A Bona Fide Conundrum: Attorney Debt Collector Liability Revisited

By: Jeffrey D. Dunn
Texas Lawyer
August 2, 2010

The federal Fair Debt Collection Practices Act (FDCPA) aims to eliminate abusive consumer debt collection practices, but the pervasiveness of alleged abuses is apparent from Federal Trade Commission (FTC) reports indicating over 119,500 debt collection complaints filed in 2009 alone. Most enforcement action occurs through private litigation and it is through these lawsuits that attorney debt collectors risk personal liability to debtors for statutory violations that may result from seemingly innocuous conduct or innocent legal mistakes.

Both the FDCPA and its counterpart, the Texas Debt Collection Act (TDCA), offer a safe harbor for unintentional violations through the “bona fide error” affirmative defense. Under the FDCPA, which applies to those who regularly collect consumer debts, liability is avoided if the collector “shows by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error notwithstanding maintenance of procedures reasonably adapted to avoid any such error.” Under the TDCA, which applies to both creditors and debt collectors, there is no liability “if the action complained of resulted from a bona fide error that occurred notwithstanding the use of reasonable procedures adopted to avoid the error.” Although the wording of these statutes is slightly different, federal courts have held that the two statutes should be similarly construed.

The problem with the bona fide error defense is that the line between an excusable and inexcusable statutory violation is often elusive. In Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, 506 F.Supp.3d 686 (N.D.Ohio 2007), aff’d, 538 F.3d 469 (6th Cir. 2008), rev’d, 130 S.Ct. 1605 (2010), an Ohio attorney filed a consumer foreclosure action that included an FDCPA notice stating that the debt would be assumed to be valid unless the debtor disputed it in writing. The debtor responded in writing that the debt had been paid in full. The creditor’s attorney confirmed payment, dismissed the lawsuit, and later found herself a defendant in a class action because her validation notice did not permit the debtor to dispute the debt orally.

The district court in Jerman recognized a split of authority among circuit courts regarding the proper wording of FDCPA debt validation notices, but sided with courts holding that a validation notice requiring the consumer to dispute a debt in writing violated the FDCPA. The court nonetheless concluded that this “mistake of law” was excusable under the FDCPA’s bona fide error defense. On appeal the Sixth Circuit affirmed, holding that the bona fide error defense applies to both mistakes of law and clerical errors because nothing in the FDCPA limits the application of the defense to clerical errors alone.

The U.S. Supreme Court in April 2010 reversed the Sixth Circuit. In a 7-2 decision, the Court held that mistakes of law cannot qualify for the bona fide error defense, relying in part on the old maxim that “ignorance of the law will not excuse any person, either civilly or criminally.” What this seems to mean is that if an attorney debt collector relies on judicial precedent interpreting the FDCPA, the attorney will not be excused from personal liability if “the law” as expressed by that precedent is later overruled. The Court suggests that attorneys could ask the FTC for an advisory opinion when ambiguities arise. Reliance on an FTC opinion is a safe harbor under the FDCPA, but the practical reality of debt collection is that few attorneys will be able to delay collection actions to seek a discretionary FTC advisory opinion and wait for a response that may never come. Moreover, there is no Texas state agency with authority to issue comparable safe harbor advisory opinions under the TDCA.

The Texas Supreme Court has not ruled on whether the TDCA’s bona fide error defense can encompass mistakes of law, but the court in CA Partners v. Spears, 274 S.W.3d 51 (Tex.App.-Houston [14th Dist.] 2008, pet. denied), implied that a mistake of law might be allowable. A federal district court opinion has held that a lawsuit filed too late because of a bona fide error resulting from a circuit split on a legal issue did not result in a violation of the TDCPA as a matter of law. See FIA Card Services, N.A. v. Gachiengu, 571 F.Supp.2d 799 (S.D.Tex.2008).

It is not always self-evident when a clerical error occurs within the meaning of the bona fide error defense. In Liu v. Arrow Financial Services, LLC and Regent & Associates, P.C., No. H-08-3116, 2010 Westlaw 1994190 (S.D.Tex. May 17, 2010), a debt collector that had purchased delinquent accounts mistakenly failed to remove some of the accounts from “open disposition” when the seller sought to buy back those accounts. Consequently, the collector’s attorney filed suit on a debt that was not owed by the named consumer. When the error was discovered the suit was dismissed, but the defendant then sued the attorney and collector under the FDCPA and TDCA. The court focused on the meaning of “clerical error” and held that material issues of fact precluded summary judgment for the attorney under the bona fide error defense. The opinion includes an extensive discussion on how clerical errors have been defined by other courts.

Even if a clerical error can be factually proven the debt collector also must factually show that reasonable procedures were used to prevent the error which caused the violation in question. Toward this end attorneys who engage in consumer debt collection can help mitigate their risk by training themselves on the intricacies of these laws, establishing procedures that aim to prevent clerical errors, and judiciously following those procedures.

In July 2010 Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which in part creates the Bureau of Consumer Financial Protection. This new agency will largely supersede the FTC’s enforcement authority under the FDCPA and other federal consumer financial statutes. It remains to be seen whether this new consumer-focused agency will further change the landscape of attorney debt collector liability.