FDCPA Defense Blog

The Limits On Direct And Vicarious Liability Under The FDCPA

2012-01-28T12:03:00.000-08:00

Consumers and their attorneys are constantly seeking to expand the pool of potential FDCPA defendants using principles of vicarious liability. Debt buyers are being sued based on the conduct of their agencies and law firms. Lawyers and agency owners are being sued based on the conduct of their clients and their collectors. Even original creditors, who are not subject to the FDCPA, are being drawn into FDCPA litigation under various theories of recovery. What are the limits of vicarious liability under the FDCPA? How can debt collectors avoid liability for the conduct of others?

Limits on Direct Liability

Before examining vicarious liability under the FDCPA, it is important to remember that Congress significantly limited the scope of direct liability under the Act. For example, generally speaking, the Act applies only to “debt collectors” who regularly attempt to collect debts that are “due another.” For this reason, original creditors are not subject to the FDCPA (except in very limited circumstances). See, e.g., Perry v. Stewart Title Co., 756 F.2d 1197, 1208 (5th Cir.1985) ( The legislative history of section 1692a(6) indicates conclusively that a debt collector does not include the consumer's creditors . . . or an assignee of a debt, as long as the debt was not in default at the time it was assigned.”). Because original creditors are not subject to the FDCPA, courts have recognized they may not be held vicariously liable for the FDCPA violations of the debt collectors they retain. See Wadlington v. Credit Acceptance Corp., 76 F.3d 103, 108 (6th Cir. 1996) (assignee of auto loan not vicariously liable for FDCPA violations of its attorneys: “We do not think it would accord with the intent of Congress, as manifested in the terms of the Act, for a company that is not a debt collector to be held vicariously liable for a collection suit filing that violates the Act only because the filing attorney is a ‘debt collector.’”).

Courts have recognized that shareholders, officers or employees of a corporate debt collector may not be directly liable under the FDCPA, unless the plaintiff can meet the strict requirements necessary to pierce the corporate veil. See, e.g., White v. Goodman, 200 F.3d 1016, 1019 (7th Cir. 2000) (FDCPA claim filed against shareholder of agency was frivolous: “The Fair Debt Collection Practices Act is not aimed at the shareholders of debt collectors operating in the corporate form unless some basis is shown for piercing the corporate veil, which was not attempted here.”) (citation omitted); Pettit v. Retrieval Masters Creditor Bureau, Inc., 211 F.3d 1057 (7th Cir. 2000) (president and largest shareholder of agency not personally liable: “the extent of control exercised by the officer or shareholder is irrelevant to determining his liability under the FDCPA.”). But see Kistner v. Law Office of Michael P. Margelefsky, LLC, 518 F.3d 433, 437-38 (6th Cir. 2008) (sole member of LLC may be held liable under FDCPA if he plays a significant role in directing the firm’s debt collection activities).

Even someone who is a “debt collector” under the statute must engage in some sort of prohibited conduct with respect to the debtor in order to be directly, as opposed to vicariously, liable under the FDCPA. The Act allows a plaintiff to seek actual damages and “additional damages” but only where the defendant collector has “fail[ed] to comply” with a “provision of this title” and has done so “with respect to” the plaintiff. See 15 U.S.C. § 1692k(a) (“[A]ny debt collector who fails to comply with any provision of this subchapter with respect to any person is liable to such person in an amount equal to the sum of . . . .”). Thus, if the consumer cannot prove that the collector “failed to comply” with the FDCPA, he may not recover any of the remedies provided by the Act from that collector.

Where a violation occurs, the FDCPA places significant limits on the collector’s liability. In an individual action, a plaintiff may recover actual damages, but courts have consistently held that “additional damages” are limited to a maximum of $1,000 “per proceeding” and not $1,000 “per violation.” See, e.g., Wright v. Finance Servs. of Norwalk, Inc., 22 F.3d 647, 650-51 (6th Cir. 1994) (additional damages limited to $1,000 even though defendant committed fourteen violations: “Congress certainly knows how to write statutes that make each separate violation subject to a separate penalty, or even that make each separate day of a violation a separate offense subject to a separate penalty.”) (citations omitted); Harper v. Better Bus. Servs., Inc., 961 F.2d 1561, 1563 (11th Cir. 1992) (additional damages limited to $1,000 even though defendant committed seven violations: “The FDCPA does not on its face authorize additional statutory damages of $1,000 per violation of the statute, of $1,000 per improper communication, or of $1,000 per alleged debt. If Congress had intended such limitations, it could have used that terminology.”).

There are also strict limits on liability in FDCPA class actions, where the statute caps the “additional damages” to the class at the lesser of $500,000 or one percent of the “net worth” of any collector who “fails to comply” with a provision of the Act. See 15 U.S.C. § 1692k(a)(2)(B). The term “net worth” means the “book net worth” or “balance sheet net worth” of the collector, calculated using GAAP, not the “fair market value” of the collector. See Sanders v. Jackson, 209 F.3d 998, 1001-02 (7th Cir. 2000) (the “primary purpose of the net worth provision is a protective one. It ensures that defendants are not forced to liquidate their companies in order to satisfy” a damage award).

If a violation is established, the court does not automatically award the maximum possible additional damages. In fact, it may award zero damages. One famous example is Jerman v. Carlisle, where the plaintiff prevailed in an FDCPA class action in the United States Supreme Court, but was awarded zero damages upon remand. See Jerman v. Carlisle, et al., 2011 WL 1434679 (N.D. Ohio Apr. 14, 2011). The Jerman court observed that the FDCPA sets “no minimum damages” and that statutory damages are “not automatic.” Id. at *11. It agreed that “where there are no actual damages and no evidence of an intent to engage in abusive and deceptive debt collection practices, additional damages are not warranted.” Id.

Limits On Vicarious Liability

If a collector is not directly liable, when may it be held vicariously liable? The scope of vicarious liability turns on proof that the defendant exercised control over another debt collector’s conduct. “[T]o be liable for the actions of another, the principal must exercise control over the conduct or activities of the agent." Clark v. Capital Credit & Collection Servs., Inc., 460 F.3d 1162, 1173 (9th Cir. 2006) (citation omitted). In Clark, the Ninth Circuit affirmed summary judgment for an attorney, because there was no evidence that he exercised control over the actions of his client. Id.

A collection company will generally be held liable for its employees’ FDCPA violations, using principles of respondeat superior, if the violations occurred within the course and scope of their employment. See Pettit v. Retrieval Masters Creditor Bureau, Inc., 211 F.3d 1057, 1059 (7th Cir. 2000) (“[T]he debt collection company answers for its employees' violations of the statute. With vicarious or respondeat superior liability, the debt collection company and its managers have the proper incentives to adequately discipline wayward employees, as well as to instruct and train employees to avoid actions that might impose liability.”) (citations omitted).

A collector will not, however, be held vicariously liable for the FDCPA violations of its collection attorney if the collector did not exercise control over the attorney. See, e.g., Cassady v. Union Adjustment Co., 2008 WL 4773976, *6 (N.D. Cal. Oct 27, 2008) (summary judgment granted where “no evidence upon which a reasonable trier of fact could conclude that Union exercised control over Zee Law Group.”). But see Fox v. Citicorp Credit Servs., Inc., 15 F.3d 1507, 1516 (9th Cir. 1994) (collector may be vicariously liable under § 1692i of FDCPA where its attorney sues in wrong venue).

Similarly, a debt buyer will not be held vicariously liable for the FDCPA violations of its collection agency where there is no evidence the debt buyer exercised control over the conduct that led to the violation. See, e.g., Scally v. Hilco Receivables, LLC, 392 F. Supp. 2d 1036, 1040 (N.D. Ill. 2005) (“Scally offers no facts suggesting that Hilco controlled either the mechanisms or the content of MRS's contact with debtors, other than to outline general principles by which MRS would abide: i.e., observing the requirements of the FDCPA.”).

Nor will a collector be vicariously liable under the FDCPA for the conduct of vendors, such as process servers or letter companies, if the vendors are not subject to the Act. See, e.g., Worch v. Wolpoff & Abramson, LLP, 477 F. Supp. 2d 1015,1018-19 (E.D. Mo. 2007) (process server who “pounded on the door repeatedly and aggressively” to serve debtor not subject to FDCPA; collection firm not vicariously liable); Federal Home Loan Mortgage Corp. v. Lamar, 2006 WL 2422903, **8-9 (N.D. Ohio Aug. 22, 2006) (process server allegedly involved in an erratic car chase while serving debtor not liable under FDCPA; collection firm not vicariously liable); see also Laubach v. Arrow Serv. Bureau, Inc., 987 F. Supp. 625 (N.D. Ill. 1997) (letter vendor that printed and mailed letters for collector clients not “debt collector” under FDCPA).

A general partner can be held vicariously liable for the actions of the partnership if the partner exercised sufficient control over the firm’s collection activities. See Pollice v. National Tax Funding, L.P., 225 F.3d 379, 405 (3rd Cir. 2000) (“In light of the general partner's role in managing the affairs of the partnership, we see no reason why the general partner should not be responsible for conduct of the partnership which violates the FDCPA.”); see also Miller v. McCalla, Raymer et al., 214 F.3d 872 (7th Cir. 2000) (“the liability of a partnership is imputed to the partners, and so the plaintiff was entitled to sue the partners as well as the partnership.”).

The difference between direct and vicarious liability can be particularly significant in FDCPA class actions filed against multiple defendants. Consumer attorneys will often argue that the exposure in such cases is the sum of the net worth of all the collectors. But if one or more of the collectors has been sued solely under a theory of vicarious liability, there is no basis for seeking one percent of that collector’s net worth. Rather, the class would be limited to recovery of one percent of the net worth of the collector who actually violated the Act with respect to the plaintiff and the class. Once those damages are assessed, the other defendants may or may not be jointly responsible for payment of those damages under principles of vicarious liability.

Collectors named in FDCPA actions should closely examine the claims to determine whether they are alleged to have directly violated the Act, or if their liability is based solely on vicarious liability principles. This answer may significantly alter the approach taken when defending the action.

NARCA Urges The United States Supreme Court To Overturn Lesher And To Reject The "Meaningful Involvement" Doctrine

2011-11-16T15:31:00.000-08:00

The FDCPA prohibits collection lawyers from making materially false or misleading statements to consumers or to third parties when collecting consumer debts. But the FDCPA was not designed to regulate the practice of law. The Act does not define when an attorney is acting “as an attorney” or in a “legal capacity” for his client, and when he is not. The statute was not meant to be used by courts and consumer attorneys as a vehicle for dictating the interactions between a collection attorney and his client.

For these reasons, the National Association of Retail Collection Attorneys (“NARCA”) recently filed an amicus brief in the United States Supreme Court in Law Offices Of Mitchell N. Kay, P.C. v. Darwin Lesher, Case No. 11-492, urging the Court to grant the firm’s petition for writ of certiorari and to reverse the decision issued by Third Circuit Court of Appeals, Lesher v. Law Offices of Mitchell N. Kay, 650 F.3d 993 (3d Cir. 2011).

In Lesher, the Third Circuit interpreted the FDCPA in a way that improperly interferes with the attorney-client relationship. The defendant law firm in Lesher had sent polite settlement letters to a consumer which made no reference to litigation. The Lesher Court found that the settlement letters violated the FDCPA, however, and its ruling arguably held that attorney cannot act “as an attorney” for his client, nor act in a “legal capacity” for his client, unless the attorney has reviewed the consumer’s file and has determined that the consumer is a “candidate for legal action.” See Lesher, 650 F. 3d at 1003. But the law firm was, in fact, representing its client, and there was no evidence that the client was unhappy with the level of review conducted by the firm before the letters were sent.

The FDCPA does not dictate the steps that an attorney must take in order to properly represent his client. The Act does not define when an attorney is acting “as an attorney” or in a “legal capacity” for a client. There is nothing in the FDCPA stating that a creditor can only hire a lawyer to communicate on its behalf after the creditor has decided that the consumer is a “candidate for legal action.” The Lesher ruling effectively prevents creditors from engaging an attorney to notify a consumer that he is a candidate for settlement short of litigation. But there is nothing to suggest that when Congress passed the FDCPA, it wanted to prohibit all communications between collection attorneys and consumers prior to the time that the client has decided to file suit.

NARCA also urged the Court to expressly reject the so-called “meaningful involvement” doctrine that has been adopted some circuit courts. See, e.g., Clomon v. Jackson, 988 F.2d 1314, 1320-21 (2d Cir. 1993); Avila v. Rubin, 84 F.3d 222, 228-29 (7th Cir. 1996). Although the FDCPA prohibits the use of collection letters which falsely state they are from an attorney (see 15 U.S.C. § 1692e(3)), there is no “meaningful involvement” requirement in the FDCPA, nor any basis for using the Act to regulate the manner in which an attorney must review his client’s files before communicating with a consumer. See 15 U.S.C. §§ 1692-1692p.

Lawyers should certainly be involved in all of the legal work they do for their clients. But the level of involvement, the scope of the work to be performed, and the steps the attorney must take to get the job done, are things that must be left for the lawyer and the client to decide. The FDCPA is not the mechanism for determining what is “meaningful” legal work, and what is not. The judiciary and the states, not Congress, regulate the professional standards for the bar and oversee the conduct of attorneys when they interact with clients. See, e.g., Paul E. Iacono Structural Eng’r, Inc. v. Humphrey, 722 F.2d 435, 439 (9th Cir. 1983) (“[T]he regulation of lawyer conduct is the province of the courts, not Congress.”).

Of course, Congress may properly prohibit collection attorneys from making false statements in letters sent to consumers. But the FDCPA should not be read expansively in a manner that would allow judges, juries and consumers to second-guess the quantum and quality of the review performed by a collection attorney on behalf of his client. A collection lawyer, working in conjunction with his client, must be allowed to decide what amount of attorney involvement, if any, is appropriate before a settlement letter is sent on behalf of the client to the consumer.

A copy of NARCA’s motion for leave to file the amicus brief, and the amicus brief, can be found here:

Amicus Brief of NARCA.USSCT.Mitchell.N.Kay.v.Lesher

Why Your FDCPA Plaintiff May Lack Standing To Sue You

2011-08-26T10:43:00.000-07:00

Thousands of FDCPA lawsuits are filed in federal courts across the country each year, and in most cases, the plaintiff has not suffered any actual damages resulting from the alleged violation. Most consumers are pursuing only statutory damages, which are capped at $1,000, while their attorneys seek thousands more in fees as compensation for proving technical violations of the Act that have caused no harm to their clients. Unfortunately, the courts have made these “no injury” cases easy to pursue by repeatedly ruling that consumers do not need to prove “actual damages” under the FDCPA in order to recover statutory damages and attorney’s fees. But are these decisions correct? Probably not, and there is a case pending before the Supreme Court that may help clarify that all plaintiffs in “no injury” cases lack standing to sue.

But first, what exactly is “standing” and why should anybody care about it? Standing is the most basic component of any federal court case. Standing is the plaintiff’s key to the courthouse door – he must demonstrate that he has it in order to get in, and he must maintain it during the entire course of his lawsuit against you. If the plaintiff lacks standing at any time during the suit, then there is no real “case or controversy” worthy of the court’s time, and the court lacks jurisdiction to proceed.

The standing doctrine has its roots in the Constitution. Article III of the Constitution limits the judicial authority of the federal courts to “cases” and “controversies.” See U.S. Const. art. III, § 2; see also Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 471 (1982) (the existence of a “case” or “controversy” is a “bedrock requirement” of federal court jurisdiction); Simon v. Eastern Ky. Welfare Rights Org., 426 U.S. 26, 37 (1976) (“No principle is more fundamental to the judiciary's proper role in our system of government than the constitutional limitation of federal court jurisdiction to actual cases or controversies.”).

The Supreme Court developed the doctrine of “standing” to ensure that only true “cases or controversies” can proceed in federal court. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). “In essence the question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues.” Warth v. Seldin, 422 U.S. 490, 498 (1975) (standing is “a threshold issue in every federal case, determining the power of the court to entertain the suit.”).

What is the test used to determine who has standing to sue, and who does not? The Supreme Court has explained that the “irreducible constitutional minimum” requirements of standing include proof that the plaintiff has suffered “injury-in-fact” resulting from the unlawful conduct – meaning the plaintiff suffered “an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical.” Lujan, 504 U.S. at 560.

Put simply, if a plaintiff has not suffered “injury in fact” as a result of the alleged FDCPA violation, then he lacks standing to sue you. The “injury in fact” test for standing “requires more than an injury to a cognizable interest. It requires that the party seeking review be himself among the injured.” Lujan, 504 U.S. at 563 (emphasis supplied); see also Raines v. Byrd, 521 U.S. 811, 819 (1997) (“We have consistently stressed that a plaintiff's complaint must establish that he has a personal stake in the alleged dispute, and that the alleged injury suffered is particularized as to him.”) (emphasis supplied); Warth, 422 U.S. at 498 (“The Art. III judicial power exists only to redress or otherwise to protect against injury to the complaining party, even though the court's judgment may benefit others collaterally. A federal court's jurisdiction therefore can be invoked only when the plaintiff himself has suffered some threatened or actual injury resulting from the putatively illegal action . . ..”) (emphasis supplied); Valley Forge, 454 U.S. at 473 (Article III’s standing requirements prevent “the conversion of courts of the United States into judicial versions of college debating forums.”).

If “injury in fact” is so critical to proving standing, then why have so many courts allowed FDCPA plaintiffs to pursue cases when they have suffered no actual harm? Courts have repeatedly held that a plaintiff may recover statutory damages under the FDCPA without alleging or proving any actual damages resulting from the violation. But most courts have reached this conclusion without addressing the decisions of the Supreme Court governing standing.

The first circuit court to do this was the Ninth Circuit in Baker v. G.C. Servs. Corp., 677 F.2d 775, 780-81 (9th Cir. 1982). The plaintiff in Baker challenged the contents of a collection letter, and the district court determined letter violated sections 1692e and 1692g of the FDCPA. See id. at 777. Even though the court held that plaintiff suffered no actual damages resulting from the letter, it awarded him $100 in statutory damages, plus attorneys’ fees. Id. The Ninth Circuit affirmed, noting there is “no indication in the statute that [an] award of statutory damages must be based on proof of actual damages.” Id. at 780. But the Baker court never addressed whether a consumer who had not alleged or proved actual damages stemming from an FDCPA violation had standing.

After Baker, other circuit courts held that plaintiffs may pursue claims for statutory damages under the FDCPA without proving any actual damages. Like Baker, however, most of these courts made their rulings without addressing the Supreme Court’s decisions on Article III standing. See, e.g., Keele v. Wexler, 149 F.3d 589, 593-94 (7th Cir. 1998); Miller v. Wolpoff & Abramson, L.L.P., 321 F.3d 292, 307 (2d Cir. 2003); Carroll v. Wolpoff & Abramson, 53 F.3d 626, 629 (4th Cir. 1995); Harper v. Better Business Servs, Inc., 961 F.2d 1561, 1563 (11th Cir. 1992). One court did address the standing issue directly, and ruled that a consumer who suffers no actual damages still has standing based solely upon their claim for statutory damages. See Robey v. Shapiro, Marianos & Cejda, LLC, 434 F.3d 1208, 1212 (10th Cir. 2006).

So where does this leave us? A case now pending in the Supreme Court may help clarify things. In Edwards v. First American Corp., 610 F.3d 514 (9th Cir. 2010), the Ninth Circuit allowed a consumer to pursue a claim for statutory damages under the Real Estate Settlement Procedures Act (RESPA), even though there was no allegation the consumer was overcharged as a result of the violation. Id. at 517-18. The Supreme Court has granted certiorari and it will address whether Article III standing exists in these circumstances. See First American Financial Corp. v. Edwards, _ S. Ct. _, 2011 WL 2437037 (U.S. June 20, 2011).

Edwards may help clarify that plaintiffs who sue under consumer protection statutes like the FDCPA must plead and prove that they have suffered actual damages in order to demonstrate standing to sue. Congress can pass laws that provide consumers with a new cause of action, but Congress does not have the power to erase Article III's minimum standing requirements. See Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 100 (1979) (“In no event, however, may Congress abrogate the Art. III minima: A plaintiff must always have suffered a distinct and palpable injury to himself . . . that is likely to be redressed if the requested relief is granted.”) (internal quotation marks and citations omitted); see also Summers, 129 S.Ct. at 1151 (“Unlike redressability, however, the requirement of injury in fact is a hard floor of Article III jurisdiction that cannot be removed by statute.”) (emphasis added); Valley Forge, 454 U.S. at 488, n.24 (“Neither the Administrative Procedure Act, nor any other congressional enactment, can lower the threshold requirements of standing under Art. III.”); Simon, 426 U.S. at 39 (“broadening the categories of injury that may be alleged in support of standing is a different matter from abandoning the requirement that the party seeking review must himself have suffered an injury.”) (citation omitted).

ACA International has filed an amicus curiae brief in the Edwards case, urging the Court to reverse the Ninth Circuit. A copy of the brief can be downloaded here:

ACA International's Amicus Brief In First American Financial Corp v. Edwards -

A decision in the Edwards case is not expected until 2012, and the Edwards opinion may or may not address the specific FDCPA issues raised here. But FDCPA defendants should still evaluate today whether the plaintiff who has filed suit has standing to do so. If the consumer has not suffered any “injury in fact” as a result of alleged FDCPA violation, they lack standing and the case should be dismissed.

Using Dukes In FDCPA Class Actions: How Wal-Mart Stores, Inc. v. Dukes Can Help FDCPA Defendants Defeat Class Certification

2011-07-23T11:26:00.000-07:00

Any debt collector faced with an FDCPA class action should read the Supreme Court’s recent decision in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011) with care, because it provides a framework for potential challenges to class certification in FDCPA cases. Dukes was not an FDCPA case, of course – it was a class action alleging that Wal-Mart had violated Title VII by employing a discretionary pay and promotion system that discriminated against women. But Dukes provides a powerful reminder that class actions should only be certified in those rare cases where, after a rigorous analysis of the record, the court is satisfied that the plaintiff has met each of the detailed requirements for certification. Dukes will also help FDCPA defendants oppose class certification based upon the lack of “commonality” of the claims of the class members.

To figure out how Dukes might impact your particular case, start with some class action basics. Dukes reiterated that a class action is an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only and that in order to “justify a departure from that rule, a class representative must be part of the class and possess the same interest and suffer the same injury as the class members.” See Dukes, 131 S.Ct at 2550 (citations, quotation marks omitted). In federal courts, the certification process is governed by Rule 23 of the Federal Rules of Civil Procedure, which places important limits on class actions. Rule 23 is designed to “ensure that the named plaintiffs are appropriate representatives of the class whose claims they wish to litigate” and its requirements “effectively limit the class claims to those fairly encompassed by the named plaintiff’s claims.” Id. (citations, quotation marks omitted).

Under Rule 23(a) of the Federal Rules of Civil Procedure, the party seeking certification must demonstrate that: (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. See Dukes, 131 S.Ct. at 2548. If the requirements of Rule 23(a) can be satisfied, the plaintiff must also demonstrate that the proposed class satisfies at least one of the three requirements listed in Rule 23(b). Id.

Plaintiffs often argue that a court should never consider the merits of the claim when deciding whether to certify a class, but Dukes reminds us that this is not true. Dukes confirms that "sometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question, and that class certification is proper only if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied, . . . . Frequently that rigorous analysis will entail some overlap with the merits of the plaintiff's underlying claim. That cannot be helped. The class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff's cause of action.” Id. at 2551-52 (citations, quotation marks omitted).

The plaintiffs in Dukes could not meet the requirements of Rule 23(a). Specifically, the Supreme Court reiterated that proving “commonality” – i.e., establishing the requisite “questions of law or fact common to the class” under Rule 23(a) – requires a plaintiff to submit evidence that “the class members have suffered the same injury.” Id. at 2551 (citation omitted, emphasis added). “This does not mean merely that they have all suffered a violation of the same provision of law.” Id. Instead, proof of “commonality” requires evidence “that all of their claims can productively be litigated at once.” Id. (emphasis added). In other words, the claims of the class “must depend upon a common contention” and that common contention “must be of such a nature that it is capable of classwide resolution - which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” Id.

The Dukes Court explained that while identification of questions that are common to the class may be easy, the key inquiry when deciding to certify a class is whether proceeding on a classwide basis will generate common answers:

"What matters to class certification . . . is not the raising of common questions' - even in droves - but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities within the proposed class are what have the potential to impede the generation of common answers."

Id. (italics in original, emphasis added, citation omitted). The Dukes Court held that litigation of the claims of the class members would not generate common answers, because the reasons for Wal-Mart’s employment decision would vary for each class member:

"Here respondents wish to sue about literally millions of employment decisions at once. Without some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members' claims for relief will produce a common answer to the crucial question why was I disfavored."

Id. at 2552 (italics in original).

With Dukes as the backdrop, ask yourself whether the named plaintiff in your FDCPA class action can show “commonality” under Rule 23. Have the members of the class suffered the same injury? Often the answer is “no” because the class members may have incurred different alleged injuries based upon varying factors that may or may not be related to the alleged FDCPA violation. Can all of the class members claims be productively litigated at once in the same case? Do all of their claims depend on one common contention, the resolution of which will be central to the validity of all of their claims? Will litigating the case on a classwide basis make sense because it is apt to generate common answers to the same questions? Once again, the answer to these questions is often “no” because the resolution of each of class members’ claims will turn upon a disparate set of facts and circumstances, or because the defendant may have a different defense to the purported class members’ claims.

Like the plaintiffs in Dukes, many FDCPA plaintiffs will not be able to demonstrate “commonality” because resolution of claims of the proposed class members will turn upon thousands of individualized fact patterns. If the claims of the class members cannot be productively litigated at the same time, then under Dukes, class certification should be denied.

Lesher And “Legal Capacity” - The Third Circuit Grafts A New Concept Into The FDCPA With Lesher v. Mitchell N. Kay

2011-07-03T09:59:00.000-07:00

If collection attorneys were looking for guidance on how to draft their collection letters without violating the FDCPA, the decision of the Third Circuit Court of Appeals in Lesher v. The Law Offices Of Mitchell N. Kay, _ F.3d _, 2011 WL 2450964 (3d Cir. 2011) definitely will not help them. In Lesher, the Court held that settlement letters sent on a law firm’s letterhead “raise[d] the specter of potential legal action” and were therefore false and misleading under section 1692e of the FDCPA, because the firm was not acting in a “legal capacity” when the letters were sent. See id. at *9. The term “legal capacity” is not defined by the FDCPA, however, and the Court did not explain exactly when an attorney is, or is not, acting in a “legal capacity” for his client.

The Lesher decision also held that the use of the disclaimer approved by the Second Circuit in Greco v. Trauner, Cohen & Thomas, 412 F.3d 360 (2d Cir. 2005), i.e., “[a]t this point in time, no attorney with this firm has personally reviewed the particular circumstances of your account” on the back of the letters was not sufficient to inform the debtor that the firm was “acting solely as a debt collector and not in any legal capacity in sending the letters.” See Lesher, at *8.

In Lesher, the defendant sent two letters stating that the firm was “handl[ing]” the account and had been authorized to make a settlement proposal. Id. at *1. Neither letter was signed by an attorney, and neither contained any references to legal action if the settlement offer was not accepted. Id. Both letters stated, on the reverse side, that “no attorney with this firm has personally reviewed the particular circumstances of your account.” Id. There was nothing in the letters suggesting that the firm would initiate a lawsuit or otherwise escalate the matter if the debtor did not accept the settlement offer.

Despite this, the Third Circuit held that “the least sophisticated debtor, upon receiving these letters, may reasonably believe that an attorney has reviewed his file and has determined that he is a candidate for legal action.” Id. at *8. The Court held the letters falsely implied “that an attorney, acting as an attorney, is involved in collecting Lesher's debt.” Id. (emphasis added). The Lesher Court concluded: “[W]e believe that it was misleading and deceptive for the Kay Law Firm to raise the specter of potential legal action by using its law firm title to collect a debt when the firm was not acting in its legal capacity when it sent the letters.” Id. at *9 (emphasis added).

Thus, under Lesher, a collection attorney who is not “acting as an attorney” nor acting in a “legal capacity” must take extra care when sending a settlement letter to a consumer. But when, exactly, is a collection lawyer “acting as an attorney” or acting in a “legal capacity” for his client, consistent with Lesher? Can an attorney act in a “legal capacity” for his client before any decision has been made about whether to file a lawsuit? Is a lawyer “acting as an attorney” even when he is offering to settle a debt without initiating litigation? The Lesher Court does not explain the terms or provide any guidance, and there is nothing in the language of the FDCPA that defines either term.

The FDCPA prohibits collection attorneys from making materially false or misleading statements in their communications with consumers. The Act does not regulate the practice of law, however, nor does it govern the workflow and interaction between an attorney and his creditor client. But the Lesher Court did exactly that, holding that the defendant was not acting in a “legal capacity” for its client at the moment in time when the letters were sent.

The FDCPA should not be used as a vehicle for federal courts to regulate the practice of law. There is nothing in the language in the FDCPA which suggests that Congress wanted courts to use it to define or otherwise intrude upon the attorney-client relationship. See, e.g., American Bar Ass’n v. Federal Trade Comm’n, 430 F.3d 457, 467 (D.C. Cir. 2005) (rejecting argument that Congress intended the FTC to regulate attorneys using the privacy provisions of the Gramm-Leach Bliley Act: “[Congress] does not . . . hide elephants in mouseholes. (citation)”).

The Lesher decision is wrong. It unfairly penalizes an attorney for sending two truthful, non-threatening settlement letters to a consumer. It improperly interferes with the practice of law. It creates further confusion for an industry that is sorely in need of clarity. Lesher does not explain when an attorney is “acting as an attorney” and when he is not. Nor should any federal court utilize the FDCPA to do so.

Zero Damages: A Pyrrhic Victory For Plaintiffs In Jerman v. Carlisle

2011-04-24T10:14:00.000-07:00

You would think that if an FDCPA plaintiff takes her case all the way to the United States Supreme Court and wins, she would recover the maximum amount of damages that the statute allows, right? Wrong.

After winning just the second FDCPA case to ever reach the highest court, Jerman v. Carlisle, et al, 130 S. Ct. 1605 (2010), plaintiff Karen Jerman was remanded to the district court, where she was promptly awarded zero damages for herself, and zero damages for the class of consumers she had been representing for five years. See Jerman v. Carlisle, et al., 2011 WL 1434679 (N.D. Ohio April 14, 2011). For those of you who are keeping score at home, in the only other FDCPA case to make it to the United States Supreme Court, the plaintiff also won, but later came up empty-handed when the case was remanded. See Jenkins v. Heintz, 124 F. 3d 824 (7th Cir. 1997) (on remand, defendant attorneys prevailed on the “bona fide error” defense).

So what exactly is going on here? Is there a Supreme Court curse for FDCPA plaintiffs that we ought to know about? Not really. A closer look at the district court’s decision on remand in Jerman shows that it is consistent with recent FDCPA rulings that reject claims based on highly-technical readings of the statute where nobody is harmed. The district court in Jerman carefully examined the record, applied the five-factor test established by Congress for evaluating statutory damages, and properly determined that Ms. Jerman and her class were entitled to recover nothing.

In Jerman, the defendants, a law firm and one of its attorneys, had filed a complaint in state court on behalf of Countrywide Home Loans, Inc., seeking to foreclose on Jerman’s property. See Jerman, 2011 WL 1434679, at *1. The defendants attached a “Notice” to the complaint, stating, inter alia, that the mortgage debt would be assumed valid unless Jerman disputed the debt “in writing.” Id. Ms. Jerman’s lawyer sent a letter disputing the debt, and when the defendants sought verification from Countrywide, it acknowledged that Jerman had in fact paid the debt in full, so the foreclosure suit was withdrawn. Id. In other words, the section 1692g notice and dispute process worked exactly as Congress designed it.

Apparently unsatisfied with this result, however, Jerman then filed an FDCPA class action against the law firm and its attorney, alleging that the Notice violated the Act by stating the debt would be assumed valid unless she submitted a dispute “in writing.” Id. The district court held that the Notice violated section 1692g(a)(3) of the FDCPA, but also ruled in favor of defendants on the “bona fide error” defense, because the wording used in the Notice resulted from their error of law. Id. The Sixth Circuit affirmed that ruling, but on this narrow legal point, the Supreme Court reversed. It held that the “bona fide error” defense does not apply to a violation of the Act which results from a defendant’s incorrect interpretation of the legal requirements of the FDCPA. Id. at *2.

So if the Supreme Court held in favor of Ms. Jerman, how exactly did she and the class end up with an award of zero damages? On remand, the parties filed cross-motions for summary judgment on the issue of damages. Id. Jerman claimed she was entitled to the maximum amount of statutory damages, $1,000.00, and that the class should also recover the maximum amount, which was one percent of the defendants’ net worth, or $13,052.35. Id. After considering each of the five factors set forth by Congress in section 1692k(b)(2) of the FDCPA, however, the district court held that Jerman and the class should take nothing. Here are the factors the court considered:

1. The frequency and persistence of noncompliance by the debt collector. The district court held that Defendants’ noncompliance was neither frequent nor persistent, because Defendants had only sent one Notice to Jerman and each class member. Id. at *5. It rejected Jerman’s argument that the conduct was frequent and persistent because the Notice had been sent to 4,211 class members within the year preceding the suit, and had been used by the firm for several years before that. The court noted that “there is no evidence that anyone was badgered or harassed” by Defendants, and observed that Defendants could not have known the Notice violated the FDCPA until the court ruled against them. Id. at *4. The court also held that the “frequency and persistence” of the Defendants’ conduct cannot be measured just by adding up the number of consumers who received the Notice, or this would make the term “number of persons adversely affected” – another factor that must be weighed in the damage analysis – superfluous. Id. at *4-5.

2. The Nature Of The Noncompliance. Although the nature of the Defendants’ noncompliance was not necessarily “trivial” the court found there was no evidence that anyone was harmed by the letters, so this factor did not weigh in favor of either party when assessing statutory damages. Id. at *6-7.

3. The Resources Of The Debt Collector. The court found that consideration of the defendants’ resources weighed in favor of the plaintiff. The net worth of Defendants was $1,305,225.17, and thus the maximum amount of statutory damages that could be awarded was $1,000 for Jerman and $13,052.25 for the class. Id. at *7. Defendants argued that even a nominal award of statutory damages would unjustly punish them, given their good faith and the lack of any harm. Id. The court noted, however, that even the maximum award “would not have a severe impact on the Law Firm’s ability to operate” and that statutory damages can be awarded even in the absence of actual damages. Id.

4. The Number Of Persons Adversely Affected. The court held that Jerman had failed to show any person had been “adversely” effected by the Notice, so this factor weighed in favor of Defendants. Id. at *8. There was no evidence that Jerman or any member of the class had suffered any actual damage, nor was there evidence to support Jerman’s argument that consumers may have been intimidated into waiving their dispute rights. Id.

5. The Extent To Which The Debt Collector’s Noncompliance Was Intentional. The court held that Defendants had relied in good faith upon their interpretation of the requirements of the FDCPA, and there was no evidence that Defendants’ noncompliance was intentional. Id. at *8-9. The court had already ruled that Defendants acted in good faith, and that ruling had not been disturbed by the Supreme Court on appeal. Id. at *10.

In reaching its conclusion that zero damages was appropriate, the court observed that the FDCPA sets “no minimum damages” and that statutory damages are therefore “not automatic.” Id. at *11. It agreed with Defendants’ argument that “where there are no actual damages and no evidence of an intent to engage in abusive and deceptive debt collection practices, additional damages are not warranted.” Id.

At the time of this writing, the district court has not yet addressed whether Jerman is entitled to recover her attorney’s fees. It would appear that she is facing an uphill battle. Attorneys fees may only be awarded in any “successful” action, pursuant to section 1692k(a)(3). Given that Jerman failed to prove that any consumer was harmed and recovered zero damages for herself and the class, she may have difficulty showing that her lawsuit was a success.

Why Courts Have Read Section 1692d Of The FDCPA Narrowly To Prohibit Only Outrageous Language

2011-04-04T10:42:00.000-07:00

Debt collectors are being sued in courts across the country for allegedly violating the FDCPA by making harassing and abusive phone calls to consumers. No clear rules exist on what constitutes harassing or abusive language, however, and the language of the FDCPA does not shed much light on this subject.

Section 1692d provides that collectors may not engage in “any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt.” See 15 U.S.C. § 1692d. In addition, section 1692d(2) of the Act prohibits debt collectors from using “obscene or profane language or language the natural consequence of which is to abuse the hearer or reader.” Id. at § 1692d(2). But what exactly does this mean? When has a collector stepped over the line from making an appropriate demand for payment into harassing or abusive conduct?

Surprisingly few circuit courts have interpreted section 1692d of the FDCPA, but the courts that have done so have construed it very narrowly. The leading case is Jeter v. Credit Bureau, Inc., 760 F.2d 1168 (7th Cir. 1985), where the Seventh Circuit held that a letter stating that an account would be referred for legal action, and that this “may cause you embarrassment, inconvenience and further expense,” did not violate section 1692d. Id. at 1178-79. The description of the potential impact of a lawsuit was a “true statement” and did not create a “tone of intimidation.” Id. at 1179. The statement did not violate section 1692d(2), because that subsection was “meant to deter offensive language which is at least akin to profanity or obscenity. Such offensive language might encompass name-calling, racial or ethnic slurs, and other derogatory remarks which are similar in their offensiveness to obscene or profane remarks.” Id. at 1178. It was no surprise, therefore, in Horkey v. J.V.D.B. & Associates, Inc., 333 F. 3d 769 (7th Cir. 2003), when the Seventh Circuit affirmed a trial court ruling that section 1692d(2) was violated. There, after the debtor explained she could not discuss the debt a work, the collector called back and left a message with a coworker stating “tell Amanda to stop being such a [expletive] bitch.” Id. at 773.

More recently, the Sixth Circuit held in Harvey v. Great Seneca Fin. Corp., 453 F.3d 324 (6th Cir. 2006), that “the filing of a debt-collection lawsuit without the immediate means of proving the debt does not have the natural consequence of harassing, abusing, or oppressing a debtor” and thus does not violate section 1692d. Id. at 330. As the Harvey Court observed: “Any attempt to collect a defaulted debt will be unwanted by a debtor, but employing the court system in the way alleged by Harvey cannot be said to be an abusive tactic under the FDCPA.” Id. at. 330-31.

District courts have also read section 1692d narrowly, recognizing that it prohibits “only oppressive and outrageous conduct,” and that it was “not intended to shield even the least sophisticated recipients of debt collection activities from the inconvenience and embarrassment that are natural consequences of debt collection.” Beattie v. D.M. Collections, Inc., 754 F. Supp. 383, 394 (D. Del. 1991) (attempts to collect debt from wrong individuals did not violate section 1692d); see also Bieber v. Associated Collection Servs., Inc., 631 F. Supp. 1410, 1471 (D. Kan. 1986) (asking if debtor had hired a bankruptcy attorney did not violate section 1692d: “[Section 1692d] prohibits a debtor's tender sensibilities only from oppressive and outrageous conduct. Some inconvenience to the debtor is a natural consequence of debt collection.”); Shuler v. Ingram & Assocs., 710 F. Supp. 2d 1213, 1222 (N.D. Ala. 2010) ( references to potential garnishment and liens were “probably unpleasant” but were not sufficient to support a claim: “Courts have construed narrowly the type of conduct that violates § 1692d( 2).”)).

Given that section 1692d only prohibits outrageous language and conduct, courts have held that laughing at a debtor during a collection call is not sufficient to support a section 1692d claim. See, e.g., Bassett v. I.C. Sys., Inc., 715 F. Supp. 2d 803, 809 (N.D. Ill. 2010) (laughing may be “rude” but does not amount to a section 1692d violation); Gallagher v. Gurstel, Staloch & Chargo, P.A., 645 F. Supp. 2d 795, 799 (D. Minn. 2009) (laughing is not even “remotely comparable” to type of conduct that violates section 1692d).

In addition, courts have held that calling a debtor a “liar” does not violate section 1692d. See, e.g., Bassett, 715 F. Supp. 2d at 809 (calling debtor “liar” and accusing him of making excuses to avoid payment did not violate section 1692d(2)); Guarjardo v. GC Servs., LP, 2009 WL 3715603 (S.D. Tex. Nov. 3, 2009) (calling debtor “liar,” demanding “payment in full within 24 hours or else,” and saying “I can tell the kind of life you live by the fact that you don’t pay your bills on time” not enough to prove section 1692d claim); Mammen v. Bronson & Migliacco, LLP, 715 F. Supp. 2d 1210, 1218 (M.D. Fla. 2009) (telling debtor “You’re lying, this is your account and you have to pay it” and hanging up not sufficient to prove a section 1692d claim); Montgomery v. Florida First Financial Group, Inc., 2008 WL 3540374 (M.D. Fla. Aug. 12, 2008) (calling debtor a “liar” and her mother a liar not enough to prove section 1692d claim).

Some courts have held that yelling at a debtor is not a violation of section 1692d. See, e.g., Kelemen v. Professional Collection Sys., 2011 WL 31396 (M.D. Fla. Jan. 4, 2011) (telling debtor to “pay your damn bills” was rude but not obscene or profane under section 1692d(2); noting that profane means “importing an imprecation of divine vengeance or implying divine condemnation or irreverence toward God or holy things.”); Unterreiner v. Stoneleigh Recovery Assocs., LLC, 2010 WL 2523257, *1 (N.D. Ill. June 17, 2010) (screaming at debtor, saying you owe “all kinds of money” and asking “how could you go and max out a card like that?” was “rude and unpleasant” but did not state a section 1692d claim); Thomas v. LDG Fin. Servs. LLC, 463 F. Supp. 2d 1370, 1373 (N.D. Ga. 2006) (yelling at debtor “Georgia is a garnishable state” and hanging up did not violate section 1692d).

Debt collectors should always treat consumers with dignity and respect during the collection process. As courts throughout the country have recognized, however, section 1692d of the FDCPA is narrow in scope, and only prohibits the use of truly outrageous language – such as profanity, racial or ethnic slurs or other derogatory remarks – which has the natural tendency to harass, oppress or abuse the listener.

Caveat Creditor: Why Creditors Must Be Wary Of California’s Rosenthal Act And The FDCPA

2011-02-20T11:18:00.000-08:00

Should creditors care about the FDCPA? For the most part, original creditors – including banks, credit card issuers, finance companies, telecommunications companies, payday lenders, and other entities that extend credit directly to consumers – do not operate as “debt collectors” as defined by the FDCPA. For this reason, when creditors are trying to collect money from their own customers, they may not pay much attention to the requirements of the FDCPA, or the myriad of cases that have interpreted the statute. But ignoring the FDCPA is not a good idea for creditors who want to collect money from customers located in California.

Any creditor who attempts to collect a consumer debt from a California consumer likely qualifies as a “debt collector” under California’s debt collection statute – the Rosenthal Act. See Cal. Civ. Code § 1788.2(c) (“debt collector” includes anyone “who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection.”). The Rosenthal Act not only includes its own set of requirements regulating debt collection, but also incorporates by reference most of the requirements of the FDCPA. See Cal. Civ. Code §1788.17. Thus, a creditor who fails to comply with the FDCPA while collecting from a California resident may be violating California law.

There are two significant exceptions to section 1788.17 of the Rosenthal Act: creditors do not need to provide consumers with the “mini-Miranda” notice required by section 1692e(11) of the FDCPA, nor must creditors send consumers the validation notice mandated by section 1692g of the FDCPA. See Cal. Civ. Code § 1788.17. But the remaining substantive provisions of the FDCPA, as well as the remedies provided by section 1692k(a)(3) of the Act, apply to creditors who collect in California. Id.

The FDCPA can be an awkward fit when it is applied to creditors collecting from their own customers. Despite this, courts will often rely on the reasoning employed by FDCPA decisions when evaluating Rosenthal Act claims filed against creditors. See, e.g., Reyes v. Wells Fargo Bank, N.A., 2011 WL 30759 (N.D. Cal. Jan. 3, 2011) (using “least sophisticated debtor” standard to evaluate Rosenthal Act claims against creditor); Thompson v. Chase Bank, N.A., 2010 WL 1329061, at *3 (S.D. Cal. March 30, 2010) (refusing to dismiss Rosenthal Act claims alleging that collection calls made on Easter Sunday, Memorial Day and Mothers’ Day were at “inconvenient” or “unusual” times).

Creditors, like traditional debt collectors, must be aware of the volume and pattern of their collection phone calls. Creditors obviously have a legitimate need to contact their delinquent customers by phone to make payment arrangements. But the Rosenthal Act, like the FDCPA, prohibits creditors from placing telephone calls repeatedly or continuously with the intent to annoy the person called. See Cal. Civ. Code §§ 1788.11(d), 1788.11(e). Is there a limit on how many call attempts a creditor can make?

To date, there are no clear answers, because the reported decisions have involved calls placed by traditional debt collectors, not by creditors. But we can expect that the courts will be guided by the reasoning used in FDCPA cases, considering not only the volume of the calls, but also the calling pattern and the individual facts of the case. See e.g., Arteaga v. Asset Acceptance, 733 F. Supp. 2d 1218, 1229 (E.D. Cal. 2010) (summary judgment for debt collector; evidence of “daily” calls not sufficient to support claim for intent to harass under FDCPA or section 1788.11 of the Rosenthal Act); Rucker v. Nationwide Credit, Inc., 2011 WL 25300 (E.D. Cal. Jan. 5, 2011) (refusing to dismiss claims under FDCPA or sections 1788.11(d), (e) of Rosenthal Act where collector allegedly placed 80 calls to consumer in one year).

Will courts utilize the Foti line of cases when evaluating the content of voice mail messages left by creditors? The reasoning of the Foti decisions likely will not make sense when applied to a creditor’s voice mails messages, and to date, there are no published decisions on the issue. But creditors should consider that California courts have held that a debt collector’s failure to properly identify itself in a voice mail message can violate both the FDCPA and the Rosenthal Act. See, e.g., Hosseinzadeh v. M.R.S. Associates, Inc., 387 F. Supp. 2d 1104,1117-18 (N.D. Cal. 2005) (collector’s failure to properly identify itself in voice mail messages violated FDCPA and Rosenthal Act); Joseph v. J.J. Mac Intyre, L.L.C., 238 F. Supp. 2d. 1158, 1168 (N.D. Cal. 2002) (same, denying motion to dismiss).

Most creditors have procedures in place for dealing with consumers who are represented by attorneys. When a consumer notifies the creditor in writing that she has retained an attorney, the Rosenthal Act prohibits the creditor from initiating communications directly with the consumer – “other than statements of account” – in an attempt to collect the debt. See Cal. Civ. Code § 1788.14(c). But what if the creditor mails a monthly statement directly to a represented consumer, and the statement includes language noting that the account is delinquent? Unfortunately, the Rosenthal Act does not define the term “statements of account” and the courts in California are split on this issue. See, e.g., Marcotte v. GE Capital Services, 709 F. Supp. 2d 994 (S.D. Cal. 2010) (granting judgment on the pleadings; monthly billing statements sent directly to represented consumer did not violate section 1788.17 of Rosenthal Act); Moya v. Chase Cardmember Service, 661 F. Supp. 2d 1129 (N.D. Cal. 2009) (denying motion to dismiss claim that monthly statements sent to represented consumer violated section 1788.14 of Rosenthal Act).

Should creditors be concerned about facing Rosenthal Act class actions? Section 1788.30 of the Rosenthal Act does not allow for class actions, and in fact, it specifically limits consumers to pursuing claims “only in an individual action.” See Cal. Civ. Code §§ 1788.30(a), 1788.30(b). Under section 1788.17 of the Rosenthal Act, however, creditors are “subject to the remedies” of section 1692k of the FDCPA. A number of courts have held that consumers may pursue class actions under the Rosenthal Act. See, e.g. Abels v. JBC Legal Group, P.C., 227 F.R.D. 541 (N.D. Cal. 2005) (granting motion to certify Rosenthal Act class action); Gonzalez v. Arrow Financial Services LLC, 489 F. Supp. 2d 1140 (S.D. Cal. 2007) (denying motion to decertify Rosenthal Act class action).

The Rosenthal Act allows consumers to recover any actual damages they sustain by reason of the violation. See Cal. Civ. Code § 1788.30(a). Unlike the FDCPA, however, the Rosenthal Act is not a strict liability statute. Statutory penalties ranging from $100 to $1000 may be recovered, but only where the consumer demonstrates the defendant “willfully and knowingly” violated the Rosenthal Act. See Cal. Civ Code § 1788.30(b).

If a willful and knowing violation is shown, are the statutory damages limited to $1000 per action, as in FDCPA cases, or may the consumer recover $1000 per violation? The better-reasoned decisions hold that the consumer is limited to $1000 per action. See, e.g., Scott v. Federal Bond and Collection Service, Inc., 2011 WL 176846, at *3 (N.D. Cal. Jan 19, 2011) (Rosenthal Act statutory damages limited to $1000 per action); Marseglia v. JP Morgan Chase Bank, 2010 WL 4595549 (S.D. Cal. Nov. 12, 2010) (same). One California court, however, refused to grant a creditor’s motion to strike portions of a Rosenthal Act complaint that sought $1000 per violation. See Hamberg v. JP Morgan Chase Bank, 2010 WL 2523947 (S.D. Cal. June 22, 2010).

What about defenses? Like the FDCPA, the Rosenthal Act includes a “bona fide error” defense, which allows a creditor to prove that any violation was not intentional, and occurred notwithstanding maintenance of procedures reasonably adapted to avoid the violation. See Cal. Civ. Code § 1788.30(e). The Rosenthal Act also has a “right to cure” defense, which permits a creditor, within 15 days of discovering any violation which is “able to be cured” or after written notice of any such violation, to notify the debtor of the violation and to make any adjustments or corrections necessary to cure the violation. See Cal. Civil Code § 1788.30(d).

The Rosenthal Act has been around for decades, and the statute has always applied to creditors. During the past few years, however, the Rosenthal Act has become a favorite of consumer attorneys, and the trend appears likely to continue. Creditors with customers in California must be aware that, in light of section 1788.17 of the Rosenthal Act, any attempts to collect in California must comply with the Rosenthal Act and the FDCPA.

Getting FDCPA Complaints Dismissed Using Twombly and Iqbal

2010-12-04T17:37:00.000-08:00

FDCPA lawsuits are being filed by the thousands in federal courts across the country, and a lot of the complaints look strangely similar. These complaints are long on legal conclusions, but short on facts describing what allegedly happened to the consumer and when. Many complaints do little more than identify the parties and assert that various sections of the Act have been violated. Is this enough state a valid FDCPA claim? Not anymore.

For years, the conventional wisdom was that filing motions to dismiss in federal court was usually a waste of time and money, because the notice pleading standards were so liberal. More recently, however, collectors have successfully obtained dismissals of formulaic FDCPA claims, relying on the Supreme Court’s decisions in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (“Twombly”) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) (“Iqbal”). Armed with the more exacting analytical framework established Twombly and Iqbal, district courts across the country have been taking a closer look at the FDCPA complaints that are flooding their courthouses. The courts appear to be granting motions to dismiss with increasing regularity.

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a complaint may be dismissed if it fails “to state a claim upon which relief can be granted.” Fed. R. Civ. Proc. 12(b)(6). The Federal Rules of Civil Procedure provide little guidance on what a plaintiff must do to “state a claim” for relief, other than Rule 8, which says that a complaint must set forth a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. Proc. 8(a)(2). For years, federal courts emphasized that this was an extremely “liberal” pleading standard, and until recently, the leading Supreme Court case on the subject, Conley v. Gibson, 355 U.S. 41, 45-46 (1957), was repeatedly cited for proposition that no motion to dismiss should be granted “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Id.

All of this changed recently, however, beginning with the Supreme Court’s decision in Twombly, which expressly rejected the “no set of facts” language used in Conley. See Twombly, 550 U.S. at 562-63. The Court clarified that although “detailed factual allegations” are not required at the pleading stage, “labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” 550 U.S. at 555. The complaint must contain factual allegations, and they “must be enough to raise a right to relief above the speculative level.” Id. There must be sufficient facts plead to state a claim to relief that is “plausible on its face.” Id. at 570.

The Court refined its analysis even further in Iqbal, where it reiterated that Rule 8 of the Federal Rules of Civil Procedure requires “more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” See Iqbal, 129 S. Ct. at 1949. Only a complaint that states “a plausible claim for relief” can survive a motion to dismiss. Id. “A claim has facial plausability when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. . . . The plausability standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. A complaint that contains facts which are “merely consistent with” defendant’s liability is not sufficient, because it “stops short of the line between possibility and the plausibility of entitlement to relief. Id. (citations and quotation marks omitted).

The court should not assume the truth of legal conclusions in the complaint. See Iqbal at 1949. Thus, the first step when evaluating a motion to dismiss is to identify the legal conclusions, because they “are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Id. at 1950. Next, with respect to any “well-pleaded factual allegations” in the complaint “a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Id. The determination of whether a plausible claim for relief has been stated is “a context-specific task” that requires a court to “draw on its judicial experience and common sense.” Id. The Ninth Circuit recently observed: “In sum, for a complaint to survive a motion to dismiss, the non-conclusory factual content, and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) (internal quotation marks omitted).

District courts located across the country have used Twombly and Iqbal to dismiss FDCPA claims that merely contain formulatic allegations commonly used by consumer attorneys. See, e.g., Jackson v. ASA Holdings, LLC, _ F.Supp.2d _, 2010 WL 4449367, *6 (D.D.C. Nov. 8, 2010) (dismissing section 1692d claim where complaint “does little more than parrot the language of the statute in conclusory fashion”); Brown v. Hosto & Buchan, PLLC, _ F.Supp.2d _, 2010 WL 4352932, *5 (W.D. Tenn. Nov. 2, 2010) (dismissing section 1692c(a)(2) claim that merely recited “the statutory language almost word for word.”); Franke v. Global Credit and Collection Corp., 2010 WL 4449373 (D. Conn. Nov. 1, 2010) (dismissing complaint that was “bare of any specific facts that would support a claim” under sections 1692d, 1692e, 1692f or 1692g); Sierra v. Rubin & Debski, P.A., 2010 WL 4384216, *2-3 (S.D. Fla. Oct. 28, 2010) (allegations that collector filed suit with proper documentation to support the debt did not state a claim under section 1692d or 1692f); Lopez v. Rash Curtis & Assoc., 2010 WL 3505079, *2-3 (E.D. Cal. Sept. 3, 2010) (allegations that defendant was a “debt collector” who falsely threatened to sue, garnish the plaintiff’s wages and add $10,000 in legal fees to the debt did not state a claim under section 1692e or 1692f of the FDCPA); Clemente v. IC Systems, Inc., 2010 WL 3855522, *1-2 (E.D. Cal. Sept. 29, 2010) (allegations that Plaintiff does not owe the money, yet Defendant “constantly and continuously places collection calls seeking and demanding payment” and “hangs up before Plaintiff or Plaintiff’s voicemail answers” failed to state a claim under section 1692d(5) of the FDCPA: “defendants cannot be expected to craft a responsive pleading when plaintiff fails to allege the date or contents of even one call that defendant allegedly made. ) (citation and quotation marks omitted); Velazquez v. Arrow Financial Services LLC, 2009 WL 2780372, *1-3 (S.D. Cal. Aug. 31, 2009) (allegations that defendant filed suit on a debt that was not owed, without reasonable investigation into debt, and knowing it would be unable to prove its case, did not state claim under section 1692e(2), e(5) or e(10) of FDCPA); Dokumaci v. MAF Collection Services, 2010 WL 1507014, *1 (M.D. Fla. April 14, 2010) (dismissing complaint that failed to plead sufficient facts suggesting plaintiff was a “debtor” and that defendant was a “debt collector”); see also Zigdon v. LVNV Funding, LLC, 2010 WL 1838637, *12 (N.D. Ohio April 23, 2010) (under Iqbal, FDCPA class action complaint contained insufficient factual allegations to support equitable tolling or fraudulent concealment).

The Eastern District of California has repeatedly refused to enter default judgments in favor a well-known consumer law firm, because under Twombly and Iqbal, that firm’s FDCPA complaints have not met the minimum pleading requirements. See Johnson v. National Recovery Group, LLC, 2010 WL 1992636, *2 (E.D. Cal. May 14, 2010) (“the Court finds that the merits and sufficiency of the Complaint are severely lacking. This is a recurring issue with Plaintiff's counsel. Indeed, the Court recently and repeatedly cautioned Plaintiff's counsel about insufficient, conclusory allegations in similar FDCPA actions. . . . It is apparent that the Court's previous admonitions have gone unheeded, because the Complaint and claims in this action suffer from even greater deficiencies.”). The court in Johnson held, for example, that an allegation that “Defendant constantly and continuously placed collection calls to Plaintiff seeking and demanding payment for an alleged debt” was insufficient to state a claim under section 1692d(5) of the FDCPA, because “the factual allegations fail to identify (1) the ‘called number,’ (2) the number of calls made to demonstrate repeated, constant and/or continuous calls, (3) when the calls were made and over what period of time, (4) the content of the conversations, if any, (5) the alleged debt, and (6) the link between the caller and the Defendant debt collector.” Id. at *3.

The Supreme Court’s decisions in Twombly and Iqbal provide district court judges with a powerful screening device to help weed out FDCPA claims that lack facial plausibility. Collectors should consider filing motions to dismiss when they are served with FDCPA complaints that do little more than track the language of the Act and claim that the collector violated it.

Why The "Meaningful Involvement" Doctrine Should Not Exist Under The FDCPA

2010-10-30T22:45:00.000-07:00

Section 1692e(3) of the FDCPA contains a simple rule: collectors may not make the “false representation or implication that any individual is an attorney or that any communication is from an attorney.” 15 U.S.C. § 1692e(3). But some circuit courts have expanded this narrow prohibition far beyond the plain language of the statute. They have read section 1692e(3) to include a broader mandate that requires collection attorneys to be “meaningfully involved” in the review of a consumer’s file before a collection letter is sent. See, e.g., Clomon v. Jackson, 988 F.2d 1314, 1320-21 (2d Cir. 1993); Avila v. Rubin, 84 F.3d 222, 228-29 (7th Cir. 1996).

Using this expansive interpretation of section 1692e(3) of the FDCPA, consumer attorneys, federal judges and juries have been allowed to invade the attorney-client privilege and second-guess the amount of review performed by collection attorneys on behalf of their clients. In other words, these cases have gone wildly wrong.

Collection attorneys and their clients should not be content to live with the “meaningful involvement” doctrine. Instead, they should continue to remind courts of the important reasons why the “meaningful involvement” doctrine has to be rejected. The phrase “meaningful involvement” is not contained in the plain language of the FDCPA, and courts should not imply words where Congress decided not to use them. Nor is the “meaningful involvement” doctrine consistent with the purposes of the FDCPA. The Act is an anti-deception statute. Congress can and has properly prohibited attorneys from making false or misleading statements when they communicate with consumers. But the FDCPA does not give federal courts the power to regulate the private interactions between a collection attorney and his client. Nor does the Act define the level of care that an attorney must use when handling a collection matter. A collection lawyer, working in conjunction with his client, has the right to decide the appropriate level of attorney “involvement” – if any – that is warranted by the circumstances.

Nothing in the plain language of section 1692e(3) of the FDCPA - or in any other provision of the FDCPA – refers to “meaningful involvement” by attorneys. See 15 U.S.C. §§ 1692-1692o. Courts should not read new requirements into the FDCPA beyond those specified by the Act’s plain language. See, e.g., Camacho v. Bridgeport Fin., Inc., 430 F.3d 1078, 1081 (9th Cir. 2005) (“‘[W]hen the statute’s language is plain, the sole function of the courts – at least where the disposition required by the text is not absurd – is to enforce it according to its terms.’”); Dutton v. Wolpoff and Abramson, 5 F.3d 649, 654 (3d Cir. 1993) (“It is beyond our power to deviate from the text of the statute unless its literal application would lead either to an absurd or futile result or one plainly at odds with the policy of the whole legislation.”).

Congress never intended to use the FDCPA to regulate the level of attorney “involvement” with a client’s files. The judiciary, not Congress, establishes professional standards for the bar and oversees the conduct of attorneys. See Paul E. Iacono Structural Eng’r, Inc. v. Humphrey, 772 F.2d 435, 439 (9th Cir. 1983) (“[T]he regulation of lawyer conduct is the province of the courts, not Congress.”); see also ABA v. FTC, 430 F.3d 457, 467 (D.C. Cir. 2005) (rejecting argument that Congress wanted the FTC to regulate attorneys under the Gramm-Leach Bliley Act: “[Congress] does not ... hide elephants in mouseholes. (citation)”).

Even the decisions in Clomon and Avila – the leading “meaningful involvement” cases – do not suggest otherwise. Read closely, Clomon and Avila stand for nothing more than the notion that attorneys, like other collectors, may not send letters that contain false statements or threats.

In Clomon, the debtor received collection letters sent on attorney letterhead and which “bore a mechanically reproduced signature” of an attorney. See 988 F.2d at 1316-17. The letters falsely suggested that the attorney had personally reviewed Clomon’s case and that litigation was a real possibility. See id. at 1317. It was undisputed, however, that the attorney never advised his client “about how to address particular circumstances of Clomon’s case” and “never received any instructions from [his client] about what steps to take against Clomon.” Id. It was not surprising that the Clomon found that the letters violated the Act because they explicitly – and falsely – suggested the attorney had conducted an individualized review of the debtor’s file.

Similarly, the debtor in Avila received three letters sent on attorney letterhead “‘signed’ with a mechanically reproduced facsimile” of the attorney’s signature. See 84 F.3d at 225. The first letter stated that if payment was not received within ten days, “‘a civil suit may be initiated against you by your creditor for repayment of your loan.’” Id. The second and third letters demanded payment and threatened a lawsuit if payment was not made. See id. Despite these express threats of suit, the court observed that it was “unclear (but we think doubtful) whether [Rubin & Associates] litigate anywhere.” Id. at 224.

Clomon and Avila turned on their specific facts. They involved collection letters sent on attorney letterhead, “signed” by attorneys, and containing false threats of legal action and other false statements. Neither case provides support for creating a qualitative “meaningful involvement” standard under the FDCPA that applies to collection attorneys and their clients.

The FDCPA was not passed by Congress as a means to regulate the practice of law or to dictate the relationship and workflow between a client and a collection attorney. Clients and collection lawyers have the right to decide what level of attorney review or “involvement” is appropriate for collection matters, and the FDCPA must not be interpreted in a way that would interfere with the attorney-client relationship. The “meaningful involvement” doctrine should be rejected.

Readers who are interested in a more detailed critique of the "meaningful involvement" doctrine can download and read the amicus brief filed in the Third Circuit Court of Appeals by the National Association of Retail Collection Attorneys in the case of Lesher v. Mitchell N. Kay.

NARCA's Amicus Brief In Third Circuit Lesher v. Mitchell N. Kay -

A Summary Of Senator Al Franken's Bill (S. 3888) To Amend The FDCPA

2010-10-04T21:51:00.000-07:00

It is widely anticipated that Congress will amend the FDCPA in the near future, perhaps as soon as next year. Exactly how the Act will be amended, however, is still an open question.

On September 29, 2010, Senator Al Franken (D-MN) introduced a bill to amend the FDCPA, S.3888, which he styled as the "End Debt Collector Abuse Act of 2010." The most widely-publicized portion of the proposed bill is the section that prohibits collectors from seeking a warrant for the arrest of a debtor. But the real teeth in the bill can be found in its proposals to 1) expand the duties of collectors to provide information with the initial validation notice and in response to disputes received from consumers, 2) significantly increase statutory damages, and 3) allow courts to issue injunctive relief for violations of the Act.

A copy of the text of the bill appears in the window below.

S.3888 Al Franken Bill To Amend The FDCPA -

It seems highly unlikely that Congress will take any action on Senator Franken's bill this year, but it may become the starting point in the drive to amend the Act in the coming year. If S. 3888 were adopted into law without any changes, it would amend the FDCPA as follows:

1. Add a new subsection, 1692f(9), providing that "unfair or unconscionable means to collect or attempt to collect any debt" would include: "(9) A request by a debt collector to a court or any law enforcement agency for the issuance of a warrant for the arrest of a debtor or any other similar request that a debt collector knows or should know would lead to the issuance of an arrest warrant, in relation to collection of a debt."

2. Add new required language and new obligations for debt collectors in subsection 1692g(a), by requiring that the initial validation notice include:

"(5) the date of the last payment to the creditor on the subject debt by the consumer and the amount of the debt at the time of default;

(6) the name and address of the last person to extend credit with respect to the debt;

(7) an itemization of the principal, fees and interest that make up the debt and any other charges added after the date of the last payment to the creditor;

(8) a description of the rights of the consumer – (A) to request that the debt collector cease communication with the consumer under section 805(c); and (B) to have collection efforts stopped under subsection (b); and

(9) the name and contact information of the person who is responsible for handling complaints on behalf of the debt collector.”

3. Add new language to subsection 1692g(b)(2) which provides: "(2) Reasonable investigation and verification required. Upon receipt of a notification under paragraph (1) that a debt is disputed by the consumer, the debt collector shall undertake a thorough investigation of the substance of the dispute, and shall timely provide to the consumer specific responsive information and verification of the disputed debt."

4. Add a new remedy for injunctive relief to section 1692k(d) as follows: "In a civil action alleging a violation of this title, the court may award appropriate relief, including injunctive relief."

5. Add a new subsection 1692k(f) that would provide an increase in the amount of statutory damages the can be awarded under the FDCPA, and would then allow for subsequent annual increases in statutory damages, adjusted based upon the Consumer Price Index, as follows:

"(f) Adjustment for inflation.

(1) initial adjustment - Not later than 90 days after the date of the enactment of this subsection, the Commission shall provide a percentage increase (rounded to the nearest multiple of $100 or $1,000, as applicable) in the amounts set forth in such section equal to the percentage by which - (A) the Consumer Price Index for All Urban Consumers (all items, United States city average) for the 12-month period ending on the June 30 preceding the date on which the percentage increase is provided, exceeds (B) the Consumer Price Index for the 12-month period preceding January 1, 1978.

(2) Annual adjustments - With respect to any fiscal year beginning after the date of the increase provided under paragraph (1), the Commission shall provide a percentage increase (rounded to the nearest multiple of $100 or $1,000, as applicable) in the amounts set forth in this section equal to the percentage by which - (A) the Consumer Price Index for All Urban Consumers (all items, United States city average) for the 12-month period ending on the June 30 preceding the beginning of the fiscal year for which the increase is made, exceeds (B) the Consumer Price Index for the 12-month period preceding the 12-month period described in subparagraph (A)."

When he introduced the bill, Senator Franken explained that there were "big problems in the debt collection industry that are long overdue in being addressed" and that he had learned of these problems as a result of a series of articles about collectors featured in his local newspaper, the Minneapolis Star Tribune.

You can watch Senator Franken's Senate Floor Statement introducing the bill here:

Defending “Call Volume” Claims: How Many Calls Are Too Many Under Section 1692d(5) Of The FDCPA?

2010-08-22T16:19:00.000-07:00

Collectors cannot collect money if they cannot make contact with consumers. The primary way collectors do this is by phone, and it is often necessary to make multiple call attempts before a consumer is reached. But how many call attempts are too many? When will a collector cross the line between diligently trying to make contact, and calling so many times that a court will conclude the collector was trying to harass the consumer? Is there a magic number of calls?

There are no hard and fast rules on how many times a collector can call a consumer, and decisions of the district courts have been all over the map. Call volume claims are generally fact-intensive and can be expensive to defend, and this may explain why these cases are favored by consumer lawyers. Fortunately for collectors, however, there is an emerging trend among the district courts to reject FDCPA claims that are based solely upon counting up the number of call attempts made by the collector. These decisions reflect an appreciation of the basic fact that collectors often must make multiple attempts before the can make contact with the debtor. These call attempts reflect an attempt to start a dialogue about the debt – not an intent to harass or annoy.

Section 1692d(5) of the FDCPA prohibits collectors “[c]ausing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number.” 15 U.S.C. § 1692d(5) (emphasis added). The FDCPA is often described as a “strict liability” statute, but this is not true for a section 1692d(5) claim. The plaintiff must plead and prove that the collector intended to annoy, abuse or harass in order to prevail. See, e.g., Clark v. Capital Credit & Collection Servs, Inc., 460 F. 3d 1162, 1176, n.11 (9th Cir. 2006) (identifying sections 1692d(5), 1692f(3) and 1692c(a)(1) of the FDCPA as exceptions to strict liability); Kaplan v. Assetcare, Inc., 88 F. Supp. 2d 1355, 1362 (S.D. Fla. 2000)(same: “Congress took care to require an element of knowledge or intent in certain portions of the FDCPA where it deemed such a requirement necessary.”).

Thus, to establish a violation of section 1692d(5), the consumer must show that the calls were made “repeatedly or continuously” and that they were made with the intent to annoy, abuse, or harass. Although the FDCPA does not define “repeatedly or continuously,” the FTC has opined that "continuously" means “making a series of telephone calls, one right after the other” and has said that “repeatedly means “calling with excessive frequency under the circumstances.” See Statements of General Policy or Interpretation Staff Commentary On the Fair Debt Collection Practices Act, 53 Fed.Reg. 50,097, 50,105 (Fed. Trade Comm’n Dec. 13, 1988).

The FDCPA does not contain any bright-line rules setting forth the permissible number of calls a collector can place in a day, week, month or year without violating section 1692d(5). When deciding if a collector has violated section 1692d(5), courts consider both the volume and the pattern of the calls. See Katz v. Capital One, 2010 WL 1039850, *3 (E.D. Va. Mar. 18, 2010); Saltzman v. I.C. Sys., Inc., 2009 WL 2190359, *7 (E.D. Mich. Sept. 30, 2009); see also Martin v. Select Portfolio Serving Holding Corp., 2008 WL 618788, *6 (S.D. Ohio Mar. 3, 2008) (“In determining whether the debt collector intended to annoy, abuse and harass the consumer, the Court may consider frequency, persistence, and volume of the telephone calls.”); Sanchez v. Client Services, Inc., 520 F. Supp. 2d 1149 (N.D. Cal. 2007) (summary judgment for consumer on section 1692d(5) claim where collector placed 54 telephone calls to debtor's place of employment during six month period, including 17 calls in one month and six on one day); Akalwadi v. Risk Management Alternatives, Inc.,336 F. Supp. 2d 492, 505-06 (D. Maryland 2004) (summary judgment denied on section 1692d(5) claim; 28 calls in two month period, including periods of daily calls, and three calls on one day); Kuhn v. Account Control Tech., Inc., 865 F. Supp. 1443, 1453 (D. Nev.1994) (six calls to consumer’s place of employment within twenty-four minutes constituted harassment under section 1692d(5)).

Recent decisions by district courts around the country reflect an encouraging trend for collectors facing call volume claims. A district court in Florida recently granted summary judgment for a collector who called plaintiff (a non-debtor) fifty-seven times, including seven times in a single day. See Tucker v. CBE Group, Inc., _ F. Supp. 2d _, 2010 WL 1849034, *1, 3 (M.D. Fla. May 5, 2010). Despite the relatively high number of calls, there was no evidence the collector had repeatedly placed calls after being asked to cease communication, or that it had called back on the same day it left a message. See id. at *3. The court held the “evidence demonstrates that CBE placed each of its telephone calls with an intent to reach [plaintiff’s daughter] rather than an intent to harass Plaintiff.” Id.

In Katz v. Capital One, the collector allegedly called the consumer “fifteen to seventeen times” after her attorney sent a letter instructing the collector to cease contact. The letter was sent to the original creditor, however, not to the collector. See 2010 WL 1039850 at **1-2. The court granted summary judgment for the collector, concluding there was no evidence to establish “that the phone calls were intended to be annoying, abusive, or harassing. Instead, the records shows that Allied, believing the debt to be valid, attempted to take steps to collect that debt.” Id. at *3. The collector never called more than twice in one day, none of its calls “were made back-to-back, at inconvenient times, after plaintiff had asked [the collector] to stop calling, or immediately after plaintiff hung up.” Id.

In Saltzman v. I.C. Systems, Inc., the court granted summary judgment for a collector who placed “somewhere between twenty and fifty unsuccessful telephone calls and between two and ten successful telephone calls” to the consumer in just over one month. See Saltzman, 2009 WL 2190359 at *6 n.4. While number of call attempts was relatively high, the court observed that the disparity between the large number of calls placed by the collector, and low number of actual conversations with the consumer, suggested a “difficulty of reaching Plaintiff, rather than an intent to harass.” Id. at *7 (citation omitted).

In Arteaga v. Asset Acceptance, LLC, _ F. Supp. 2d _, 2010 WL 3310259 (E.D. Cal. Aug. 23, 2010), the court granted summary judgment for a collector on a section 1692d(5) claim, despite testimony from the consumer that the collector called her “daily” or “almost daily.” Id. at *7. The court held that “even if Ms. Arteaga’s allegations are believed true, and considered under the ‘least sophisticated debtor’ standard, the conduct does not constitute harassment as a matter of law.” Id.

There is no circuit level authority on section 1692d(5) claims, and no precise guidelines regarding the permissible number of call attempts have been established. Some cases appear to reflect ad hoc reasoning based solely on number of attempts made to reach the consumer. See, e.g., Bassett v. I.C. System, Inc., _ F.Supp.2d _, 2010 WL 2179175 at *4 (N.D. Ill. June 1, 2010) (denying summary judgment where collector made thirty-one call attempts during a twelve day period); Krapf v. Nationwide Credit Inc., 2010 WL 2025323, *4 (C. D. Cal. May 21, 2010) (denying summary judgment where collector placed over 180 calls in a single month, with an average of six calls per day). The trend in the case law is encouraging for collectors, however, with courts using a more holistic, analytical approach to section 1692d(5) claims, rather than just blindly counting up the number of call attempts.

Leaving Voicemail Messages - Ninth Circuit May Resolve The Foti Issue

2010-08-09T12:17:00.000-07:00

Debt collectors who have struggled to formulate what voicemail message, if any, to leave for consumers may be receiving guidance on the issue if the Ninth Circuit Court of Appeals decides to grant the petition that was filed on December 29, 2010, pursuant to 28 U.S.C. § 1292(b), in the case of Koby v. ARS National Service, Inc, 2010 WL 1438763 (S.D. Cal. March 29, 2010). A copy of the petition filed with the Court by defendant ARS National Services, Inc. can be read and downloaded here:

Koby v. ARS National Services, Inc. Section 1292(b) Petition To Ninth Circuit -

In Koby, the United States District Court for the Southern District of California found that the following voice mail message left for one of the plaintiffs, Michael Simmons, was NOT a “communication” within the meaning of the FDCPA, and, therefore, when defendant left the message it had NOT violated section 1692e(11) of the Act:

“This is Brian Cooper. This call is for Mike Simmons, I need you to return this call as soon as you get this message 877-333-3880, extension 2571.”

Regarding this message, the court held: “The Court, however, finds the message left for Plaintiff Simmons, which merely included the caller's name and asked for a return call, does not convey, directly or even indirectly, any information regarding the debt owed. As such, the claim based upon the voicemail message left with Plaintiff Simmons would not permit recovery under section 1692e(11) and Defendant is entitled to judgment as to this claim.” This portion of the Koby opinion is very similar to the case of Biggs v. Credit Collections Inc., 2007 WL 4034997 *4 (W.D. Okla. Nov.15, 2007).

Having made this ruling, however, the district court also held that the same message, and two other similar messages, left for plaintiffs Koby and Supler, violated section 1692d(6) of the FDCPA, by failing to “meaningfully disclose” the identity of the collector. The court also found that the Koby and Supler messages did constitute “communications” under the FDCPA, and therefore the complaint had stated a section 1692e(11) claim with respect to those messages. The Koby and Supler messages were alleged to state the following:

“This is Robin calling for Michael Koby, if you could please return my call at 800-440-6613. My direct extension is 3171. Please refer to your Reference Number as 15983225.”

“Hey John, uh, it's Mike Mazzouli with ARS National. Umm, there appears to be some documents here in my office, uh, John at this point your [sic] involved. Call me as soon as you can. My direct number and direct extension is 800-440-6613; I'm at extension 3697. Thank you.”

Recently, the district court held, consistent with the requirements of 28 U.S.C. § 1292(b), that its ruling “involves controlling questions of law as to which there is substantial ground for difference of opinion, and that an immediate appeal from the Order may materially advance the ultimate termination of the litigation” and the district court therefore certified the following two questions to the Ninth Circuit:

1. Do each of the voice mail messages as alleged in the complaint in this action constitute a ‘communication’ within the meaning of section 1692a(2) of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et. seq., (the “FDCPA”), 15 U.S.C. § 1692, et seq.;” and

2. Do the voice mail messages as alleged in the complaint violate section 1692e(11) and/or section 1692d(6) of the FDCPA?

The principal reasons raised by ARS in the petition explaining why the Ninth Circuit should take the appeal are:

• The messages are not “communications” under the plain language of the FDCPA. They did not disclose any information “regarding a debt,” such as the amount due, the name of the creditor or the applicable interest rate. By omitting this information, ARS respected the consumer’s right to privacy.

• The messages did meaningfully disclose the “caller’s identity,” because each message stated the name of the caller and provided the consumer with a toll-free number to return the call. In the context of a voice mail message, this is sufficiently meaningful disclosure.

• The district court correctly held that the message left for Plaintiff Simmons – “which merely included the caller’s name and asked for a return call” – was not a “communication” under the FDCPA, and therefore did not violate section 1692e(11) of the Act. This is consistent with the holding of the district court of Oklahoma in Biggs v. Credit Collections, Inc., 2007 WL 4034997, *4 (W.D. Okla. Nov. 15, 2007).

• The district court erred, however, when it held that the messages left for Plaintiffs Koby and Supler stated a viable claim under section 1692e(11), as this cannot be reconciled with the ruling on the message left for Plaintiff Simmons. The only differences are that the message for Koby also mentioned a “reference number” and the message for Supler also mentioned “documents” in the caller’s office.

• The district court erred when it held that all three messages stated a viable claim under section 1692d(6) for failure to provide meaningful disclosure of the caller’s identity. The court reasoned that a collector can avoid liability under 1692d(6) by not leaving any message at all, but this directly conflicts with a ruling issued by the Northern District of California, which effectively held that a collector must leave a voice mail message in order to avoid liability.

• The logic of the district court is internally inconsistent, since it found that ARS did not “communicate” with Simmons when ruling on the section 1692e(11) claim, but also found that ARS was required to state it was a “debt collector” attempting to collect a debt in order to comply with section 1692d(6).

• There are serious constitutional issues raised by the district court’s interpretation of the FDCPA, because the messages are a valid form of commercial speech. The ruling, read in conjunction with other district court cases, would expose collectors to strict liability every time they place a call, deterring calls to consumers, and silencing an entire channel of commercial speech. This violates the canon of “constitutional avoidance” which prohibits courts from interpreting statutes in a way that raises serious constitutional issues.

The Ninth Circuit should rule on the petition within the next few months and, if it is granted, the matter will then proceed as a normal appeal.

An Overview Of The Consumer Financial Protection Act of 2010 For Debt Collectors

2010-07-23T11:26:00.000-07:00

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. This statute undoubtedly marks a sea change for debt collectors. In particular, as described further in this article, Title 10 to the Dodd-Frank Act, known as the “Consumer Financial Protection Act of 2010” (the “CFPA”), has the potential to effectuate sweeping changes across many aspects of the collection industry.

You can read and download the text of the entire Dodd-Frank Act here:

Dodd-Frank Wall Street Reform And Consumer Protection Act -

The Act establishes a Bureau of Consumer Financial Protection (the “Bureau”) that will assume broad regulatory powers over debt collectors and virtually all other “covered persons” who have any connection to consumer financial products or services. The Bureau will have exclusive rule-making authority with respect to all significant federal statutes that impact the collection industry, including the Fair Debt Collection Practices Act (“FDCPA”), the Fair Credit Reporting Act (“FCRA”) and others. This means, for example, that the Bureau will have the ability to pass rules and regulations that interpret any of the provisions of the FDCPA, potentially impacting all facets of the collection channel.

At this time, it is not possible or practical to attempt to provide a comprehensive analysis of how the CFPA will impact debt collectors. The full extent of that impact probably will not be known for a year or more, when the Bureau begins to implement regulations. This article is designed to summarize key portions of the statute and to provide collectors with a broad overview of how the CFPA may change the landscape.

Section 1002 – Definitions

If any debt collectors are still holding out hope that the CFPA would not apply to them, they will probably be disappointed. Unless a collector manages to obtain an exemption from the Bureau, it will likely be subject to the CFPA. A “covered person” under the CFPA includes “any person that engages in offering or providing a consumer financial product or service,” as well as any “affiliate” of that person “if such affiliate acts as a service provider to such person.” Later in the Act, the term “consumer financial product or service” is defined very broadly, to include anyone who is “collecting debt relating to any consumer financial product or service.” A “financial product or service” includes not only “extending credit and servicing loans,” but also “acquiring, purchasing, selling, brokering, or other extensions of credit (other than solely extending commercial credit to a person who originates consumer credit transactions).”

The CFPA also defines “service providers” to include “any person that provides a material service to a covered person in connection with the offering or provision of such covered person of a consumer financial product or service,” including person who “processes transactions relating to the consumer financial product or service.”

Thus, if you are a debt collector, or even a “service provider” for a debt collector, you are likely subject to the CFPA.

Section 1021 – Purpose, Objectives, and Functions

Not surprisingly, the CFPA espouses strong consumer protection objectives. The purpose of the Bureau is to “implement and, where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.”

Certain of the Bureau’s stated objectives (items 3 and 4, below) could benefit the collection industry. The CFPA lists the objectives of the Bureau as ensuring that “(1) consumers are provided with timely and understandable information to make responsible decisions about financial transactions; (2) consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination; (3) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens; (4) Federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition; and (5) markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.”

Section 1022 – Rulemaking Authority

For the first time, Congress has granted a regulatory body the power to formulate broad rules that will impact debt collectors, as well as all other entities that deal with consumer services and products. Theoretically, this could be a welcome change for debt collectors, because new regulations could provide collectors with much needed clarity under the FDCPA where the courts have failed to provide consistent guidance. Some fear, though, that the new regulations will not bring much clarity, and will simply make it even more difficult to collect.

The Bureau has been given the sweeping powers to “prescribe rules and issue orders and guidance, as may be necessary or appropriate” under the federal consumer financial protection laws. In making rules, the Bureau “shall consider (i) the potential benefits and costs to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services resulting from such rule; and (ii) the impact of proposed rules on covered persons, as described in section 1026, and the impact on consumers in rural areas.”

It is possible, in theory, for debt collectors or other covered persons to obtain exemptions from select provisions of the CFPA, or from certain of the rules that may be implemented by the Bureau. The Bureau has the ability to exempt any “class of covered persons, service providers or consumer financial services or products, from any provision of this title, or from any rule issued under this title.”

At this point, it is unclear how commonly these exemptions will be granted, but the CFPA establishes the factors that the Bureau must consider in connection with granting exemptions, including “(i) the total assets of the class of covered persons; (ii) the volume of transactions involving consumer financial products or services in which the class of covered persons engages; and (iii) existing provisions of law which are applicable to the consumer financial product or service and the extent to which such provisions provide consumers with adequate protections.”

Section 1027 – Limitations On Authorities Of the Bureau; Preservation of Authorities

Debt collection attorneys will be regulated by the CFPA and the Bureau, unless they obtain an exemption. With respect to attorneys, the CFPA initially provides that the Bureau “may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law under the laws of a State in which the attorney is licensed to practice law. ” While this may sound encouraging to collection attorneys, the CFPA also provides that this limitation on the Bureau’s regulatory power “shall not be construed so as to limit the authority of the Bureau with respect to any attorney, to the extent that such attorney is otherwise subject to any of the enumerated consumer laws or the authorities transferred” to the Bureau. Thus, to the extent that an attorney is subject to the FDCPA – which is one of the enumerated consumer laws transferred to the Bureau – that attorney is also subject to the CFPA and the regulatory powers of the Bureau.

Section 1031 – Prohibiting Unfair, Deceptive or Abusive Acts Or Practices

The Bureau has the power to proscribe new rules that will apply to any debt collector or service provider, and those rules can identify “as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”

There is some good news for debt collectors in that the definitions used by the CFPA seem to acknowledge that only practices that cause some “material” harm to consumers should be deemed unlawful. For example, when determining that an act or practice is unlawful because it is “unfair,” the Bureau must have a “reasonable basis to conclude that (A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”

Similarly, before any act or practice may be declared unlawful because it is “abusive,” the Bureau must find that it “(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of – (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”

Section 1032 – Disclosures

Model forms and safe harbors may be on the horizon for debt collectors. The CFPA provides that the Bureau may proscribe disclosure rules that are designed to ensure that the “features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.” Thus, the Bureau has the ability to impose new disclosure requirements upon debt collectors, because they are dealing with consumers “over the term of the product or service. . . .”

The Bureau has the power to create “model disclosures” that can be used for this purpose, and the Act provides that any “covered person that uses a model form included with a rule issued under this section shall be deemed to be in compliance with the disclosure requirements of this section with respect to such model form.” This could be welcome news for debt collectors who have, for example, struggled to design section 1692g letters, settlement letters and privacy notices that do not run afoul of the FDCPA.

Section 1033 – Consumer Rights To Access Information

The Bureau can also implement rules requiring debt collectors and other covered persons to provide information to consumers upon request. The CFPA provides that, subject to rules prescribed by the Bureau, “a covered person shall make available to a consumer, upon request, information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including information relating to any transaction, series of transactions, or to the account including costs, charges and usage data. The information shall be made available in an electronic form usable by consumers.” The Bureau may set rules that would provide standardized formats in which this information must be provided.

It is unclear how any new requirements imposed under this section, and under section 1034 (discussed below), will interact with the existing dispute and validation requirements of section 1692g of the FDCPA.

Section 1034 – Responses To Consumer Complaints And Inquiries

Regarding consumer complaints, the Bureau will receive complaints from consumers, and where appropriate, the Bureau can direct debt collectors and other covered persons to respond to the Bureau regarding the status of the complaint. The debt collector’s response may need to include “(1) steps that have been taken by the covered person to respond to the complaint or inquiry of the consumer; (2) responses received by the covered person from the consumer; and (3) follow-up actions or planned follow-up actions by the covered person to respond to the complaint or inquiry of the consumer.”

Section 1034 of the Act also includes an ongoing duty for debt collectors and other covered persons to respond in a “timely manner” to consumer inquiries, including consumer requests for documentation regarding debts. The Act describes this duty as follows: “A covered person subject to supervision and primary enforcement by the Bureau pursuant to section 1025 shall, in a timely manner, comply with a consumer request for information in the control or possession of such covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including supporting written documentation, concerning the account of the consumer.”

Section 1036 – Prohibited Acts

The CFPA declares that it shall be “unlawful” for debt collectors or other covered persons or service providers to “(A) to offer or provide to a consumer any financial product or service not in conformity with Federal consumer financial law, or otherwise commit any act or omission in violation of a Federal consumer financial law; or (B) to engage in any unfair, deceptive, or abusive act or practice.”

The Act also declares it unlawful for “(2) any covered person or service provider to fail or refuse, as required by Federal consumer financial law, or any rule or order issued by the Bureau thereunder– (A) to permit access to or copying of records; (B) to establish or maintain records; or (C) to make reports or provide information to the Bureau.”

Finally, the Act includes a provision akin to aiding and abetting liability, which declares it unlawful for “(3) any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions of section 1031, or any rule or order issued thereunder, and notwithstanding any provision of this title, the provider of such substantial assistance shall be deemed to be in violation of that section to the same extent as the person to whom such assistance is provided.”

Section 1041 – Relation To State Law

The CFPA does not preempt state laws, except to the extent that a provision of state law is inconsistent with the Act. Thus, the CFPA states that it “may not be construed as annulling, altering, or affecting, or exempting any person subject to the provisions of this title from complying with, the statutes, regulations, orders, or interpretations in effect in any State, except to the extent that any such provision of law is inconsistent with the provisions of this title, and then only to the extent of the inconsistency.”

A state law is not inconsistent with the CFPA, however, if the state law provides consumers with greater protections than the CFPA. Accordingly, the Act provides: “For purposes of this subsection, a statute, regulation, order, or interpretation in effect in any State is not inconsistent with the provisions of this title if the protection that such statute, regulation, order, or interpretation affords to consumers is greater than the protection provided under this title. A determination regarding whether a statute, regulation, order, or interpretation in effect in any State is inconsistent with the provisions of this title may be made by the Bureau on its own motion or in response to a nonfrivolous petition initiated by any interested person.”

Section 1054 – Litigation Authority

One bright spot for debt collectors is that the CFPA does not contain a provision that allows for a private right of action for consumers. Only the Bureau can file civil actions against any person who violates the CFPA “to impose a civil penalty or to seek all appropriate legal and equitable relief including a permanent or temporary injunction as permitted by law.”

The statute of limitations for any such action by the Bureau is three years “after the date of discovery of the violation to which an action relates.”

Section 1055 – Relief Available

The Act provides for a broad range of remedies that may be obtained by the Bureau for violations of the CFPA or other consumer financial laws, including: “(A) rescission or reformation of contracts; (B) refund of moneys or return of real property; (C) restitution; (D) disgorgement or compensation for unjust enrichment; (E) payment of damages or other monetary relief; (F) public notification regarding the violation, including the costs of notification; (G) limits on the activities or functions of the person; and (H) civil money penalties, as set forth more fully in subsection( c ).”

The Bureau may not recover punitive damages, but the Act does provide for recovery of costs, as well as the imposition of potentially significant civil penalties.

FTC Issues Report "Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration"

2010-07-17T06:43:00.000-07:00

After conducting a series of roundtable discussions with industry experts in Chicago, San Francisco and Washington, D.C., the FTC recently released its report entitled: "Repairing A Broken System: Protecting Consumers In Debt Collection Litigation And Arbitration." A copy of the report can be read and downloaded here:

FTC Report.Repairing A. Broken System.Protecting Consumers In Debt Collection Litigation And Arbitration -

The Executive Summary to the Report acknowledges the critical role that collectors play in the health of the economy. The FTC states: "Credit benefits consumers by allowing them to obtain goods and services without paying the entire cost at the time of purchase. This lets consumers make purchases they might not otherwise be able to afford, and allows them to benefit from goods and services immediately while paying for them over time. Because consumers sometimes fail to pay their creditors, debt collection plays a vitally important role in the consumer credit system. Debt collection benefits individual creditors, of course, who are repaid money they are owed. More importantly, however, by providing compensation to creditors when consumers do not repay their debts, the debt collection system helps keep credit prices low and helps ensure that consumer credit remains widely available."

Having said this, however, the balance FTC's report is highly critical of the debt collection industry generally, and critical of the collection litigation and arbitration process specifically. While the report made a splash when it was announced, it is unclear whether the FTC will actually play any significant role with respect to the issues the report has raised. Will the report be a catalyst for change, or much ado about nothing?

For example, many of the recommendations made by the FTC would require wholesale changes to the rules of civil procedure and substantive rules bearing on state court collection litigation -- changes that state legislatures would need to enact. States would need to be convinced that it made sense to pass an entirely new set of rules that would apply to debt collection cases only, as opposed to other forms of civil litigation. States may conclude, contrary to the implicit assumption in the FTC report, that their existing rules governing civil litigation already provide consumers with sufficient protections.

The FTC also seems fixated on the notion that collectors throughout the country are routinely filing lawsuits that seek to collect on time-barred debt, though the report does not cite to empirical studies to provide support for this belief. The report recommends that collectors be forced to notify consumers and courts when the debt at issue may be beyond the applicable limitations period, and that collectors should advise consumers that subsequent payments may restart the limitations period. The FTC does not explain why any litigant should be required to disclose the existence of a potential affirmative defense to its adversary, or why a potential statute of limitations defense should be highlighted in collection litigation, as opposed to various other affirmative defenses that the consumer might possess. The FTC, of course, has no ability to enact state legislation, and its ability to influence rule changes at the state court level is far from clear.

The report also makes a number of recommendations with respect to debt collection arbitration proceedings that appear to be at odds with the policies underlying the Federal Arbitration Act and decades of jurisprudence favoring the resolution of disputes through private arbitration. The report is highly-critical of creditors who include mandatory pre-dispute arbitration clauses in their customer agreements, though it acknowledges that such agreements are legally enforceable. The report suggests that consumer arbitration awards should include reasoned opinions from the arbitrators. Yet there would be no precedential value in those opinions, and they would likely serve to increase the number of subsequent challenges to the awards, contrary to goal of creating a simple, streamlined process for reaching final adjudications of disputes. The report notes that consumers often do not participate in arbitration proceedings, and that creditors prevail in the vast majority of cases. From this, and from other anecdotal evidence, the report suggests that consumers are not being adequately notified of the arbitration process, and that the process is inherently biased or unfair to consumers. The FTC report cites liberally to the unproven allegations of bias that have been leveled against consumer arbitration providers by litigants and consumer attorneys.

The FTC does not have the power to amend the FDCPA in order to implement any of the recommendations in its report. The FTC can make recommendations to Congress about potential changes to the FDCPA. But the new Bureau of Consumer Financial Protection (formed by the Dodd-Frank Act) will be given concurrent authority with the FTC to enforce the FDCPA, and only the Bureau will also have rule-making authority under the FDCPA. This means that the Bureau can issue regulations that will graft on top of the FDCPA, but the FTC cannot do so. The Bureau will also have other broad powers over the collection industry. All the FTC can do is issue opinion letters (it has only done this a few times since the FDCPA was enacted in 1977), and bring enforcement actions against collection companies.

The following recommendations are contained in the FTC's report:

"States should consider adopting measures to make it more likely that consumers will defend in litigation. Very few consumers defend or otherwise participate in debt collection litigation, resulting in courts entering default judgment against them. States should take steps to ensure that: (1) consumers receive adequate notice when actions have been commenced; and (2) the costs to consumers of participating in such actions are not prohibitively high."

"States should require collectors to include more information about the debt in their complaints. Complaints often do not contain sufficient information to allow consumers in their answers to admit or deny the allegations and assert affirmative defenses. To assist them in doing so, states should consider requiring that debt collection complaints include: (1) the name of the original creditor and the last four digits of the original account number; (2) the date of default or charge-off and the amount due at that time; (3) the name of the current owner of the debt; (4) the total amount currently owed on the debt; (5) the total amount owed broken down by principal, interest, and fees; and (6) the relevant terms of the underlying credit contract, if the contract itself is not attached to the complaint."

"States should take steps to make it less likely that collectors will sue on time-barred debt and that consumers will unknowingly waive statute of limitations defenses available to them. In circumstances where it is difficult to determine the correct statute of limitations, it would be advantageous if states developed more clear and uniform statutes of limitations. Consumers do not understand that in many states a statute of limitations constitutes an affirmative defense which may preclude collectors from successfully suing to collect, so they rarely assert this affirmative defense. These states should assign to collectors the burden of proving that debts are not time-barred and require that they include the date of default and the statute of limitations in their complaints. Consumers are not aware that collectors cannot lawfully sue to recover on time-barred debt. To prevent deception, collectors who seek to collect debt they know or should know is time-barred should disclose that they cannot lawfully sue the consumers. Consumers likewise do not know that in many states making a partial payment on a time-barred debt revives the entire debt for a new statute of limitations period. Collectors in these states should disclose to consumers that making a payment will revive such debt."

"Federal and state laws should be changed to prevent the freezing of a specified amount in a bank account into which a consumer has deposited funds that are exempt from garnishment. When banks freeze the accounts of consumers who receive government payments such as Social Security (which are exempt from garnishment), it may result in significant hardship for consumers, including many who are indigent. To alleviate such hardship, federal and state laws should be changed to limit the amount that banks can freeze in accounts receiving exempt funds."

"The Commission’s principal findings, conclusions, and recommendations relating to debt collection arbitration are:"

"Consumers should be given meaningful choice about arbitration. Consumers currently have little, if any, choice regarding mandatory pre-dispute arbitration provisions in contracts. Creditors should draft their consumer credit contracts in a way that ensures consumers are aware of their choice whether to arbitrate, and provides consumers with a reasonable method of exercising that choice. The public and private sectors should increase efforts to educate consumers, so that they have a basic understanding of arbitration and its consequences. They should evaluate whether, and under what conditions, options beyond the initial choice about arbitration must be offered in consumer credit contracts."

"Arbitration forums and arbitrators should eliminate bias and the appearance of bias. Especially in the wake of serious concerns relating to the conduct of NAF, arbitration forums should take significant and concrete steps to prevent bias and the appearance of bias. Forums should develop, adopt, and vigorously enforce standards prohibiting bias and the appearance of bias for themselves and their arbitrators. Forums should diversify their rosters of arbitrators, rotate matters randomly among arbitrators, and limit the number of matters each arbitrator handles. Forums should make the process and procedures they use for selecting arbitrators as transparent as possible."

"Arbitration forums should conduct proceedings in a manner which makes it more likely consumers will participate. Consumers frequently do not appear in arbitration proceedings. While it is not clear to what extent notification problems cause low participation rates, arbitration forums should adopt measures to increase the likelihood they have valid addresses for consumers, track and document delivery of notices, and use envelopes which make it clear that their contents are important while not disclosing consumer debts to third parties. Arbitration forums and arbitrators also should conduct a closer assessment of consumers’ assertions that they did not receive adequate notice."

"Arbitration forums should establish rules that limit the total cost to consumers of arbitrating a dispute to the cost that they would pay to defend against a similar proceeding in court."

"Arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated. Arbitrators rarely accompany awards with an opinion setting forth a statement of the law and an application of the law to the facts, which makes it difficult to understand the basis for the award. Arbitration forums should require that arbitrators issue reasoned opinions setting forth: (1) the law applied; (2) how the law was applied to the facts; and (3) how the amount of the award was calculated, including how the amount of principal, interest, and fees awarded was determined."

"Arbitration forums should make their process and results more transparent. For the public to assess the costs and benefits of arbitration, and for consumers to decide whether to agree to arbitration, the process used and the results reached must be more transparent. To promote such transparency, Congress should consider creating a nationwide system requiring arbitration forums to report and make public arbitration awards and decisions."

"The Commission will continue to closely monitor debt collection arbitration, and evaluate whether creditors and arbitration forums provide consumers with meaningful choice and fair process. As appropriate, the Commission will report its views on new debt collection arbitration models to policymakers, industry, consumer groups, and the general public."

Are You Liable For Your Process Server Under The FDCPA?

2010-06-13T13:09:00.000-07:00

Consumers often assert FDCPA claims against collectors based upon alleged misstatements or misconduct by process servers while serving a state court summons and complaint. Thus, consumers may claim a process server was rude or abusive at the time of service, causing them to suffer emotional distress, or that a process server made false statements about the debt. These allegations are not sufficient to impose liability on the collector under the FDCPA.

The alleged conduct of the process server while serving the summons and complaint is not covered by the FDCPA. In fact, when it defined the term “debt collector” under the FDCPA, Congress specifically noted that the term “does not include . . . . any person while serving or attempting to serve legal process on any other person in connection with the judicial enforcement of any debt . . . .” See 15 U.S.C. § 1692a(6)(D). This is sometimes referred to as the “process server” exemption, which applies to "those individuals whose involvement in a debt collection communication was limited to serving the communication on the consumer – in effect, to being messengers[.]" Romea v. Heiberger & Assoc., 163 F.3d 111, 117 (2d Cir. 1998); see also S.Rep. No. 95-382, at 3-4 (1977), reprinted in 1977 U.S.C.C.A.N. 1695, 1697-98 ( The term debt collector is not intended to include ... process servers. ).

Given this exemption, any alleged improper conduct or statements made by a process server while serving or attempting to serve a complaint cannot give rise to FDCPA liability. Since there is no FDCPA liability for the process server’s statements or conduct, the debt collector cannot be held vicariously liable. See, e.g., Worch v. Wolpoff & Abramson, LLP, 477 F. Supp. 2d 1015,1018-19 (E.D. Mo. 2007) (process server who allegedly came to residence and “pounded on the door repeatedly and aggressively” to serve debtor was not subject to FDCPA; collection firm not vicariously liable for server’s alleged conduct); Federal Home Loan Mortgage Corp. v. Lamar, 2006 WL 2422903, *8-9 (N.D. Ohio Aug. 22, 2006) (process server allegedly involved in erratic car chase while serving debtor with complaint not liable under FDCPA; collection firm not vicariously liable).

This conclusion – that collectors are not liable for communications made by their process servers – is reinforced by provisions of section 1692c of the FDCPA. Although that section places important restrictions upon a collector’s ability to communicate with debtors and third parties, it provides exceptions for any communications made with the “express permission of a court of competent jurisdiction.” See, e.g., 15 U.S.C. § 1692c(a), (b) (listing restrictions on communications made at inconvenient times or places, with debtors represented by counsel, or at places of employment, but providing exception for communications permitted by “the express permission of a court of competent jurisdiction”). Collectors are not only permitted by the court to serve a summons and complaint on a debtor, they are required to do so consistent with state law. Thus, the service of the complaint by a process server falls within the exemption under section 1692c(a) and (b) of the FDCPA.

Similarly, even where a consumer has notified a collector in writing that the consumer refuses to pay the debt, or that he wants further communications by the collector to cease and desist, the FDCPA allows the collector to notify the consumer about “specified remedies” that the creditor or collector normally invoke and/or intend to invoke. See 15 U.S.C. § 1692c(c). The service of a state court complaint by a process server is notification that the creditor is seeking to invoke a remedy – judicial enforcement of the debt – and is exempt.

This article is not meant to provide a comprehensive analysis of a debt collector’s potential liability for “sewer service” by a process server. In situations where an FDCPA claim against a collector is based solely upon statements or conduct by a process server in connection with serving or attempting to serve a summons and complaint, however, the FDCPA simply does not apply.

Beating FDCPA Claims That Were Not Disclosed In Bankruptcy

2010-06-01T06:30:00.000-07:00

Bankruptcy filings and FDCPA lawsuits are both rising steadily. If you have been sued in an FDCPA action by a consumer who recently filed for bankruptcy, you should pull the bankruptcy filings and carefully review the debtor’s petition. You may find that the consumer failed to properly disclose the claims they now seek to pursue against you. If so, the case is subject to a motion to dismiss. Consumers lack standing to assert claims based upon pre-petition conduct if the claims were not properly disclosed in the bankruptcy petition. See, e.g., Yack v. Washington Mutual Inc., 389 B.R. 91 (N.D. Cal. 2008) (granting motion to dismiss FDCPA class action where debtor failed to disclose claims in bankruptcy schedules).

The filing of a bankruptcy petition creates an “‘estate’” that consists of “‘all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case,’” including any causes of action the debtor may have. See Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001) (quoting 11 U.S.C. § 541(a)). Once a cause of action becomes part of the bankruptcy estate, “[o]nly the trustee . . . has the authority to prosecute and/or settle such causes of action.” Cain v. Hyatt, 101 B.R. 440, 442 (Bankr. E.D. Pa. 1989).

A debtor has an affirmative duty to schedule all property the debtor owns, including all legal claims. See 11 U.S.C. § 521(1). “Causes of action are separate assets which must be formally listed.” Cusano, 264 F.3d at 947. The importance of complete disclosure of a debtor’s assets cannot be overstated: “These matters are at the heart of the bankruptcy system . . . . The proper ‘operation of the bankruptcy system depends on honest reporting.’” In re Mohring, 142 B.R. 389, 394 (Bankr. E.D. Cal. 1992) (citation omitted); see also In re Colvin, 288 B.R. 477, 480 (Bankr. E.D. Mich. 2003) (“the disclosure obligations of consumer debtors are at the very core of the bankruptcy process and meeting these obligations is part of the price debtors pay for receiving the bankruptcy discharge”).

Courts have recognized that, “[f]ull and comprehensive disclosure is critical to the integrity of the bankruptcy process.” In re Rolland, 317 B.R. 402, 413 (Bankr. C.D. Cal. 2004). This “duty of candor . . . accrues from the time the facts that give rise to the potential claim are known.” Rose v. Beverly Health & Rehab. Servs., Inc., 356 B.R. 18, 25 (E.D. Cal. 2006) (emphasis added).

Debtors have a “paramount duty” to not only list all of their assets, but also to do so “carefully, completely and accurately,” using the appropriate schedules. See In re Mohring, 142 B.R. at 394 (emphasis added); see also Cusano, 264 F.3d at 945 (bankruptcy code places “affirmative duty” on debtor to schedule “assets and liabilities”). As the In re Mohring court explained:

“The basic rule is that schedules must be accurate and complete. And they must be corrected if they are incomplete. Thus, amendments are liberally permitted and can be demanded by the court. . . . Numerous cases hold that the debtor has a duty to prepare schedules carefully, completely, and accurately. . . . There are, however, no bright-line rules for how much itemization and specificity is required. What is required is reasonable particularization under the circumstances. The Official Forms themselves have generally been regarded as subject to a rule of substantial compliance.”

In re Mohring, 142 B.R. at 394-95 (citations omitted); see also In re Searles, 317 B.R. 368, 378 (9th Cir. B.A.P. 2004) (“Every debtor has a continuing duty to assure the accuracy and completeness of schedules. Postpetition discovery of rights that actually existed at the time of filing must be addressed in the schedules. This implies a duty to amend.”).

At the conclusion of the bankruptcy proceedings, if a claim was properly scheduled by the debtor, and was not otherwise administered by the trustee, the claim is “abandoned to the debtor.” 11 U.S.C. § 554(c). But if a debtor has failed “to properly schedule an asset, including a cause of action, that asset continues to belong to the bankruptcy estate” and the claim does not revert to the debtor. Cusano, 264 F.3d at 945-46.

A trustee cannot “abandon” a claim if the claim was never disclosed by the debtor. For this reason, in Stein v. United Artists Corp., 691 F.2d 885 (9th Cir. 1982), the Ninth Circuit held that “abandonment results only when the trustee knows of the existence of the property. . . . When the bankrupt fails to list an asset, he cannot claim abandonment because the trustee had no opportunity to pursue the claim.” Id. at 891 (affirming dismissal of debtor’s unscheduled antitrust claim). Similarly, in Cusano, the Ninth Circuit held that a debtor lacked standing to assert a claim for royalties that had not been scheduled by the debtor:

“Thus, if there was any outstanding balance due Cusano on the open book account when he filed for bankruptcy, he was under a duty to schedule it as a receivable or as a cause of action for unpaid royalties. His failure to do so vests the claim in the bankruptcy estate, where it remains.”

Cusano, 264 F.3d at 948.

The debtor lacks standing to pursue claims that were not properly disclosed. See Cusano, 264 F.3d at 945-48 (where a debtor fails to “properly schedule an asset, including a cause of action, that asset continues to belong to the bankruptcy estate” and does not revert to the debtor); see also Stein, 692 F.2d at 891 (debtor lacked standing to pursue antitrust claims that were not listed in bankruptcy).

Debtors may seek to reopen the bankruptcy proceedings to reacquire claims they failed to list, but the judicial estoppel doctrine should bar them. Judicial estoppel is “is an equitable doctrine that precludes a party from gaining an advantage by asserting one position, and then later taking to their benefit a clearly inconsistent position.” See Yack, 389 B.R. at 96 (citation omitted). In “the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a reorganization plan or otherwise mentioned in the debtor’s schedules or disclosure statements.” Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 783 (9th Cir. 2001); see also Hay v. First Interstate Bank, 978 F.2d 555, 557 (9th Cir. 1992) (failure to list a cause of action in bankruptcy schedule judicially estops prosecution of that claim). This is true “even if the discharge is later vacated.” Hamilton, 270 F.3d at 784.

Where a debtor failed to disclose their alleged claims, they are judicially estopped from seeking to re-acquire and assert them later. To hold otherwise would reward debtors for hiding assets from her creditors and the trustee, and would amount to a fraud on the bankruptcy court. See Latman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004) (surcharge remedy prevented “a fraud on the bankruptcy court” where plaintiffs knowingly failed to disclose assets that should have been listed on bankruptcy schedule).

For these reasons, collectors sued in FDCPA action should carefully review the bankruptcy filings of the debtor to determine if these defenses are available.

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

2010-05-18T21:09:00.000-07:00

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

2010-05-07T06:08:00.000-07:00

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

2010-05-01T21:51:00.000-07:00

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.

Jerman v. Carlisle: Supreme Court Rules That A Legal Error Regarding The Requirements Of The FDCPA Cannot Be A “Bona Fide Error”

2010-04-25T08:10:00.000-07:00

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.

When A Debt Is Not A "Debt" Under The FDCPA

2010-04-10T14:11:00.000-07:00

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.

Why The Two-Year Statute Of Limitations In Section 415(a) of The FCA Does Not Apply To Telephone Bills

2010-04-06T19:52:00.000-07:00

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.

Are Communications With A Debtor's Lawyer Subject To The FDCPA?

2010-04-03T12:32:00.000-07:00

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]

Verification of Debts Under Section 1692g(b) of the FDCPA

2010-03-30T05:54:00.000-07:00

Consumers and their counsel often argue that a debt collector has not properly “verified” a debt under section 1692g(b) of the FDCPA unless the collector has provided the consumer with detailed evidence of the debt, like a signed contract, charge slips, monthly account statements or other documentary evidence showing the details of the debt. But this is not what the law requires. The standard for debt validation is actually very minimal. A collector can discharge its duty to verify a debt simply by sending the debtor a written notice confirming that the amount the collector is demanding is what the creditor claims is owed. Nothing further is required.

The FDCPA provides that when a collector receives a written request for verification of the debt within thirty days of the date the consumer receives the section 1692g notice, the collector must stop further collection efforts until verification of the debt is mailed to the consumer. Section 1692g(b) of the FDCPA provides in relevant part as follows: “[T]he debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or a copy of a judgment, . . . and a copy of such verification or judgment, . . . is mailed to the consumer by the debt collector.” See 15 U.S.C. § 1692g(b).

The statute does not define the term “verification of the debt” and this can leave collectors wondering about exactly what is required of them. The circuit courts that have addressed this issue have held that a collector can satisfy its duty to verify the debt under section 1692g(b) of the FDCPA by providing the debtor written confirmation of the amount that the creditor claims is owed. See Clark v. Capital Credit & Collection Services, Inc., 460 F. 3d 1162, 1173-1174 (9th Cir. 2006); Chaudhry v. Gallerizzo, 174 F.3d 394, 406 (4th Cir. 1999).

As the Chaudhry court observed, Congress did not implement the verification requirements of section 1692g(b) as a mechanism to allow consumers to demand that collectors provide them detailed evidence of the debt. The goal of section 1692g(b) was much more modest:

Consistent with the legislative history, verification is only intended to eliminate the ... problem of debt collectors dunning the wrong person or attempting to collect debts which the consumer has already paid. (Citation). There is no concomitant obligation to forward copies of bills or other detailed evidence of the debt.

See Chaudhry, 174 F. 3d at 406. In Clark, the Ninth Circuit followed Chaudhry, and rejected the consumer’s argument that in order to verify a debt, a collector must provide copies of bills or other detailed evidence. The Clark court stated:

[V]erification of a debt involves nothing more than the debt collector confirming in writing that the amount being demanded is what the creditor is claiming is owed.

See Clark, 460 F.3d at 1173-74 (citations omitted).

Collectors may find that providing consumers with further documentation of the debt, beyond the minimum verification requirements, will assist them in their collection efforts. But their failure to do so will not run afoul of section 1692g(b) of the FDCPA.

Why Foti Raises Serious Problems Under The First Amendment

2010-03-24T09:17:00.000-07:00

I. Introduction

In Foti v. NCO Financial Systems, Inc., 424 F. Supp. 2d 643 (S.D.N.Y. 2006) (“Foti”), the District Court for the Southern District of New York held that if a debt collector leaves a message on a debtor’s answering machine that merely invites a return phone call, the message amounts to a “communication” within the meaning of the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 et seq. (the “FDCPA” or the “Act”). The court also held that the voicemail message must state it is from a “debt collector” in order to comply with section 1692e(11) of the Act. See Foti, 424 F. Supp. 2d at 669.

The FDCPA was designed to protect a debtor’s privacy, however, so the Act generally prohibits collectors from communicating information about a debt to third parties. See, e.g., 15 U.S.C. § 1692c(b). Given that parties other than the debtor (such as a roommate, parent or guest) may retrieve or hear a collector’s voice mail message, any message which states that it is from a “debt collector” necessarily puts the collector at risk of violating the prohibition on third party disclosure set forth in section 1692c(b) of the Act.

The Foti court was wrong. A debt collector’s use of a truthful, non-threatening voicemail message that requests a return phone call constitutes a valid form of commercial speech, and is therefore entitled to protection under the First Amendment. By holding that such a message is a “communication” under the FDCPA, the Foti court interpreted the Act in a manner that unreasonably restricts valid commercial speech. Given the Supreme Court’s express prohibition on interpreting any statute in a manner that raises serious constitutional problems (see Debartolo v. Florida Gulf Coast Build. & Constr. Trades Council, 485 U.S. 568, 575 (1988)), the holding of Foti must be rejected.

II. A Collector’s Voicemail Messages Is Valid Commercial Speech

In Foti, the collector left a message on the debtor’s answering machine that stated:

Good day, we are calling from NCO Financial Systems regarding a personal business matter that requires your immediate attention. Please call back 1-866-701-1275 once again please call back, toll-free, 1-866-701-1275, this is not a solicitation.

See Foti, 424 F. Supp. 2d at 648.

The message was valid commercial speech. The Supreme Court has defined commercial speech as any “expression related solely to the economic interests of the speaker and its audience.” See Central Hudson v. Public Serv. Comm. Of New York, 447 U.S. 557, 562 (1980). Debt collectors generally act on behalf of creditors who have an existing economic relationship with the debtor, or on behalf of entities who purchase delinquent accounts after they have gone into default. When a collector leaves a message for a debtor requesting a return call, that message is a form of expression that relates to the parties’ economic interests.

It is true that commercial speech is entitled to less protection than other forms of expression. No regulation that restricts commercial speech can survive, however, unless it directly advances a substantial governmental interest and is not more extensive than necessary to serve that interest.

The holding that the message in Foti was a “communication” under the FDCPA places an unreasonable restraint a collector’s lawful commercial speech.

III. The Foti Decision Improperly Construes The FDCPA In A Manner That Prohibits Or Unreasonably Restricts Valid Commercial Speech

Statutes should not be construed in a manner that will raise serious constitutional problems. A “cardinal principle” of statutory construction is that “where an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress.” See Debartolo v. Florida Gulf Coast Build. & Constr. Trades Council, 485 U.S. 568, 575 (1988) (citing N.L.R.B. v. Catholic Bishop of Chicago, 440 U.S. 490, 499-501, 504 (1979). This rule, which is sometimes referred to as the “canon of constitutional avoidance,” has been described as “a tool for choosing between competing plausible interpretations of a statutory text, resting on the reasonable presumption that Congress did not intend the alternative which raises serious constitutional doubts.” See Clark v. Martinez, 543 U.S. 371, 381 (2005).

Thus, in Debartolo, when a proposed interpretation of a provision of the National Labor Relations Act would have prohibiting peaceful handbilling, thereby raising serious First Amendment issues, the Court concluded that “we must independently inquire whether there is another interpretation, not raising these serious constitutional concerns, that may fairly be ascribed to” the statute. See Debartolo, 485 U.S. at 577. After concluding the statute was “open to a construction that obviates deciding” the constitutional issues, and finding no “clear indication” in the legislative history that Congress intended to prohibit the peaceful handbilling at issue, the Court affirmed the lower court’s reversal of the NLRB’s ruling. Id. at 578, 583-88.

The Foti court erred by interpreting the definition of a “communication” under the FDCPA in a manner that raises serious constitution problems. Foti held that 1) a voicemail message that does not mention a debt but simply invites a return call from a debtor is a “communication” within the meaning of section 1692a(2) of the FDCPA, and 2) that such a message must state that it is from a “debt collector” under section 1692e(11) of the Act. See Foti, 424 F. Supp. 2d at 665-66, 669. But the voicemail message in Foti was not a “communication” because it did not convey “information regarding a debt directly or indirectly to any person.” See 15 U.S.C. § 1692a(2) (defining “communication”) (emphasis supplied). Since no information “regarding a debt” was conveyed by the message, there was no “communication.” Further, a voicemail message cannot recite that it is from a “debt collector” without risking a violation of the Act’s prohibition on third party disclosure. See 15 U. S. C. § 1692c(2). By interpreting the Act in this manner, the Foti court imposed an unreasonable restraint on the use of voicemail messages.

The Foti court should not have construed the FDCPA in a way that effectively bans truthful, non-threatening voicemail messages, unless the court found a “clear expression of an affirmative intention of Congress” to do so. See Catholic Bishop, 440 U.S. at 504. Nothing in the plain language of the FDCPA or its legislative history suggests that Congress intended this result.

The FDCPA was passed by Congress in 1977 in an effort to protect consumers from threats, harassment, abuse and other deceptive practices that might be utilized by unscrupulous debt collectors. See 15 U.S.C. § 1692. The legislative history that the objective of the Act was to eliminate debt collection practices such as:

threats of violence; obscene language; the publishing of 'shame lists;' harassing or anonymous telephone calls; impersonating a government official or attorney; misrepresenting the consumer's legal rights; simulating court process; obtaining information under false pretenses; collecting more than is legally owing; and misusing postdated checks.

See Sen. Rep. No. 382, 95th Cong. 2d Sess. 4, reprinted in 1977 U.S.C.C.A.N. 1695, 1698 (internal quotation marks omitted).

Congress also took great pains to design a regulatory scheme that would do more to protect the consumer’s privacy during the collection process. See 15 U.S.C. § 1692(a) (“Abusive debt collection practices contribute to . . . invasions of individual privacy.”). With very limited exceptions, collectors are prohibited from disclosing the existence of a debt to any third parties. Id. § 1692c(b). Although collectors may contact third parties to obtain certain location information, collectors must carefully avoid disclosing the existence of the debt during that process. Id. § 1692b. Collectors may not publish lists of consumers with unpaid debts. Id. § 1692d(3). To avoid third party disclosure, collectors may not communicate about a debt by post card, nor may they use language on an envelope which indicates a collection letter is enclosed. Id. §§ 1692f(7), 1692f(8).

Thus, the focus of the Act is the prevention of harassment and abuse and the protection of consumer privacy. Nothing in the Act or its legislative history evinces a Congressional intent to regulate voicemail messages that merely seek a return call from a debtor. Rather, as the Ninth Circuit recently observed,

The purpose of the FDCPA is to protect vulnerable and unsophisticated debtors from abuse, harassment and deceptive collection practices. . . . Congress was concerned with disruptive, threatening, and dishonest tactics. The Senate Report accompanying the Act cites practices such as ‘threats of violence, telephone calls at unreasonable hours [and] misrepresentation of consumer’s legal rights.’ (Citation). In other words, Congress seems to have contemplated the type of actions that would intimidate unsophisticated individuals and which, in the words of the Seventh Circuit, ‘would likely disrupt a debtor’s life.’ (Citation).

Guerrero v. RJM Acquisitions LLC, 499 F.3d 926, 938-39 (9th Cir. 2007) (emphasis added). Congress specifically stated that one purpose of the Act was to “insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged . . . .” See 15 U.S.C. § 1692.
The most reasonable interpretation of the FDCPA – and the one which avoids the serious constitutional problems raised by Foti – is that the voicemail message at issue in Foti did not convey any “information regarding a debt directly or indirectly to any person” (see 15 U.S.C. § 1692a(2)), and therefore was not a “communication” within the meaning of the FDCPA.

The Foti court suggested that if the collector’s voicemail message was not considered a “communication” under the FDCPA, this might “create a significant loophole” that could undermine the protections afforded by the Act. See Foti, 424 F. Supp. 2d at 657. But no such “loophole” exists. The message itself does not harm the debtor, and the debtor can elect not to return the call. If the debtor returns the call and an actual “communication” occurs, the collector would be obliged to comply with all provisions of the Act, including disclosing that it is a “debt collector” consistent with section 1692e(11).

The “loophole” theory also ignores the other sections of the Act which protect the debtor. The collector cannot cause a phone to ring repeatedly or continuously with the intent to harass or annoy any person. See 15 U.S.C. § 1692d(5). The collector cannot utilize any false, deceptive, or misleading representation or means to collect a debt, nor can it employ any unfair or unconscionable means to collect. See 15 U.S.C. §§ 1692e, 1692f. A debtor retains the power to stop all communications from a collector by informing the collector in writing that the debtor refuses to pay the debt, or that the debtor wishes the collector to cease further communications. See 15 U.S.C. § 1692c(c).

IV. Conclusion

Debt collectors engage in protected commercial speech when they leave truthful, non-threatening voicemail messages that simply invite a return phone call from the debtor. Such messages do not constitute “communications” under the FDCPA because they do not convey information “regarding a debt” to anyone. By ruling that such messages constitute “communications” and therefore must recite that they are from “debt collectors,” the Foti court put all collectors who leave messages at risk of violating the Act’s third party disclosure requirements, thereby placing an unreasonable restriction on valid commercial speech. The Foti court violated the Supreme Court’s holding in Debartolo by construing the FDCPA in a manner that raises serious constitutional problems under the First Amendment.

Endnotes:
1. The Act defines a “communication” as follows: “The term ‘communication’ means the conveying of information regarding a debt directly or indirectly to any person through any medium.” See 15 U.S.C. § 1692a(2).
2. Since the Foti decision issued, numerous other court have reached similar conclusions. See, e.g., Baker v. Allstate Fin. Srvs., Inc., 554 F. Supp. 2d 945 (D. Minn. 2008);Anchondo v. Anderson, Crenshaw & Assocs., 583 F.Supp.2d 1278, 1281-82 (D.N.M. 2008);Edwards v. Niagara Credit Solutions, Inc., 586 F.Supp.2d 1346, 1351-53 (N.D. Ga. 2008), aff’d on other grounds, 584 F. 3d 1350 (2009); Ramirez v. Apex Fin. Mgmt., LLC, 567 F.Supp.2d 1035, 1041(N.D. Ill. 2008).
3. There are certain limited exceptions to the prohibition on third party disclosure, which are not relevant here. See, e.g., 15 U.S.C. §§ 1692b, 1692c(b).
4. For example, in Berg v. Merchs. Ass’n Collection Div., 586 F. Supp. 2d 1336 (S.D. Fla. 2008), the defendant left a message on the plaintiff’s voice mail machine which stated that it was “an attempt to collect a debt.” Id. at 1339. The debtor sued under section 1692c(b) of the FDCPA, alleging the message was overheard by his father, step-mother, step-mother’s ex-spouse, girlfriend and neighbor. Id. Even though the collector had attempted to prevent disclosure, by warning any third parties to stop listening, the court refused to grant the collector’s motion to dismiss. Id. at 1441-44.
5. Although the voicemail message left by the collector in Foti was a form of expression that related to the economic interest of the parties and was therefore entitled to First Amendment protection, as discussed herein, that message did not communicate any information directly or indirectly “regarding a debt” to anyone, and the Foti court therefore erred when it held the message was a “communication” within the meaning of section 1692a(2) of the Act.
6. The existence of this business relationship with the debtor is also a significant factor in distinguishing Foti from the facts presented by Mainstream Marketing Services, Inc. v. FTC, 358 F. 3d 1228 (10th Cir. 2004). Mainstream Marketing upheld a ban on most telemarketing calls made to consumers who had registered their phone numbers on the national “do-not-call” registry, noting that “individuals are not required to welcome unwanted speech into their own homes . . .” Id. at 1237-38, 1246. But the restrictions on “unsolicited calls from commercial telemarketers” at issue in Mainstream Marketing did not apply to companies with an “established business relationship” with the consumer. Id. at 1234 and n.7.
7. While the Supreme Court has noted that the Constitution “protects commercial speech from unwarranted governmental regulation,” the Court has also noted that the Constitution “accords a lesser protection to commercial speech than to other constitutionally guaranteed expression.” Central Hudson, 447 U. S. at 563.
8. The Court in Central Hudson articulated the test as follows: “At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.” Central Hudson, 447 U.S. at 566.
9. See also Solid Waste Agency of Northern Cook County v. Un. St. Army Corps of Engrs, 531 U.S. 159, 172-74 (2001) (rejecting interpretation of Clean Water Act that would raise “serious constitutional issues” relating to the reach of the Commerce Clause); Jones v. United States, 590 U.S. 848, 857-58 (rejecting interpretation of federal arson statute that raised serious constitutional issues regarding the scope of the Commerce Clause: “where a statute is susceptible of two constructions, by one of which grave and doubtful constitutional questions arise and by the other of which such questions are avoided, our duty is to adopt the latter. (citation)”).
10.Similarly, if a collector elected to leave a voicemail message that did convey information concerning the debt directly or indirectly, that message would constitute a “communication” and would need to comply with the statute.
11.The forgoing is provided for informational purposes only and should not be construed as legal advice given by the author or by Simmonds & Narita LLP. Transmission of this information is not intended to create an attorney-client relationship, nor should it be viewed as a substitute for obtaining legal advice from a licensed attorney. Parties should not rely upon the foregoing without first engaging their own legal counsel to obtain advice.

How To Combat Frivolous FDCPA Lawsuits: Tapping Into Section 1927 And The Court's Inherent Powers

2010-03-17T07:01:00.000-07:00

[Note: this post is adapted from an article authored by Tomio Narita and originally published in the March 2010 MAP Bulletin]

Debt collectors have witnessed an incredible increase in the number of FDCPA cases filed in federal courts across the country. Let’s face it: some of these cases have merit, and they are a natural result of increasing collection volume. It would be irresponsible to conclude that just because the number of new FDCPA cases has skyrocketed, all of the new cases must be nuisance lawsuits.

But many of the FDCPA suits that are filed are frivolous, and many have been filed by consumer law firms that appear to specialize in a high-volume, cookie-cutter approach to litigation. What can collectors do about the cases that are so clearly without merit that they should never have been filed? How can a defendant fight back when a consumer attorney has refused to abandon a case long past the point where a reasonable attorney would have simply dismissed it? In situations where a plaintiff’s counsel has needlessly increased the cost of litigation, do debt collectors have any recourse?

Your first thought might be to file a motion for sanctions against an attorney under Rule 11 of the Federal Rules of Civil Procedure. Although Rule 11 can be an important way to combat frivolous action, the rule has limitations on its scope and it includes a “safe harbor” mechanism that can make a fee motion cumbersome to pursue. You might also consider section 1692k(a)(3) of the FDCPA, which allows a defendant to recover its reasonable costs and attorney’s fees where an action was filed “in bad faith and for the purpose of harassment,” but last year the Ninth Circuit clarified that counsel for a debtor cannot be held liable under that section. See Hyde v. Midland Credit Management, Inc., 567 F.3d 1137 (9th Cir. 2009). Where, then, can a collector turn when a frivolous FDCPA case has been recklessly pursued by an attorney who refuses to dismiss it?

Collectors should remember that a federal court has two important tools for sanctioning attorneys who pursue frivolous cases or who engage in bad faith litigation tactics: namely, 28 U.S.C. § 1927 and the court’s “inherent authority.” In the right circumstances, motions filed under section 1927 and the court’s inherent authority can be an effective way for collectors to fight back.

Sanctions under section 1927 are proper when an attorney has recklessly and knowingly abused the judicial process. Any attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct. 28 U.S.C. § 1927. As the Supreme Court has explained, section 1927

"does not distinguish between winners and losers, or between plaintiffs and defendants. The statute is indifferent to the equities of a dispute and to the values advanced by the substantive law. It is concerned only with limiting the abuse of court processes."

Roadway Express, Inc. v. Piper, 447 U.S. 752, 762 (1980).

In extreme cases, the record may show that a consumer attorney has engaged in bad faith conduct while pursuing an FDCPA action. But the Ninth Circuit has confirmed that a bad faith finding is not required to support a sanctions award under section 1927. See B.K.B. v. Maui Police Dep’t, 276 F.3d 1091, 1107 (9th Cir. 2002). Sanctions may be imposed under section 1927 against an attorney who merely acts recklessly. See also Gomez v. Vernon, 255 F.3d 1118, 1134 (9th Cir. 2001) (“Section 1927 requires a finding of recklessness or bad faith.”).

A motion under section 1927 can also be combined with a motion for sanctions under the court’s “inherent power.” Every district court has certain “inherent” powers, including the power to “levy sanctions in response to abusive litigation practices.” See Roadway Express, 447 U.S. at 765. This inherent power to sanction parties or attorneys is not displaced by other statutes or rules that allow a court to impose sanctions, such as section 1927 or Rule 11. See Chambers v. NASCO, Inc., 501 U.S. 32, 42-43 (1991). “The inherent powers of federal courts are those that ‘are necessary to the exercise of all others.’ Primus Auto. Fin. Servs., Inc. v. Batarse, 115 F.3d 644, 648 (9th Cir. 1997), quoting Roadway Express, 447 U.S. at 764.

The inherent powers of a court include the power to sanction an attorney for “bad faith” conduct by directing the attorney to pay the fees incurred by the opposing party. See Roadway Express, 447 U.S. at 765-66 (“If a court may tax counsel fees against a party who has litigated in bad faith, it certainly may assess those expenses against counsel who willfully abuse judicial processes.”). Bad faith conduct, however, is not required: conduct that is “‘tantamount to bad faith’ is sanctionable,” as well. B.K.B., 276 F.3d at 1108; accord Fink v. Gomez, 239 F.3d 989, 993-94 (9th Cir. 2001); Gomez v. Vernon, 255 F.3d at 1134 (no clear error “in finding conduct tantamount to bad faith” and imposing sanctions under inherent authority where attorney knowingly disregarded advice of state bar counsel regarding receipt of privileged materials).

Reckless conduct, combined with an improper purpose or knowing misconduct, is sanctionable under the court’s inherent powers. See B.K.B., 276 F.3d at 1107-08; see also Fink, 239 F.3d at 994 (sanctions permitted where attorney acts with “recklessness when combined with an additional factor such as frivolousness, harassment, or an improper purpose”); In Re Itel Secs. Litig., 791 F.2d 672, 675 (9th Cir. 1986) (sanctions proper where counsel “willfully abused judicial process or otherwise conducted litigation in bad faith.”).

An attorney may act in “bad faith” even when pursuing a colorable claim. In circumstances where the entire action was not “filed” in bad faith, an award of fees may be based upon counsel’s bad faith conduct during the litigation. See Roadway Express, 447 U.S. at 766. The Ninth Circuit has held that a finding of bad faith “does not require that the legal and factual basis for the action prove totally frivolous; where a litigant is substantially motivated by vindictiveness, obduracy, or mala fides, the assertion of a colorable claim will not bar the assessment of attorney’s fees. (Citation).” In Re Itel Secs. Litig., 791 F.2d at 675; see also Fink, 239 F.3d at 992 (“Itel teaches that sanctions are justified when a party acts for an improper purpose – even if the act consists of making a truthful statement or a non-frivolous argument or objection.”).

When exercising it inherent authority, a district court is also free to consider an attorney’s conduct in other litigation. See Artese v. Academy Collection Serv., Inc., 2000 WL 133733, at *4 (D. Conn. Jan. 18, 2000); see also Johnson v. Commissioner of Internal Revenue, 289 F.3d 452, 456-57 (7th Cir. 2002) (“The Tax Court was not required to ignore Izen’s bad conduct in other cases; indeed it would have been remiss not to consider it.”). In Itel, although the objections filed by counsel were not frivolous, the Ninth Circuit affirmed the district court’s conclusion that they were asserted in bad faith and solely to gain an advantage in other pending litigation. See Itel, 791 F.2d at 675-76. Similarly, in Fink, the Ninth Circuit held that an attorney’s reckless misstatements of fact and law in the case before the district court could amount to bad faith if the statements were made for the purpose of gaining a tactical advantage in a separate action. See Fink, 239 F.3d at 994.

Collectors are understandably frustrated by the onslaught of FDCPA litigation they are facing, and by the tactics employed by certain consumer attorneys. Keep in mind that consumer lawyers, like defense lawyers, are entitled to be vigorous advocates for their clients, and that motions for sanctions are not appropriate for every case. But for those extreme cases where a collector can demonstrate that a consumer attorney has engaged in bad faith or reckless litigation tactics, collectors should consider fighting back by filing motions under section 1927 or the court’s inherent powers.

Is Donohue The Death Knell For Technical FDCPA Violations?

2010-03-17T06:46:00.000-07:00

[Note: this post has previously appeared as an article authored by Tomio Narita published in the February 2010 MAP Bulliten]

In its recent opinion, Donohue v. Quick Collect, Inc., 592 F.3d 1027 (9th Cir. 2010), the Ninth Circuit joined the Seventh Circuit and the Sixth Circuit, holding that a false and misleading statement does not violate sections 1692e or 1692f of the FDCPA unless the statement is “material.” See Donohue, 592 F.3d at 1033-34. Does Donohue mark the end of the era of hyper-technical FDCPA violations? While it is probably too early for collection professionals to celebrate, the Donohue case provides strong additional support for notion that technical FDCPA violations are on their way out.

The plaintiff in Donohue asserted a highly-technical alleged violation of the FDCPA. She claimed the collector violated the Act by serving her with a state court complaint which sought the “sum of $270.99, together with interest thereon of 12% per annum . . . in the amount of $32.89.” The collector was entitled to collect the $32.89, but that figure did not actually reflect 12% interest on the principal balance due. Rather, the $32.89 figure was comprised of $24.07 in pre-assignment finance charges (properly assessed by the original creditor) and $8.82 in post-assignment interest calculated at the 12% annual rate. Thus, the statement in the collection complaint was technically false. Id. at 1032.

Despite this, the Ninth Circuit ruled that the collection complaint did not violate the FDCPA. The complaint “sought recovery of sums to which Quick Collect was clearly and lawfully entitled” even though it incorrectly labeled the $32.89 amount sought as 12% interest on principal, instead of finance charges imposed by the creditor and post-assignment interest. Id. at 1033. Following the Seventh Circuit’s decisions in Hahn v. Triumph Partnerships LLC, 557 F.3d 755 (7th Cir. 2009), and Wahl v. Midland Credit Mgmt., Inc., 556 F.3d 643, 646 (7th Cir. 2009), as well as the Sixth Circuit’s decision in Miller v. Javitch, Block & Rathbone, 561 F.3d 588, 596 (6th Cir. 2009), the Ninth Circuit held that a false and misleading statement is not actionable under the FDCPA unless it is “material.” The Court stated: “We now conclude that false but non-material representations are not likely to mislead the least sophisticated consumer and therefore are not actionable under §§ 1692e or 1692f.” See Donohue, 592 F.3d at 1033.

The Ninth Circuit’s holding that only material misstatements violate the FDCPA is consistent with the remedial nature of the Act, because “immaterial statements, by definition, do not affect a consumer’s ability to make intelligent decisions.” Id. The Court noted that:

"In assessing FDCPA liability, we are not concerned with mere technical falsehoods that mislead no one, but instead with genuinely misleading statements that may frustrate a consumer’s ability to intelligently choose his or her response. Here, the statement in the Complaint did not undermine Donohue’s ability to intelligently choose her action concerning her debt."

Id. at 1034. As the Ninth Circuit observed: “Even if the Complaint had separated $32.89 into interest and finance charges, we can conceive of no action Donohue could have taken that was not already available to her on the basis of the information in the Complaint—nor has Donohue articulated any different action she might have chosen.” Id.

Under Donohue, a consumer must demonstrate “materiality” by showing how an allegedly false or misleading statement could have impacted the least sophisticated debtor’s ability to make intelligent choices. Although the court stopped short of adding a “reasonable reliance” requirement, similar to common law fraud, Donohue does require plaintiffs to explain how the least sophisticated consumer might have changed their position as a result of the allegedly false and misleading statement. Highly-technical violations of the FDCPA will rarely qualify as “material” under Donohue because the language used by the collector will not “frustrate a consumer’s ability to intelligently chose a response” to the collector’s communication. Donohue, 592 F.3d at 1034.

The FDCPA was passed to prevent truly “abusive, deceptive and unfair debt collection practices” (see 15 U.S.C. § 1692(a)), not as method for consumers and their attorneys to seize upon meaningless misstatements contained in letters and collection complaints. Circuit courts across the country, including the Ninth Circuit, are recognizing this by holding that technically false statements do not violate the FDCPA unless they are “material” to the collection process. Collectors facing highly-technical FDCPA claims have a powerful new ally in Donohue.