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From Banking and Finance Law Daily, August 18, 2014

Consumers can sue debt collectors for misrepresentations without demanding validation

By Richard A. Roth, J.D.

A consumer who was subjected to continued debt collection demands and threats by a debt collection agency after she paid the debt could sue the agency for Fair Debt Collection Practices Act violations even if she had not used the debt verification procedures the act provides, the U.S. Court of Appeals for the Fourth Circuit has decided. The court also determined that the agency’s incorrect statement that the debt remained unpaid and its threat to report the debt to consumer reporting agencies were, as a matter of law, misrepresentations (Russell v. Absolute Collection Services, Inc., Aug. 15, 2014, Floyd, Circuit Judge).

Debt collection process. The genesis of the suit was a $501 medical bill incurred by the consumer’s husband. When the bill went unpaid, the doctors’ office referred it to a debt collection agency, which sent the consumer a letter that demanded payment and apparently included all of the consumer notices required by 15 U.S.C. §1692g. These included a warning that the debt collector would assume the debt to be valid if it was not disputed within 30 days and that the consumer could within 30 days demand in writing that the debt be verified.

The consumer neither disputed the debt nor demanded verification. Instead, after receiving several telephone calls from the collection agency, she paid the bill by sending a check directly to the doctors’ office. A month later, when the agency again called to demand payment, she told the caller the bill was paid.

Later that month, the agency sent her another letter asserting the bill was unpaid and demanding payment. The consumer called the agency and told it, again, that the bill had been paid. The agency asked for proof, which the consumer did not supply. The following month, the agency sent another letter demanding payment and threatening to report the unpaid bill to credit reporting agencies.

The consumer responded by filing a complaint with the Better Business Bureau. At that point, the collection agency, for the first time, contacted the doctors’ office directly and confirmed that the bill had been paid. The payment demands stopped, but the consumer sued the collection agency under both the FDCPA and comparable state laws.

Trial court rulings. The jury trial did not go well for the debt collection agency. The trial judge first rejected the agency’s request for judgment after the consumer closed her case, deciding that the FDCPA did not require her to demand verification of the debt before suing for claimed misrepresentations. Then, at the close of all of the evidence, the judge decided that the agency unquestionably had made misrepresentations that violated the act and that the agency had not shown the violations were bona fide errors. The jury awarded the consumer a total of $37,501 in actual and statutory damages.

The agency appealed the judge’s rulings on liability, as well as an earlier decision that it could not introduce evidence bearing on its bona fide error defense due to discovery violations.

Need to demand verification. According to the collection agency, a consumer can sue a debt collector for making misrepresentations only if she first disputes the debt and demands in writing that the debt be verified within 30 days of the debt collector’s initial communication. In other words, the FDCPA requires the debt collector to notify the consumer of her dispute and verification rights, and the consumer is required to exercise those rights as a condition of being able to sue. The appellate court rejected that argument.

The notification requirements are set out in 15 U.S.C. §1692g. The collection agency asserted that, since the consumer did not exercise those rights, it was permitted to assume the debt was valid and continue its collection activities. However, the appellate court said that nothing in 15 U.S.C. §1692e, which bans misrepresentations, imposed that requirement. The act’s language did not include such a requirement, and imposing it would be contrary to the act’s remedial nature.

Requiring a consumer to demand that a debt be verified would weaken the FDCPA’s goal of protecting unsophisticated consumers, the court said. It would have particularly incongruous results in this case, because the debt was valid when payment first was demanded. The FDCPA violations occurred only after the debt was paid. Requiring the consumer to demand verification before suing essentially would require her to have demanded verification of a debt she knew was owed, the court pointed out.

Moreover, if a consumer did not demand verification, the collection agency’s interpretation would immunize any FDCPA violations that were committed once the 30-day deadline passed, the court said.

The court also approvingly cited a recent decision by the U.S. Court of Appeals for the Third Circuit that reached the same conclusion (McLaughlin v. Phelan Hallinan & Schmieg, LLP, discussed at Banking and Finance Law Daily, June 27, 2014).

Misrepresentations. The appellate court then agreed with the trial judge that there was no factual dispute over whether the collection agency’s letters were misrepresentations. According to the court, “the collection notices are so plainly false and misleading that the district court was justified in concluding, as a matter of law, that the communications violated §1692e.”

The demand letter that asserted the debt “has not been satisfied” would lead the least sophisticated consumer to believe the debt remained due even though it had been paid, the court said. The statement was “false on its face,” misrepresenting the character, the amount, and the legal status of the debt in violation of 15 U.S.C. §1692e(2)(A). The threat to inform credit bureaus was a threat to communicate credit information the collection should have known was false in violation of 15 U.S.C. §1692e(8), and also was a deceptive means to collect a debt in violation of 15 U.S.C. §1692e(10).

Bona fide error. A debt collector that violates the FDCPA is not liable if the violation is unintentional and occurs despite the debt collector’s procedures that are reasonably adapted to prevent such an error (15 U.S.C. §1692k). The collection agency attempted to assert this bona fide error defense, but its ability to do so was fatally weakened by the trial judge’s pretrial ruling excluding the agency’s evidence.

The problem, according to the court, was that the agency’s disclosure of a witness and of information about the doctors’ office’s duty to report payments was not disclosed in a timely manner. The disclosures were not made for the first 20 months of litigation, after the original trial date, until shortly before the trial began. They also revealed a new factual basis for the bona fide error defense.

In such a situation, it was not an abuse of discretion for the trial judge to exclude the evidence in order to enforce the discovery rules and prevent unfair surprise at the trial.

The case is No. 12-2357.

Attorneys: Sean T. Partrick (Yates, McLamb & Weyher) for Absolute Collection Services, Inc. Deepak Gupta (Gupta Beck PLLC) for Diane Russell.

Companies: Absolute Collection Services, Inc.

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