On April 21, 2010, the United States Supreme Court resolved a federal circuit court split regarding the “bona fide error” defense found in the Fair Debt Collection Practices Act (FDCPA). The Supreme Court held in Jerman v. Carlisle, McNellie, Rini, Kramer and Ulrich LPA, No. 08-1200 (United States Supreme Court 2010), that the FDCPA’s bona fide error defense does not apply to violations of the FDCPA that result from misinterpretations of the legal requirements of the Act.
The case began when the Carlisle firm (Carlisle) sued Karen Jerman in foreclosure on behalf of Countrywide Home Loans, Inc. The complaint Carlisle filed and ultimately served on Jerman contained a validation notice that said Carlisle would assume Jerman’s mortgage debt alleged in the complaint was valid unless Jerman disputed the debt in writing. Jerman’s lawyer sent a letter to Carlisle disputing the debt. Carlisle sought verification of the debt from Countrywide, who confirmed that it had been paid. Carlisle withdrew the foreclosure suit, and Jerman filed a putative class action claiming that Carlisle’s notice requiring Jerman to dispute the mortgage debt in writing violated the FDCPA.
The federal district court in Ohio held that Carlisle had violated the FDCPA by requiring in its notice that Jerman dispute the debt in writing, noting that Section 1692g(a)(3) does not appear to require disputes to be written to be effective under the FDCPA. Nevertheless, the court granted summary judgment in favor of Carlisle, holding that the misstatement of the law was not intentional, resulted from a bona fide error and occurred despite “the maintenance of procedures reasonably adapted to avoid any such error” (referencing 15 U.S.C. § 1692(k)(c)). Jerman appealed, and the U.S. Court of Appeals for the Sixth Circuit affirmed, while noting the split among federal circuits on the question of whether the bona fide error defense extended to mistakes of law like the one Carlisle made. The Supreme Court granted certiorari in order to decide the question.
In a 7-2 decision, the Supreme Court reversed the Sixth Circuit. Justice Sotomayor wrote for the majority and cited Supreme Court authority from 1833 for the “common maxim, familiar to all minds, that ignorance of the law will not excuse any person, either civilly or criminally.” The Court noted that Congress seems to provide “a mistake-of-law defense to civil liability” in a way that is explicit when it wants good faith error defenses to go that far. The Court specifically noted that the onerous administrative penalties under the FTC Act apply under the FDCPA only for acts of a debt collector undertaken with actual knowledge or knowledge fairly implied on the basis of objective circumstances, but that the debtor recovery provisions did not contain similar language. The Court noted that there was long-standing agreement among the courts that the bona fide error defense applied to clerical and factual errors, but no similar uniformity with respect to errors based on misinterpretations of the law.
The Court considered other statutes with similar language in their bona fide error defenses, and looked specifically and at length at the bona fide error defense in the Truth in Lending Act (TILA). The Court pointed out that the FDCPA version of the defense tracks the TILA version that was in effect before simplification in 1980. The Court noted that three federal appellate courts held that that the pre-simplification version of the defense, which is the same as the FDCPA version, excluded mistaken legal interpretations of TILA. Congress then amended the TILA bona fide error defense to specifically exclude an “error of judgment with respect to a person’s obligations” under TILA from the kind of errors that can qualify for bona fide errors that avoid liability under the Act. Carlisle argued that the fact that Congress had amended the FDCPA twice after Truth in Lending simplification and had not changed the bona fide error defense meant that Congress did not want to limit the defense in FDCPA cases to the same extent as TILA. The Court disagreed, though, and ultimately held that the bona fide error defense “does not apply to a violation of the FDCPA resulting from a debt collector’s incorrect interpretation of the requirements of that statute.”
Justice Kennedy dissented and Justice Alito joined him, arguing that the Court’s interpretation of the bona fide error defense plays into the hands of plaintiffs’ attorneys who “use litigation to enrich themselves at the expense of attorneys who strictly follow and adhere to professional and ethical standards.” According to the dissent, the Court’s holding allows and even encourages “certain actors” in the legal system to turn good-faith technical violations of the FDCPA into lucrative litigation for themselves.
Finally, the Court did not address the underlying interpretive issue in the case, which was whether disputes under the FDCPA may take a form other than writing. While that question remains, it is clear that the conservative approach on the legal interpretation will avoid costly litigation similar to this case: debt collectors subject to the FDCPA should not write validation notices that purport to require debtors to dispute debts in writing, notwithstanding the possible interpretation of the FDCPA that would allow them to require that.
Chuck Dodge is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Chuck at 410-865-5427 or by email at cdodge@hudco.com.