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Unfortunately, the odds are pretty good that if you are a collection agency or a collection attorney, you have been (or will someday be) sued for allegedly violating the Fair Debt Collection Practices Act (“FDCPA”), or some other similar law or regulation. The FDCPA’s attorney’s fee provision (FDCPA, 15 U.S.C. §1692k(a)(3)), which permits a debtor’s attorney to receive his or her attorney’s fees for even a “technical” breach of the FDCPA, provides a powerful incentive to bring an FDCPA claim for even questionable (and one might even say “frivolous”) violations.
Consequently, the hard and inescapable truth is that even the best, most scrupulously compliant collection agency or attorney will probably be sued at some point. The purpose of this article is to cover some of the important issues to keep in mind if, and after, you are sued.
BEFORE YOU ARE SUED
For those of you who have heard me speak, you know that I strongly believe that a case is often, if not
invariably, won or lost before you are served with a lawsuit. Indeed, if you cannot eliminate a lawsuit, the best strategy is to at least minimize the debtor’s chance of winning by the implementation of effective risk management which is built into your operational policies and procedures.
There must be an agency-wide commitment to develop and adhere to invariable policies and procedures as to how you (and your employees) interact with debtors.
|" . . . the hard and inescapable truth is that even the best, most scrupulously compliant collection agency or attorney will probably be sued at some point."
In this regard, the PPMS Program may be helpful in assisting in the set up of such policies and procedures, as well as in ensuring that your agency’s compliance is well documented. Written documentation is especially helpful in assisting your lawyer in the event you are sued.
By way of one example, most agencies use one of several commercially available computerized “collection note and tracking” systems. With such a system, it is possible to follow the history of the collection process and status of a particular account from its assignment or purchase. The information stored in these types of systems is extremely helpful to your attorneys, so long as the collector’s notes are accurate and thorough. The history of the communications (written and oral) documented in the system must, in fact, be accurate. Information documented in the notes (such as the date of assignment or the date the first notice was mailed) is helpful from both a pre-claim (risk management) standpoint, as well as from a post-lawsuit defense standpoint.
An in depth exploration of pre-litigation practices is beyond the scope of this article; however, one other issue warrants discussion here. This is the issue of how receipt of pre-litigation written threats, demands, and the service of a lawsuit is handled by your company. If at all possible, any threat of a possible lawsuit or demand should be handled by one person or department within your organization. For example, this person may be designated as the “risk manager” in your organization. Many debtor threats or demands go nowhere, but, even so, management needs to evaluate and respond to such pre-litigation communications in a consistent, coherent fashion.
Generally, it is not a good idea to have collectors themselves, lower level managers, or other employees make the determination as to whether you have received a “serious” threat or not. Rather, any written threat should be funneled to one person or department for evaluation and a response, if necessary. Even a written request for a validation of debt received from a debtor should be forwarded to this centralized risk management department, or to the risk manager. Receipt of such letters should always be noted and flagged in the agency’s “collector’s notes” of the specific account, whether computerized or otherwise. Remember, the receipt of such a dispute may also trigger other obligations (such as the duty to report the debt as disputed) under the FCRA (and similar laws) if you have previously reported your history with the debtor to a consumer credit reporting agency.
Likewise, notes of all telephone conversations with debtors or their attorneys who threaten suit should be maintained by your collectors. If possible, your “risk manager” should normally handle a call from an attorney. The person I have referred to as the “risk manager” should determine when any “threat” is sufficiently serious enough to notify the company’s insurance company of a potential claim. What is considered a potential “claim” for purposes of insurance varies from policy to policy. Under all policies, receipt of a lawsuit constitutes a claim; however, under certain policies, a pre-litigation demand or threat may also constitute a claim. Under certain policies, failure to immediately report a “claim” may lead to a later denial of coverage if, the “claim” is thereafter tendered.
Of course, you and your risk manager may have other legitimate business reasons for not reporting a pre-litigation threat, or even an actual lawsuit, to the company’s insurer. This decision involves a cost-benefit analysis that is personal and highly specific to each agency. Indeed, experience shows that most threats just disappear. The payment of a pre-litigation “nuisance” settlement of, say, $500, without going through the hassle of the reporting process and creating a claims history may justify not reporting a pre-litigation threat or demand.
However, the company and its risk manager should also keep in mind that failed “in-house” attempts at resolution of a lawsuit may have coverage implications and lead to denial of coverage for a particular claim. Read your insurance policy carefully. Most insurance policies carry a standard condition that the insured is not to attempt to negotiate, or attempt to settle, a lawsuit on its own. The attempt to do so can lead to denial of coverage. Whether such a limitation exists or is enforced varies from insurer to insurer and claim to claim.
AFTER YOU ARE SERVED WITH A LAWSUIT
It is paramount that any lawsuit that is served on your company (whether properly served or not) must be funneled to the risk manager or some other clearly designated individual. We have found that, sometimes, a lawsuit may be served on a collector, secretary, or receptionist, who “sits” on the summons and complaint without immediately informing anyone it was received. We have occasionally been assigned the defense of a claim after a default had been entered because no one learned of the complaint’s existence until after the time to respond had expired. I cannot emphasize strongly enough that your employees must be educated, and re-educated, so that any lawsuit served on the company is taken to the risk manager (or other designee) on the same day it is received.
A lawsuit is initiated by the filing of a summons and complaint with the court and serving these documents upon the defendant. After the summons and complaint are served, an “appearance” must be filed which officially notifies the plaintiff’s counsel of your legal representation. This is generally done by filing an answer to the complaint or a motion to dismiss, and filing must be done within certain time limitations. Generally, if the complaint is filed in federal court, the deadline within which to prepare and file a responsive pleading is 20 days from the date of service; in California State courts, it is 30 days.
These deadlines do not afford much time (a) to decide whether to report the claim to your insurance company or attempt to settle it yourself, (b) to send the proper information to your insurance company (if this is what you decide to do), (c) to permit the insurance company time to decide whether to defend or to settle the claim, and/or (d) to send the claim to an attorney (i.e. my firm) for a preliminary evaluation as to whether the suit can be won, what it will cost to litigate or settle it, and how to respond or answer. It is an understatement to say this process is hindered when the summons and complaint sits on someone’s desk, or in a cubical for a week or two.
STEPS TO BE TAKEN AFTER YOU ARE SERVED
After your company is served with the summons and complaint, and it is funneled to the risk manager, there are several steps which should be taken immediately.
First, review the complaint to determine the gist of the claims being made, and, if time permits, prepare a brief outline of the claims. Check the complaint to see if any exhibits are attached, such as one of your demand or collection letters. Try to determine, preliminarily, whether you believe the claims have any credibility.
Second, assemble and review all materials and files pertaining to your collection efforts as to the debtor. Print out the collection notes and history, if computerized. If the collection is in litigation, pull the litigation file with the collection complaint and the like. Pull or print out all correspondence to or from the debtor or her attorney. The purpose of gathering this material is, among other things, to help put together a working chronology of events and to get a feel for the nature and the type of interaction between your company and the debtor. This information will be extremely valuable to your attorney for evaluation and defense purposes.
Third, if the complaint alleges a wrongful act (i.e. calling a debtor after 9:00 p.m.) which is explicitly in derogation of your company’s express policy, procedures, and training, then collect any written information which documents those policies. This will help your attorney put together and support a bona fide error defense.
Fourth, determine whether the collector who handled the plaintiff-debtor’s account is still employed with your agency. If so, obtain his or her version of events. Any notes you or your risk manager take from this interview should be put in a “litigation file” to ensure that they remain confidential. As is often the case, the high turnover of collectors may mean the actual collector involved no longer works for you. If this is true, attempt to obtain a forwarding address or telephone number for that previous employee to give to your attorney. Determine whether that employee left your employment on good terms or otherwise, as this is important information to your attorney as well.
Fifth, preserve your records. Do not, under any circumstances, destroy or alter your files or collector’s notes after the lawsuit is served. Be especially careful with computerized data, as it is possible to detect changes or additions and when they occurred. Many computerized collection systems have a lockout function to prevent altering or deleting the notes. Even if your system does not have this capability, it is a good policy to never alter collector’s notes beyond a reasonable window of time (so as to allow the collector to clarify or edit his or her notes). If a court believes you have altered or destroyed evidence, it can issue sanctions up to and including striking your answer or summarily entering judgment against you. Proof of willful and deliberate alteration of evidence can lead to the denial of insurance coverage as well. Believe me when I say that I can properly evaluate and defend you as long as I know -- fully and truthfully -- what I am dealing with. Help your attorney help you.
Sixth, after alerting the persons involved in the incident of the claim and obtaining their version of events, instruct them to avoid discussing the case with anyone who is not directly involved, other than the designated manager or your attorney. They should further be instructed not to discuss the case with other employees.
Finally, as a general rule of thumb, even management level employees or officers should decline discussing the case with a debtor’s attorney without first consulting the company’s attorney or insurance company. The reason for this is to avoid someone from making an inadvertent “admission against interest” that may be used against you later by the plaintiff’s attorney so as to increase the value of the case Thus, it is generally best, once a lawsuit is filed, to avoid direct communication with the debtor or the debtor’s attorney, even if they instigate it. Rather, communications or negotiations should be made through an intermediary, such as an attorney or your insurance company’s claims representative.
DO YOU REPORT THE CLAIM OR RESOLVE IT YOURSELF?
At some point shortly after you have been served with the lawsuit, have gathered all of the relevant materials, and have reviewed those materials, a determination must be made by you either to report the lawsuit as a “claim” to your insurer, or to attempt to settle the case yourself (presumably through an attorney). Again, while I act as “panel” counsel for several insurance companies, I will not presume to advise CAC members what is the “right” or the “wrong” decision as to tendering the claim. This is a determination that is highly personal to each agency or law firm. Whether a lawsuit should be reported as a claim is dependent upon too many variables for me to take a position in the abstract. There are certain questions that should be answered, however, in reaching the appropriate decision.
First, can you keep control of the settlement process and get the case settled for an acceptably small, or “nuisance” amount of money? The truth is that most claims settle for less than $5,000, and many are settled for less than $2,500. Given that most insurance deductibles that I see are between $5,000 and $25,000, a decision to attempt a “nuisance” settlement that saves you some money off your deductible is an understandable business decision. The problem is, however, the settlement process may “go south”, and if your self-help efforts at settlement are not successful, your efforts may trigger a denial of coverage under certain insurance policies.
Second, what is the size of the plaintiff’s demand, the costs of defense, and the chances of prevailing? You should consider the size of plaintiffs demand, the cost of defending the lawsuit, and whether the case can be won. The case may be won by way of summary judgment or some other pre-trial dismissal procedure, such as a demurrer or a motion for judgment on the pleadings.
If the demand is too high, and you are not likely to get the plaintiff to accept a settlement for less than your deductible, then it makes no sense not to report the lawsuit to your insurer and utilize the benefits of insurance. As for the cost of defense, the cold reality is that it is virtually impossible for a law firm to successfully evaluate, research, prepare and file a motion to dismiss, attend the hearing, argue, and the like, for much less than 10 to 15 hours of attorney time. And there is always a risk of losing a motion that should have been won. In short, plan that it will cost at least $2,500 to $3,500 to attempt to get a simple lawsuit summarily dismissed. The initial costs are normally much less if only an answer is filed.
There is some question as to whether agencies need to report claims which they have handled or settled themselves on a later application for insurance which asks for the agency’s claims history. If your application requires you to list even informally resolved suits, this may undermine any perceived advantage in not reporting a claim, in an effort to keep future premiums low.
Ultimately, the decision to report what appears to be a small or nuisance lawsuit is each agency’s business decision to make based upon its own cost/benefit analysis. But, be aware that a claim may actually “blow up” to be a large damage claim and that you may lose coverage by negotiating the claim directly, or by not reporting a claim promptly. Carefully weigh those risks in order to make a legitimate choice as to whether to report or not.
AFTER REPORTING THE LAWSUIT TO YOUR INSURER
If you decide to tender the lawsuit, the insurance company will normally appoint an attorney, like me, to defend your agency and any employee also named as a defendant. Your assistance is invaluable in evaluating whether to recommend settlement or litigation, as well as in evaluating the estimated cost of defense. For example, a written or oral narrative from you is extremely helpful. The following information should be included:
- Information on your company’s background.
- An outline of the interaction with the debtor chronologically (i.e. date of initial assignment, initial demand letter, and the like.)
- Describe the relevant communications that took place and provide an interpretation of their significance. Identify all collectors involved, their role and/or responsibilities.
- Provide relevant information about the debtor. Describe interactions with the debtor and include anything that might be helpful to the defense.
- Identify your strengths and weaknesses in this case. What areas of collection could be criticized and why? Do you believe your collection activity was proper and in compliance with the FDCPA?
- Identify areas where the defense attorney should focus his or her research or investigation.
- Establish a separate lawsuit file. Place all correspondence received from your attorney and the insurance company in this file.
- Forward all materials and information gathered (including the lawsuit and its exhibits).
After talking with you, the attorney will review all the materials you have provided and make an initial “snap-shot” evaluation as to whether the case can be won and at what stage (trial or earlier), and at what cost. Your view on whether to settle or to litigate will be elicited. If insurance is involved, the claims representative’s views are also important.
If the lawsuit is not immediately settled, then a responsive pleading, as discussed above, will need to be filed. Informal and formal investigation of the facts (called “discovery” or “pre-trial discovery”) then commences.
Tell your defense attorney everything you know, feel and believe about the case, regardless of whether the information supports or damages the case. Your attorney must know every fact to provide proper advice and an adequate defense. Information between you and your attorney cannot be made public at trial or at the deposition, since this information is protected by the attorney-client privilege.
During discovery, the attorneys investigate:
- the facts of the lawsuit;
- the existence of relevant documents;
- the nature and extent of damages; and
- whether legitimate defenses exist to defeat or mitigate the claim.
The attorneys use legal devices, such as:
- Requests for production - a method used to obtain documents from other parties.
- Interrogatories - written questions which must be answered by the other party.
- Depositions - oral questions posed to parties and other witnesses under oath.
Your personal involvement during formal discovery will usually be limited to answering written questions from the plaintiff’s attorney, producing files relating to your collection efforts and providing testimony during deposition to the plaintiff’s attorney. All of these activities will be accomplished through and with your defense attorney.
Because you are a party to a lawsuit, you are usually entitled to attend any depositions or court hearings that may occur during this phase of the lawsuit. Advise your attorney to provide a schedule of hearings for the case. It may be helpful to be present during a plaintiff’s deposition.
As the lawsuit progresses, your case will be continually reviewed by your attorney. If the facts ultimately turn out adverse, your attorney may recommend settlement.
On the other hand, if the facts are favorable, before trial, your attorney may attempt to have your case dismissed through a so-called motion for summary judgment. This is a request made to a judge to dismiss the case without trial. The motion argues that the plaintiff’s case is not sufficiently meritorious to reach a jury. We are very successful in winning these motions in FDCPA cases.
Only a small percentage of lawsuits actually go to trial. Many cases are disposed of by:
- summary judgment or other summary dismissal.
Cases that do go to trial are usually tried by a jury. On occasion, because of unique circumstances, a case may be tried by a judge rather than a jury. In a jury case, the lay jury determines:
- the question of liability (whether there was a violation), and
- damages (if liability exists, how much money should the plaintiff receive).
- whether any defense exists
The usual trial scenario goes something like this:
The case is assigned to a judge in whose courtroom the trial will be held. Thereafter, attorneys submit trial briefs which outline the facts of the case and applicable legal principles. The judge familiarizes himself or herself with the case by reading the trial briefs and talking briefly with the attorneys. Pre-trial motions are argued by counsel; these motions sometimes seek to exclude testimony, or other evidence, which may be prejudicial to a fair trial.
A jury is selected. The judge and/or the attorneys ask the prospective jurors questions in order to decided if individual jurors are “fair” or “biased”. Jurors may be biased if they are familiar with the subject matter of the lawsuit or because they know one of the parties, witnesses or lawyers. Some people claim that jurors are biased against collectors or attorneys; that has not been our experience.
Each side has the opportunity to challenge jurors for cause, which means that the judge is asked to dismiss jurors if it can be established they are prejudiced or biased. Prospective jurors can also be excused on a peremptory challenge. This means a juror can be excused arbitrarily; no reason need be given.
Once jury selection is complete, the attorney for the plaintiff presents an opening statement, that is, a brief outline of the evidence from the standpoint of plaintiff. Following the plaintiff’s opening statement, the defense counsel gives an opening statement on behalf of the agency and/or its employees.
The next phase is presentation of oral testimony and documentary evidence. The plaintiff presents his or her evidence, through testimony and exhibits and then rests. Following this, the defense presents its evidence and exhibits and then rests. After the defense has presented its case, the plaintiff often is allowed an opportunity to present rebuttal evidence which the defendant then can refute.
Once all the evidence is presented, the judge reads the court’s instructions to the jury. The instructions are prepared by each party and describe the law which applies to the case. Afterward, each side presents closing statements. The jury then retires to the jury room to deliberate the case. It may take a jury one or more days to reach a verdict.
When the jury returns its verdict, the judge signs a judgment “on the verdict”. Signing the judgment generally concludes the trial phase of the lawsuit. Of course, either party has the right to appeal a verdict if they believe an error occurred during the trial which prevented a fair hearing.
Even the most careful and competent collector, agency, or collection attorney can be the target of an FDCPA lawsuit. How you respond to such a suit may effect the final outcome. It is imperative that you play an active role in the defense.
Hopefully, you will never be sued, but if you are, I hope I have given you some information in this article to make the process less stressful and increase the chances of success.
This article is not to be considered legal advice by the author or Ellis Law Group LLP. Any person or agency with specific legal questions must consult with the legal counsel of their choice.
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