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The Fair Debt Collection Practices Act Does Not Excuse a Good-Faith Mistake of Law


Business & Commercial Litigation Newsletter

June 8, 2010

The Supreme Court of the United States recently expanded a debtor’s remedies under the Fair Debt Collection Practices Act (the “Act”), 15 U.S.C. § 1692, et seq. In Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 176 L. Ed. 2d 519 (2010), the Court held that the Act’s “bona fide error defense” does not cover a mistake of law made while pursuing a debt. Jerman thus increases liability exposure for those engaging in activity governed by the Act, especially to putative class actions brought on behalf of debtors that have suffered little or no damage but can enforce the Act’s civil penalty provision. Financial institutions and others seeking repayment of debt obligations are therefore well-advised to seek legal advice, before commencing collection efforts, to ensure compliance with the Act’s requirements.

The Act governs certain persons and entities involved in collecting debts related to personal, home, or consumer items. 15 U.S.C. § 1692k; Heintz v. Jenkins, 514 U.S. 291 (1995). The Act’s express purpose is “to eliminate abusive debt collection practices” and to ensure that those “who refrain from using abusive debt collection practices are not competitively disadvantaged.” 15 U.S.C. § 1692k(g).

The Act’s “bona fide error defense”
The Act creates a “bona fide error defense” for unintentional violations of the statute. The defense applies when the alleged violation of the Act is an unintentional and bona fide mistake that was made despite “the maintenance of procedures reasonably adapted to avoid” the violation. 15 U.S.C. § 1692k(c). Although the defense has always applied to a mistake of fact, federal courts were split on whether the defense covered a mistake of law. Compare Picht v. Jon R. Hawks, Ltd., 236 F.3d 446, 451 (8th Cir. 2001) (stating that bona fide error defense does not apply to mistakes of law); Pipiles v. Credit Bureau of Lockport, Inc., 886 F.2d 22, 27 (2d Cir. 1989) (same); Baker v. G.C. Servs. Corp., 677 F.2d 775, 779 (9th Cir. 1982) (same); Arroyo v. Solomon & Solomon, P.C., 2001 U.S. Dist. LEXIS 12180, 2001 WL 984940, at *6 (E.D.N.Y. July 19, 2001) (same), with Jenkins v. Heintz, 124 F.3d 824, 832 & n.7, 833 (7th Cir. 1997) (stating that bona fide error defense not limited to clerical errors and can apply to mistakes of law); Frye v. Bowman, Heintz, Boscia & Vician, 193 F. Supp. 2d 1070, 1085-86 (S.D. Ind. 2002) (same); Filsinger v. Upton, Cohen, & Slamowitz, 2000 U.S. Dist. LEXIS 1824, 2000 WL 198223, at *2 (N.D.N.Y. Feb. 18, 2000) (same); Aronson v. Commercial Fin. Servs, Inc., 1997 U.S. Dist. LEXIS 23534, 1997 WL 1038818, at *5 (W.D. Pa. Dec. 22, 1997) (same).

Jerman involved a foreclosure action filed by the defendant law firm. The complaint alleged that the debt would be deemed valid if the debtor did not dispute it in writing within thirty days. When the law firm filed the complaint, courts were divided on the question whether a debtor waives his right to challenge a debt if he does not dispute it in writing. See, e.g., Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078, 1082 (9th Cir. 2005) (holding that the Act does not require a debtor to dispute an asserted debt in writing); Graziano v. Harrison, 950 F.2d 107, 112 (3d Cir. 1991) (holding that a consumer’s dispute of a debt under the Act must be in writing to be effective). The debtor disputed the debt in writing, and the foreclosure complaint was dismissed.

The debtor thereafter commenced in Ohio federal district court a putative class action against the law firm. In the debtor’s view, the law firm violated the Act when it alleged in its foreclosure complaint that the debtor would waive a challenge to the validity of the debt if it was not disputed in writing. The law firm moved to dismiss, arguing that the bona fide error defense barred the claim because the alleged violation arose from the law firm’s reasonable, good-faith interpretation of the Act. The district court agreed with the law firm, and the court of appeals affirmed.

The Supreme Court saw things differently. Reviewing the Act’s legislative history, the Court observed that the Act’s bona fide error defense was modeled on a similar provision in the Truth in Lending Act (“TILA”). When the Act was enacted, three courts of appeals had determined that TILA’s equivalent defense referred to clerical but not legal errors. Thereafter, when Congress amended TILA to bring legal errors within the ambit of the defense, it could have similarly amended the Act but didn’t. The Jerman Court therefore reasoned that Congress did not wish to extend the Act’s bona fide error defense to legal mistakes. The Court found its interpretation consistent with the broader regulatory scheme that allows administrative penalties to be imposed for knowing or intentional violations and with analogous provisions in other statutes. The Court did not address whether the law firm violated the Act by asserting that the debtor was obligated to dispute the debt in writing.

Justice Kennedy, in a dissent joined by Justice Alito, wrote that the Court’s decision “aligns the judicial system with those who would use litigation to enrich themselves at the expense of attorneys who strictly follow and adhere to professional and ethical standards.” The dissent opined:

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.

Jerman’s Significance
The Act allows for statutory damages, punitive damages, and attorney’s fees. Notwithstanding the salutary purposes of those remedies, there is a potential for abuse when invoked in a case where a debtor suffered little or no actual harm. Jerman does not eliminate that potential. Instead, as the dissent observed, the decision creates liability for a mistaken interpretation or application of the Act, even if made in good-faith and even if it involved an unsettled legal issue. Under Jerman, a standard akin to strict liability now exists for those who make such a mistake. Accordingly, financial institutions and others seeking repayment of debt obligations, as well as their counsel, should take special care to keep informed of case law interpreting and applying the Act and should err on the side of caution when engaging in activity governed by it.