7th Cir. Finds Verification Letter Sent to Consumers’ Counsel Not Misleading
Gomez v. Cavalry Portfolio Servs., No. 19-1737, 2020 U.S. App. LEXIS 19228 (7th Cir. June 19, 2020)
The U.S. Court of Appeals for the Seventh Circuit recently held that a debt collection verification letter sent to the consumers’ attorney, which sought to collect interest on a credit card debt for the months after the issuing bank ceased sending monthly statements, was not “false” and would not have misled the attorney in violation of the federal Fair Debt Collection Practices Act (FDCPA).
The consumers defaulted on their credit card debt. The bank that issued the card determined that collection was unlikely and stopped sending monthly statements to the consumers, but never told them that “they no longer owed the money.”
The bank sold the debt and subsequently a debt collector sent a letter to the consumers seeking to collect almost $5,800. The amount sought included about $1,600 in interest for months after the bank stopped sending monthly statements to the consumers. Several months later, the debt collector sent a second letter to the consumers demanding $6,200.
The consumers hired an attorney to represent them with respect to the debt. The attorney asked the debt collector to verify the debt and the debt collector’s verification stated the current balance was $6,320.13.
The letter did not state what portion of the balance was interest, “but since the original unpaid debt was only $3,226.35, the letter effectively claimed an entitlement to more than $3,000 in interest, including the $1,600 that [the debt collector]” believe[d] had accrued before the Bank sold the account.”
Eight months after receiving the verification of the debt, the consumers filed suit alleging that by demanding interest during the months when the bank did not send monthly statements, “the debt collector violated 15 U.S.C. section 1692e, which prohibits ‘any false, deceptive, or misleading representation … in connection with the collection of any debt,’ including any ‘false representation of . . . the character, amount, or legal status of any debt.’”
The trial court found that the first two letters were untimely because they were sent more than one year before the borrower filed suit, but the suit on the verification letter was timely. Nevertheless, the trial court found that the letter did not violate § 1692e because it was “factual and unproblematic.”
Thus, the trial court entered a judgment in the debt collector’s favor, and the appeal followed.
On appeal, the consumers argued that the letter was “false” or “misleading” because it sought to collect amounts greater than what the debt collector was entitled to collect. The Seventh Circuit disagreed.
Instead, the Seventh Circuit held that the consumers promised to pay interest on their credit card, and there was no evidence that the debt collector used the incorrect interest rate. The credit card agreement expressly “provided that the Bank’s inaction or silence would not waive any of its rights.” Thus, the claim that the debt collector pursued “is not one that any careful debt collector would know to be unenforceable.”
Whether failing to send monthly statements, together with 12 C.F.R. § 1026.5(b)(2)’s requirement to mail or deliver a periodic statement for each billing cycle, prevents collecting interest for those months was described as an unresolved “topic for litigation.” However, a demand for payment is not “false” simply because a court may later disagree with a debt collector’s calculation of the amount owed. Instead a “statement is false, or not, when made; there is no falsity by hindsight.”
The Seventh Circuit also held that the letter did not violate § 1692e because the debt collector sent it to the consumers’ lawyer. Under Bravo v. Midland Credit Management, Inc., 812 F.3d 599, 603 (7th Cir. 2016), the test under § 1692e “for a letter to counsel is whether it would deceive or mislead a competent attorney.”
The court opined that if the consumer’s counsel disagreed with the amount claimed in the verification letter, he could have followed up with the debt collector or told his clients not to pay the disputed amount. The court noted that the debt collector “did not need to explain to a lawyer something that the first two letters revealed, and it certainly did not need to provide a disquisition on the non-waiver clause in the contract or [its] take on 12 C.F.R. §1026.5(b)(2).” Verifying a debt should “be a simple process, not an occasion for a legal brief.”
The Seventh Circuit acknowledged a circuit split on this issue. The Second, Eighth, and Tenth Circuits agree with the Seventh Circuit regarding the standard for evaluating correspondence sent to counsel. See, e.g., Kropelnicki v. Siegel, 290 F.3d 118, 128 (2d Cir. 2002); Powers v. Credit Management Services, Inc., 776 F.3d 567, 573–75 (8th Cir. 2015); Dikeman v. National Educators, Inc., 81 F.3d 949, 953–54 (10th Cir. 1996). The Third and Eleventh Circuits disagree. See, e.g., Simon v. FIA Card Services, N.A., 732 F.3d 259, 269–70 (3d Cir. 2013); Bishop v. Ross Earle & Bonan, P.A., 817 F.3d 1268, 1277 (11th Cir. 2016).
However, the Seventh Circuit saw no reason to abandon the standard it set in Bravo.
Here, the verification letter would not have misled a competent lawyer, who also would not deem “false” a demand by a potential opponent in litigation just because counsel believes that his client may be able to persuade a judge that there is a defense.
Thus, the Seventh Circuit affirmed the trial court’s judgment order dismissing the suit.
7th Cir. Explains CRAs and Furnishers Are Held to Different Standards
Denan v. Trans Union LLC, 959 F.3d 290 (7th Cir. 2020)
Agreeing with similar rulings in the First, Ninth, and Tenth Circuits, the U.S. Court of Appeals for the Seventh Circuit recently held that the Fair Credit Reporting Act does not require consumer reporting agencies to determine the legal validity of disputed debts.
Two borrowers obtained loans from online payday lenders affiliated with Native American tribes. The loans charged interest in excess of 300% and the terms were subject to and governed by tribal law and not the law of the borrowers’ resident states.
After the borrowers stopped making the monthly payments, the lenders reported the delinquent amounts to a credit reporting agency. One of the borrowers contacted the credit reporting agency and disputed the accuracy of his credit reports because the loan was “illegally issued” such that “there was no legal obligation for [him] to repay.” The credit reporting agency investigated the dispute and verified the accuracy of the information provided by the lender. The other borrower never contacted the credit reporting agency.
The borrowers brought a putative class action against the credit reporting agency, alleging it violated two FCRA provisions: 15 U.S.C. § 1681e(b) — which requires consumer reporting agencies “to assure maximum possible accuracy of the information” contained in credit reports — and 15 U.S.C § 1681i(a) — which requires consumer reporting agencies to reinvestigate disputed items.
The borrowers did not claim that the credit reports were factually inaccurate, and they did not contest the debt amounts or payment history. Instead, they claimed the credit reports contained “legally inaccurate” information because the loans were void when made under New Jersey and Florida usury laws and therefore “legally invalid debts.”
For their § 1681e(b) claim, the borrowers contended the credit reporting agency “knew or recklessly ignored” that loans were unenforceable, because: 1) the credit reporting agency’s lender screening procedures showed that the lenders lacked licenses to lend outside of Native American tribal reservations; 2) the same screening procedures showed that the lenders had histories of charging loan interest rates in excess of rates permitted in New Jersey and Florida; and 3) the credit reporting agency allegedly ignored government investigations and enforcement actions in several states, though none in New Jersey or Florid, and “could and should have discovered” that the lenders made illegal loans.
For their § 1681i(a) claim, the borrower who disputed the debt contended the credit reporting agency “failed to use reasonable reinvestigation practices for ascertaining the accuracy of information” contained in his credit report after he disputed the debt.
The credit reporting agency moved for judgment on the pleadings, arguing that §§ 1681e(b) and 1681i(a) impose a duty to transmit factually accurate credit information, not to make a legal determination regarding the validity of disputed debts.
The trial court granted the credit reporting agency’s motion, concluding that “[u]ntil a formal adjudication invalidates the plaintiffs’ loans . . . they cannot allege factual inaccuracies in their credit reports.”
The borrowers appealed.
The Seventh Circuit first analyzed § 1681e(b), which requires that “[w]henever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.” The statute requires a plaintiff to show that a consumer reporting agency prepared a report containing “inaccurate” information. See Walton v. BMO Harris Bank N.A., 761 F. App’x 589, 591 (7th Cir. 2019) (holding that under § 1681e(b), a consumer reporting agency “cannot be liable as a threshold matter if it did not report inaccurate information.”).
The borrowers argued that § 1681e(b) requires consumer reporting agencies to verify the factual and legal accuracy of information contained in credit reports, requiring the consumer reporting agencies to look beyond the data furnished and determine the legality of the borrowers’ loans.
The Seventh Circuit noted the FCRA does not require unfailing accuracy from consumer reporting agencies. Instead, it requires a consumer reporting agency to follow “reasonable procedures to assure maximum possible accuracy” when it prepares a credit report. 15 U.S.C. § 1681e(b). See also Henson v. CSC Credit Servs., 29 F.3d 280, 284 (7th Cir. 1994) (“A credit reporting agency is not liable under the FCRA if it followed ‘reasonable procedures to assure maximum possible accuracy,’ but nonetheless reported inaccurate information in the consumer’s credit report.”).
The Court noted that is a different measure than furnishers are required to follow. “Accuracy,” for furnishers means information that “correctly reflects . . . liability for the account.” 12 C.F.R. § 1022.41(a). Neither the FCRA nor its implementing regulations impose a comparable duty upon consumer reporting agencies, much less a duty to determine the legality of a disputed debt.
Thus, the Seventh Circuit joined the First, Ninth, and Tenth Circuits in holding that a consumer’s defense to a debt “is a question for a court to resolve in a suit against the [creditor,] not a job imposed upon consumer reporting agencies by the FCRA.”
The Seventh Circuit concluded the borrowers’ § 1681i claim ran into the same problems.
Regarding the § 1681i claim, the Court held that when a consumer disputes the “accuracy of any item of information” contained in a credit report, § 1681i requires consumer reporting agencies to “conduct a reasonable reinvestigation to determine whether the disputed information is inaccurate.” 15 U.S.C. § 1681i(a)(1)(A). Like § 1681e(b), § 1681i requires “accuracy” of information but does not differentiate between factual and legal accuracy.
Accordingly, as with the borrowers’ § 1681e(b) claim, the Seventh Circuit interpreted inaccurate information under § 1681i to mean factually inaccurate information, as consumer reporting agencies are neither qualified nor obligated to resolve legal issues.
As a result, the trial court’s entry of judgment on the pleadings was affirmed.
U.S. Supreme Court Holds CFPB Structure Unconstitutional
Seila Law LLC v. Consumer Fin. Prot. Bureau, No. 19-7, 2020 U.S. LEXIS 3515 (June 29, 2020)
The Supreme Court of the United States recently vacated the judgment of the U.S. Court of Appeals for the Ninth Circuit that rejected constitutional challenges to the design and structure of the Consumer Financial Protection Bureau (CFPB).
By a 5-4 majority vote, the Supreme Court concluded that protection afforded to the CFPB’s single director, being removable by the President only “for cause,” violated the separation of powers under the United States Constitution. However, a 7-2 majority concluded that the director’s “for cause” removal protection was severable from the remainder of the Dodd-Frank Act that created the CFPB, allowing the CFPB to continue to operate.
As background, in 2017 a law firm received a civil investigative demand (CID) issued by the CFPB alleging the firm “to determine whether the firm had engaged in unlawful acts or practices in the advertising, marketing, or sale of debt relief services.” The law firm filed suit in federal court seeking to set aside the CID on the ground that the CFPB’s structure violates the U.S. Constitution’s separation of powers doctrine and therefore lacked statutory authority to issue the CID.
The CFPB prevailed in the trial court and on appeal the Ninth Circuit upheld the CFPB’s structure. Consumer Fin. Prot. Bureau v. Seila Law LLC, 923 F.3d 680 (9th Cir. 2019).
The Supreme Court of the United States granted certiorari to address the law firm’s assertions.
The two questions before the Supreme Court were: 1) whether the provision in Title X of the Dodd-Frank Act restricting the President’s removal of the CFPB director only “for cause” violates the Constitution’s separation of powers, and; 2) if the provision is unconstitutional, whether the CFPB director’s removal protection is severable from the other statutory provisions bearing on the CFPB’s authority.
Reviewing the structure of the CFPB established by Title X of the Dodd-Frank Act, the Court noted that Congress elected to place the CFPB under the leadership of a single director appointed by the President with the advice and consent of the Senate, in contrast to a traditional independent agency headed by a multimember board or commission. 12 U. S. C. §§ 5491(b)(1)-(2). Further, the CFPB’s director serves a five-year term, during which the President may remove the director from office only for “inefficiency, neglect of duty, or malfeasance in office.” §§ 5491(c)(1), (3).
The Court first considered the arguments raised by the amicus curiae that was appointed by the Court to defend the Bureau’s constitutionality due to the Department of Justice’s decision not to do so. The amicus argued: 1) that the CID is not “traceable” to the alleged constitutional defect because two of the three directors who have in turn played a role in enforcing the demand were (or now consider themselves to be) removable by the President at will; 2) that the proper context for assessing the constitutionality of an officer’s removal restriction is a contested removal, and; 3) that the case should be dismissed for lack of “adverseness” because the primary parties agreed on the merits of the constitutional question.
Finding none of these arguments persuasive, the Court turned to the merits of the law firm’s constitutional challenge.
The Court initially noted the long history of precedent confirming the President’s removal power afforded under Article II of the Constitution which grants “general administrative control of those executing the laws, including the power of appointment and removal of executive officers.” Myers v. United States, 272 U. S. 52, 163-164 (1926). More recently, the President’s general removal power was reiterated in Free Enterprise Fund v. Public Company Accounting Oversight Bd., 561 U. S. 477 (2010).
Free Enterprise Fund provided for only two exceptions to the President’s unrestricted removal power: 1) permitting Congress to give for-cause removal protection to a multi-member body of experts balanced along partisan lines, appointed to staggered terms, and performing only “quasi-legislative” and “quasi-judicial functions; and 2) for-cause removal protection for an independent counsel with limited duties and no policymaking or administrative authority.
The Supreme Court declined to extend these exceptions to the “new situation” before it and noted that Congress has provided removal protection to principal officers who alone wield power in only four isolated incidences which do not involve regulatory or enforcement authority comparable to that exercised by the CFPB. The Court also noted that the single-director configuration is incompatible with the structure of the Constitution, which “with the sole exception of the Presidency” scrupulously avoids concentrating power in the hands of any single individual.
Accordingly, the Court concluded that the CFPB’s leadership by a single independent director violates the Constitution’s separation of powers.
Having reached this conclusion, the Supreme Court was left to decide whether the director’s removal protection was severable from the other provisions of the Dodd-Frank Act that establish the CFPB. The SCOTUS concluded that the CFPB could continue to exist and operate notwithstanding Congress’s unconstitutional attempt to insulate the agency’s director from removal by the President.
The Court recited long-settled precedent that declaration of one section or portion of a statute as unconstitutional does not act to void the statute in whole, and that “even in the absence of a severability clause, the “traditional” rule is that “the unconstitutional provision must be severed unless the statute created in its absence is legislation that Congress would not have enacted.” Accordingly, the Court concluded that the removal restriction could be severed, leaving the CFPB operational.
The judgment of the Ninth Circuit was vacated and the case remanded for the Court of Appeals to consider whether the CID was “validly ratified.”
7th Cir. Finds Collection Letter Not ‘Confusing or Misleading to Significant Fraction of Population’
Johnson v. Enhanced Recovery Co., 961 F.3d 975 (7th Cir. 2020)
A debt collector sent a letter to the consumer regarding a delinquent phone bill that offered settlement options and stated, in part: “This letter serves as notification that your delinquent account may be reported to the national credit bureaus. Payment of the offered settlement amount will stop collection activity on this matter.” When the consumer received the letter, the debt collector had already reported the debt to a credit reporting agency, as it said it would in previous letters.
The consumer filed suit against the debt collector alleging that the collection letter was misleading in violation of 15 U.S.C. § 1692e because “’may be reported’ implied future reporting, and by the time she received the letter her debt had already been reported.” Additionally, since the debt had already been reported, it would have been impossible for the debt collector to “stop collection activity” in the form of credit reporting if she paid the settlement amount.
The trial court denied the debt collector’s motion to dismiss, but after class certification it granted its motion for summary judgment due to the consumer’s failure to provide evidence that the language in question would be confusing or misleading to a significant fraction of the population.”
The consumer appealed the summary judgment rulings and the debt collector cross-appealed, claiming that the trial court erred in denying its motion to dismiss the complaint for failure to state a claim.
The Seventh Circuit first addressed the debt collector’s cross-appeal of the order denying its motion to dismiss, and cited numerous cases upholding the proposition that “complaints alleging misleading communications under § 1692e are rarely subject to dismissal for failure to state a claim  because whether a communication is false, deceptive or misleading under the FDCPA is a question of fact.” However, the court noted that dismissal of a claim under § 1692e is appropriate “when it is clear from the face of the communication that no reasonable person, however unsophisticated, would be deceived by the allegedly false or misleading statement.”
The court rejected the debt collector’s argument that the collection letter’s disputed language was not misleading because it tracked the safe harbor model language found in Regulation V, which governs the Fair Credit Reporting Act, and ruled that use of the model language does not eliminate the factual question of whether the consumer stated a claim under the FDCPA.
The Court further ruled that the consumer’s interpretation of the language stated a cause of action under section 1692e. Accordingly, the order denying the debt collector’s Rule 12(b)(6) motion to dismiss was affirmed.
Turning to the consumer’s argument that summary judgment in the debt collector’s favor was improper, the Seventh Circuit began by explaining that this case fell into a category of cases “where the debt collection language is not deceptive or misleading on its face, but could be construed so as to be confusing or misleading to the unsophisticated consumer.” In such cases, it is necessary for a plaintiff to provide “extrinsic evidence, such as consumer surveys, tending to show that unsophisticated consumers are in fact confused or misled by the challenged language.”
The consumer argued that no additional evidence was required beyond her own opinion and that a reasonable but unsophisticated consumer would deem the collection letter as a “threat to engage in credit reporting” unless payment was made by the deadline for the settlement offer. However, the Court disagreed, reasoning that “may” could refer to future events, but could also be intended to simply notify the consumer that the debt collector has the capability to report the outstanding debt.
Moreover, the consumer failed to meet “the burden of producing evidence beyond her own say so demonstrating the likelihood that an unsophisticated debtor would conclude as much. It is not enough that [the consumer] reached such a conclusion; under the FDCPA, confusion is not in the eyes of the beholder.”
Accordingly, entry of summary judgment in the debt collector’s favor and against the consumer was affirmed.
DC Cir. Holds FDCPA Plaintiff Lacked Standing Under Spokeo
Frank v. Autovest, LLC, No. 19-7119, 2020 U.S. App. LEXIS 18082 (D.C. Cir. June 9, 2020)
The U.S. Court of Appeals for the District of Columbia Circuit recently vacated a summary judgment order against a consumer on her claims against a debt owner and its debt collector for alleged violations of the federal Fair Debt Collection Practices Act because the consumer did not suffer a concrete injury-in-fact traceable to the alleged statutory violations and therefore lacked the required Article III standing.
In May 2011, a consumer obtained financing to purchase a used car from a dealer. The dealer immediately assigned its interest in the borrower’s financing agreement to an automobile finance company. The consumer defaulted on the financing agreement and voluntarily surrendered her car to the finance company.
The debt owner subsequently acquired the debt from the finance company. The debt owner retained a debt collector which sent two letters to the consumer indicating that the debt owner had purchased the debt and requiring that the consumer make all future payments to the debt collector.
The debt collector sued the consumer in the Superior Court for the District of Columbia to collect the debt. The complaint attached a sworn “Verification of Complaint” and the debt collector’s counsel later filed affidavits in support of their fees and costs, including documenting that their fees were contingent upon recovery. The Superior Court initially entered a default against the consumer, but later vacated the default upon motion of the consumer. After the consumer retained counsel, the debt collector dismissed its case with prejudice.
The consumer then filed a putative class action in federal court against the debt owner and debt collector alleging that the affidavits filed in support of the debt collection suit contained “false, deceptive, or misleading representations” in violation of 15 U.S.C. § 1692e of the FDCPA, that the affidavits were designed to “harass, oppress, or abuse” the consumer in violation of § 1692d, and that this “unfair or unconscionable” debt-collection practice violated the FDCPA under § 1692f. The consumer also claimed that the debt collector violated all these provisions of the FDCPA “by attempting to collect contractually unauthorized contingency fees.”
The consumer testified at her deposition that she “was being scammed” in the debt collection suit because she had “never heard” of the debt collector. She admitted that she did not take any action or “refrain from doing anything” because of the affidavits. She also admitted she did not make any payments to the debt collector because of the affidavits.
The federal trial court granted the debt owner and debt collector’s motions for summary judgment, finding that any misstatements in the affidavits were not actionable because they were immaterial and did not affect the borrower’s “ability to respond or to dispute the debt.”
This appeal followed.
Although the trial court did not examine the consumer’s standing, the D.C. Circuit began its analysis by evaluating standing because it has “an independent obligation to assure that standing exists.” Article III requires that a plaintiff have “a concrete and particularized injury-in-fact traceable to the defendant’s conduct and redressable by a favorable judicial order” for standing to exist. When opposing summary judgment, a “plaintiff must demonstrate standing by affidavit or other evidence.”
Here, the D.C. Circuit held that the consumer failed to meet her burden because she did not “identify a concrete personal injury traceable to the false representations” in the affidavits. To the contrary, her testimony established “that she neither took nor failed to take any action because of these statements.” She also did not testify that the affidavits “confused, misled, or harmed” her.
Although the consumer claimed that the lawsuit stressed and inconvenienced her, she “never connected those general harms to the affidavits,” as required to confer Article III standing on her alleged FDCPA claims.
The D.C. Circuit rejected the consumer’s argument that the “court costs and attorney’s fees” she incurred in defense of the suit were sufficient to establish standing because “the record contains no evidence linking these expenses to the alleged statutory violations.”
The consumer also argued that she suffered an informational injury sufficient to establish standing because the debt collector and the debt owner denied her “access to truthful information.” To demonstrate a cognizable informational injury a plaintiff must prove that she: “1) has been deprived of information that, on her interpretation, a statute requires a third party to disclose; and (2) suffers, by being denied access to that information, the type of harm Congress sought to prevent by requiring disclosure.”
The D.C. Circuit determined that the consumer could not satisfy the second requirement because her testimony established no “detrimental reliance—or any other harm—based on the misrepresentations in the . . . affidavits.”
The consumer also argued that her claims were the type of injuries that Congress “sought to curb” with the FDCPA and that the FDCPA authorizes a private right of action. Thus, the consumer claimed that she did not have to prove “any additional harm.”
However, in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), the Supreme Court made it clear that even for a statutory violation, “Article III standing requires a concrete injury.” Although Congress may identify and elevate an intangible harm, this “does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.” Nowhere does the FDCPA state “that every violation of the provisions implicated here—no matter how immaterial the infraction— creates a cognizable injury.”
The D.C. Circuit held that simply pointing to alleged false statements in the affidavits is not enough to establish standing because “not all inaccuracies cause harm or present any material risk of harm.” Although a misrepresentation in a debt collector’s affidavit filed in court could cause a consumer to suffer “a concrete and particularized injury,” that was not the case here. Thus, even if the debt collector and debt owner violated the FDCPA, the consumer lacked Article III standing.
Finally, the D.C. Circuit examined the consumer’s argument that her subjective response to the affidavits was immaterial, because the proper inquiry is the “affidavits’ likely effect on a hypothetical unsophisticated debtor.”
The Court rejected this argument because it confused “standing with the merits.” Although the “unsophisticated consumer (or in some courts, the least sophisticated consumer)” is the correct substantive standard that courts use to evaluate the borrower’s FDCPA claims, this does not relieve a consumer from the threshold requirement “to establish Article III standing—including a concrete and particularized injury-in-fact.” This is because, as broad as Congress’s powers are to “to define and create injuries,” Congress “cannot override constitutional limits.”
Thus, the D.C. Circuit vacated the trial court’s summary judgment order and remanded the case to be dismissed for lack of jurisdiction.