Opinion
No. 4-684 / 04-582
Filed December 22, 2004
Appeal from the Iowa District Court for Mitchell County, Bryan McKinley, Judge.
Jon Bergstrom appeals the district court's denial of his counter claim alleging Chrysler Financial Company's violation of the Iowa Consumer Credit Code by filing suit against him in the wrong county. AFFIRMED IN PART, REVERSED IN PART AND REMANDED.
Ray Johnson of Johnson Law Firm, West Des Moines, for appellant.
Becky J. Petersen and Phil Watson of Phil Watson, P.C., Des Moines, for appellee.
Heard by Huitink, P.J., and Mahan, Miller, Vaitheswaran, JJ., and Snell, S.J.
Senior Judge assigned by order pursuant to Iowa Code section 602.9206 (2003).
A creditor who sued a debtor in the wrong county alleged that the mistake was a "bona fide error," insulating it from liability under Iowa's Consumer Credit Code. We disagree and conclude that, as a matter of law, the creditor could not prevail on its bona fide error defense.
I. Background Facts and Proceedings
Chrysler Financial Company (Chrysler) sued Jon Bergstrom in Howard County, Iowa for an alleged violation of his vehicle lease agreement. Bergstrom moved for a change of venue to Mitchell County, arguing that Howard County had "no relationship to this transaction" because he lived in Mitchell County. Chrysler agreed to the change and the case was transferred to Mitchell County.
Bergstrom then filed a counterclaim, alleging that Chrysler's conduct in filing the action in the wrong county was an unfair debt collection practice under the Iowa Consumer Credit Code. See Iowa Code § 537.5113 (2003) (stating that "[a]n action by a creditor against a consumer arising from a consumer credit transaction shall be brought in the county of the consumer's residence"); Id. § 537.7103(1)(f) (prohibiting a debt collector from taking or threatening to take an action "prohibited by this chapter or any other law"). Bergstrom sought actual and statutory damages as well as attorney fees and costs.
Chrysler does not dispute that the contract giving rise to its lawsuit was a consumer credit transaction, triggering application of the Iowa Consumer Credit Code. See Iowa Code § 537.1301(11). Chrysler also does not dispute that it is a "creditor" collecting a "debt" within the meaning of the Iowa Debt Collection Practices Act, a subdivision of the Consumer Credit Code. Id. § 537.7102(2), (3).
In response, Chrysler asserted that the violation "was not intentional and resulted from a bona fide error as contemplated in Code of Iowa § 537.5201(7) (2003)." Following trial, the district court accepted Chrysler's defense to the counterclaim and granted judgment for Chrysler on its petition. Bergstrom moved for enlarged findings and conclusions, which the district court denied.
On appeal, Bergstrom does not challenge the district court's entry of judgment in favor of Chrysler on the underlying debt. Instead, he focuses on the court's rejection of his counterclaim. In his view, Chrysler's bona fide error defense to the counterclaim should have failed as a matter of law.
II. Bona Fide Error A. The Law
The bona fide error defense states:
A person may not be held liable in any action brought under this section for a violation of this chapter if the person 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 the error.
Iowa Code section 537.5201(7). Chrysler argues that, under section 537.5201(7), it only needed to show that the mistaken filing "was inadvertently drafted, unintentional, or resulted in a bona fide error." Bergstrom responds that the statute plainly required Chrysler to prove more than an unintentional violation. He maintains Chrysler also had to establish that the error was bona fide and that the company maintained procedures reasonably adapted to avoid the error.
A similar provision addresses bona fide error in the context of a violation of the Truth in Lending Act. See Iowa Code § 537.5203(3).
At oral arguments, counsel for Chrysler appeared to concede that the statute required proof of all three elements articulated by Bergstrom. As his brief does not make this concession, we will afford him the benefit of the doubt and will proceed to address this issue.
This case presents the first opportunity for Iowa's appellate courts to address the elements of section 537.5201(7). We agree with Bergstrom that Iowa Code section 537.5201(7) plainly and unambiguously requires a person raising this affirmative defense to prove the violation (1) was not intentional, (2) resulted from a bona fide error, and (3) occurred notwithstanding the maintenance of procedures reasonably adapted to avoid the error.
Monahan Loan Service, Inc. v. Janssen, 349 N.W.2d 752 (Iowa 1984), an opinion cited to support Chrysler's position, is inapposite. As in the present case, Monahan Loan Service, Inc. initiated a debt collection action in the wrong county and later refiled in the correct county. Monahan, 349 N.W.2d at753. The debtor responded by filing essentially the same counterclaim filed by Bergstrom. Id. After holding that the plaintiff committed an unfair debt collection practice by filing the petition in the wrong county, the court turned to other unfair practices urged by the debtor. Id. at 754. With respect to these practices, the court held that the claims "were not urged by the defendants until after the evidence was closed in the trial court" and "the district court acted well within its discretion in refusing to consider those claims." Id. at 755. Therefore the court neither reached the merits of these additional claims nor the merits of the bona fide error defense the creditor sought to raise. The court cited the defense solely to highlight that the creditor had no opportunity to marshall evidence supporting it. For this reason, we are convinced that Monahan does not set forth the elements of the bona fide error defense and does not require solely that the error be unintentional or bona fide.
We turn to case law from other jurisdictions. See Iowa Code § 537.1102(2)(g) (encouraging the promotion of uniformity among jurisdictions in consumer protection law); First Wisconsin Nat'l Bank v. Nicolaou, 335 N.W.2d 390, 394 (Wis. 1983) (same). That case law supports our conclusion that more than a showing of an unintentional error is required to establish the bona fide error defense. See Johnson v. Riddle, 305 F.3d 1107, 1121 (10th Cir. 2002) (interpreting identical language found in the Fair Debt Collection Practices Act, 15 U.S.C. § 1692k(c), and outlining elements of defense in this way: "[The] violation was (1) unintentional, (2) a bona fide error, and (3) made despite `the maintenance of procedures reasonably adapted to avoid' the violation."); Fox v. Citicorp Credit Serv., Inc., 15 F.3d 1507, 1514 (9th Cir. 1994) (interpreting identical language found in the Fair Debt Collection Practices Act, and finding creditor was not entitled to bona fide error defense because it failed to produce evidence of "reasonable preventative procedures," an "essential element" of the defense); Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 250-51 (3rd Cir. 1980) (interpreting identical language found in Truth in Lending Act, 15 U.S.C. § 1640(c), and stating elements of defense require a showing that (1) the violation was not intentional and was a bona fide error, and (2) the error occurred notwithstanding the maintenance of procedures reasonably adapted to avoid any such error, i.e. "a special system . . . to assure that no initial errors occur, and . . . a checking mechanism . . . to catch any errors that slip through the system"); Mirabal v. General Motors Acceptance Corp., 537 F.2d 871, 877-79 (7th Cir. 1976), overruled on another issue by Brown v. Marquette Sav. and Loan Assn., 686 F.2d 608 (7th Circ. 1982) (interpreting identical language found in Truth in Lending Act, and stating that "creditors must prove first, that the error was an unintentional, bona fide error and second, that they maintained procedures reasonably adapted to avoid such error"); Turner v. Firestone Tire and Rubber Co., 537 F.2d 1296, 1298 (5th Cir. 1976) (interpreting identical language found in Truth in Lending Act, and finding bona fide error defense unavailable to creditor where creditor failed to prove the mistake was unintentional and failed to produce evidence or even plead that "it maintained a procedure reasonably adapted to avoid such errors"); Edwards v. McCormick, 136 F. Supp. 2d 795, 800 (S.D. Ohio 2001) (stating that under Fair Debt Collection Practices Act, proponent of bona fide error defense must prove the violation was not intentional, the violation resulted from a bona fide error, and the violator maintained procedures reasonably adapted to avoid any such error); In re Underwood, 66 B.R. 656, 664 (W.D. Virg. 1986) (stating "test articulated in 15 U.S.C.S. § 1640(c) . . . is a two-pronged test" requiring proof that the error was "unintentional and bona fide and that it occurred notwithstanding the maintenance of procedures reasonably adapted to avoiding such errors") (emphasis in original); Allied Finance Co. v. Rodriquez, 869 S.W.2d 567, 573 (Texas Ct. App. 1993) (requiring maintenance of "fail-proof" procedure to avoid error under state consumer protection act); Miller v. Soliz, 648 S.W.2d 734, 737 (Texas Ct. App. 1983) (stating bona fide error defense requires proof of bona fide error and adoption of procedures to avoid errors).
The Fair Debt Collection Practices Act, 15 U.S.C. § 1692k(c) provides as follows:
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.
The Truth in Lending Act, 15 U.S.C. § 1640(c) provides as follows:
A creditor or assignee may not be held liable in any action brought under this section or section 1635 of this title for a violation of this subchapter if the creditor or assignee 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. Examples of a bona fide error include, but are not limited to, clerical, calculation, computer malfunction and programming, and printing errors, except that an error of legal judgment with respect to a person's obligations under this subchapter is not a bona fide error.
Some courts have gone so far as to "require that a special system be established to assure that no initial errors occur, and that a checking mechanism be maintained to catch any errors that slip through the system." Thomka, 619 F.2d at 251; In re Webster, 300 B.R. 787, 798 (W.D. Okla. 2003) (noting absence of any extra preventative step, safety catch or rechecking mechanism to detect error in compliance with error avoidance procedures); McCormick, 136 F. Supp. 2d at 801-02 (error catching procedure that was not consistently used did not satisfy third element); In re Ralls, 230 B.R. 508, 520 (E.D. Penn. 1999) (stating creditors must generally show procedures designed to avoid error which might "slip through procedures aimed at good faith compliance, a safety catch or a re-checking mechanism"); In re matter of Wright, 11 B.R. 590, 594 (S.D.Miss. 1981) (finding use of forms insufficient to detect error in absence of written check list or guidelines to detect errors in forms).
We need not decide whether the "procedures" envisioned by Iowa Code section 537.5201(7) must include this type of double-checking mechanism. We simply cite these opinions to emphasize that the standard is a heavy one. See Mirabal, 537 F.2d at 878 (stating "Congress had no intention of having the consumer bear the burden of a creditor's negligence"). There is clearly "a higher burden than merely good faith compliance." Id.; see also Johnson v. Eaton, 873 F. Supp. 1019, 1028 (M.D. La. 1995) (stating "mere inadvertence" not shielded by bona fide error defense); Dutton v. Wolhar, 809 F. Supp. 1130, 1138 (D. Del. 1992) (requiring proof of more than "[m]ere inadvertency").
Narwick v. Wexler, 901 F. Supp. 1275 (N.D. Ill. 1995) is particularly instructive. There, a law firm sued a debtor in the wrong county. Narwick, 901 F. Supp at 1280. The law firm asserted a bona fide error defense under the Fair Debt Collection Practices Act. The attorney of record claimed that he personally reviewed each complaint to ensure that the venue identified in the complaint matched the county of residence and/or the county in which the contract was signed. Id. at 1282. He also claimed the billing clerk performed a second check. Id. The court held these procedures were not "`reasonably adapted to avoid' FDCPA venue violations as a matter of law." Id.
These opinions from courts around the country bolster our conclusion that Iowa Code section 537.5201(7) mandates proof of the maintenance of procedures reasonably adapted to avoid the error in addition to proof that the error was unintentional and bona fide.
B. Discussion
Bergstrom does not contest the first two elements of the bona fide error defense. He focuses on the third element, arguing that Chrysler failed to prove it "maint[ained] . . . procedures reasonably adapted to avoid the [unintentional, bona fide] error." Chrysler responds that, even if it must prove it maintained preventative procedures, it did so with the testimony of Karen Brewer, a receptionist who worked at the law firm Chrysler retained. She testified she was trained to file actions in the debtor's county of residence and she used United States Postal Service and Iowa Department of Transportation documents to determine the debtor's county of residence.
Although the documents Brewer cited were not offered into evidence, Brewer described them as follows:
[F]rom the post office, it was a two-page list that listed the cities and, you know, across from it would be the county in which the city was located. When I first started, I also telephoned the Department of Transportation to see if they had any kind of list that named the city and the county on, you know, one piece of paper. You know, across from each other, same type of format, and they faxed it to me and I compared it with the list that we already had. It was the same so it wasn't one that I had to combine.
Brewer testified she "never had any problems" locating a person's residence in this fashion. We agree with Bergstrom that, as a matter of law, these procedures were not reasonably adapted to avoid the error.
Bergstrom also argues the procedures were not "maintained." He points to the fact that Chrysler's recitation of those procedures evolved over time. We assume without deciding that the procedures discussed at trial were the procedures on which Chrysler intended to rely and that these procedures were "maintained."
Brewer's testimony established that the law firm had a manual directing that petitions "be filed in the county in which the debtor resides." This was something the law firm was "independently obligated to do." Narwick, 901 F. Supp. at 1282. It was not a procedure designed to avoid filing in the wrong county.
The law firm also had a list of cities and the counties in which the United States Post Office located those cities. That list did not account for cities that straddle more than one county, as was the case with Bergstrom's city of residence. Bergstrom argues that a map would have alerted Chrysler to this fact. We agree.
Chrysler finally points out that the venue error "could have been easily corrected had the defendant's lawyer simply contacted the plaintiff's lawyer." He urges that the Iowa Consumer Credit Code "was not intended to compensate the defendant" under these circumstances. We disagree. See Dutton, 809 F. Supp. at 1139 (stating purpose of venue provision in FDCPA was to "prevent debt collectors from bringing collection suits in forums located at great distances from debtors' residences" and to "prevent forum abuse"). We also note the burden is not on Bergstrom but on Chrysler to establish the elements of the bona fide error defense. Johnson v. Statewide Collections, Inc., 778 P.2d 93, 101 (Wyo. 1989); Temborius v. Slatkin, 403 N.W.2d 821, 829 (Mich.App. 1986). Therefore, defense counsel had no obligation to contact Chrysler's attorney about the venue violation.
Bergstrom's attorney also had no obligation to present evidence of Chrysler's procedures relating to determination of venue, as suggested in oral argument.
We conclude Chrysler's bona fide error defense fails as a matter of law. There is no dispute that Chrysler filed its petition in the wrong county and that this incorrect filing was a violation of the Iowa Consumer Credit Code, absent a viable bona fide error defense. See Monahan, 349 N.W.2d at 754. Therefore, Bergstrom is entitled to judgment on his counterclaim.
III. Disposition
We affirm the deficiency judgment in favor of Chrysler, reverse the dismissal of Bergstrom's counterclaim, and remand for entry of judgment in favor of Bergstrom on his counterclaim and for a determination of statutory damages and attorney fees.