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FDCPA & FCRA: Two Most Important Cases of the Collections Industry in 2010

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Introduction

Numerous decisions came down last year which are significant to the collection industry.  I briefly discuss two of these cases:Jerman v. Carlisle, et al. and Pintos v. Pacific Creditors Association, et al..  These cases were probably the two most important cases to the collection industry decided last year – although, as we will see, for quite different reasons.

Jerman v. Carlisle, et al.

In Jerman v. Carlisle, the United States Supreme Court addressed, for only the second time, an issue of statutory interpretation and legislative intent arising under the language of the FDCPA.  The case presented the question of whether the so-called “bona fide error” defense (found at 15 USC § 1692k(c)) applied to a violation resulting from a debt collector’s good-faith, but mistaken, interpretation of the legal requirements of the FDCPA itself.  The court concluded the bona fide error defense does not apply in such circumstances.

I previously addressed the Jerman decision in an article published in an earlier issue of the Collector’s Ink (July 2010) and I will not repeat that discussion here. The Jerman decision is perhaps of more importance to those of us who defend debt collectors than it is for third-party collection agencies, collection law firms and debt purchasers who perform the actual collection. This is particularly true here in California, in that the Jerman decision reaffirmed the rule under which we defense attorneys have been operating since 1982, when the Ninth Circuit published the Baker v. G.C. Services decision. Consequently the policies and procedures of most debt collectors operating in California have not had to be retuned to address the implications of Jerman

The point to be taken from Jerman is the Supreme Court’s reaffirmance that, in most instances, the FDCPA is a strict liability statute.  A collector’s reliance on even a reasonable and good-faith, but mistaken, interpretation of its legal duties under the FDCPA is not a defense to liability.

One positive outcome of the decision, however, is the Court left open whether the defense could apply in situations where a mistaken interpretation arose under state law or procedure.  Thus, in footnote 4 of the opinion, Justice Solomayor wrote:  “Because this case involves only an alleged misinterpretation of the requirements of the FDCPA, we need not, and do not, reach those other questions.” 

In fact, a body of law is developing that suggests that the bona fide error defense may be asserted where (1) an interpretation of state law is mistaken, and (2) the mistake was reasonably supported by the collector’s good-faith belief, which in turn was justified, in part, by reliance on the state courts’ own interpretations of the state law in question.  See, e.g., Johnson v. Riddle, 305 F.3d 1107, 1121 (10th Cir. 2002); Watkins v. Peterson Int., Inc., 57 F.Supp.2d 1102, 1107 (E.D. Wash 1999). 

Happily, since Jerman, there have been some positive suggestions that courts are carving out exceptions to the Jerman holding, and allowing the bona fide error defense where the alleged FDCPA violation arises from a good-faith misinterpretation of state law or procedure.

Pintos v. Pacific Creditors Association

The Supreme Court’s recent (January 2011) denial of certiorari in Pintos v. Pacific Creditors Association leaves standing the Ninth Circuit’s May 21, 2010 amended decision (which itself supersedes two earlier decisions).  I wrote about the earlier, original decision in an earlier article for the Collector’s Ink, entitled “Life After Pintos” (July 2008).  

In the May 21, 2010 Pintos decision (found at 605 F.3d. 672 (9th Cir. 2010)), the Ninth Circuit was asked to decide whether a collection agency possessed a permissible purpose under the FCRA subsection, found at 15 USC § 1681b(a)(3)(A), to pull a credit report on a debtor solely on the basis that the debtor had been sent to collections. 

The Ninth Circuit answered the question in the negative, finding no authorization to pull a credit report pursuant to § 1681b(a)(3)(A) under circumstances where the debt did not arise out of, or “in connection with, a credit transaction” involving the debtor. The court held that because the debt being collected in Pintos was an “involuntary” towing charge/lien, the debt was not created through a “credit transaction” wherein Pintos had requested and received credit. As such, it found § 1681b(a)(3)(A) “did not authorize PCA to obtain the credit report on Pintos.”

The court observed:  “Pintos did not initiate the transaction that resulted in [the collector] requesting her credit report. . .[T]hat Pintos owned the car that was towed did not mean that she initiated the credit transaction . . . Pintos was not a ‘participant’ in the credit transaction, but was ‘obliged to become associated’ with it after her car was towed and the towing deficiency claim arose.”  (Text omitted, brackets, and some bracketed language added.)

Oddly, even though (1) a judgment was not at issue in Pintos, (2) the specific section (§ 1692b(a)(3)(A)) does not appear to concern judgments, and (3) virtually all judgments are involuntarily imposed against a judgment debtor, the Ninth Circuit nevertheless found that collection on a judgment gave rise to a permissible authorization to pull a credit report on a judgment debtor against whom collection efforts were ongoing to enforce a judgment (debt).

This is the current law in federal court in the Ninth Circuit, despite a strong dissent and unusually sharp disagreement by six judges of the Ninth Circuit, including the Chief Judge, who wrote:  “We . . . can’t say that a debt collection transaction was non-consumer initiated.  In holding otherwise, the [Pintos] majority flunks Statutory Interpretation 101.”  (Some language omitted, bracketed word added.)

So, what to do?  Clearly, the Ninth Circuit no longer recognizes any generalized debt collection purpose that provides a “permissible purpose” to obtain a credit report no matter how the debt arose.  Consequently, in my judgment, a collection agency now has no choice but to scrutinize its portfolio of debts to determine which involve a “credit transaction” by which the debtor sought, or was given, credit, and those transactions where the debt (other than a judgment) arose involuntarily. 

If a credit transaction is involved such as, for example, a credit card debt, a revolving credit plan, a deferred payment arrangement, or a lending transaction wherein the debtor has borrowed money, then there should be a “permissible purpose” to pull a credit report during collections under §1681b(a)(3)(A).  Other transactions, of course, are covered where the debtor expressly grants authority in writing to pull a credit report (§1681b(a)(2)), and for purposes of various purchase and lease transactions and other business transactions initiated by the consumer/debtor (§1681b(a)(3)(F)(i)).

In the aftermath of Pintos, a collector no longer possesses carte blanch to pull a credit report, safe in the apparent authority that an account is being collected. Rather, you, the debt collector, should now scrutinize or review the debt before pulling a credit report so as to first determine whether the debt was incurred “voluntarily” by the debtor in a “credit transaction” that he or she “initiated,” or for some other permissible purpose.

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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