Thursday, September 10, 2009

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,, 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).