commercial speech. Given the Supreme Court’s express prohibition on interpreting any statute in a manner that raises serious constitutional problems (see Debartolo v. Florida Gulf Coast Build. & Constr. Trades Council, 485 U.S. 568, 575 (1988)), the holding of Foti must be rejected.
II. A Collector’s Voicemail Messages Is Valid Commercial Speech
In Foti, the collector left a message on the debtor’s answering machine that stated:
Good day, we are calling from NCO Financial Systems regarding a personal business matter that requires your immediate attention. Please call back 1-866-701-1275 once again please call back, toll-free, 1-866-701-1275, this is not a solicitation.
See Foti, 424 F. Supp. 2d at 648.
The message was valid commercial speech. The Supreme Court has defined commercial speech as any “expression related solely to the economic interests of the speaker and its audience.” See Central Hudson v. Public Serv. Comm. Of New York, 447 U.S. 557, 562 (1980). Debt collectors generally act on behalf of creditors who have an existing economic relationship with the debtor, or on behalf of entities who purchase delinquent accounts after they have gone into default. When a collector leaves a message for a debtor requesting a return call, that message is a form of expression that relates to the parties’ economic interests.
It is true that commercial speech is entitled to less protection than other forms of expression. No regulation that restricts commercial speech can survive, however, unless it directly advances a substantial governmental interest and is not more extensive than necessary to serve that interest.
The holding that the message in Foti was a “communication” under the FDCPA places an unreasonable restraint a collector’s lawful commercial speech.
III. The Foti Decision Improperly Construes The FDCPA In A Manner That Prohibits Or Unreasonably Restricts Valid Commercial Speech
Statutes should not be construed in a manner that will raise serious constitutional problems. A “cardinal principle” of statutory construction is that “where an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress.” See Debartolo v. Florida Gulf Coast Build. & Constr. Trades Council, 485 U.S. 568, 575 (1988) (citing N.L.R.B. v. Catholic Bishop of Chicago, 440 U.S. 490, 499-501, 504 (1979). This rule, which is sometimes referred to as the “canon of constitutional avoidance,” has been described as “a tool for choosing between competing plausible interpretations of a statutory text, resting on the reasonable presumption that Congress did not intend the alternative which raises serious constitutional doubts.” See Clark v. Martinez, 543 U.S. 371, 381 (2005).
Thus, in Debartolo, when a proposed interpretation of a provision of the National Labor Relations Act would have prohibiting peaceful handbilling, thereby raising serious First Amendment issues, the Court concluded that “we must independently inquire whether there is another interpretation, not raising these serious constitutional concerns, that may fairly be ascribed to” the statute. See Debartolo, 485 U.S. at 577. After concluding the statute was “open to a construction that obviates deciding” the constitutional issues, and finding no “clear indication” in the legislative history that Congress intended to prohibit the peaceful handbilling at issue, the Court affirmed the lower court’s reversal of the NLRB’s ruling. Id. at 578, 583-88.
The Foti court erred by interpreting the definition of a “communication” under the FDCPA in a manner that raises serious constitution problems. Foti held that 1) a voicemail message that does not mention a debt but simply invites a return call from a debtor is a “communication” within the meaning of section 1692a(2) of the FDCPA, and 2) that such a message must state that it is from a “debt collector” under section 1692e(11) of the Act. See Foti, 424 F. Supp. 2d at 665-66, 669. But the voicemail message in Foti was not a “communication” because it did not convey “information regarding a debt directly or indirectly to any person.” See 15 U.S.C. § 1692a(2) (defining “communication”) (emphasis supplied). Since no information “regarding a debt” was conveyed by the message, there was no “communication.” Further, a voicemail message cannot recite that it is from a “debt collector” without risking a violation of the Act’s prohibition on third party disclosure. See 15 U. S. C. § 1692c(2). By interpreting the Act in this manner, the Foti court imposed an unreasonable restraint on the use of voicemail messages.
The Foti court should not have construed the FDCPA in a way that effectively bans truthful, non-threatening voicemail messages, unless the court found a “clear expression of an affirmative intention of Congress” to do so. See Catholic Bishop, 440 U.S. at 504. Nothing in the plain language of the FDCPA or its legislative history suggests that Congress intended this result.
The FDCPA was passed by Congress in 1977 in an effort to protect consumers from threats, harassment, abuse and other deceptive practices that might be utilized by unscrupulous debt collectors. See 15 U.S.C. § 1692. The legislative history that the objective of the Act was to eliminate debt collection practices such as:
threats of violence; obscene language; the publishing of 'shame lists;' harassing or anonymous telephone calls; impersonating a government official or attorney; misrepresenting the consumer's legal rights; simulating court process; obtaining information under false pretenses; collecting more than is legally owing; and misusing postdated checks.
See Sen. Rep. No. 382, 95th Cong. 2d Sess. 4, reprinted in 1977 U.S.C.C.A.N. 1695, 1698 (internal quotation marks omitted).
Congress also took great pains to design a regulatory scheme that would do more to protect the consumer’s privacy during the collection process. See 15 U.S.C. § 1692(a) (“Abusive debt collection practices contribute to . . . invasions of individual privacy.”). With very limited exceptions, collectors are prohibited from disclosing the existence of a debt to any third parties. Id. § 1692c(b). Although collectors may contact third parties to obtain certain location information, collectors must carefully avoid disclosing the existence of the debt during that process. Id. § 1692b. Collectors may not publish lists of consumers with unpaid debts. Id. § 1692d(3). To avoid third party disclosure, collectors may not communicate about a debt by post card, nor may they use language on an envelope which indicates a collection letter is enclosed. Id. §§ 1692f(7), 1692f(8).
Thus, the focus of the Act is the prevention of harassment and abuse and the protection of consumer privacy. Nothing in the Act or its legislative history evinces a Congressional intent to regulate voicemail messages that merely seek a return call from a debtor. Rather, as the Ninth Circuit recently observed,
The purpose of the FDCPA is to protect vulnerable and unsophisticated debtors from abuse, harassment and deceptive collection practices. . . . Congress was concerned with disruptive, threatening, and dishonest tactics. The Senate Report accompanying the Act cites practices such as ‘threats of violence, telephone calls at unreasonable hours [and] misrepresentation of consumer’s legal rights.’ (Citation). In other words, Congress seems to have contemplated the type of actions that would intimidate unsophisticated individuals and which, in the words of the Seventh Circuit, ‘would likely disrupt a debtor’s life.’ (Citation).
Guerrero v. RJM Acquisitions LLC, 499 F.3d 926, 938-39 (9th Cir. 2007) (emphasis added). Congress specifically stated that one purpose of the Act was to “insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged . . . .” See 15 U.S.C. § 1692.
The most reasonable interpretation of the FDCPA – and the one which avoids the serious constitutional problems raised by Foti – is that the voicemail message at issue in Foti did not convey any “information regarding a debt directly or indirectly to any person” (see 15 U.S.C. § 1692a(2)), and therefore was not a “communication” within the meaning of the FDCPA.
The Foti court suggested that if the collector’s voicemail message was not considered a “communication” under the FDCPA, this might “create a significant loophole” that could undermine the protections afforded by the Act. See Foti, 424 F. Supp. 2d at 657. But no such “loophole” exists. The message itself does not harm the debtor, and the debtor can elect not to return the call. If the debtor returns the call and an actual “communication” occurs, the collector would be obliged to comply with all provisions of the Act, including disclosing that it is a “debt collector” consistent with section 1692e(11).
The “loophole” theory also ignores the other sections of the Act which protect the debtor. The collector cannot cause a phone to ring repeatedly or continuously with the intent to harass or annoy any person. See 15 U.S.C. § 1692d(5). The collector cannot utilize any false, deceptive, or misleading representation or means to collect a debt, nor can it employ any unfair or unconscionable means to collect. See 15 U.S.C. §§ 1692e, 1692f. A debtor retains the power to stop all communications from a collector by informing the collector in writing that the debtor refuses to pay the debt, or that the debtor wishes the collector to cease further communications. See 15 U.S.C. § 1692c(c).
IV. Conclusion
Debt collectors engage in protected commercial speech when they leave truthful, non-threatening voicemail messages that simply invite a return phone call from the debtor. Such messages do not constitute “communications” under the FDCPA because they do not convey information “regarding a debt” to anyone. By ruling that such messages constitute “communications” and therefore must recite that they are from “debt collectors,” the Foti court put all collectors who leave messages at risk of violating the Act’s third party disclosure requirements, thereby placing an unreasonable restriction on valid commercial speech. The Foti court violated the Supreme Court’s holding in Debartolo by construing the FDCPA in a manner that raises serious constitutional problems under the First Amendment.
Endnotes:
1. The Act defines a “communication” as follows: “The term ‘communication’ means the conveying of information regarding a debt directly or indirectly to any person through any medium.” See 15 U.S.C. § 1692a(2).
2. Since the Foti decision issued, numerous other court have reached similar conclusions. See, e.g., Baker v. Allstate Fin. Srvs., Inc., 554 F. Supp. 2d 945 (D. Minn. 2008);Anchondo v. Anderson, Crenshaw & Assocs., 583 F.Supp.2d 1278, 1281-82 (D.N.M. 2008);Edwards v. Niagara Credit Solutions, Inc., 586 F.Supp.2d 1346, 1351-53 (N.D. Ga. 2008), aff’d on other grounds, 584 F. 3d 1350 (2009); Ramirez v. Apex Fin. Mgmt., LLC, 567 F.Supp.2d 1035, 1041(N.D. Ill. 2008).
3. There are certain limited exceptions to the prohibition on third party disclosure, which are not relevant here. See, e.g., 15 U.S.C. §§ 1692b, 1692c(b).
4. For example, in Berg v. Merchs. Ass’n Collection Div., 586 F. Supp. 2d 1336 (S.D. Fla. 2008), the defendant left a message on the plaintiff’s voice mail machine which stated that it was “an attempt to collect a debt.” Id. at 1339. The debtor sued under section 1692c(b) of the FDCPA, alleging the message was overheard by his father, step-mother, step-mother’s ex-spouse, girlfriend and neighbor. Id. Even though the collector had attempted to prevent disclosure, by warning any third parties to stop listening, the court refused to grant the collector’s motion to dismiss. Id. at 1441-44.
5. Although the voicemail message left by the collector in Foti was a form of expression that related to the economic interest of the parties and was therefore entitled to First Amendment protection, as discussed herein, that message did not communicate any information directly or indirectly “regarding a debt” to anyone, and the Foti court therefore erred when it held the message was a “communication” within the meaning of section 1692a(2) of the Act.
6. The existence of this business relationship with the debtor is also a significant factor in distinguishing Foti from the facts presented by Mainstream Marketing Services, Inc. v. FTC, 358 F. 3d 1228 (10th Cir. 2004). Mainstream Marketing upheld a ban on most telemarketing calls made to consumers who had registered their phone numbers on the national “do-not-call” registry, noting that “individuals are not required to welcome unwanted speech into their own homes . . .” Id. at 1237-38, 1246. But the restrictions on “unsolicited calls from commercial telemarketers” at issue in Mainstream Marketing did not apply to companies with an “established business relationship” with the consumer. Id. at 1234 and n.7.
7. While the Supreme Court has noted that the Constitution “protects commercial speech from unwarranted governmental regulation,” the Court has also noted that the Constitution “accords a lesser protection to commercial speech than to other constitutionally guaranteed expression.” Central Hudson, 447 U. S. at 563.
8. The Court in Central Hudson articulated the test as follows: “At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.” Central Hudson, 447 U.S. at 566.
9. See also Solid Waste Agency of Northern Cook County v. Un. St. Army Corps of Engrs, 531 U.S. 159, 172-74 (2001) (rejecting interpretation of Clean Water Act that would raise “serious constitutional issues” relating to the reach of the Commerce Clause); Jones v. United States, 590 U.S. 848, 857-58 (rejecting interpretation of federal arson statute that raised serious constitutional issues regarding the scope of the Commerce Clause: “where a statute is susceptible of two constructions, by one of which grave and doubtful constitutional questions arise and by the other of which such questions are avoided, our duty is to adopt the latter. (citation)”).
10.Similarly, if a collector elected to leave a voicemail message that did convey information concerning the debt directly or indirectly, that message would constitute a “communication” and would need to comply with the statute.
11.The forgoing is provided for informational purposes only and should not be construed as legal advice given by the author or by Simmonds & Narita LLP. Transmission of this information is not intended to create an attorney-client relationship, nor should it be viewed as a substitute for obtaining legal advice from a licensed attorney. Parties should not rely upon the foregoing without first engaging their own legal counsel to obtain advice.
In Foti v. NCO Financial Systems, Inc., 424 F. Supp. 2d 643 (S.D.N.Y. 2006) (“Foti”), the District Court for the Southern District of New York held that if a debt collector leaves a message on a debtor’s answering machine that merely invites a return phone call, the message amounts to a “communication” within the meaning of the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 et seq. (the “FDCPA” or the “Act”). The court also held that the voicemail message must state it is from a “debt collector” in order to comply with section 1692e(11) of the Act. See Foti, 424 F. Supp. 2d at 669.
The FDCPA was designed to protect a debtor’s privacy, however, so the Act generally prohibits collectors from communicating information about a debt to third parties. See, e.g., 15 U.S.C. § 1692c(b). Given that parties other than the debtor (such as a roommate, parent or guest) may retrieve or hear a collector’s voice mail message, any message which states that it is from a “debt collector” necessarily puts the collector at risk of violating the prohibition on third party disclosure set forth in section 1692c(b) of the Act.
The Foti court was wrong. A debt collector’s use of a truthful, non-threatening voicemail message that requests a return phone call constitutes a valid form of commercial speech, and is therefore entitled to protection under the First Amendment. By holding that such a message is a “communication” under the FDCPA, the Foti court interpreted the Act in a manner that unreasonably restricts valid commercial speech. Given the Supreme Court’s express prohibition on interpreting any statute in a manner that raises serious constitutional problems (see Debartolo v. Florida Gulf Coast Build. & Constr. Trades Council, 485 U.S. 568, 575 (1988)), the holding of Foti must be rejected.
II. A Collector’s Voicemail Messages Is Valid Commercial Speech
In Foti, the collector left a message on the debtor’s answering machine that stated:
Good day, we are calling from NCO Financial Systems regarding a personal business matter that requires your immediate attention. Please call back 1-866-701-1275 once again please call back, toll-free, 1-866-701-1275, this is not a solicitation.
See Foti, 424 F. Supp. 2d at 648.
The message was valid commercial speech. The Supreme Court has defined commercial speech as any “expression related solely to the economic interests of the speaker and its audience.” See Central Hudson v. Public Serv. Comm. Of New York, 447 U.S. 557, 562 (1980). Debt collectors generally act on behalf of creditors who have an existing economic relationship with the debtor, or on behalf of entities who purchase delinquent accounts after they have gone into default. When a collector leaves a message for a debtor requesting a return call, that message is a form of expression that relates to the parties’ economic interests.
It is true that commercial speech is entitled to less protection than other forms of expression. No regulation that restricts commercial speech can survive, however, unless it directly advances a substantial governmental interest and is not more extensive than necessary to serve that interest.
The holding that the message in Foti was a “communication” under the FDCPA places an unreasonable restraint a collector’s lawful commercial speech.
III. The Foti Decision Improperly Construes The FDCPA In A Manner That Prohibits Or Unreasonably Restricts Valid Commercial Speech
Statutes should not be construed in a manner that will raise serious constitutional problems. A “cardinal principle” of statutory construction is that “where an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress.” See Debartolo v. Florida Gulf Coast Build. & Constr. Trades Council, 485 U.S. 568, 575 (1988) (citing N.L.R.B. v. Catholic Bishop of Chicago, 440 U.S. 490, 499-501, 504 (1979). This rule, which is sometimes referred to as the “canon of constitutional avoidance,” has been described as “a tool for choosing between competing plausible interpretations of a statutory text, resting on the reasonable presumption that Congress did not intend the alternative which raises serious constitutional doubts.” See Clark v. Martinez, 543 U.S. 371, 381 (2005).
Thus, in Debartolo, when a proposed interpretation of a provision of the National Labor Relations Act would have prohibiting peaceful handbilling, thereby raising serious First Amendment issues, the Court concluded that “we must independently inquire whether there is another interpretation, not raising these serious constitutional concerns, that may fairly be ascribed to” the statute. See Debartolo, 485 U.S. at 577. After concluding the statute was “open to a construction that obviates deciding” the constitutional issues, and finding no “clear indication” in the legislative history that Congress intended to prohibit the peaceful handbilling at issue, the Court affirmed the lower court’s reversal of the NLRB’s ruling. Id. at 578, 583-88.
The Foti court erred by interpreting the definition of a “communication” under the FDCPA in a manner that raises serious constitution problems. Foti held that 1) a voicemail message that does not mention a debt but simply invites a return call from a debtor is a “communication” within the meaning of section 1692a(2) of the FDCPA, and 2) that such a message must state that it is from a “debt collector” under section 1692e(11) of the Act. See Foti, 424 F. Supp. 2d at 665-66, 669. But the voicemail message in Foti was not a “communication” because it did not convey “information regarding a debt directly or indirectly to any person.” See 15 U.S.C. § 1692a(2) (defining “communication”) (emphasis supplied). Since no information “regarding a debt” was conveyed by the message, there was no “communication.” Further, a voicemail message cannot recite that it is from a “debt collector” without risking a violation of the Act’s prohibition on third party disclosure. See 15 U. S. C. § 1692c(2). By interpreting the Act in this manner, the Foti court imposed an unreasonable restraint on the use of voicemail messages.
The Foti court should not have construed the FDCPA in a way that effectively bans truthful, non-threatening voicemail messages, unless the court found a “clear expression of an affirmative intention of Congress” to do so. See Catholic Bishop, 440 U.S. at 504. Nothing in the plain language of the FDCPA or its legislative history suggests that Congress intended this result.
The FDCPA was passed by Congress in 1977 in an effort to protect consumers from threats, harassment, abuse and other deceptive practices that might be utilized by unscrupulous debt collectors. See 15 U.S.C. § 1692. The legislative history that the objective of the Act was to eliminate debt collection practices such as:
threats of violence; obscene language; the publishing of 'shame lists;' harassing or anonymous telephone calls; impersonating a government official or attorney; misrepresenting the consumer's legal rights; simulating court process; obtaining information under false pretenses; collecting more than is legally owing; and misusing postdated checks.
See Sen. Rep. No. 382, 95th Cong. 2d Sess. 4, reprinted in 1977 U.S.C.C.A.N. 1695, 1698 (internal quotation marks omitted).
Congress also took great pains to design a regulatory scheme that would do more to protect the consumer’s privacy during the collection process. See 15 U.S.C. § 1692(a) (“Abusive debt collection practices contribute to . . . invasions of individual privacy.”). With very limited exceptions, collectors are prohibited from disclosing the existence of a debt to any third parties. Id. § 1692c(b). Although collectors may contact third parties to obtain certain location information, collectors must carefully avoid disclosing the existence of the debt during that process. Id. § 1692b. Collectors may not publish lists of consumers with unpaid debts. Id. § 1692d(3). To avoid third party disclosure, collectors may not communicate about a debt by post card, nor may they use language on an envelope which indicates a collection letter is enclosed. Id. §§ 1692f(7), 1692f(8).
Thus, the focus of the Act is the prevention of harassment and abuse and the protection of consumer privacy. Nothing in the Act or its legislative history evinces a Congressional intent to regulate voicemail messages that merely seek a return call from a debtor. Rather, as the Ninth Circuit recently observed,
The purpose of the FDCPA is to protect vulnerable and unsophisticated debtors from abuse, harassment and deceptive collection practices. . . . Congress was concerned with disruptive, threatening, and dishonest tactics. The Senate Report accompanying the Act cites practices such as ‘threats of violence, telephone calls at unreasonable hours [and] misrepresentation of consumer’s legal rights.’ (Citation). In other words, Congress seems to have contemplated the type of actions that would intimidate unsophisticated individuals and which, in the words of the Seventh Circuit, ‘would likely disrupt a debtor’s life.’ (Citation).
Guerrero v. RJM Acquisitions LLC, 499 F.3d 926, 938-39 (9th Cir. 2007) (emphasis added). Congress specifically stated that one purpose of the Act was to “insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged . . . .” See 15 U.S.C. § 1692.
The most reasonable interpretation of the FDCPA – and the one which avoids the serious constitutional problems raised by Foti – is that the voicemail message at issue in Foti did not convey any “information regarding a debt directly or indirectly to any person” (see 15 U.S.C. § 1692a(2)), and therefore was not a “communication” within the meaning of the FDCPA.
The Foti court suggested that if the collector’s voicemail message was not considered a “communication” under the FDCPA, this might “create a significant loophole” that could undermine the protections afforded by the Act. See Foti, 424 F. Supp. 2d at 657. But no such “loophole” exists. The message itself does not harm the debtor, and the debtor can elect not to return the call. If the debtor returns the call and an actual “communication” occurs, the collector would be obliged to comply with all provisions of the Act, including disclosing that it is a “debt collector” consistent with section 1692e(11).
The “loophole” theory also ignores the other sections of the Act which protect the debtor. The collector cannot cause a phone to ring repeatedly or continuously with the intent to harass or annoy any person. See 15 U.S.C. § 1692d(5). The collector cannot utilize any false, deceptive, or misleading representation or means to collect a debt, nor can it employ any unfair or unconscionable means to collect. See 15 U.S.C. §§ 1692e, 1692f. A debtor retains the power to stop all communications from a collector by informing the collector in writing that the debtor refuses to pay the debt, or that the debtor wishes the collector to cease further communications. See 15 U.S.C. § 1692c(c).
IV. Conclusion
Debt collectors engage in protected commercial speech when they leave truthful, non-threatening voicemail messages that simply invite a return phone call from the debtor. Such messages do not constitute “communications” under the FDCPA because they do not convey information “regarding a debt” to anyone. By ruling that such messages constitute “communications” and therefore must recite that they are from “debt collectors,” the Foti court put all collectors who leave messages at risk of violating the Act’s third party disclosure requirements, thereby placing an unreasonable restriction on valid commercial speech. The Foti court violated the Supreme Court’s holding in Debartolo by construing the FDCPA in a manner that raises serious constitutional problems under the First Amendment.
Endnotes:
1. The Act defines a “communication” as follows: “The term ‘communication’ means the conveying of information regarding a debt directly or indirectly to any person through any medium.” See 15 U.S.C. § 1692a(2).
2. Since the Foti decision issued, numerous other court have reached similar conclusions. See, e.g., Baker v. Allstate Fin. Srvs., Inc., 554 F. Supp. 2d 945 (D. Minn. 2008);Anchondo v. Anderson, Crenshaw & Assocs., 583 F.Supp.2d 1278, 1281-82 (D.N.M. 2008);Edwards v. Niagara Credit Solutions, Inc., 586 F.Supp.2d 1346, 1351-53 (N.D. Ga. 2008), aff’d on other grounds, 584 F. 3d 1350 (2009); Ramirez v. Apex Fin. Mgmt., LLC, 567 F.Supp.2d 1035, 1041(N.D. Ill. 2008).
3. There are certain limited exceptions to the prohibition on third party disclosure, which are not relevant here. See, e.g., 15 U.S.C. §§ 1692b, 1692c(b).
4. For example, in Berg v. Merchs. Ass’n Collection Div., 586 F. Supp. 2d 1336 (S.D. Fla. 2008), the defendant left a message on the plaintiff’s voice mail machine which stated that it was “an attempt to collect a debt.” Id. at 1339. The debtor sued under section 1692c(b) of the FDCPA, alleging the message was overheard by his father, step-mother, step-mother’s ex-spouse, girlfriend and neighbor. Id. Even though the collector had attempted to prevent disclosure, by warning any third parties to stop listening, the court refused to grant the collector’s motion to dismiss. Id. at 1441-44.
5. Although the voicemail message left by the collector in Foti was a form of expression that related to the economic interest of the parties and was therefore entitled to First Amendment protection, as discussed herein, that message did not communicate any information directly or indirectly “regarding a debt” to anyone, and the Foti court therefore erred when it held the message was a “communication” within the meaning of section 1692a(2) of the Act.
6. The existence of this business relationship with the debtor is also a significant factor in distinguishing Foti from the facts presented by Mainstream Marketing Services, Inc. v. FTC, 358 F. 3d 1228 (10th Cir. 2004). Mainstream Marketing upheld a ban on most telemarketing calls made to consumers who had registered their phone numbers on the national “do-not-call” registry, noting that “individuals are not required to welcome unwanted speech into their own homes . . .” Id. at 1237-38, 1246. But the restrictions on “unsolicited calls from commercial telemarketers” at issue in Mainstream Marketing did not apply to companies with an “established business relationship” with the consumer. Id. at 1234 and n.7.
7. While the Supreme Court has noted that the Constitution “protects commercial speech from unwarranted governmental regulation,” the Court has also noted that the Constitution “accords a lesser protection to commercial speech than to other constitutionally guaranteed expression.” Central Hudson, 447 U. S. at 563.
8. The Court in Central Hudson articulated the test as follows: “At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.” Central Hudson, 447 U.S. at 566.
9. See also Solid Waste Agency of Northern Cook County v. Un. St. Army Corps of Engrs, 531 U.S. 159, 172-74 (2001) (rejecting interpretation of Clean Water Act that would raise “serious constitutional issues” relating to the reach of the Commerce Clause); Jones v. United States, 590 U.S. 848, 857-58 (rejecting interpretation of federal arson statute that raised serious constitutional issues regarding the scope of the Commerce Clause: “where a statute is susceptible of two constructions, by one of which grave and doubtful constitutional questions arise and by the other of which such questions are avoided, our duty is to adopt the latter. (citation)”).
10.Similarly, if a collector elected to leave a voicemail message that did convey information concerning the debt directly or indirectly, that message would constitute a “communication” and would need to comply with the statute.
11.The forgoing is provided for informational purposes only and should not be construed as legal advice given by the author or by Simmonds & Narita LLP. Transmission of this information is not intended to create an attorney-client relationship, nor should it be viewed as a substitute for obtaining legal advice from a licensed attorney. Parties should not rely upon the foregoing without first engaging their own legal counsel to obtain advice.
Wednesday, March 17, 2010
How To Combat Frivolous FDCPA Lawsuits: Tapping Into Section 1927 And The Court's Inherent Powers
[Note: this post is adapted from an article authored by Tomio Narita and originally published in the March 2010 MAP Bulletin]
Debt collectors have witnessed an incredible increase in the number of FDCPA cases filed in federal courts across the country. Let’s face it: some of these cases have merit, and they are a natural result of increasing collection volume. It would be irresponsible to conclude that just because the number of new FDCPA cases has skyrocketed, all of the new cases must be nuisance lawsuits.
But many of the FDCPA suits that are filed are frivolous, and many have been filed by consumer law firms that appear to specialize in a high-volume, cookie-cutter approach to litigation. What can collectors do about the cases that are so clearly without merit that they should never have been filed? How can a defendant fight back when a consumer attorney has refused to abandon a case long past the point where a reasonable attorney would have simply dismissed it? In situations where a plaintiff’s counsel has needlessly increased the cost of litigation, do debt collectors have any recourse?
Your first thought might be to file a motion for sanctions against an attorney under Rule 11 of the Federal Rules of Civil Procedure. Although Rule 11 can be an important way to combat frivolous action, the rule has limitations on its scope and it includes a “safe harbor” mechanism that can make a fee motion cumbersome to pursue. You might also consider section 1692k(a)(3) of the FDCPA, which allows a defendant to recover its reasonable costs and attorney’s fees where an action was filed “in bad faith and for the purpose of harassment,” but last year the Ninth Circuit clarified that counsel for a debtor cannot be held liable under that section. See Hyde v. Midland Credit Management, Inc., 567 F.3d 1137 (9th Cir. 2009). Where, then, can a collector turn when a frivolous FDCPA case has been recklessly pursued by an attorney who refuses to dismiss it?
Collectors should remember that a federal court has two important tools for sanctioning attorneys who pursue frivolous cases or who engage in bad faith litigation tactics: namely, 28 U.S.C. § 1927 and the court’s “inherent authority.” In the right circumstances, motions filed under section 1927 and the court’s inherent authority can be an effective way for collectors to fight back.
Sanctions under section 1927 are proper when an attorney has recklessly and knowingly abused the judicial process. Any attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct. 28 U.S.C. § 1927. As the Supreme Court has explained, section 1927
"does not distinguish between winners and losers, or between plaintiffs and defendants. The statute is indifferent to the equities of a dispute and to the values advanced by the substantive law. It is concerned only with limiting the abuse of court processes."
Roadway Express, Inc. v. Piper, 447 U.S. 752, 762 (1980).
In extreme cases, the record may show that a consumer attorney has engaged in bad faith conduct while pursuing an FDCPA action. But the Ninth Circuit has confirmed that a bad faith finding is not required to support a sanctions award under section 1927. See B.K.B. v. Maui Police Dep’t, 276 F.3d 1091, 1107 (9th Cir. 2002). Sanctions may be imposed under section 1927 against an attorney who merely acts recklessly. See also Gomez v. Vernon, 255 F.3d 1118, 1134 (9th Cir. 2001) (“Section 1927 requires a finding of recklessness or bad faith.”).
A motion under section 1927 can also be combined with a motion for sanctions under the court’s “inherent power.” Every district court has certain “inherent” powers, including the power to “levy sanctions in response to abusive litigation practices.” See Roadway Express, 447 U.S. at 765. This inherent power to sanction parties or attorneys is not displaced by other statutes or rules that allow a court to impose sanctions, such as section 1927 or Rule 11. See Chambers v. NASCO, Inc., 501 U.S. 32, 42-43 (1991). “The inherent powers of federal courts are those that ‘are necessary to the exercise of all others.’ Primus Auto. Fin. Servs., Inc. v. Batarse, 115 F.3d 644, 648 (9th Cir. 1997), quoting Roadway Express, 447 U.S. at 764.
The inherent powers of a court include the power to sanction an attorney for “bad faith” conduct by directing the attorney to pay the fees incurred by the opposing party. See Roadway Express, 447 U.S. at 765-66 (“If a court may tax counsel fees against a party who has litigated in bad faith, it certainly may assess those expenses against counsel who willfully abuse judicial processes.”). Bad faith conduct, however, is not required: conduct that is “‘tantamount to bad faith’ is sanctionable,” as well. B.K.B., 276 F.3d at 1108; accord Fink v. Gomez, 239 F.3d 989, 993-94 (9th Cir. 2001); Gomez v. Vernon, 255 F.3d at 1134 (no clear error “in finding conduct tantamount to bad faith” and imposing sanctions under inherent authority where attorney knowingly disregarded advice of state bar counsel regarding receipt of privileged materials).
Reckless conduct, combined with an improper purpose or knowing misconduct, is sanctionable under the court’s inherent powers. See B.K.B., 276 F.3d at 1107-08; see also Fink, 239 F.3d at 994 (sanctions permitted where attorney acts with “recklessness when combined with an additional factor such as frivolousness, harassment, or an improper purpose”); In Re Itel Secs. Litig., 791 F.2d 672, 675 (9th Cir. 1986) (sanctions proper where counsel “willfully abused judicial process or otherwise conducted litigation in bad faith.”).
An attorney may act in “bad faith” even when pursuing a colorable claim. In circumstances where the entire action was not “filed” in bad faith, an award of fees may be based upon counsel’s bad faith conduct during the litigation. See Roadway Express, 447 U.S. at 766. The Ninth Circuit has held that a finding of bad faith “does not require that the legal and factual basis for the action prove totally frivolous; where a litigant is substantially motivated by vindictiveness, obduracy, or mala fides, the assertion of a colorable claim will not bar the assessment of attorney’s fees. (Citation).” In Re Itel Secs. Litig., 791 F.2d at 675; see also Fink, 239 F.3d at 992 (“Itel teaches that sanctions are justified when a party acts for an improper purpose – even if the act consists of making a truthful statement or a non-frivolous argument or objection.”).
When exercising it inherent authority, a district court is also free to consider an attorney’s conduct in other litigation. See Artese v. Academy Collection Serv., Inc., 2000 WL 133733, at *4 (D. Conn. Jan. 18, 2000); see also Johnson v. Commissioner of Internal Revenue, 289 F.3d 452, 456-57 (7th Cir. 2002) (“The Tax Court was not required to ignore Izen’s bad conduct in other cases; indeed it would have been remiss not to consider it.”). In Itel, although the objections filed by counsel were not frivolous, the Ninth Circuit affirmed the district court’s conclusion that they were asserted in bad faith and solely to gain an advantage in other pending litigation. See Itel, 791 F.2d at 675-76. Similarly, in Fink, the Ninth Circuit held that an attorney’s reckless misstatements of fact and law in the case before the district court could amount to bad faith if the statements were made for the purpose of gaining a tactical advantage in a separate action. See Fink, 239 F.3d at 994.
Collectors are understandably frustrated by the onslaught of FDCPA litigation they are facing, and by the tactics employed by certain consumer attorneys. Keep in mind that consumer lawyers, like defense lawyers, are entitled to be vigorous advocates for their clients, and that motions for sanctions are not appropriate for every case. But for those extreme cases where a collector can demonstrate that a consumer attorney has engaged in bad faith or reckless litigation tactics, collectors should consider fighting back by filing motions under section 1927 or the court’s inherent powers.
Debt collectors have witnessed an incredible increase in the number of FDCPA cases filed in federal courts across the country. Let’s face it: some of these cases have merit, and they are a natural result of increasing collection volume. It would be irresponsible to conclude that just because the number of new FDCPA cases has skyrocketed, all of the new cases must be nuisance lawsuits.
But many of the FDCPA suits that are filed are frivolous, and many have been filed by consumer law firms that appear to specialize in a high-volume, cookie-cutter approach to litigation. What can collectors do about the cases that are so clearly without merit that they should never have been filed? How can a defendant fight back when a consumer attorney has refused to abandon a case long past the point where a reasonable attorney would have simply dismissed it? In situations where a plaintiff’s counsel has needlessly increased the cost of litigation, do debt collectors have any recourse?
Your first thought might be to file a motion for sanctions against an attorney under Rule 11 of the Federal Rules of Civil Procedure. Although Rule 11 can be an important way to combat frivolous action, the rule has limitations on its scope and it includes a “safe harbor” mechanism that can make a fee motion cumbersome to pursue. You might also consider section 1692k(a)(3) of the FDCPA, which allows a defendant to recover its reasonable costs and attorney’s fees where an action was filed “in bad faith and for the purpose of harassment,” but last year the Ninth Circuit clarified that counsel for a debtor cannot be held liable under that section. See Hyde v. Midland Credit Management, Inc., 567 F.3d 1137 (9th Cir. 2009). Where, then, can a collector turn when a frivolous FDCPA case has been recklessly pursued by an attorney who refuses to dismiss it?
Collectors should remember that a federal court has two important tools for sanctioning attorneys who pursue frivolous cases or who engage in bad faith litigation tactics: namely, 28 U.S.C. § 1927 and the court’s “inherent authority.” In the right circumstances, motions filed under section 1927 and the court’s inherent authority can be an effective way for collectors to fight back.
Sanctions under section 1927 are proper when an attorney has recklessly and knowingly abused the judicial process. Any attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct. 28 U.S.C. § 1927. As the Supreme Court has explained, section 1927
"does not distinguish between winners and losers, or between plaintiffs and defendants. The statute is indifferent to the equities of a dispute and to the values advanced by the substantive law. It is concerned only with limiting the abuse of court processes."
Roadway Express, Inc. v. Piper, 447 U.S. 752, 762 (1980).
In extreme cases, the record may show that a consumer attorney has engaged in bad faith conduct while pursuing an FDCPA action. But the Ninth Circuit has confirmed that a bad faith finding is not required to support a sanctions award under section 1927. See B.K.B. v. Maui Police Dep’t, 276 F.3d 1091, 1107 (9th Cir. 2002). Sanctions may be imposed under section 1927 against an attorney who merely acts recklessly. See also Gomez v. Vernon, 255 F.3d 1118, 1134 (9th Cir. 2001) (“Section 1927 requires a finding of recklessness or bad faith.”).
A motion under section 1927 can also be combined with a motion for sanctions under the court’s “inherent power.” Every district court has certain “inherent” powers, including the power to “levy sanctions in response to abusive litigation practices.” See Roadway Express, 447 U.S. at 765. This inherent power to sanction parties or attorneys is not displaced by other statutes or rules that allow a court to impose sanctions, such as section 1927 or Rule 11. See Chambers v. NASCO, Inc., 501 U.S. 32, 42-43 (1991). “The inherent powers of federal courts are those that ‘are necessary to the exercise of all others.’ Primus Auto. Fin. Servs., Inc. v. Batarse, 115 F.3d 644, 648 (9th Cir. 1997), quoting Roadway Express, 447 U.S. at 764.
The inherent powers of a court include the power to sanction an attorney for “bad faith” conduct by directing the attorney to pay the fees incurred by the opposing party. See Roadway Express, 447 U.S. at 765-66 (“If a court may tax counsel fees against a party who has litigated in bad faith, it certainly may assess those expenses against counsel who willfully abuse judicial processes.”). Bad faith conduct, however, is not required: conduct that is “‘tantamount to bad faith’ is sanctionable,” as well. B.K.B., 276 F.3d at 1108; accord Fink v. Gomez, 239 F.3d 989, 993-94 (9th Cir. 2001); Gomez v. Vernon, 255 F.3d at 1134 (no clear error “in finding conduct tantamount to bad faith” and imposing sanctions under inherent authority where attorney knowingly disregarded advice of state bar counsel regarding receipt of privileged materials).
Reckless conduct, combined with an improper purpose or knowing misconduct, is sanctionable under the court’s inherent powers. See B.K.B., 276 F.3d at 1107-08; see also Fink, 239 F.3d at 994 (sanctions permitted where attorney acts with “recklessness when combined with an additional factor such as frivolousness, harassment, or an improper purpose”); In Re Itel Secs. Litig., 791 F.2d 672, 675 (9th Cir. 1986) (sanctions proper where counsel “willfully abused judicial process or otherwise conducted litigation in bad faith.”).
An attorney may act in “bad faith” even when pursuing a colorable claim. In circumstances where the entire action was not “filed” in bad faith, an award of fees may be based upon counsel’s bad faith conduct during the litigation. See Roadway Express, 447 U.S. at 766. The Ninth Circuit has held that a finding of bad faith “does not require that the legal and factual basis for the action prove totally frivolous; where a litigant is substantially motivated by vindictiveness, obduracy, or mala fides, the assertion of a colorable claim will not bar the assessment of attorney’s fees. (Citation).” In Re Itel Secs. Litig., 791 F.2d at 675; see also Fink, 239 F.3d at 992 (“Itel teaches that sanctions are justified when a party acts for an improper purpose – even if the act consists of making a truthful statement or a non-frivolous argument or objection.”).
When exercising it inherent authority, a district court is also free to consider an attorney’s conduct in other litigation. See Artese v. Academy Collection Serv., Inc., 2000 WL 133733, at *4 (D. Conn. Jan. 18, 2000); see also Johnson v. Commissioner of Internal Revenue, 289 F.3d 452, 456-57 (7th Cir. 2002) (“The Tax Court was not required to ignore Izen’s bad conduct in other cases; indeed it would have been remiss not to consider it.”). In Itel, although the objections filed by counsel were not frivolous, the Ninth Circuit affirmed the district court’s conclusion that they were asserted in bad faith and solely to gain an advantage in other pending litigation. See Itel, 791 F.2d at 675-76. Similarly, in Fink, the Ninth Circuit held that an attorney’s reckless misstatements of fact and law in the case before the district court could amount to bad faith if the statements were made for the purpose of gaining a tactical advantage in a separate action. See Fink, 239 F.3d at 994.
Collectors are understandably frustrated by the onslaught of FDCPA litigation they are facing, and by the tactics employed by certain consumer attorneys. Keep in mind that consumer lawyers, like defense lawyers, are entitled to be vigorous advocates for their clients, and that motions for sanctions are not appropriate for every case. But for those extreme cases where a collector can demonstrate that a consumer attorney has engaged in bad faith or reckless litigation tactics, collectors should consider fighting back by filing motions under section 1927 or the court’s inherent powers.
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