Fair Debt Collection Practices Act Malpractice Claims and the Bona Fide Error Defense

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The FDCPA (15 U.S.C. §1692 et seq.) imposes virtually strict liability for consumer debt collectors who violate any of the Act’s numerous prohibited conduct and required conduct provisions. This law spawned a cottage malpractice industry capitalizing on debt collector lawyers who carelessly or inadvertently violate the Act. While often the claims are meritorious, many are weak or frivolous filed by claimants hoping for a quick nuisance settlement. In either case a claim can be expensive and time consuming.

The first risk management principle for consumer debt collection lawyers is to know what you are doing by meticulously complying with the Act. Second, understand and comply with the requirements for use of the bona fide error defense provided for in the Act. To assist lawyers in preserving this defense, this article provides an overview of the bona fide error defense and offers risk management suggestions for implementing internal controls to satisfy the requirement that the debt collector maintain procedures reasonably adapted to avoid a bona fide error.

Bona Fide Error Defense

15 U.S.C. § 1692k(c): A debt collector may not be held liable in any action brought under this subchapter if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.

A recent New York court decision* succinctly explained the bona fide error defense as follows:

To avail itself of this defense, a defendant must prove:

(1) the presumed FDCPA violation was not intentional;
(2) the presumed FDCPA violation resulted from a bona fide error; and
(3) that [the defendant] maintained procedures reasonably adapted to avoid any such error.”

The procedures need not be “foolproof,” but must constitute a “reasonable precaution” to avoid the error at issue. The bona fide error defense is an affirmative defense, and the defendant bears the burden of proving its elements at trial by a preponderance of the evidence. To survive summary judgment, a defendant must make a showing sufficient to establish the existence of, or at least a factual question as to, every element of the defense. See Fed. R. Civ. P. 56(c) ... (citations omitted)

*Lee v. Kucker & Bruh, LLP And Kucker (No. 12 Civ.04622 (LGS) US District Court, S.D. New York (2013).

Is an Unintentional Mistake of FDCPA Law a Bona Fide Error?

Initially there was a split of authority whether a lawyer making an honest error in misinterpreting the FDCPA could use the bona fide error defense for a claim resulting from that error. A minority of courts, including the 6th Circuit Court of Appeals, held that the defense in §1692k(c) is not limited to clerical or factual errors, but extends to mistakes of law.

The US Supreme Court settled this issue in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 130 S.Ct. 1605 (2010). The Court held that “[t]he bona fide error defense in §1692k(c) does not apply to a violation resulting from a debt collector’s mistaken interpretation of the legal requirements of the FDCPA ... A violation resulting from a debt collector’s misinterpretation of the legal requirements of the FDCPA cannot be ‘not intentional’ under §1692k(c). It is a common

The Court found that lawyers may assert §1692k(c) for defense of violations resulting from qualifying factual errors and clerical errors. The Court’s only example of factual error is the “factually mistaken belief ... that a particular debt arose out of a nonconsumer transaction and was therefore not ‘covered’ by the Act.”

The Court left open the question whether the bona fide error defense could be asserted when the error concerned state or federal law other than the FDCPA. The Court determined that since the Jerman “case involves only an alleged misinterpretation of the requirements of the FDCPA, we need not, and do not, reach those other questions.”

What Are Procedures Reasonably Adapted To Avoid Any Error?

Horror Story: The Lee case cited above is a classic example of a firm failing to have procedures in place to avoid error. In attempting to collect alleged back rent from Lee, the firm relied exclusively on two reports supplied by the client. After having no success in collecting back rent, the firm commenced eviction proceedings against Lee. When the firm realized that Lee was actually current on his payments the firm discontinued the eviction action. Lee then sued the firm and the client for violation of the FDCPA. The firm asserted the affirmative defense of bona fide error.

In evaluating this defense the Court found that the delinquency reports the firm received from the client were suspect because one showed a payment that was not subtracted from the amount of the debt claimed. A second report showed the debt owed had increased. The increase was the result of the client not only failing to credit Lee with the payment that had been received, but instead adding it to the amount owed. Not withstanding these apparent errors in calculation, the firm made no effort to verify the accuracy of the reports with the client.

The Court then looked to the firm’s procedures for avoiding error. Lawyer Kucker’s testimony when asked about these procedures is a classic of a sort (Could this be you?):

Q: And is it also your testimony that your firm, you and/or your firm had reasonable procedures that had been adopted to avoid the error?
A: Yes. It’s called my law license.

Q: What other reasonable procedures, if any, were adopted to avoid the error … ?
A: I believe — I believe that as an attorney, since I am ethically mandated to understand the law, that my law license is — and my good standing in the bar … are reasonable procedures under the statute.

Q: So what specific procedures did you and your firm adopt to avoid violating the Fair Debt Collection Practices Act?
A: The law firm is responsible for all its paralegals and its process servers, everything is under the auspices of the firm ... I believe in this circumstance the difference between debt collectors who are not attorneys and debt collectors who are attorneys, because certainly whether I have a manual or I go listen to somebody’s lecture, it doesn’t provide any greater obligation for my firm to have procedures to avoid errors in the litigation than my requirement that as attorneys we follow the law and don’t violate it in the process.

Q: So what specific procedures did you and your firm adopt to avoid violating the Fair Debt Collection Practices Act?
A: I believe I answered the question.

The Court summed up its denial of the bona fide error defense and ruling in favor of Lee as follows:

Defendants had no procedures designed to avoid discoverable errors in their client’s computation of the amount due. Their sole procedure was to rely blindly on their client’s business record maintained in the regular course of business. The Court need not reach the question of what procedures might have been adequate, as well as practical under the circumstances, to avoid liability for the error that occurred here, such as asking the client to verify in writing whether a tenant received a SCRIE or another form of rent subsidy, providing training and protocols for document examiners to detect irregularities, or maintaining procedures for employees to follow up with the client when the information provided is questionable. While the court makes no finding of what procedures would have been sufficient, the absence of any procedure to avoid discoverable errors clearly is insufficient. On the undisputed facts, Defendant cannot satisfy the third prong of the bona fide error defense. No reasonable jury could conclude that Defendants’ procedures were reasonably designed to avoid the type of error that occurred in this case.

Effective Procedures: Firms that have successfully used bona fide error as a defense presented evidence of some of these procedures:

  1. Leadership:
    1. Employment of compliance manager who oversaw application and implementation of FDCPA collection safeguards.
    2. Appointment of firm’s senior principal to be responsible for ensuring compliance with the FDCPA.
      • The principal attended conferences and seminars, subscribed to trade publications, distributed relevant cases to the attorneys, provided all employees (attorneys and nonattorneys) with the firm’s FDCPA Procedures Manual.
      • Conducted mandatory meetings discussing FDCPA developments at least twice a year.
  2. Publications and Printed Material:
    1. Distribution of an in-house FDCPA compliance manual updated regularly and supplied to each firm employee.
    2. Cards containing required statutory language posted on telephones used for collection purposes.
    3. Subscribed to trade publications and distributed relevant cases to attorneys.
  3. Training:
    1. Training seminars conducted for firm employees involved in collecting consumer debts.
    2. Employees sent periodically to seminars on FDCPA compliance.
  4. Review Procedures:
    1. Firm used an eight-step, highly detailed pre-litigation review process to ensure accuracy.
    2. Review procedures used to determine whether follow up with the client is appropriate because the documents or other information provided is questionable.
  5. Computers:
    1. Firm’s computer system was reasonably adapted to avoid errors.

Primary source for Effective Procedures: ABA/Lawyers’ Manual on Professional Conduct §301:416, Statutory Liability, Bona Fide Error.

Conclusion

Many lawyers, especially those practicing as sole practitioners or in smaller firms, resist developing detailed written operating procedures, seeing them as unnecessary for the scale of their practice. The risk management error of this kind of thinking is never more obvious than in the application of the FDCPA bona fide error defense. You must have reasonable procedures in place to avoid error to avail yourself of this defense. We recommend that you review the five categories listed above of effective procedures and tailor a program for your practice that qualifies as “reasonably adapted to avoid error.”

 


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