Another Federal Circuit Holds Debt Collectors Can't Leave Voicemail Without Violating the FDCPA

The Fair Debt Collection Practices Act (FDCPA) prohibits a debt collector from disclosing information regarding the debt to third parties in the debtor's home (except the debtor's spouse). It also requires a debt collector to disclose to the debtor in the first communication and in every subsequent communication, whether written or oral, that the communication is from a debt collector and is an attempt to collect a debt. See generally 15 USC sections 1692c and 1692e.

When read together, these requirements make it very difficult, if not impossible, to leave manual or automated messages on debtor voicemail systems or answering machines. If the debt collector leaves a message on a debtor's answering machine indicating its identity as a debt collector and the message is retrieved or overheard by a third party in the household, the debt collector has violated the first prohibition. If it leaves the message without the disclosure that the communication from the debt collector, it violates the second prohibition.

Another Federal Circuit weighed in on this predicament last week. The Eleventh Circuit (the Appeals Court residing over Florida's District Courts) held in Edwards v. Niagara Credit Solutions, Inc. (No. 08-17006, Decided October 14, 2009) that while it may prove difficult for a debt collector to balance these prohibitions, there is no guaranteed right to leave messages under the FDCPA, and if a debt collector believes these provisions read together make it impossible to leave messages without violating the FDCPA, it should not leave messages at all.

This is not a novel decision. The seminal case emerged from the Southern District of New York in 2006, Foti v. NCO Fin. Sys., 424 F.Supp.2d 643 (S.D.N.Y. 2006). It confirmed that both disclosing the identity as a debt collector and failing to disclose the identity as a debt collector on a machine or voicemail (whether through an automated call or a manual one) constitute an FDCPA violation. Florida District Courts have agreed. See Berg v. Merchant's Ass'n Collection Division, Inc., 586 F.Supp.2d 1336 (S.D. Fla. 2008); Belin v. Litton Loan Servicing, LP, 2006 WL 1992410 (M.D. Fla. 2006). The judges in these cases heard (and dismissed) many different arguments regarding Foti's reading of the FDCPA, from arguments that it is against public policy in general to arguments that it is an unconstitutional restriction on free commercial speech.

But this most recent installment discusses the situation from the perspective of the bona fide error defense, which we have detailed in prior posts and discussed on the Debt Collection Regulations Forum on LinkedIn (username and password required). Niagara argued that it's policy to not disclose its identity was a decision it made so as to avoid violation of the provision prohibiting disclosure to a third party. It had already conceded that it in fact violated the FDCPA, and I think at this point all authority indicates that it did. Thus, the only question before the Court was whether a debt collector can avoid liability under the bona fide error defense when it intentionally violates one provision of the FDCPA in order to comply with another.

Not surprisingly, the Court answered the question in the negative, holding that one cannot 'destroy the village to save it.' It reasoned that none of the three elements of a bona fide error were present. The testimony indicated that the policy was instituted on purpose, which means the violation was not unintentional. It also indicated that the debt collector was well aware that the policy would result in a violation of the meaningful disclosure requirement, and thus the violation was not bona fide or objectively reasonable, inasmuch as it was not a mistake at all. Finally, with respect to the third requirement, procedures reasonably adapted to avoid the error, the Court relied without explanation on the trial court's finding that this element was not satisfied.

If it wasn't previously abundantly clear, it should be now: leaving automated voice messages is problematic at best. Whenever possible, upon initial debtor contact the debt collector should get authorization from the debtor to leave a message on subsequent calls if the debtor is unavailable. And absent this preauthorization (which may rarely be given), debt collectors should be very careful to leave messages at all. With respect to the challenges this presents to debt collectors, courts are almost universally in agreement: Congress provides the only appropriate forum for raising public policy arguments regarding the FDCPA, and I think consumer advocates and creditor's rights attorneys can agree- the FDCPA needs to be updated (see a recent conversation I had with Bob Lawless on his blog, Credit Slips.)

Chrysler Fraudulent Transfer Case Study Part II - Constructive Fraudulent Transfer Under the Bankruptcy Code and the Uniform Fraudulent Transfer Act

It is now time for Part II of our fraudulent transfer case study, where we discuss constructive fraudulent transfers under the Bankruptcy Code and the Uniform Fraudulent Transfer Act. This installment is being posted on our JD Supra page, as its content proves too long for a single blog post. Click here to view the article. In Part III, coming soon, we will discuss the challenges to pleading and proving a case of intentional fraudulent transfer.

Availability of the FDCPA's Bona Fide Error Defense to Debt Collectors Who Don't Seek Legal Advice

A recent Federal case has suggested that it is difficult, if not impossible, for a debt collector to shield itself from liability for violation of the Fair Debt Collection Practices Act (FDCPA) due to a misunderstanding of the law unless it has sought the advice of legal counsel or a governmental agency.

In Ruth v. Triumph Partnerships, et.al., decided by the U.S. Court of Appeals for the Seventh Circuit in August, the Plaintiff consumer filed a class action lawsuit alleging that the Defendant collector violated the FDCPA by notifying the consumer that information related to the debt could be shared with third parties for the purposes of servicing the account unless the debtor completed and returned an included "Opt-Out Response Form" (a violation of the provision precluding threats of action that cannot legally be taken). The collector defended on the ground that because after soliciting sample letters from a vendor, submitting the notice to the collector's compliance department for approval, and consulting applicable industry publications, it had concluded that the language was required under the Gramm-Leach-Bliley Act's notice provisions and not in violation of the FDCPA, the collector could avoid liability under the bona fide error defense.


The court disagreed. It first recited the elements of the FDCPA's bona fide error defense: (1) that the violation was unintentional, (2) that the violation resulted from a bona fide error, and (3) that the error occurred despite the collector's maintenance of procedures reasonably adapted to avoid the error. The court then noted a circuit split currently existing as to whether the bona fide error defense applies to legal errors like the one in this case at all, and the U.S. Supreme Court's recent granting of certiorari in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich on that very issue. The Second, Eighth, and Ninth Circuits currently hold that the bona fide error defense applies only to clerical errors, and not mistakes of law, while the Sixth and Tenth Circuits have held that mistakes of law do qualify for the bona fide error defense.

The Ruth court declined to take a side in the circuit split, finding that even if the bona fide error defense is available to collectors who commit an FDCPA violation as a result of a misunderstanding of the law, the defense was not available to the collector in the case at bar because it had not taken actions sufficient to satisfy the requisite third element of the defense.  In order to satisfy this element, the court held, it was not enough to consult industry pamphlets and attend FDCPA compliance training; but rather:

"if the bona fide error defense is available at all for errors of law, it is available only to debt collectors who can establish that they reasonably relied on either: (1) the legal opinion of an attorney who has conducted the appropriate legal research, or (2) the opinion of another person or organization with expertise in the relevant area of law—for example, the appropriate government agency."

Therefore, in the absence of record evidence that the collector sought an opinion from a legal or regulatory authority, the court entered judgment against the collector on the availability of the bona fide error defense.

This decision should be of note to collectors, especially if the U.S. Supreme Court sides with the Sixth and Tenth Circuits in the case before it (which will be monitored on this blog, and more on which can be read here, and the lower court's decision here).  Obtaining a legal opinion from an experienced attorney is a relatively inexpensive endeavor (sometimes less than $1,000) when compared to potential liability in an FDCPA class action lawsuit (which could be up to $500,000 or more, plus costs and attorney's fees).

Chrysler Fraudulent Transfer Case Study Part I - Background

In my last post, I promised to break down the lawsuit filed recently by Chrysler LLC's creditors alleging fraudulent transfer against Daimler AG. That project begins with this entry, which discusses the procedural background, the parties, and the attorneys.

Chrysler LLC filed for Chapter 11 Bankruptcy relief earlier this year, at least in part in order to allow it to restructure itself for the purposes of partnering with Italian automaker Fiat. Since then, Chrysler LLC has been reorganized into a new company called Chrysler Group LLC, of which Fiat is part owner. As part of the Bankruptcy, in June the Federal government helped finance the sale of most of Chrysler LLC's assets to Chrysler Group LLC (New Chrysler) in the amount of $6.6 billion paid to Chrysler LLC (Old Chrysler). The Bankruptcy continues with respect to the remaining assets of Old Chrysler.

The Plaintiff in the fraudulent transfer action is the committee of creditors of Old Chrysler (New Chrysler is not involved). The Defendants are Daimler AG, several of its American subsidiaries, and several common members of the boards of Daimler AG and Old Chrysler (although Old Chrysler is the Bankruptcy debtor, it is not a fraudulent transfer lawsuit defendant). Daimler AG is a German company whose earliest predecessor began operations in the 1800s. In 1926, the company became Daimler-Benz AG, the name by which it was known until 1998, when it merged with Chrysler, and Daimler and Chrysler became sister companies under the newly created parent company DaimlerChrysler AG. What's now Daimler AG is the remainder of DaimlerChrysler AG after its sale of Chrysler to Cerberus Capital Management in 2007.

Daimler AG is sued in its capacity as the owner of Old Chrysler. The creditor's committee obtained court authority to pursue Daimler AG in the Bankruptcy Court earlier this month. Creditor's counsel has apparently taken the case on a contingency fee basis, which means their analysis of the claims made by the committee is that there is more than minimal merit to them (documents indicate the firms may have agreed to be responsible for a certain portion of the litigation costs as well, another good indicator of counsel's positive impression of the claims). They do appear to have been advanced $2 million in fees for taking the case, however. Commercial collection cases are often taken on a contingency fee basis (by my firm for example), but fraudulent transfer actions would only be pursued on contingency when the analysis of the claims indicates a strong likelihood of recovery of a significant amount of money. When there is too much of a risk of little or no recovery, creditor's attorneys will pursue the case (as long as it has merit), but only if the client agrees to pay for our services by the hour, and often in advance.

Obviously, this lawsuit does not represent the run of the mill collection case, and neither the complexity of the corporate structures involved in this lawsuit, nor their size, is typical. But as we will discuss in further detail in coming posts, the next with respect to the allegations of fraudulent transfer under the Bankruptcy Code, the issues and the analysis are quite similar.

The Daimler Chrysler Fraudulent Transfer Lawsuit: A Case Study

Earlier this month, United States Bankruptcy Judge Arthur Gonzalez in New York entered an order allowing an organization of creditors of former Chrysler LLC to file a lawsuit against Daimler AG alleging fraudulent transfer of a significant portion of Chrysler's assets on the eve of the 2007 sale of Chrysler by Daimler to Cerberus Capital Management LP. The lawsuit was filed Monday, and I have reviewed a redacted version thereof.

The 31 page complaint alleges that Daimler recognized in 2006 that its merger with Chrysler would ultimately prove to be detrimental to Daimler, partially because Chrysler's pension and employment related liabilities (and Daimler's potential responsibility for those liabilities) outweighed its assets, the most valuable of which were its financial services subsidiaries (collectively FinCo). According to the complaint, in an effort to segregate FinCo from Chrysler's liabilities in anticipation of selling the company, Daimler carried out an intricate restructuring plan, which resulted in Daimler and its own subsidiaries receiving in excess of $9 billion in Chrysler assets in exchange for Chrysler's receipt of a promissory note valued at roughly $1.5 billion and equity in arms of Daimler that were allegedly "worthless." Then, it is alleged, Daimler sold a majority of FinCo (without Chrysler's liabilities) to Cerberus for roughly $7 billion, $3.45 billion of which went to Chrysler, $2.275 billion to FinCo (who then immediately paid off the note owed to Daimler), and $1.212 directly to Daimler. According to the complaint, these transfers were made with the knowledge on the part of Daimler that there were numerous lawsuits pending against Chrysler that could be satisfied, at least partially, with the transferred assets; and with the intent on the part of Daimler to defraud Chrysler creditors.

The creditors seek damages against Daimler on theories of constructive and intentional fraudulent transfer under the Bankruptcy Code, and on state law causes of action for breach of Daimler's fiduciary duty as sole shareholder and controlling force behind all Chrysler decisions, unjust enrichment, and corporate alter ego liability. Daimler has filed no formal response to the complaint yet, as the time to do so has not come, but their initial reaction to the lawsuit is that it is without merit.

This case should be of interest to business debtors and creditors of all shapes and sizes (and their attorneys) because it highlights the remedies available to creditors when assets that could be used to satisfy creditor claims are transferred beyond the reach of creditors without justification, and hopefully it will provide the public some insight into how these remedies are obtained (or avoided). Over the next few weeks we will present a discussion on each theory of liability raised by Chrysler's creditors (and on the defenses raised by Daimler), with an aim toward relating these issues to more typically-structured businesses and their attorneys.