Two recent decisions demonstrate the continued viability of the Fair Debt Collection Practices Act’s (FDCPA) “bona fide error” defense following the U.S. Supreme Court decision last year in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA.
The bona fide error defense shields a debt collector from civil liability in a private action if it shows that an FDCPA violation “was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” While acknowledging in Jerman that the defense covers clerical or factual errors, the Supreme Court ruled that it does not apply to an FDCPA violation resulting from a debt collector’s incorrect interpretation of FDCPA requirements. The Supreme Court left open the question as to whether the defense applies to incorrect interpretations of state or other federal laws.
In Hare v. Hosto and Buchan, PLLC, 2011 WL 1206196 (S.D. Tex. Mar. 30, 2011), the U.S. District Court for the Southern District of Texas allowed a law firm to rely on the bona fide error defense to shield it from liability for FDCPA violations resulting from an erroneous interpretation of a law other than the FDCPA.
The plaintiff alleged that because the firm’s filing of a state court action to enforce an arbitration award against her was time-barred under the Federal Arbitration Act (FAA), the filing represented an action “that cannot legally be taken” in violation of the FDCPA. According to the District Court, the issue of when the FAA bars such state court lawsuits was unsettled in the Fifth Circuit, and the other federal circuit courts that had addressed the issue were split. The District Court concluded that, under those circumstances, the law firm was entitled to rely on the bona fide error defense, even if its lawsuit filing was time-barred under the FAA.
The bona fide error defense did not succeed in in McCollough v. Johnson, Rodenburg & Lauinger, LLC, issued by the U.S. Court of Appeals for the Ninth Circuit on March 4, 2011, but the decision indicates that a debt collector can successfully use the defense for factual errors, provided it has the requisite procedures in place. In McCollough, a law firm’s attempt to use the defense to defeat an FDCPA claim failed because the evidence showed that the firm’s procedures for avoiding the factual errors that led to its filing of a time-barred collection suit were not reasonably adapted to avoid those errors.
After spotting a limitations period problem, the law firm had contacted the purchaser of the credit card debt owed by the McCollough plaintiff, seeking a written instrument extending the limitations period. However, according to the Ninth Circuit, the firm erred by relying, without verification, on the purchaser’s representation that a partial payment had extended the limitations period, overlooking contrary information in the loan file. The Ninth Circuit affirmed the District Court’s grant of summary judgment against the law firm on the bona fide error defense, agreeing with it that relying on the purchaser’s representation was unreasonable as a matter of law for reasons including the purchaser’s disclaimer in its contract with the firm of the accuracy or validity of the data it provided.
The Ninth Circuit also agreed that the District Court had properly granted summary judgment for the plaintiff on his claim that the law firm had violated the FDCPA by requesting attorney’s fees in its complaint without any evidence that the plaintiff’s specific card agreement authorized such fees, and by serving requests for admission that asked the plaintiff to admit facts shown to be untrue by information the law firm possessed.
The risk that a bona fide error defense will not prevail continues to underscore the need for debt collectors and others subject to such potential liability to select legal counsel with the experience necessary to provide sophisticated consumer compliance advice.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). In addition to having vast experience in defending all manner of debt collection lawsuits, Ballard Spahr lawyers regularly counsel their clients engaged in consumer debt collection on compliance with the FDCPA and state debt collection laws.