The Supreme Court has issued a new decision on the scope of the Fair Debt Collection Practices Act, interpreting the Act in a manner that is likely to raise concerns for law firms and others engaged in debt collection. In Jerman v. Carlisle, McNellie, Rini, Kramer & Ullrich LPA, No. 08-1200, the Court held that a debt collector who makes an incorrect statement of law in communications with a debtor may not invoke the Act’s “bona fide error” defense, 15 U.S.C. § 1692k(c), even if the error was unintentional and reasonable under the circumstances.
The case arose out of a fairly typical collections action. The defendants, an attorney and his law firm, served a complaint on behalf of their client seeking foreclosure on property owned by plaintiff Karen Jerman. Attached to the complaint was a form notice that provided, among other things, that the alleged debt would be assumed valid unless Jerman disputed the debt “in writing.” Jerman responded with a lawsuit of her own, complaining that the defendants did not provide her with proper notice because the Act did not require that she dispute the debt “in writing.” Despite a split of authority with regard to the “in writing” requirement, the district court held that the notice had indeed violated the Act. But the district court (and ultimately the Sixth Circuit) found that the violation was predicated on the defendants’ good-faith error as to the meaning of the law, and thus the defendants were shielded from liability by the Act’s “bona fide error” defense, which provides immunity if the debt collector can prove that the violation of the Act was unintentional and, despite reasonable efforts to prevent it, “resulted from a bona fide error.” 15 U.S.C. § 1692k(c).
The Supreme Court reversed. Justice Sotomayor, writing for the majority, concluded that the Act’s “bona fide error” defense is limited to clerical or factual mistakes and does not extend to mistakes of law. The Court explained that a mistake of law generally does not provide a defense to liability and that, when Congress has chosen to permit a mistake-of-law defense, it has typically done so in express terms. Reviewing the text of the Act, the Court found that it lacked any clear indication that Congress meant to preclude liability for mistakes of law. The Court also observed that its interpretation was consistent with the Act’s role in the larger regulatory scheme, which allowed additional administrative penalties to be imposed for knowing or intentional violations, and also with analogous provisions in other statutes. The Court rejected the defendants’ argument that excluding legal mistakes from the defense’s coverage would present ethical difficulties for attorney debt collectors, noting that “[t]o the extent the [Act] imposes some constraints on a lawyer’s advocacy on behalf of a client, it is hardly unique in our law.” The Court likewise discounted the defendants’ argument that its interpretation would subject debt collectors to devastating liabilities, explaining that when an alleged violation is trivial, the amount of damages awarded should be minimal as well.
Justices Kennedy and Alito dissented, explaining that the bona fide error defense is better interpreted to include mistakes of law and that Congress could not have intended the significant harmful consequences—including abusive litigation—that arise when a defendant can be punished for trivial, good-faith mistakes.
Under the Court’s decision, taking what is ultimately the losing position on a disputed issue of law may subject a debt collector to liability, even if the position was taken in good faith. Moreover, as the dissent explained, the availability of statutory damages, punitive damages, and attorney’s fees for violations of the Act may provide incentives for plaintiffs to file suit even in cases where they suffered little or no actual harm. Accordingly, although the extent of its impact remains to be seen, Jerman will not come as good news to businesses and law firms engaged in debt collection.
NOTE: Winston & Strawn submitted an amicus brief in support of the defendants in this case on behalf of DRI: The Voice of the Defense Bar.