Don’t get me wrong. I fully understand that the decision in Pintos v. Pacific Creditors Association (9th Cir 2007) 504 F.3d 792 seriously affects the way the collection and credit reporting industries conduct their business. Changes in business practice will, of course, have to be made, but the near hysteria which the ruling has generated in certain quarters is far out of proportion to the opinion’s actual affect.
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Does this mean the current decision is correct? In my mind, the answer is clearly no, which is why Andrew Steinheimer and myself, on behalf of PCA, a collection agency, and the Jones Day firm, on behalf of Experian, have asked for en banc review by the entire Ninth Circuit. 1 Nonetheless, the world will not end even if the decision becomes final—as I explain below.
The saga started when a vehicle registered to Marie Pintos was found by the police illegally parked on the street in San Bruno, California. They ran the registration and found it had expired, and they had it towed by P&S Towing to an impound lot.
Pintos did not reclaim the vehicle or pay for the towing and impound charges. P&S asserted a towing/impound charge lien. Subsequently, P&S auctioned the vehicle at a commercial sale, but only recouped part of the towing/impound costs. P&S subsequently assigned the deficiency balance to PCA for collection. As part of its collection efforts, PCA sought, and obtained, a credit report on Ms. Pintos. This was, of course, standard collection practice throughout the collection industry and the practice appeared supported by applicable case authority. See Edge v. Professional Claims Bureau, Inc. (E.D. N.Y. 1999) 64 F.Supp.2d 115.
On December 5, 2002, PCA obtained Ms. Pintos’ credit report from Experian in connection with its collection efforts.
On December 4, 2003, Pintos filed her Complaint against PCA and Experian, the credit reporting agency from which PCA had obtained the report. As to PCA, the Complaint asserted a single cause of action for violation of the FCRA based on PCA’s acquisition of Ms. Pintos’ credit report, allegedly without a “permissible purpose” in violation of 15 U.S.C. Section 1681b. As to Experian, the Complaint alleged that Esperian violated the FCRA by improperly furnishing Ms. Pintos’ credit report to PCA.
PCA thereafter filed a motion for summary judgment, as did Experian, both of which were heard on November 5, 2004. On November 9, 2004, the District Court granted PCA’s and Experian’s motions for summary judgment and entered the judgment in favor of PCA and Experian, and against Ms. Pintos. 2
Ms. Pintos challenged the District Court’s grant of summary judgment in favor of PCA and Experian (which led to the dismissal of her case) and she appealed to the Ninth Circuit.
On appeal, the sole issue before the court was whether PCA’s conduct in requesting Pintos’ credit report (for the purpose of assisting it in the collection process) and Experian’s conduct in supplying the report for that purpose, were “permissible” within the meaning of that term under 15 U.S.C. §1681b(a)(3)(A).
The relevant case authority that then interpreted the FCRA, and which were then applicable to PCA’s and Experian’s 2002 conduct, supported the conclusion of the District Court judge that “pulling” a credit report was “permissible” under the FCRA if related to the “collection of an account.” FCRA, 15 U.S.C. § 1681b(a)(3)(A); see, e.g., Edge v. Professional Claims Bureau, Inc., supra, 64 F.Supp.2d at 117-119; see also Hasbun v. County of Los Angeles (9th Cir. 2003) 323F.3d 801, 803-804; Korotki v. Attorney Services Corp. (D. Md. 1996) 931 F.Supp. 1269, 1277.
The showing of a “permissible” purpose acts as a complete defense to a so-called “impermissible purpose” claim under the FCRA, such as that brought by Ms. Pintos. Washington v. CSC Credit Services (5th Cir. 2000) 199 F.3d 263, 266-267; accord Edge, supra, 64 F.Supp.2d at 117-118.
There are several circumstances, or so-called “permissible purposes” under which a credit report may be pulled, including:
- for “employment” related purposes (15 U.S.C. § 1681b(a)(3)(B));
- for insurance underwriting related reasons (15 U.S.C. § 1681b(a)(3)(C));
- for licensing considerations and financial determinations (15 U.S.C. § 1681b(a)(3)(D));
- in order to evaluate credit risk in certain financial transactions (15 U.S.C. § 1681b(a)(3)(E));
- where there is a “legitimate business need” arising from certain transactions with the consumer (15 U.S.C. § 1681b(a)(3)(F));
- in response to court order or federal grand jury subpoena (15 U.S.C. § 1681b(a)(1); and/or
- based upon the express written consent or authority of the consumer whose credit is being pulled (15 U.S.C. § 1681b(a)(2)).
A “permissible purpose” exists under the FCRA § 1681b(a)(3)(A) where:
In general. – Subject to subsection (c) of this section, any consumer reporting agency may furnish a consumer report under the following circumstances and no other:
(3) To a person which it has reason to believe –
(A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, review or collection of an account of, the consumer. (Emphasis added.)
The Ninth Circuit Opinion
At first blush, the Ninth Circuit seemingly recognized the correctness of the District Court’s decision to dismiss Ms. Pintos’ case – noting that the District Court’s “reading of Hasbun was not unreasonable” (Pintos, supra, 504 F.3d at 799) – but, it nevertheless “reverse[d] the district court.” Id. at 796. The Ninth Circuit explained that “FACTA makes clear” that “debt collection is a permissible purpose for obtaining a credit report under § 1681b(a)(3)(A) only in connection with a ‘credit transaction’ in which a consumer has participated directly and voluntarily.” Id. (Emphasis added).
The Court of Appeals based this holding on a definition of “credit” – a term undefined in the FCRA as of December 2002 – that was added in 2003 by the FACTA amendments. “Credit” is defined under FACTA as “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefore.” Pintos, supra, 504 F.3d at 798 (quoting the FACTA definition codified in 15 U.S.C. § 1691a(d).)
The Ninth Circuit Panel reasoned that “[b]y defining credit as a ‘right . . .to defer payment,’ FACTA indicates that a § 1681b(a)(3)(A) ‘credit transaction’ could only involve a transaction in which the consumer directly participates and voluntarily seeks credit.” Id. (Emphasis added.)
In other words, only consumer-initiated debt involves a voluntary “credit transaction.” Id.. The panel did not explain how it derived its “voluntarily seeks credit” rule from FACTA’s definition. 3
In addition, although the Ninth Circuit noted the open question of “whether PCA’s pre-FACTA conduct may subject it to penalties under a post-FACTA reading of the FCRA” (Id. at 800), it nevertheless offered no explanation for why it was utilizing a “post-FACTA reading” in a case that concerned “PCA’s pre-FACTA conduct.” See generally Id. at 799-802.
The Ninth Circuit further held that the Circuit’s own earlier Hasbun decision was no longer “persuasive” because it had to be “reevaluated” in light of the new FACTA amendments. Accordingly – and without explaining why any “reevaluati[ion]” was necessary in a pre-FACTA case – the panel expressly rejected Hasbun’s conclusion that debt collection generally was a “permissible purpose” under the FCRA for pulling a credit report – a view shared by the Federal Trade Commission, and other courts. Id. at 800 & n. 4 (citing 16 C.F.R. Pt. 600, App. at 509 (2002); Duncan v. Handmaker (6th Cir. 1998) 149 F.3d 424; Baker v. Bronx-Westchester Investigations, Inc. (S.D.N.Y. 1994) 850 F.Supp.260, 262-63.
Applying its new interpretation, the Ninth Circuit concluded that PCA could have had no permissible debt-collection purpose, because Pintos did not voluntarily incur the towing debt. Id. at 800-802. The opinion therefore reversed the dismissal, reinstated Ms. Pintos’ case, and remanded the case back to the District Court.
It is significant to note that none of the parties on appeal relied upon, or even raised, the FACT Act amendments in their briefs – this includes Ms. Pintos’ attorneys. Because the conduct at issue here all occurred in 2002, the parties’ briefs (understandably) addressed only the then applicable law (e.g. Edge, Hasbun) to that conduct, rather that the later-passed, non-retroactive FACTA. As a result, the Ninth Circuit’s ruling was made without the benefit of any relevant briefing, and is wholly advisory with respect to the controversy actually before the Court. This is one reason we have asked the entire Ninth Circuit to review the opinion and we have asked the court to reconsider and vacate the portion of its opinion purporting to address the FCRA as amended by FACTA.
In short, we have asked the court to decide the case on the basis of the applicable 2002 pre-FACTA law. In the alternative, we have asked the court to permit further briefing and argument concerning the applicability and interpretation of FACTA, which we believe will demonstrate that (1) FACTA is wholly inapplicable to this case, and (2) even if the FACTA amendments are applicable, the Ninth Circuit’s interpretation is still erroneous.
Finally, we believe that other un-argued “permissible purposes” existed to pull the report; for example, that “PCA” possessed a “legitimate business need” for the information. We believe that under the circumstances, we should be permitted to argue those alternative bases.
In any event, as noted, we have moved to have the ruling reexamined by the entire Ninth Circuit (“en banc”) because we feel the ruling threatens the traditionally accepted use of credit reports, and, as noted, the ruling was inexplicably and erroneously based entirely on a statue enacted after the conduct at issue, but retroactively applied.
The decision also overrules sub silencio the earlier decision of the Ninth Circuit in Hasbun v. County of Los Angeles. The Pintos court avoided the full-court review required to overturn Ninth Circuit precedent by citing FACTA as purportedly changing the law, but, as noted above, FACTA should not have been applied at all. Review en banc is therefore necessary, in our view, to maintain the uniformity of case law.
Equally significantly, the case presents a “question of exceptional importance” that, in our judgment, was decided precipitously and erroneously. By restricting the permissible use of credit reports for debt collection to only “voluntary” debts, the decision removes an important tool that has traditionally been relied upon for the collection of, among other things, taxes, child support and other debts. A decision of such import should not be rendered without the benefit of full on-point briefing and argument. It was not here – by either side. We believe, such briefing would demonstrate that the panel’s interpretation of FACTA is highly suspect.
Life After Pintos
Nonetheless, despite our fervent belief that the Ninth Circuit was wrong, it is clear that there remain many bases to justify the pulling of a credit report. And, “voluntary” credit transactions involve any situation where there is an extension of credit, whether express or, as noted in Pintos, by “implication.” For example, credit card debt involves a voluntary credit transaction. Revolving charge cards and store credit would qualify. Payments permitted over time probably qualify. Thus, collections on such debts would permit the pulling of a credit report.
Bad checks, on the other hand, are not voluntary credit transactions under California law unless the possibility of a post-dated check is involved. Medical debts would have to be examined on a case-by-case basis, but, as a general rule in my judgment, the answer is they do not involve credit transaction. Also remember that you and your clients can insert express written authorizations for the pulling of credit reports into contracts, agreements and notices.
As with other bad rulings, life, and your business, will go on. You will adjust. So relax, and we’ll keep you advised--from the Frontline.
1. As of the date of this article, a decision on whether review would be granted is still pending.
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2. Meanwhile the Fair and Accurate Credit Transaction Act (FACT Act or FACTA) was signed into law on December 4, 2003. That law amended certain provisions of the FCRA, including the definition of "credit" as discussed below. Those amendments became effective on March 31, 2004 (see 12 C.F.R.
§ 221.1(c)(i); 16 C.F.R. § 602.1(c)(2)(i), or more than 15 months after PCA sought and obtained Pintos' credit report in December 2002. No amendment under the FACT Act became effective prior to December 31, 2003. Return To Text
3. The court did note, however, that a "consumer who chooses to initiate a credit transaction implicitly consents to the release of a credit report for related purposes." Return To Text
The above article and all articles in this website are not intended to be legal advice. Readers should consult an attorney to determine how the law applies to their particular circumstances. Also, please understand that the law constantly evolves and changes. Certain of the decisions and legal propositions quoted in the above article may be out of date or superseded. Questions or comments about the above article can be directed to its author, Mark E. Ellis.
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