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When I started writing “Tales from the Frontline” 10 years ago, my goal was to write articles which were easy to read and understand by a non-lawyer audience, even though my articles almost invariably discussed legal issues. In rereading my most recent articles, I have noticed the tendency for them to become far too long, and much too “legal”, if you know what I mean.
For this, I apologize. I should have understood that the Collector’s Ink is not a law review, and that the articles should not be written for other lawyers, but for you, the interested CAC member. I pledge to get back to basics and write this and future articles in a non-technical fashion and to explain to you the importance that new legal developments and cases may have on your collection business.
In this article, I review the new U.S. Supreme Court decision of Jerman v. Carlisle. 1 Jerman is only the second case decided by the United States Supreme Court to analyze the text and legislative history of the FDCPA.
In upcoming articles, I hope to review the status and implications of Pintos v. PCA, 2 an FCRA decision which the Ninth Circuit Court of Appeal has just announced is now final, and Rouse v. Law Offices of Rory Clark, 3 which relates to the award of costs to a prevailing debt collector.
Karen Jerman owned a residence secured by a mortgage held by Countrywide. Countrywide retained the law firm of Carlisle, et al. to foreclose on the mortgage after payments allegedly were not timely made. The law firm filed a complaint in Ohio state court on behalf of Countrywide against Ms. Jerman. The complaint included with it a “validation” notice pursuant to 15 U.S.C. § 1692g, which stated the mortgage debt would be assumed to be valid unless Jerman disputed the debt in writing. The law firm used this language in reliance on the holding of another federal court, Graziano v. Harrison. 4 However, the same language was found to violate the FDCPA in a conflicting decision from another court, Camacho v. Bridgeport Financial, Inc.. 5
The attorneys at the law firm had reviewed the state of FDCPA law and exercised their considered legal judgment in drafting the notice at issue. They felt it was written in a way that they felt best reflected the correct interpretation of the FDCPA, although they were aware that two diametrically opposed views existed under the Graziano and Camacho holdings.
In any event, the 15 U.S.C. § 1692g validation notice sent by the Carlisle firm worked exactly as designed under the FDCPA. Jerman’s lawyer, in response to the notice, sought validation, and Carlisle, in turn, went to Countrywide for verification. Countrywide acknowledged that Jerman had, in fact, previously paid in full. Carlisle, in due course, withdrew its foreclosure action even before Jerman had to respond. She suffered no actual damage. In short, the validation of debts mechanism embodied in the FDCPA worked exactly as designed, and one would have assumed the matter would have been dropped with no further ado.
Ms. Jerman, however, (as we who defend FDCPA lawsuits so often see) decided to use the FDCPA as a sword, rather than a shield. As such, she filed her own lawsuit against the law firm seeking class certification and statutory damages under the FDCPA. Relying upon the Camacho decision, she contended the law firm’s notice violated § 1692g(a)(3) of the FDCPA when it stated her debt would be assumed valid unless she disputed the debt in writing – Camacho found that imposing such a requirement under § 1692g(a)(3) violated the plain language of that particular subsection.
The district court granted summary judgment in favor of the law firm, finding that the bona fide error defense applied to good faith errors, such as this one related to the correct interpretation of the FDCPA. It found this was particularly true where, as here, two valid, supportable, but directly conflicting interpretations existed. The Sixth Circuit Court of Appeals affirmed. Ms. Jerman then petitioned for certiorari review to the United States Supreme Court, and the High Court granted review.
The Supreme Court's Analysis and Holding
The issue presented to the Supreme Court was whether the FDCPA bona fide error defense found at 15 U.S.C. § 1692k(c) applied to a violation resulting from a debt collector’s mistaken interpretation of the requirements of the FDCPA itself.
In summary, the Court concluded the defense did not apply to a collector’s mistaken interpretation of the statutory scheme itself, even if the collector’s interpretation was reasonable and was reached in good faith. Consequently, the Supreme Court reversed the underlying judgment in favor of the collection law firm, and remanded the case back to the District Court.
The rather lengthy opinion analyzes the language of the FDCPA itself, its legislative history, various conflicting decisions, similar bona fide error language found in other statutes (such as the Truth in Lending Act), as well as public policy considerations. Justice Sotomayor, writing for the Court, held that the bona fide error defense was inapplicable under circumstances where the interpretation of the FDCPA was itself at issue. She wrote that to hold otherwise would violate the well-established legal principle that ignorance or mistake of law is no defense.
The majority decision pulled an interesting concurrence from Justice Scalia. He noted the majority’s decision gave short shrift to language from the FDCPA legislative history wherein a Senate Committee Report on the FDCPA provided: “[A] debt collector has no liability . . . if he violates the Act in any manner, including with regard to the Act’s coverage, when such violation is unintentional and occurred despite procedures designed to avoid such violations.” This and other language from the legislative history supported the argument that the bona fide error defense should apply to legal errors as to the FDCPA “coverage”, not just to clerical errors. While agreeing with the result of the Court, Justice Scalia noted this language was alternatively ignored, or rejected, by the majority in reaching its decision.
Justice Kennedy, joined by Justice Alito, wrote a strong dissent containing statements well worth repeating. Justice Kennedy observed:
|When the law is used to punish good-faith mistakes; when adopting reasonable safeguards is not enough to avoid liability; when the costs of discovery and litigation are used to force settlement, even absent fault or injury; when class action suits transform technical legal violations into windfalls for plaintiffs or their attorneys, the court, by failing to adopt a reasonable interpretation to counter these excesses, risks compromising its own institutional responsibility to ensure a workable and just litigation system. The interpretation of the FDCPA the court today endorses will entrench, not eliminate, some of the most troubling aspects of our legal system.
Justice Kennedy also noted:
|The case illustrates how a technical violation of a complex federal statute can give rise to costly litigation with incentives to settle simply to avoid attorney’s fees.  Today’s holding gives new impetus to this already troubling dynamic of allowing certain actors in the system to spin even good-faith, technical violations of federal law into lucrative litigation, if not for themselves then for the attorneys who conceive of the suit.
What Are The Implications Of The Jerman Decision?
So what are the practical implications from the Jerman decision?
First, any mistaken interpretation as to the legal scope, meaning or coverage of a particular provision of the Act itself is not subject to the bona fide error defense, no matter how reasonable or well researched. A wholly innocent, but mistaken, prediction as to the Act’s legal application will constitute a violation not subject to the bona fide error defense. Likewise, reliance upon the legal advice of an attorney as to the interpretation of the FDCPA is not a defense under the bona fide error provision of § 1692k(c) of the Act. An error of legal judgment with respect to a collector’s (or even a debtor’s) obligations under the FDCPA is not a bona fide error under the Act.
For example, currently there is a huge dispute over what type of disclosure and language is required under the FDCPA to be left on a debtor’s answering machine after Foti 6 and subsequent decisions. There is a split among the courts as to exactly what message must be left, when and with whom. After Jerman, it seems clear that if a collector erroneously, but in good faith, chooses the “wrong” message, the defense of bona fide error will almost certainly not be available as a defense to the violation. Unfortunately, this may also be true, as Justice Kennedy pointed out, as to other technical violations where the collector predicts wrong—legally—about the correct outcome of how a particular provision of this complex statute will be interpreted.
Second, there is nonetheless a bright side to the opinion in that, in footnote 4 of the decision, the Court expressly reserved for a later date a determination as to whether the bona fide error defense may apply to good-faith misinterpretations of state law, or even federal law (other than the FDCPA). We believe that this “carve-out” from the Court’s holding may have been a direct result of the strong briefing put forward on this precise issue by the CAC in its Amicus Curiae brief to the High Court.
Third, the Court reconfirmed that qualifying clerical errors still provide a basis for raising the bona fide error defense. Indeed, the Court held that non-clerical “factual” issues were also subject to the bona fide error defense. The Court writes: “Lawyers can, of course, invoke § 1692k(c) for violations resulting from qualifying factual errors.” The Court itself noted an example of a debt collector’s “qualifying factual error” as including the situation where the collector possesses the “factually mistaken belief. . .that a particular debt arose out of a non-consumer transaction and was, therefore, not ‘covered’ by the Act.” This language would tend to support the line of cases wherein it has been held that a debt collector may reasonably, and in good faith, rely upon information provided by the creditor client in undertaking collection activity – even if that information ultimately turns out to be incorrect. 7
Fourth, realistically, the Jerman decision will make little material difference to the defense of collectors in California, since we have been operating under a similar interpretation from the Ninth Circuit that has been on the books since 1982 in the form of the Baker v. G.C. Services decision. 8 That decision, like Jerman, held that the bona fide error defense did not apply to a mistake of law as to the proper interpretation of the FDCPA itself. As such, Jerman will not affect FDCPA defense practice in California where, for almost 30 years, “pure” legal errors, without more, have not been subject to the bona fide error defense. However, whether reasonable mistakes as to the correct interpretation of applicable state and/or non-FDCPA related federal law may still give rise to the bona fide error defense remains an open question. Cases so holding were not overruled by the Jerman Court. 9
Finally, there has been some criticism as to whether the Jerman case was an appropriate one for testing the limits of the bona fide error defense, or, rather, it was “ill advised.” With due respect to the proponents of such a view, their criticism seems unfair and well . . . “ill advised.”
After all, the Carlisle collection law firm prevailed before the District Court and before the Sixth U.S. Circuit Court of Appeals on the bona fide error defense. It was Ms. Jerman who successfully petitioned for, and was granted, certiorari review by the High Court. The collection lawyers had no choice but to respond.
Moreover, the reasonableness, or unreasonableness, of the lawyers’ interpretation of the FDCPA provision in question in Jerman played no identifiable role in the decision at all. The Supreme Court accepted, for the sake of argument, that the lawyers’ interpretation of § 1692g(a)(3) was reasonable. Indeed, the Court expressly wrote: “Because the question was not raised on appeal, the Court of Appeals did not address whether Carlisle’s inclusion of the “in writing” requirement violated § 1692g. . .We likewise express no view about whether inclusion of an “in writing” requirement in a notice to a consumer violates § 1692g. . .”
In my judgment, there could have been no better factual scenario than the Jerman case to test the scope of the bona fide error defense. The law firm’s actions were clearly reasonable, and the validation mechanism worked exactly as designed with the law firm dismissing the collection action even before Ms. Jerman was forced to respond. The factual background was “clean.” To lose this chance to press the ACA’s and the CAC’s views by a favorable expansion of the bona fide error defense would have been a wasted opportunity. Given that the Baker decision was already on the books, we could not do worse. And, look at the strong, helpful language obtained from Justice Kennedy, albeit in dissent.
Last year, the CAC supported its general counsel, Ronald Sargis (now the Honorable Judge Sargis) in his argument before the California Supreme Court as to whether interest applied to amounts collected under Civil Code § 1719. Judge Sargis did not prevail, but the effort was a worthy one, fully consistent with the CAC’s mission statement – in my view at least. And so it was with the CAC’s efforts in Jerman. We must press these opportunities when they present themselves – no one else will.
I will continue to keep you advised, as promised, from the Frontline. . .
1. Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, LPA, __ U.S. __, 130 S.Ct. 1605, 78 USLW 4301 (Apr. 21, 2010) (Return To Text)
2. Pintos v. PCA, 565 F.3d 1106 (9th Cir. 2009), as amended May 21, 2010.(Return To Text)
3. Rouse v. Law Offices of Rory Clark, No. 09-55146, 2010 WL 1740910 (9th Cir. May 3, 2010). (Return To Text)
4. Graziano v. Harrison, 950 F.2d 107, 112 (3rd Cir. 1991) (requiring a written dispute under 15 U.S.C. § 1692g(a)(3) does not violate the FDCPA). (Return To Text)
5. Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078, 1080-1082 (9th Cir. 2005) (requiring a written dispute under 15 U.S.C. § 1692g(a)(3) in order to rebut the assumption of debt validity violates the FDCPA.) (Return To Text)
6. Foti v NCO Financial Systems Inc., 424 F. Supp.2d 643 (S.D. N.Y. 2006). (Return To Text)
7. e.g., Clark v. Capitol Credit & Collection Svcs., 460 F.3d 1162 (9th Cir. 2006).(Return To Text)
8. Baker v. G.C. Services, 677 F.2d 775, 779 (9th Cir. 1982). (Return To Text)
9. See, e.g., Watkins v, Peterson Ent., Inc., 57 F.Supp.2d 1102 (E.D. Wash. 1999) (bona fide error defense applicable where collector relied upon and followed well-established practices and procedures approved by long usage in Washington and did not simply rely upon advice of counsel “by itself”); Taylor v. Luper, Sheriff & Niedenthal Co., LPA, 74 F.Supp.2d 761, 765 (S.D. Ohio 1997) (factual mistake about whether the collection of certain fees, charges or expenses was permitted under Ohio law deemed bona fide error; mistake of law relied upon was not a mistake about the requirements of the FDCPA itself. (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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