Finding Guidance In Gorman: Examining A Furnisher’s Duty To Report Complete And Accurate Information And The Duty To Investigate Consumer Disputes

The Ninth Circuit’s decision in Gorman v. Wolpoff & Abramson, 584 F.3d 1147 (9th Cir. 2009) probably triggered more than a few groans from collectors who furnish information to consumer reporting agencies. In Gorman, the Ninth Circuit recognized a new cause of action arising under California law based upon a furnisher’s failure to report complete and accurate information. Although furnishers have always had this duty, which is established by section 1785.25(a) of the California Civil Code, previous decisions had held that consumer claims arising under the state statute were preempted by the Fair Credit Reporting Act.

Gorman thus adds another potential claim that can be asserted by California consumers against collectors who furnish information about their accounts. If there is a silver lining to Gorman, however, it is that the case provides furnishers with a reminder of the importance of the need to ensure they are reporting complete and accurate information, and some guidance on how they should handle disputes about the information they report.


In Gorman, the Court held, inter alia, that a consumer can pursue a private right of action, under section 1785.25(a) of the California Civil Code, against a furnisher who reports inaccurate or incomplete information to a consumer reporting agency. The consumer can also seek actual damages, punitive damages, attorney’s fees and injunctive relief, and can seek to pursue claims on behalf of a class of consumers, under sections 1785.25(g) and 1785.31 of the Code. See Gorman, 584 F. 3d at 1170-73. Although these Civil Code sections had been on the books for decades, they had not given rise to many claims against the collection industry, because a line of district court cases had held that the Fair Credit Reporting Act preempted the damage provisions found at sections 1785.25(g) and 1785.31 of the Civil Code. See, e.g., Lin v. Universal Card Services Corp., 238 F. Supp. 2d 1147 (N.D. Cal. 2002).


Furnishers already have a duty, arising under both federal and state law, to ensure that they submit accurate and complete information to consumer reporting agencies. See 15 U.S.C. § 1681s-2(a); Cal. Civ. Code § 1785.25(a). But courts have recognized that consumers cannot pursue damage claims under federal law for alleged violations of section 1681s-2(a) of the FCRA. Thus, the Gorman decision recognized a “new” cause of action against furnishers. Under Gorman, a consumer can now sue the furnisher under state law where the furnisher has submitted information “on a specific transaction or experience to any consumer credit reporting agency” if the consumer proves the furnisher “knows or should know the information is incomplete or inaccurate.” See Cal. Civ. Code § 1785.25(a).

All of this may sound depressing, but the good news is, there is likely nothing new that a furnisher needs to do in order to comply with Gorman. Furnishers should already have in place procedures for ensuring that the information they report is complete and accurate, consistent with their obligations under 16 C.F.R. § 660.3 (effective July 1, 2010). The federal agencies have published guidelines that furnishers must consider when developing policies and procedures to ensure the “accuracy” and “integrity” of the information they furnish, and the guidelines are designed to be flexible in order to reflect “the nature, size, complexity, and scope of the furnisher's activities.” See 16 C.F.R. Pt. 660, App A.

Thus, a furnisher who is complying with federal law should have no trouble defeating a claim asserted under section 1785.25(a) of the Civil Code. In fact, the Civil Code includes a defense, similar to the “bona fide error” defense in the FDCPA, which provides that the furnisher will not be liable if it “establishes by a preponderance of the evidence that, at the time of the failure to comply with this section, the furnisher maintained reasonable procedures to comply with those provisions.” See Cal. Civ. Code § 1785.25(g).


The Gorman case also provides some helpful guidance on how furnishers should go about investigating disputes they receive from consumers through the consumer reporting agencies. Most furnishers know that they must conduct a reasonable investigation of these disputes, but it is not always easy to determine exactly what you need to do in order to discharge your duty of investigation. Do you have the right procedures in place?

Although the reasonableness of furnisher’s investigation under section 1681s-2(b) of the FCRA would appear to be a question of fact, the Gorman court held that an investigation can be reasonable as a matter of law. See Gorman, 584 F.3d at 1157 (“Summary judgment is not precluded altogether on questions of reasonableness. It is appropriate when only one conclusion about the conduct's reasonableness is possible.”) (citations and quotation marks omitted).

A review of the holding in Gorman reveals some basic steps that a furnisher should follow to ensure that the investigation process is reasonable. A furnisher should:

1) individually review each dispute received from a consumer reporting agency,
2) analyze all information in its possession bearing on the dispute, and
3) update all the reporting on the account as appropriate.

A furnisher should not believe that it can conduct a reasonable investigation by treating every dispute in an identical fashion. Most furnishers receive electronic notice of disputes from consumer reporting agencies through the E-Oscar system. The description of the dispute is often cryptic, and is typically described using one or more standardized dispute codes. One of the disputes received by MBNA in the Gorman case simply stated “Claims Company Will Change” and nothing more. See Gorman, 584 F.3d at 1158. Even if the description of the dispute is sparse, however, the investigation conducted by the furnisher must be reasonable. A “superficial” investigation will not do; rather, a “fairly searching inquiry” is required. Id. at 1156.

Furnishers should read each ACDV carefully, because the scope of the duty to investigate under section 1681s-2(b) of the FCRA is delineated by the description of the dispute received from the consumer reporting agency. In addition to the standard dispute codes, ACDVs typically have a space entitled “FCRA Relevant Information,” which can be used to further describe the dispute. All sections of the ACDV should be read carefully. As the Gorman court noted,

[T]he reasonableness of the furnisher's investigation is measured by its response to the specific information provided by the CRA in the notice of dispute. The pertinent question is thus whether the furnisher's procedures were reasonable in light of what it learned about the dispute from the description in the CRA's notice of dispute.

Gorman, 584 F.3d at 1157 (citation omitted).

After the dispute has been reviewed, the furnisher must have in place a procedure for reviewing all information in its possession which might bear upon the dispute. Consumers often argue that a furnisher must go beyond a review the information contained in its own files. To date, however, no circuit court has extended the duty of investigation that far. For example, in Westra v. Credit Control of Pinellas, 409 F.3d 825 (7th Cir. 2005), the consumer argued the furnisher’s investigation was unreasonable because it never contacted the consumer directly. The Seventh Circuit rejected this, noting that “requiring a furnisher to contact every consumer who disputes a debt would be terribly inefficient and such action is not mandated by the FCRA.” Id. at 827.

Similarly, in Gorman, the consumer argued that MBNA’s investigation was unreasonable, because the bank had not contacted the merchant or the consumer, and had relied solely upon its internal account records. Gorman, 584 F. 3d at 1160. The Ninth Circuit noted that MBNA had properly consulted “the relevant information in its possession.” Id. at 1161. The bank reviewed its account notes, which showed it had previously investigated and rejected Gorman’s dispute. Id. The bank was not required to reinvestigate the dispute, particularly since no new information had been supplied by the consumer. The Court observed:

Congress could not have intended to place a burden on furnishers continually to reinvestigate a particular transaction, without any new information or other reason to doubt the result of the earlier investigation, every time the consumer disputes again the transaction with a CRA because the investigation was not resolved in his favor.

Id. at 1160.

If the furnisher does not even bother to review data in its own files which might bear on the dispute, however, the review will be deemed unreasonable. For example, in Johnson v. MBNA America Bank, 357 F.3d 426 (4th Cir. 2004), a woman disputed an MBNA account that appeared on her credit report. The dispute stated “consumer states belongs to husband only ... was never a signer on account. Was an authorized user.” Id. at 429. In response, MBNA reviewed its electronic notes, but did not attempt to ascertain if it still had records reflecting whether the plaintiff was a co-obligor on the account. The court upheld a jury’s finding that this investigation was unreasonable. Id. at 431.

Once the investigation is complete, the furnisher must review the information it is furnishing and make any appropriate updates to its reporting to the consumer reporting agency. See 15 U.S.C. § 1681s-2(b)(1). Thus a furnisher’s procedures should include steps to ensure that any new information uncovered by the investigation is reflected in future reporting. This does not mean that the furnisher must always agree with the consumer, or that you will automatically violates the FCRA if the updated information turns out to be wrong. See Gorman, 584 F.2d at 1161 (“An investigation is not necessarily unreasonable because it results in a substantive conclusion unfavorable to the consumer, even if that conclusion turns out to be inaccurate.”). But furnishers should be sure to review all information they are reporting on the account for accuracy. Continuing to report information about an account that is “materially misleading” – i.e., information that could have an “adverse effect” on credit decisions relating to the consumer – can support a claim under section 1681s-2(b) of the FCRA. Id. at 1163.

The Gorman decision recognizes a “new” cause of action for consumers, arising under section 1785.25(a) of the California Civil Code. But the case does not impose a new set of legal duties on furnishers. Furnishers have always had a responsibility under federal and state law to maintain procedures designed to ensure that the information they furnish to consumer reporting agencies is complete and accurate. As of July 2010, federal law mandates that furnishers must maintain written policies and procedures which explain how they will ensure the accuracy and integrity of the data that they submit. Thus, furnishers who continue to comply with their existing obligations should have much trouble in defeating the consumer claims that they may encounter under section 1785.25(a).

To comply with the duty of investigation under section 1681s-2(b) of the FCRA, and consistent with the Gorman decision, furnishers should establish procedures (preferably in writing) setting forth how each dispute received from a consumer reporting agency will be reviewed. Employees must be trained on how to read and understand all standard dispute codes used by the consumer reporting agencies, and to evaluate any additional “FCRA Relevant Information” that is supplied. All of the information in the furnisher’s files that might bear upon the dispute must be reviewed. Once the investigation is complete, all information that is being reported by the furnisher should be reviewed, and updated as appropriate.

[Note: This post reflects an article authored by Tomio Narita that originally appeared in the May/June 2010 Edition of "Collector's Ink" Magazine]

A copy of the full text of the Fair Credit Reporting Act as published by the Federal Trade Commission can be viewed and downloaded here:


FTC's.Complete.Text.of.FCRA.July.2009 -


Endnotes:

1. Section 1785.25(a) of the California Civil Code provides: “A person shall not furnish information on a specific transaction or experience to any consumer credit reporting agency if the person knows or should know the information is incomplete or inaccurate.”

2. Section 1785.25(g) of the California Civil Code provides: “A person who furnishes information to a consumer credit reporting agency is liable for failure to comply with this section, unless the furnisher establishes by a preponderance of the evidence that, at the time of the failure to comply with this section, the furnisher maintained reasonable procedures to comply with those provisions.”

3. Section 1785.31 of the California Civil Code provides that any consumer who suffers damages as a result of a violation of the title may seek actual damages for negligent violations (including court costs, loss of wages, attorney’s fees and pain and suffering), and in the case of wilful violations, may also seek punitive damages of not less than one hundred dollars ($100) and not more than five thousand dollars ($5,000) for each violation as the court deems proper. Consumers may also seek injunctive relief and may assert their claims in a class action.

4. The Ninth Circuit has held that there is no private right of action for breach of the duties set forth in section 1681s-2(a) of the FCRA, which includes the duty to furnish accurate information to consumer reporting agencies. See Nelson v. Chase Manhattan Mortgage Corp., 282 F.3d 1057, 1059-60 (9th Cir. 2002).

5. Section 1681s-2(b) of the FCRA provides that, after receiving a notice of dispute, the furnisher shall: (A) conduct an investigation with respect to the disputed information; (B) review all relevant information provided by the [CRA] pursuant to section 1681i(a)(2) ...;(C) report the results of the investigation to the [CRA]; (D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other [CRAs] to which the person furnished the information ...; and (E) if an item of information disputed by a consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation under paragraph (1) ... (i) modify ... (ii) delete[or] (iii) permanently block the reporting of that item of information [to the CRAs]. 15 U.S.C. § 1681s-2(b).

Using The Rooker-Feldman Doctrine To Defeat FDCPA Claims

As collection attorneys know, consumers often do not pay close attention to the collection process until the creditor already has a judgment and counsel has an order that allows for garnishing the consumer’s wages or attaching their bank accounts. These post-judgment collection efforts can spawn FDCPA claims in federal court, where the consumers allege they were never served with the state court complaint, or that the state court judgment against them is somehow improper. FDCPA claims of this type, however, are barred by the Rooker-Feldman doctrine and are doomed to fail.

What exactly is the Rooker-Feldman doctrine anyway? As the Supreme Court recently observed, the Rooker-Feldman doctrine applies to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284 (2005). Thus, the Rooker-Feldman doctrine prevents litigants from attacking a state court judgment by filing a subsequent federal lawsuit, “no matter how erroneous or unconstitutional the state court judgment may be. (citations). Kelly v. Med-1 Solutions, LLC, 548 F.3d 600, 603 (7th Cir. 2008).

The Rooker-Feldman doctrine “applies not only to claims that were actually raised before the state court, but also to claims that are inextricably intertwined with state court determinations.” Id. (citation omitted). A claim filed by a consumer in federal court is “inextricably intertwined” with a state court decision if “the adjudication of the federal claims would undercut the state ruling or require the district court to interpret the application of state laws or procedural rules . . . .” Bianchi v. Rylaarsdam, 334 F.3d 895, 898 (9th Cir. 2003). Even a claim by a consumer that the state court judgment was obtained through “extrinsic fraud” is barred by the Rooker-Feldman doctrine. See Reusser v. Wachovia Bank, N.A., 515 F.3d 855, 859-60 (9th Cir. 2008).

The Kelly case provides an excellent example of how the Rooker-Feldman doctrine can bar an FDCPA claim. There, the plaintiffs’ FDCPA claims alleged that the state court judgments defendants had obtained included sums for attorneys’ fees that were not permitted by contract or law. See Kelley, 548 F.3d at 602. When defendants raised the Rooker-Feldman doctrine, plaintiffs argued their claims were not barred, because they were only challenging “defendants’ representations and requests related to attorney fees, and not the state court judgments granting those requests.” Id. at 604. The Kelly court rejected this argument, noting that the state court had determined the fees were proper, and the district court lacked jurisdiction to rule that the holding was erroneous:

“Because defendants needed to prevail in state court in order to capitalize on the alleged fraud, the FDCPA claims that plaintiffs bring ultimately require us to evaluate the state court judgments. We could not determine that defendants' representations and requests related to attorney fees violated the law without determining that the state court erred by issuing judgments granting the attorney fees.”

Id. at 605.

More recently, in Bryant v. Gordon & Wong Group, P.C., 681 F. Supp. 2d 1205 (E.D. Cal. 2010), appeal docketed, No. 10-15401 (9th Cir. Feb. 22, 2010), the plaintiff sued a collection law firm under the FDCPA, claiming he had never been served with the complaint in the state court collection action, and that “out of the blue” he discovered his checking and savings accounts had been garnished. See Bryant, 681 F. Supp. 2d at 1206. The court rejected the claim, noting that by “disputing the garnishment of his accounts, Plaintiff is inherently challenging the entry of default against him and the writ of execution that authorized the garnishment.” Id. at 1208. Summary judgment was granted for defendant under the Rooker-Feldman doctrine, because plaintiff’s claims were seeking to undermine the judgments entered against him in state court. The court held:

“The net effect is that Plaintiff is seeking to undermine the state court judgments. These judgments were rendered before the current district court proceeding, and any action by this Court in favor of Plaintiff on his FDCPA or RFDCPA claims would necessarily require review of those state court judgments. The Rooker-Feldman doctrine specifically bars this Court from doing so. If Plaintiff believes he has been wronged by the actions of the state court, he must turn to the state for remedy. This Court lacks jurisdiction to provide redress for Plaintiff's claims.”

Id.

The Rooker-Feldman doctrine is a key defense in cases like Kelly and Bryant, where a consumer is pursuing FDCPA claims that would undermine the validity of a state court judgment or its findings. The collector should move for summary judgment on the grounds that the district court lacks subject matter jurisdiction over the claims. See Bianchi, 334 F.3d at 898 (district court lacks subject matter jurisdiction if claims raised in federal action are inextricably intertwined with state court decision).

If a consumer has a problem with a state court judgment, he cannot attack the judgment or undermine it using the FDCPA and the federal courts. He must seek relief from the judgment utilizing the procedures available under state law. “A state litigant seeking review of a state court judgment must follow the appellate process through the state court system and then directly to the United States Supreme Court.” Kelley, 548 F.3d at 603.

Fighting Back With An Anti-SLAPP: Defeating FDCPA Cross-Complaints Using Your State's Anti-SLAPP Statute

Collection attorneys who file state court collection actions routinely face FDCPA cross-complaints filed by consumers. Many of these cross-complaints are of the “cookie cutter” variety, and they amount to little more than a list of legal conclusions about alleged FDCPA violations with no factual basis for the claims. Debtors file these cross-complaints solely to dissuade the creditor from continuing with the collection action. They know the cost of defending FDCPA cross-complaints can be substantial, and they hope the creditor or its attorney will pay the debtor’s attorney some money to dismiss the cross-complaint and go away. How can a collector turn the table in these cases?

One effective method for combating FDCPA cross-complaints filed in state court is the anti-SLAPP motion. Anti-SLAPP statutes are procedural devices designed to encourage early dismissal of lawsuits that have been filed solely to chill a person’s freedom of speech or petition (the acronym “SLAPP” stands for “Strategic Litigation Against Public Participation”). Although this article will focus on California’s anti-SLAPP statute, many other states have enacted similar legislation. In fact, according to a website sponsored by the Public Participation Project (see http://www.anti-slapp.org/?q=node/12), there are at least twenty-seven states that have enacted anti-SLAPP statutes.

In California, the anti-SLAPP statute is found at section 425.16(b) of the Code of Civil Procedure, which provides as follows:

“A cause of action against a person arising from any act of that person in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.”

Cal. Code Civ. Proc. § 425.16(b)(1).

The California legislature enacted the anti-SLAPP statute to provide “an efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims ‘arising from any act’ of the defendant ‘in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue . . . .’” Martinez v. Metabolife Int’l, Inc., 113 Cal. App. 4th 181, 186 (2003); accord Jarrow Formulas v. LaMarche, 31 Cal. 4th 728, 737 (2003) (explaining that § 425.16 “is a procedural device for screening out meritless claims”). The phrase “in furtherance of the person’s right of petition or free speech” is defined broadly:

As used in this section, ‘act in furtherance of a person’s right of petition or free speech under the United States or California Constitution in connection with a public issue’ includes: (1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law; (2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law; . . . .

Cal. Code Civ. Proc. § 425.16(e).

The California legislature and courts have dictated that section 425.16 “shall be construed broadly.” Id. § 425.16(a); Navellier v. Sletten, 29 Cal. 4th 82, 92 (2002)(rejecting narrow construction of the statute that “would contravene the Legislature's express command that section 425.16 ‘shall be construed broadly’”); Kibler v. Northern Inyo County Local Hosp. Dist., 39 Cal. 4th 192, 195-96 (2006). The Court explained why a broad construction was appropriate in Kibler:

Because these meritless lawsuits seek to deplete the defendant's energy and drain his or her resources, the Legislature sought to prevent SLAPPs by ending them early and without great cost to the SLAPP target.

Kibler, 39 Cal. 4th at 195 (citations and quotation marks omitted); see Martinez, 113 Cal. App. 4th at 186 (anti-SLAPP statute implemented to provide “efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims. . . ”).

In California, the court’s first step is to determine if the action is subject to a special motion to strike. If it is, the Court must then determine if the opposing party has established a probability of prevailing on his claim. See HMS Capital, Inc. v. Lawyers Title Co., 118 Cal. App. 4th 204, 211 (2004); Barak v. Quisenberry, 135 Cal. App. 4th 654, 661 (2006) (“In order to trigger a response from a plaintiff in a special motion to strike, a moving defendant need only demonstrate that the action arises out of protected First Amendment activity.”).

The first prong of the test will almost always be met with respect to a motion to strike an FDCPA cross-complaint. These pleadings generally target the allegations made in the collection complaint, and thus implicate the creditor’s right to petition. The California Supreme Court held that the “constitutional right to petition . . . includes the basic act of filing litigation.” Briggs v. Eden Council for Hope & Opportunity, 19 Cal. 4th 1106, 1115 (1999).

Once the creditor shows that the cross-complaint implicates its right to petition, the burden shifts to the debtor to “establish a probability of prevailing in the litigation.” To do so, the debtor will need to show that his cross-complaint is “both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by [him] is credited.” HMS Capital, 118 Cal. App 4th at 213 (internal quotation marks omitted). Evidence “that would be admissible at trial is required.” Id. at 212. Declarations submitted by the debtor “based upon ‘information and belief’” are not sufficient. Id.; see Evans v. Unkow, 38 Cal. App. 4th 1490, 1497-98 (1995). The Court considers “the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based.” Cal. Code Civ. Proc. § 425.16(b)(2); see Navellier, 29 Cal. 4th at 89. If the party opposing the motion has submitted sufficient evidence, the court “evaluate[s] the defendant’s evidence only to determine if it has defeated that submitted by the plaintiff as a matter of law.” HMS Capital, Inc., 118 Cal. App. 4th at 212.

California’s anti-SLAPP statute has a few additional features that make it particularly effective at fighting FDCPA cross-complaints. Once the motion is filed, there is a freeze on discovery. See Cal. Code Civ. Proc. § 425.16(g). This prevents the debtor and his counsel from arguing they are entitled to pursue expensive and time-consuming discovery in order to respond to the motion. They must defeat the motion with whatever evidence they have on hand, which is usually not much.

The other benefit to California’s anti-SLAPP motion is that the prevailing party is entitled to recover the attorneys’ fees and costs incurred in connection with the motion. See Cal. Code Civ. Proc. § 425.16(c) (“In any action subject to subdivision (b), a prevailing defendant on a special motion to strike shall be entitled to recover his or her attorney’s fees and costs.”). The prospect of having the cross-complaint quickly dismissed and then paying the creditor’s attorneys’ fees can act as a strong deterrent to frivolous FDCPA cross-complaints.


The laws governing anti-SLAPP motions may vary significantly in your state, and of course an anti-SLAPP motion is not appropriate in every case. But these motions can provide creditors and their counsel with a powerful tool for fighting back against frivolous FDCPA cross-complaints.