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).
Tuesday, May 18, 2010
Friday, May 7, 2010
Using The Rooker-Feldman Doctrine To Defeat FDCPA Claims
As collection attorneys know, consumers often do not pay close attention to the collection process until the creditor already has a judgment and counsel has an order that allows for garnishing the consumer’s wages or attaching their bank accounts. These post-judgment collection efforts can spawn FDCPA claims in federal court, where the consumers allege they were never served with the state court complaint, or that the state court judgment against them is somehow improper. FDCPA claims of this type, however, are barred by the Rooker-Feldman doctrine and are doomed to fail.
What exactly is the Rooker-Feldman doctrine anyway? As the Supreme Court recently observed, the Rooker-Feldman doctrine applies to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284 (2005). Thus, the Rooker-Feldman doctrine prevents litigants from attacking a state court judgment by filing a subsequent federal lawsuit, “no matter how erroneous or unconstitutional the state court judgment may be. (citations). Kelly v. Med-1 Solutions, LLC, 548 F.3d 600, 603 (7th Cir. 2008).
The Rooker-Feldman doctrine “applies not only to claims that were actually raised before the state court, but also to claims that are inextricably intertwined with state court determinations.” Id. (citation omitted). A claim filed by a consumer in federal court is “inextricably intertwined” with a state court decision if “the adjudication of the federal claims would undercut the state ruling or require the district court to interpret the application of state laws or procedural rules . . . .” Bianchi v. Rylaarsdam, 334 F.3d 895, 898 (9th Cir. 2003). Even a claim by a consumer that the state court judgment was obtained through “extrinsic fraud” is barred by the Rooker-Feldman doctrine. See Reusser v. Wachovia Bank, N.A., 515 F.3d 855, 859-60 (9th Cir. 2008).
The Kelly case provides an excellent example of how the Rooker-Feldman doctrine can bar an FDCPA claim. There, the plaintiffs’ FDCPA claims alleged that the state court judgments defendants had obtained included sums for attorneys’ fees that were not permitted by contract or law. See Kelley, 548 F.3d at 602. When defendants raised the Rooker-Feldman doctrine, plaintiffs argued their claims were not barred, because they were only challenging “defendants’ representations and requests related to attorney fees, and not the state court judgments granting those requests.” Id. at 604. The Kelly court rejected this argument, noting that the state court had determined the fees were proper, and the district court lacked jurisdiction to rule that the holding was erroneous:
“Because defendants needed to prevail in state court in order to capitalize on the alleged fraud, the FDCPA claims that plaintiffs bring ultimately require us to evaluate the state court judgments. We could not determine that defendants' representations and requests related to attorney fees violated the law without determining that the state court erred by issuing judgments granting the attorney fees.”
Id. at 605.
More recently, in Bryant v. Gordon & Wong Group, P.C., 681 F. Supp. 2d 1205 (E.D. Cal. 2010), appeal docketed, No. 10-15401 (9th Cir. Feb. 22, 2010), the plaintiff sued a collection law firm under the FDCPA, claiming he had never been served with the complaint in the state court collection action, and that “out of the blue” he discovered his checking and savings accounts had been garnished. See Bryant, 681 F. Supp. 2d at 1206. The court rejected the claim, noting that by “disputing the garnishment of his accounts, Plaintiff is inherently challenging the entry of default against him and the writ of execution that authorized the garnishment.” Id. at 1208. Summary judgment was granted for defendant under the Rooker-Feldman doctrine, because plaintiff’s claims were seeking to undermine the judgments entered against him in state court. The court held:
“The net effect is that Plaintiff is seeking to undermine the state court judgments. These judgments were rendered before the current district court proceeding, and any action by this Court in favor of Plaintiff on his FDCPA or RFDCPA claims would necessarily require review of those state court judgments. The Rooker-Feldman doctrine specifically bars this Court from doing so. If Plaintiff believes he has been wronged by the actions of the state court, he must turn to the state for remedy. This Court lacks jurisdiction to provide redress for Plaintiff's claims.”
Id.
The Rooker-Feldman doctrine is a key defense in cases like Kelly and Bryant, where a consumer is pursuing FDCPA claims that would undermine the validity of a state court judgment or its findings. The collector should move for summary judgment on the grounds that the district court lacks subject matter jurisdiction over the claims. See Bianchi, 334 F.3d at 898 (district court lacks subject matter jurisdiction if claims raised in federal action are inextricably intertwined with state court decision).
If a consumer has a problem with a state court judgment, he cannot attack the judgment or undermine it using the FDCPA and the federal courts. He must seek relief from the judgment utilizing the procedures available under state law. “A state litigant seeking review of a state court judgment must follow the appellate process through the state court system and then directly to the United States Supreme Court.” Kelley, 548 F.3d at 603.
What exactly is the Rooker-Feldman doctrine anyway? As the Supreme Court recently observed, the Rooker-Feldman doctrine applies to “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284 (2005). Thus, the Rooker-Feldman doctrine prevents litigants from attacking a state court judgment by filing a subsequent federal lawsuit, “no matter how erroneous or unconstitutional the state court judgment may be. (citations). Kelly v. Med-1 Solutions, LLC, 548 F.3d 600, 603 (7th Cir. 2008).
The Rooker-Feldman doctrine “applies not only to claims that were actually raised before the state court, but also to claims that are inextricably intertwined with state court determinations.” Id. (citation omitted). A claim filed by a consumer in federal court is “inextricably intertwined” with a state court decision if “the adjudication of the federal claims would undercut the state ruling or require the district court to interpret the application of state laws or procedural rules . . . .” Bianchi v. Rylaarsdam, 334 F.3d 895, 898 (9th Cir. 2003). Even a claim by a consumer that the state court judgment was obtained through “extrinsic fraud” is barred by the Rooker-Feldman doctrine. See Reusser v. Wachovia Bank, N.A., 515 F.3d 855, 859-60 (9th Cir. 2008).
The Kelly case provides an excellent example of how the Rooker-Feldman doctrine can bar an FDCPA claim. There, the plaintiffs’ FDCPA claims alleged that the state court judgments defendants had obtained included sums for attorneys’ fees that were not permitted by contract or law. See Kelley, 548 F.3d at 602. When defendants raised the Rooker-Feldman doctrine, plaintiffs argued their claims were not barred, because they were only challenging “defendants’ representations and requests related to attorney fees, and not the state court judgments granting those requests.” Id. at 604. The Kelly court rejected this argument, noting that the state court had determined the fees were proper, and the district court lacked jurisdiction to rule that the holding was erroneous:
“Because defendants needed to prevail in state court in order to capitalize on the alleged fraud, the FDCPA claims that plaintiffs bring ultimately require us to evaluate the state court judgments. We could not determine that defendants' representations and requests related to attorney fees violated the law without determining that the state court erred by issuing judgments granting the attorney fees.”
Id. at 605.
More recently, in Bryant v. Gordon & Wong Group, P.C., 681 F. Supp. 2d 1205 (E.D. Cal. 2010), appeal docketed, No. 10-15401 (9th Cir. Feb. 22, 2010), the plaintiff sued a collection law firm under the FDCPA, claiming he had never been served with the complaint in the state court collection action, and that “out of the blue” he discovered his checking and savings accounts had been garnished. See Bryant, 681 F. Supp. 2d at 1206. The court rejected the claim, noting that by “disputing the garnishment of his accounts, Plaintiff is inherently challenging the entry of default against him and the writ of execution that authorized the garnishment.” Id. at 1208. Summary judgment was granted for defendant under the Rooker-Feldman doctrine, because plaintiff’s claims were seeking to undermine the judgments entered against him in state court. The court held:
“The net effect is that Plaintiff is seeking to undermine the state court judgments. These judgments were rendered before the current district court proceeding, and any action by this Court in favor of Plaintiff on his FDCPA or RFDCPA claims would necessarily require review of those state court judgments. The Rooker-Feldman doctrine specifically bars this Court from doing so. If Plaintiff believes he has been wronged by the actions of the state court, he must turn to the state for remedy. This Court lacks jurisdiction to provide redress for Plaintiff's claims.”
Id.
The Rooker-Feldman doctrine is a key defense in cases like Kelly and Bryant, where a consumer is pursuing FDCPA claims that would undermine the validity of a state court judgment or its findings. The collector should move for summary judgment on the grounds that the district court lacks subject matter jurisdiction over the claims. See Bianchi, 334 F.3d at 898 (district court lacks subject matter jurisdiction if claims raised in federal action are inextricably intertwined with state court decision).
If a consumer has a problem with a state court judgment, he cannot attack the judgment or undermine it using the FDCPA and the federal courts. He must seek relief from the judgment utilizing the procedures available under state law. “A state litigant seeking review of a state court judgment must follow the appellate process through the state court system and then directly to the United States Supreme Court.” Kelley, 548 F.3d at 603.
Saturday, May 1, 2010
Fighting Back With An Anti-SLAPP: Defeating FDCPA Cross-Complaints Using Your State's Anti-SLAPP Statute
Collection attorneys who file state court collection actions routinely face FDCPA cross-complaints filed by consumers. Many of these cross-complaints are of the “cookie cutter” variety, and they amount to little more than a list of legal conclusions about alleged FDCPA violations with no factual basis for the claims. Debtors file these cross-complaints solely to dissuade the creditor from continuing with the collection action. They know the cost of defending FDCPA cross-complaints can be substantial, and they hope the creditor or its attorney will pay the debtor’s attorney some money to dismiss the cross-complaint and go away. How can a collector turn the table in these cases?
One effective method for combating FDCPA cross-complaints filed in state court is the anti-SLAPP motion. Anti-SLAPP statutes are procedural devices designed to encourage early dismissal of lawsuits that have been filed solely to chill a person’s freedom of speech or petition (the acronym “SLAPP” stands for “Strategic Litigation Against Public Participation”). Although this article will focus on California’s anti-SLAPP statute, many other states have enacted similar legislation. In fact, according to a website sponsored by the Public Participation Project (see http://www.anti-slapp.org/?q=node/12), there are at least twenty-seven states that have enacted anti-SLAPP statutes.
In California, the anti-SLAPP statute is found at section 425.16(b) of the Code of Civil Procedure, which provides as follows:
“A cause of action against a person arising from any act of that person in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.”
Cal. Code Civ. Proc. § 425.16(b)(1).
The California legislature enacted the anti-SLAPP statute to provide “an efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims ‘arising from any act’ of the defendant ‘in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue . . . .’” Martinez v. Metabolife Int’l, Inc., 113 Cal. App. 4th 181, 186 (2003); accord Jarrow Formulas v. LaMarche, 31 Cal. 4th 728, 737 (2003) (explaining that § 425.16 “is a procedural device for screening out meritless claims”). The phrase “in furtherance of the person’s right of petition or free speech” is defined broadly:
As used in this section, ‘act in furtherance of a person’s right of petition or free speech under the United States or California Constitution in connection with a public issue’ includes: (1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law; (2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law; . . . .
Cal. Code Civ. Proc. § 425.16(e).
The California legislature and courts have dictated that section 425.16 “shall be construed broadly.” Id. § 425.16(a); Navellier v. Sletten, 29 Cal. 4th 82, 92 (2002)(rejecting narrow construction of the statute that “would contravene the Legislature's express command that section 425.16 ‘shall be construed broadly’”); Kibler v. Northern Inyo County Local Hosp. Dist., 39 Cal. 4th 192, 195-96 (2006). The Court explained why a broad construction was appropriate in Kibler:
Because these meritless lawsuits seek to deplete the defendant's energy and drain his or her resources, the Legislature sought to prevent SLAPPs by ending them early and without great cost to the SLAPP target.
Kibler, 39 Cal. 4th at 195 (citations and quotation marks omitted); see Martinez, 113 Cal. App. 4th at 186 (anti-SLAPP statute implemented to provide “efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims. . . ”).
In California, the court’s first step is to determine if the action is subject to a special motion to strike. If it is, the Court must then determine if the opposing party has established a probability of prevailing on his claim. See HMS Capital, Inc. v. Lawyers Title Co., 118 Cal. App. 4th 204, 211 (2004); Barak v. Quisenberry, 135 Cal. App. 4th 654, 661 (2006) (“In order to trigger a response from a plaintiff in a special motion to strike, a moving defendant need only demonstrate that the action arises out of protected First Amendment activity.”).
The first prong of the test will almost always be met with respect to a motion to strike an FDCPA cross-complaint. These pleadings generally target the allegations made in the collection complaint, and thus implicate the creditor’s right to petition. The California Supreme Court held that the “constitutional right to petition . . . includes the basic act of filing litigation.” Briggs v. Eden Council for Hope & Opportunity, 19 Cal. 4th 1106, 1115 (1999).
Once the creditor shows that the cross-complaint implicates its right to petition, the burden shifts to the debtor to “establish a probability of prevailing in the litigation.” To do so, the debtor will need to show that his cross-complaint is “both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by [him] is credited.” HMS Capital, 118 Cal. App 4th at 213 (internal quotation marks omitted). Evidence “that would be admissible at trial is required.” Id. at 212. Declarations submitted by the debtor “based upon ‘information and belief’” are not sufficient. Id.; see Evans v. Unkow, 38 Cal. App. 4th 1490, 1497-98 (1995). The Court considers “the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based.” Cal. Code Civ. Proc. § 425.16(b)(2); see Navellier, 29 Cal. 4th at 89. If the party opposing the motion has submitted sufficient evidence, the court “evaluate[s] the defendant’s evidence only to determine if it has defeated that submitted by the plaintiff as a matter of law.” HMS Capital, Inc., 118 Cal. App. 4th at 212.
California’s anti-SLAPP statute has a few additional features that make it particularly effective at fighting FDCPA cross-complaints. Once the motion is filed, there is a freeze on discovery. See Cal. Code Civ. Proc. § 425.16(g). This prevents the debtor and his counsel from arguing they are entitled to pursue expensive and time-consuming discovery in order to respond to the motion. They must defeat the motion with whatever evidence they have on hand, which is usually not much.
The other benefit to California’s anti-SLAPP motion is that the prevailing party is entitled to recover the attorneys’ fees and costs incurred in connection with the motion. See Cal. Code Civ. Proc. § 425.16(c) (“In any action subject to subdivision (b), a prevailing defendant on a special motion to strike shall be entitled to recover his or her attorney’s fees and costs.”). The prospect of having the cross-complaint quickly dismissed and then paying the creditor’s attorneys’ fees can act as a strong deterrent to frivolous FDCPA cross-complaints.
The laws governing anti-SLAPP motions may vary significantly in your state, and of course an anti-SLAPP motion is not appropriate in every case. But these motions can provide creditors and their counsel with a powerful tool for fighting back against frivolous FDCPA cross-complaints.
One effective method for combating FDCPA cross-complaints filed in state court is the anti-SLAPP motion. Anti-SLAPP statutes are procedural devices designed to encourage early dismissal of lawsuits that have been filed solely to chill a person’s freedom of speech or petition (the acronym “SLAPP” stands for “Strategic Litigation Against Public Participation”). Although this article will focus on California’s anti-SLAPP statute, many other states have enacted similar legislation. In fact, according to a website sponsored by the Public Participation Project (see http://www.anti-slapp.org/?q=node/12), there are at least twenty-seven states that have enacted anti-SLAPP statutes.
In California, the anti-SLAPP statute is found at section 425.16(b) of the Code of Civil Procedure, which provides as follows:
“A cause of action against a person arising from any act of that person in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.”
Cal. Code Civ. Proc. § 425.16(b)(1).
The California legislature enacted the anti-SLAPP statute to provide “an efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims ‘arising from any act’ of the defendant ‘in furtherance of the person’s right of petition or free speech under the United States or California Constitution in connection with a public issue . . . .’” Martinez v. Metabolife Int’l, Inc., 113 Cal. App. 4th 181, 186 (2003); accord Jarrow Formulas v. LaMarche, 31 Cal. 4th 728, 737 (2003) (explaining that § 425.16 “is a procedural device for screening out meritless claims”). The phrase “in furtherance of the person’s right of petition or free speech” is defined broadly:
As used in this section, ‘act in furtherance of a person’s right of petition or free speech under the United States or California Constitution in connection with a public issue’ includes: (1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law; (2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law; . . . .
Cal. Code Civ. Proc. § 425.16(e).
The California legislature and courts have dictated that section 425.16 “shall be construed broadly.” Id. § 425.16(a); Navellier v. Sletten, 29 Cal. 4th 82, 92 (2002)(rejecting narrow construction of the statute that “would contravene the Legislature's express command that section 425.16 ‘shall be construed broadly’”); Kibler v. Northern Inyo County Local Hosp. Dist., 39 Cal. 4th 192, 195-96 (2006). The Court explained why a broad construction was appropriate in Kibler:
Because these meritless lawsuits seek to deplete the defendant's energy and drain his or her resources, the Legislature sought to prevent SLAPPs by ending them early and without great cost to the SLAPP target.
Kibler, 39 Cal. 4th at 195 (citations and quotation marks omitted); see Martinez, 113 Cal. App. 4th at 186 (anti-SLAPP statute implemented to provide “efficient procedural mechanism to obtain an early and inexpensive dismissal of nonmeritorious claims. . . ”).
In California, the court’s first step is to determine if the action is subject to a special motion to strike. If it is, the Court must then determine if the opposing party has established a probability of prevailing on his claim. See HMS Capital, Inc. v. Lawyers Title Co., 118 Cal. App. 4th 204, 211 (2004); Barak v. Quisenberry, 135 Cal. App. 4th 654, 661 (2006) (“In order to trigger a response from a plaintiff in a special motion to strike, a moving defendant need only demonstrate that the action arises out of protected First Amendment activity.”).
The first prong of the test will almost always be met with respect to a motion to strike an FDCPA cross-complaint. These pleadings generally target the allegations made in the collection complaint, and thus implicate the creditor’s right to petition. The California Supreme Court held that the “constitutional right to petition . . . includes the basic act of filing litigation.” Briggs v. Eden Council for Hope & Opportunity, 19 Cal. 4th 1106, 1115 (1999).
Once the creditor shows that the cross-complaint implicates its right to petition, the burden shifts to the debtor to “establish a probability of prevailing in the litigation.” To do so, the debtor will need to show that his cross-complaint is “both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by [him] is credited.” HMS Capital, 118 Cal. App 4th at 213 (internal quotation marks omitted). Evidence “that would be admissible at trial is required.” Id. at 212. Declarations submitted by the debtor “based upon ‘information and belief’” are not sufficient. Id.; see Evans v. Unkow, 38 Cal. App. 4th 1490, 1497-98 (1995). The Court considers “the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based.” Cal. Code Civ. Proc. § 425.16(b)(2); see Navellier, 29 Cal. 4th at 89. If the party opposing the motion has submitted sufficient evidence, the court “evaluate[s] the defendant’s evidence only to determine if it has defeated that submitted by the plaintiff as a matter of law.” HMS Capital, Inc., 118 Cal. App. 4th at 212.
California’s anti-SLAPP statute has a few additional features that make it particularly effective at fighting FDCPA cross-complaints. Once the motion is filed, there is a freeze on discovery. See Cal. Code Civ. Proc. § 425.16(g). This prevents the debtor and his counsel from arguing they are entitled to pursue expensive and time-consuming discovery in order to respond to the motion. They must defeat the motion with whatever evidence they have on hand, which is usually not much.
The other benefit to California’s anti-SLAPP motion is that the prevailing party is entitled to recover the attorneys’ fees and costs incurred in connection with the motion. See Cal. Code Civ. Proc. § 425.16(c) (“In any action subject to subdivision (b), a prevailing defendant on a special motion to strike shall be entitled to recover his or her attorney’s fees and costs.”). The prospect of having the cross-complaint quickly dismissed and then paying the creditor’s attorneys’ fees can act as a strong deterrent to frivolous FDCPA cross-complaints.
The laws governing anti-SLAPP motions may vary significantly in your state, and of course an anti-SLAPP motion is not appropriate in every case. But these motions can provide creditors and their counsel with a powerful tool for fighting back against frivolous FDCPA cross-complaints.
Sunday, April 25, 2010
Jerman v. Carlisle: Supreme Court Rules That A Legal Error Regarding The Requirements Of The FDCPA Cannot Be A “Bona Fide Error”
The FDCPA includes a “bona fide error” defense, which provides that a debt collector may not be held liable in any action brought under [the FDCPA] if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. 15 U.S.C. § 1692k(c). In Jerman v. Carlisle, _ S. Ct. _, 2010 WL 1558977 (Apr. 21, 2010), the United States Supreme Court held that the “bona fide error” defense does not apply to a violation resulting from a debt collector’s mistaken interpretation of the legal requirements of the FDCPA.
Although Jerman does not provide collectors with much to celebrate, the opinion is very narrow and leaves significant issues undecided. The Court expressly declined to decide whether a violation of the FDCPA that results from a collector’s mistaken interpretation of state law or a federal statute other than the FDCPA, would support the bona fide error defense. Id. at *4 n.4. Thus, the lower courts will need to sort out, for example, whether a collector’s erroneous interpretation of a state’s statute of limitations, or an incorrect interpretation of the Fair Credit Reporting Act, can give rise to a bona fide error defense. Jerman may help collectors facing claims for highly technical violations of the Act, as it strongly suggests that any good faith error of law by a collector can provide grounds for significantly reducing the amount of statutory damages or attorneys’ fees to be awarded to a plaintiff. Id. at *11. Jerman also confirms that any good faith factual mistake by a collector – not just a “clerical” error – can support a bona fide error defense. Id. at *7.
In Jerman, the defendants, a law firm and one of its attorneys, filed a complaint in state court seeking to foreclose on the plaintiff’s property. Id. at *4. They attached to the complaint a notice stating, inter alia, that the debt would be assumed valid unless the plaintiff disputed the debt “in writing” within thirty days of receiving the notice. Id. The district court held that the collector’s notice violated section 1692g(a)(3) of the FDCPA, but also held for defendants on the “bona fide error” defense, because the wording of the notice was based upon their error of law. Id. The Sixth Circuit affirmed the district court, but the Supreme Court reversed.
The Supreme Court rejected the argument that Congress only meant to impose liability on collectors who know that their conduct is unlawful, citing the “common maxim, familiar to all minds, that ignorance of the law will not excuse any person, either civilly or criminally. Id. at *5 (citations, internal quotation marks omitted). When Congress wants to provide a mistake of law defense, it generally does so explicitly. For example, the administrative-penalty provisions of the FTC Act only apply if a debt collector has acted with “actual knowledge or knowledge fairly implied on the basis of objective circumstances” that its conduct is prohibited by the Act, but the “bona fide error” defense does not contain similar language. Id. Given this, the Court inferred that Congress intended to allow consumers to recover for an FDCPA violation even when it results from a collector’s mistaken interpretation of the FDCPA, while reserving the more onerous provisions of the FTC Act to be imposed on collectors whose intentional actions reflected “knowledge fairly implied on the basis of objective circumstances” that they knew their conduct was prohibited. Id.
The Court also observed that the defense allows a collector to maintain “procedures” to avoid the error, and that a “procedure” is defined as “a series of steps followed in a regular orderly definite way. (Citation).” Id. at *7. The word “procedure” is thus “more naturally read to apply to processes that have mechanical or other such ‘regular orderly’ steps to avoid mistakes, for instance, the kind of internal controls a debt collector might adopt to ensure its employees do not communicate with consumers at the wrong time of day (citation), or make false representations as to the amount of the debt. (citation).” Id. Legal reasoning is not a “mechanical or strictly linear process,” said the Court, and therefore the “relevant procedures are ones that help to avoid errors like clerical or factual mistakes.” Id.
The Court noted that section 1692k(e) of the FDCPA provides separate protection from liability for “any act done or omitted in good faith in conformity with any advisory opinion of the [FTC].” Id. Congress apparently wanted the FTC to resolve ambiguities in the Act, and debt collectors would have no incentive to consult the FTC if the “bona fide error” defense provided immunity “for good faith reliance on private counsel.” Id.
Finally, the Court observed that Congress passed the FDCPA nine years after it had enacted the Truth In Lending Act (“TILA”), and Congress copied verbatim the language from TILA’s “bona fide error” defense into the FDCPA. Id. at *8. Three circuit courts had interpreted the language of the TILA statute to only extend to clerical errors. Id. While this may not have “settled” the meaning of TILA’s bona fide error defense, there was no reason to conclude that Congress disagreed with those interpretations when it passed the FDCPA. Id. The Court found “an inference that Congress understood the statutory formula it chose for the FDCPA consistent with Federal Court of Appeals interpretations of TILA.” Id.
The Court rejected the argument that its decision would lead to a “flood of lawsuits” against collection attorneys, or that it would create “an irreconcilable conflict between an attorney's personal financial interest and her ethical obligation of zealous advocacy on behalf of a client . . . .” Id. at *11. The Court observed that the FDCPA contains provisions designed to protect creditors and their attorneys. If an alleged violation is trivial, the actual damages “will likely be de minimus or even zero.” Id. Courts have discretion to reduce statutory damages “where a violation is based on a good faith error” of law. Id. Courts also have discretion to reduce the amount of attorneys’ fees below the lodestar in appropriate circumstances. Id. at *11, n. 16. Attorneys’ fees can be awarded to a collector defendant if the court finds that a plaintiff brought the case “in bad faith and for purpose of harassment.” Id. at *11. To the extent the FDCPA imposes constraints on a lawyer’s vigorous advocacy on behalf of a client, the Court found this “hardly unique in our law” citing, inter alia, a lawyer’s duties of professional conduct, and Rule 11 of the Federal Rules of Civil Procedure. Id. at *12.
The Court noted that Congress can amend the FDCPA if it believes that errors of law relating to the application of the Act should be included within the “bona fide error” defense. “This Court may not, however, read more into § 1692k(c) than the statutory language naturally supports. We therefore hold that the bona fide error defense in § 1692k(c) does not apply to a violation of the FDCPA resulting from a debt collector's incorrect interpretation of the requirements of that statute.” Id. at *13.
Although Jerman does not provide collectors with much to celebrate, the opinion is very narrow and leaves significant issues undecided. The Court expressly declined to decide whether a violation of the FDCPA that results from a collector’s mistaken interpretation of state law or a federal statute other than the FDCPA, would support the bona fide error defense. Id. at *4 n.4. Thus, the lower courts will need to sort out, for example, whether a collector’s erroneous interpretation of a state’s statute of limitations, or an incorrect interpretation of the Fair Credit Reporting Act, can give rise to a bona fide error defense. Jerman may help collectors facing claims for highly technical violations of the Act, as it strongly suggests that any good faith error of law by a collector can provide grounds for significantly reducing the amount of statutory damages or attorneys’ fees to be awarded to a plaintiff. Id. at *11. Jerman also confirms that any good faith factual mistake by a collector – not just a “clerical” error – can support a bona fide error defense. Id. at *7.
In Jerman, the defendants, a law firm and one of its attorneys, filed a complaint in state court seeking to foreclose on the plaintiff’s property. Id. at *4. They attached to the complaint a notice stating, inter alia, that the debt would be assumed valid unless the plaintiff disputed the debt “in writing” within thirty days of receiving the notice. Id. The district court held that the collector’s notice violated section 1692g(a)(3) of the FDCPA, but also held for defendants on the “bona fide error” defense, because the wording of the notice was based upon their error of law. Id. The Sixth Circuit affirmed the district court, but the Supreme Court reversed.
The Supreme Court rejected the argument that Congress only meant to impose liability on collectors who know that their conduct is unlawful, citing the “common maxim, familiar to all minds, that ignorance of the law will not excuse any person, either civilly or criminally. Id. at *5 (citations, internal quotation marks omitted). When Congress wants to provide a mistake of law defense, it generally does so explicitly. For example, the administrative-penalty provisions of the FTC Act only apply if a debt collector has acted with “actual knowledge or knowledge fairly implied on the basis of objective circumstances” that its conduct is prohibited by the Act, but the “bona fide error” defense does not contain similar language. Id. Given this, the Court inferred that Congress intended to allow consumers to recover for an FDCPA violation even when it results from a collector’s mistaken interpretation of the FDCPA, while reserving the more onerous provisions of the FTC Act to be imposed on collectors whose intentional actions reflected “knowledge fairly implied on the basis of objective circumstances” that they knew their conduct was prohibited. Id.
The Court also observed that the defense allows a collector to maintain “procedures” to avoid the error, and that a “procedure” is defined as “a series of steps followed in a regular orderly definite way. (Citation).” Id. at *7. The word “procedure” is thus “more naturally read to apply to processes that have mechanical or other such ‘regular orderly’ steps to avoid mistakes, for instance, the kind of internal controls a debt collector might adopt to ensure its employees do not communicate with consumers at the wrong time of day (citation), or make false representations as to the amount of the debt. (citation).” Id. Legal reasoning is not a “mechanical or strictly linear process,” said the Court, and therefore the “relevant procedures are ones that help to avoid errors like clerical or factual mistakes.” Id.
The Court noted that section 1692k(e) of the FDCPA provides separate protection from liability for “any act done or omitted in good faith in conformity with any advisory opinion of the [FTC].” Id. Congress apparently wanted the FTC to resolve ambiguities in the Act, and debt collectors would have no incentive to consult the FTC if the “bona fide error” defense provided immunity “for good faith reliance on private counsel.” Id.
Finally, the Court observed that Congress passed the FDCPA nine years after it had enacted the Truth In Lending Act (“TILA”), and Congress copied verbatim the language from TILA’s “bona fide error” defense into the FDCPA. Id. at *8. Three circuit courts had interpreted the language of the TILA statute to only extend to clerical errors. Id. While this may not have “settled” the meaning of TILA’s bona fide error defense, there was no reason to conclude that Congress disagreed with those interpretations when it passed the FDCPA. Id. The Court found “an inference that Congress understood the statutory formula it chose for the FDCPA consistent with Federal Court of Appeals interpretations of TILA.” Id.
The Court rejected the argument that its decision would lead to a “flood of lawsuits” against collection attorneys, or that it would create “an irreconcilable conflict between an attorney's personal financial interest and her ethical obligation of zealous advocacy on behalf of a client . . . .” Id. at *11. The Court observed that the FDCPA contains provisions designed to protect creditors and their attorneys. If an alleged violation is trivial, the actual damages “will likely be de minimus or even zero.” Id. Courts have discretion to reduce statutory damages “where a violation is based on a good faith error” of law. Id. Courts also have discretion to reduce the amount of attorneys’ fees below the lodestar in appropriate circumstances. Id. at *11, n. 16. Attorneys’ fees can be awarded to a collector defendant if the court finds that a plaintiff brought the case “in bad faith and for purpose of harassment.” Id. at *11. To the extent the FDCPA imposes constraints on a lawyer’s vigorous advocacy on behalf of a client, the Court found this “hardly unique in our law” citing, inter alia, a lawyer’s duties of professional conduct, and Rule 11 of the Federal Rules of Civil Procedure. Id. at *12.
The Court noted that Congress can amend the FDCPA if it believes that errors of law relating to the application of the Act should be included within the “bona fide error” defense. “This Court may not, however, read more into § 1692k(c) than the statutory language naturally supports. We therefore hold that the bona fide error defense in § 1692k(c) does not apply to a violation of the FDCPA resulting from a debt collector's incorrect interpretation of the requirements of that statute.” Id. at *13.
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]
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