Defending Against a Debt Collection Harassment Claim

November 18, 2010

Content originally posted on MGLAW.net

In these economic times, debt collectors have seen a marked uptick in business, with many also adopting much more aggressive tactics. In response, consumers have taken to the web to share information on what the law allows and possible claims against debt collectors for violations of the Fair Debt Collection Practices Act. A simple Google search reveals thousands of results for how to respond to debt collectors, including sample complaints, motions for summary judgment, and settlement agreements.

Armed with this information, more and more consumers are filing actions against debt collectors. These actions range from warranted to frivolous shakedowns. The new reality of debt collection is that increased litigation costs are now the cost of doing business. This article will provide a short summary of concepts in defending against these actions.

I. Introduction

The Fair Debt Collection Practices Act ("FDCPA" or "the Act") creates guidelines for debt collectors performing the collection of consumer debt and prescribes penalties and remedies for violations of the Act. Violations, can occur upon the first contact and carry a fine of $1,000 each, along with an award for attorney's fees.

Definition of "Debt Collector"

The prohibitions set forth in the FDCPA only apply to parties who meet the definition of a "debt collector" set forth in 15 U.S.C. § 1692a(6) as follows:

The term "debt collector" means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

The definition includes any person who uses the mail or other instrumentality of interstate commerce to engage in a business the principal purpose of which is the enforcement of security interests.

The Act does not cover creditors attempting to collect their own debts in house (as long as they use their own name in collection), government employees attempting to collect debts owed to the government or process servers attempting service of process.

A party that sends a form that falsely represents that a third party (like an attorney) is involved in the debt collection process, is liable even without meeting the defined requirements of 15 U.S.C. § 1692a(6).

The definition of "debt collector" is followed by 6 exceptions:

1. Officers and employees of a creditor while collecting debts for the creditor;
2. Persons collecting debts for an affiliated corporation when collection of debts is not the principal business of such a person;
3. Any officer or employee of the federal state government collecting a debt as part of his official duties;
4. Any person serving or attempting to serve process;
5. Any nonprofit organizations engaged in consumer credit counseling services; and
6. Any person collecting a variety of debts such as, inter alia, those incidental to escrow arrangements, debts originated by that person, and debts not in default at the time they were obtained by such person.

Definition of "Debt"

Under 15 U.S.C. § 1692a(5), covered "debts" include "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment."

The reference to "consumer" means any natural person obligated or allegedly obligated to pay any debt." 15 U.S.C. § 1692a(3). Thus, corporations and limited liability companies are never entitled to protection under the Act.

Examples of "consumer debts" include:

• Debts incurred for clothing
• Debts incurred for food
• Debts incurred for home furnishings
• Debts incurred for water bills
• Debts incurred for sewage bills
• Debts incurred for residential rent

On the other hand, child support, taxes, debts incurred by sole proprietorships for business purposes, and debts owed for commercial properties are all non-consumer debts.

FDCPA is a strict liability statute. From a risk management standpoint, companies should handle consumer collection work as though they are governed by the FDCPA, even if they are most likely not a "debt collector". There is case law that says that as little as 1% or less of your practice needs to be in the arena of consumer collections for you to not be considered a debt collector.

II. Jurisdiction Guidelines and Issues - Generally

Subject Matter Jurisdiction

Fair Debt Collection Practices Act cases may be brought in any court of competent jurisdiction. 15 U.S.C. § 1692k(d).

Statute of Limitations

FDCPA claims may be brought up to 1 year from the date of the alleged violation. 15 U.S.C. § 1692k(d).

Damages - Set by Statute

In individual cases, the Act allows up to $1,000.00 per action, plus actual damages. In class actions, the Act allows up to $500,000 or 1% of the net worth of the collector, whichever is less, plus actual damages. 15 U.S.C. § 1692k(a).

Venue & Removal

Most cases are brought in the federal district courts. If the case is brought in state court, defense attorneys should consider removing to federal court. Federal judges have more experience in handling these types of cases, and are more likely to dismiss the case where the Plaintiff is unable to sustain his or her burden of proof.

III. Litigation Costs vs. Possible Damages

Attorneys Fees

The plaintiff's attorney fees are the greatest damages in any FDCPA case. While prevailing plaintiffs will almost always receive an award of attorney fees, prevailing defendants will not receive attorney fees unless the suit was brought in bad faith and for the purpose of harassment. Since debt collector clients can end up paying both their own attorney fees and the Plaintiff's attorney fees plays a big role in settlement negotiations and should assessed carefully.

Attorney fees in FDCPA cases are calculated based upon a modified "lodestar" analysis. This is calculated by multiplying the number of hours worked and the attorney's regular billing rate.

Other Costs

Other than attorney fees, litigation costs remain the same as for other litigation. Parties will need to pay for their own depositions and other discovery.

IV. Defenses, Counterclaims, and Rule 11 Sanctions

Bona Fide Error" Defense

The FDCPA provides an affirmative defense, called the "bona fide error" defense, for debt collectors that can show by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error.

The defense is only available if the error was made notwithstanding procedures reasonably adapted to avoid any such errors. See, e.g., Carrigan v. Central Adjustment Bureau, Inc., 494 F.Supp. 824, 827 (N.D.Ga. 1980) (Where the debt collector "failed to provide any evidence that it maintained proper procedure to avoid error", the bona fide error defense was held not to be available); see also, Oglesby v. Rotche, 1993 WL 460841 (N.D.Ill., Nov. 4, 1993). The mere assertion by a defendant that it tries to comply with the law is not enough. Dechert v. Cadle Co., 2003 WL 23008969 (S.D.Ind., Sep. 11, 2003).

The FDCPA does not require that the policy or procedure must be part of a written document or employee manual, although plaintiff's counsel may attempt to argue that it does. Generally speaking, the smaller the collection company, the less necessary a written policy manual, but as a company grows, the policies need to be in writing. The goal is to be sure that there are procedures reasonably adapted to avoid a violation of the statute.

Examples of "procedures reasonably adapted to avoid violation" include:

• Training on how to comply with the Act
• Maintaining document disposal procedures (e.g., a shredder next to the copier)

Counterclaims

A debt collector may not counterclaim for the amount of unpaid debt in a FDCPA case if it is brought in federal court. Those claims should be brought in a separate state court collection action. On the other hand, the same a counterclaim for the debt can be compulsory in state court actions in certain situations.

Rule 11 Sanctions

Rule 11 sanctions are often effective in FDCPA cases, especially with pro se plaintiffs. Some pro se plaintiffs tend to make things up as they go, which is a violation of Rule 11.

Safe Harbor Letters

In federal court, if there is a determination that the facts and law do not support continuing with the case, a defendant can issue a "safe harbor" letter, pursuant to 28 U.S.C. §1292. This can help encourage the Court to find that the matter was continued in bad faith, which triggers the reversal of the payment of plaintiff's attorney fees.

V. Avoiding Incrimination Through Collector Documents and Messages

Collection agencies keep a variety of information that can be useful to defending FDCPA cases.

Telephone logs

These will tell when calls are made, or which collectors spoke with a particular consumer. Often the collector notes will indicate the substance of the conversation.

Account Records

Client documents will show how much is owed and to whom it is owed, if the last statement or series of statements is included in the file that is placed with the agency. Client documents should also show the date the last payment by the consumer was made.

Transfer Documents

When dealing with debt purchasers, account documents should also indicate the assignment and/or purchase of the debt to prove title to the debt.

Leaving Messages

Debt collectors should avoid making third-party disclosures when leaving telephone messages. They should also take care not to tell the consumer that steps will be taken to collect the debt when those steps are not part of the company's general practices.

VI. Settlement Strategies and Techniques

It is important to determine early in the case whether or not a violation of the FDCPA actually occurred and whether there were procedures in place to avoid it. If a violation occurred and there were no procedures in place to avoid it, then settlement is likely the best option, and the sooner, the better.

Net Worth

Lawyers should know the net worth of their debt collector clients. This is especially true in defending class actions, where proving a lack of net worth can help the case settle (because individual members of the class would receive de minimus payments).

Rule 68 Offers of Judgment

One of the best settlement strategies is to make a Rule 68 offer of judgment. In an offer of judgment under Rule 68 of the Federal Rules of Civil Procedure, the defendant offers to give the plaintiff a judgment for a certain amount. The offer can either be an amount payable to the plaintiff, plus attorney fees and costs in an amount to be decided by the court, or it can be an amount payable to the plaintiff inclusive of attorney fees and costs.

There are many strategic advantages to making a Rule 68 Offer. If the offer is accepted, the defendant is able to cap its damages and avoid litigation. If the offer is rejected, then the plaintiff risks having to pay the defendant's attorneys' fees if the plaintiff does not get a judgment that is greater than the offer made in the offer of judgment.

Under the federal rules, a Rule 68 offer may only be made by the defendant. It may be made at any time more than 10 days prior to trial, although it is best to make the offer early in order to minimize costs. Rule 68 offers are improper in class action suits when the offer is just enough to moot the named plaintiff's claim.

VII. Conclusion

Consumers are more educated than ever when it comes to the FDCPA. With a strict liability statute, statutory damages, and rising attorneys fees, FDCPA claims can become quite costly. This is an arena where an ounce of prevention is much more effective than a pound of cure. If, however, you find yourself defending a FDCPA claim, knowing the law, recognizing the form complaints available on the internet, and acting quickly can be the difference between a nominal settlement and a substantial judgment.