Jerman And Its Effects On the Collection Industry

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1 Jerman And Its Effects On the Collection Industry Presented By: Alan H. Weinberg, Managing Partner

2 U.S. Supreme Court Only two Fair Debt Collection Practices Act ( FDCPA ) Cases have been before the United States Supreme Court. Heintz v. Jenkins Held that the FDCPA applies to attorneys regularly engaged in debt collection litigation. Jerman v. Carlisle Jerman v. Carlisle made its way to the U.S. Supreme Court because of two words. 2 Collections and Credit Risk Conference November 2, 2011

3 Two Words - Can You Find Them? The debt described herein will be assumed to be valid by the Creditor s law firm, unless the debtor(s), or either one of them, within thirty (30) days after the receipt of this notice, dispute, in writing, the validity of the debt or some portion thereof. 3 Collections and Credit Risk Conference November 2, 2011

4 In Writing The debt described herein will be assumed to be valid by the Creditor s law firm, unless the debtor(s), or either one of them, within thirty (30) days after the receipt of this notice, dispute, in writing, the validity of the debt or some portion thereof. 4 Collections and Credit Risk Conference November 2, 2011

5 How It All Began Jerman State Case The state court case started off as a foreclosure complaint which included a Notice that provided that the debt would be assumed valid unless disputed in writing. Ironically, Jerman did dispute the debt in writing when her attorney sent a letter to the law firm. When Carlisle received the dispute, they researched it and discovered that the debt had been paid in full. Carlisle withdrew the foreclosure lawsuit. 5 Collections and Credit Risk Conference November 2, 2011

6 It Did Not Stop With The Dismissal Although the foreclosure suit was dismissed with prejudice, the case did not end there. Jerman filed a lawsuit seeking class certification and damages under the FDCPA claiming that the in writing language in the Foreclosure Notice was a violation of the FDCPA. Judge Gaughan of the N.D. of Ohio District Court would have to decide Three Threshold Issues throughout this case. 6 Collections and Credit Risk Conference November 2, 2011

7 Threshold Issue #1 Is there an FDCPA Violation? Yes, although hyper technical 15 U.S.C. 1692(a)(3) does not include the in writing requirement stated in the Foreclosure Notice. 7 Collections and Credit Risk Conference November 2, 2011

8 Threshold Issue #2 Does the Bona Fide Error Defense Apply? Yes, under 15 U.S.C. 1692k(c) the violation of including the in writing language: Was not intentional, Resulted from a bona fide error ( BFE ), Occurred despite the maintenance of procedures reasonably adapted to avoid any such error. Judge Gaughan decided that the BFE applies to both legal and factual mistakes. 8 Collections and Credit Risk Conference November 2, 2011

9 Appeal Was Taken On Threshold Issue #2 6th Circuit Court of Appeals affirmed Judge Gaughan s decision that the BFE applied to both legal and factual mistakes. Counsel for Carlisle thought that this case was finally over. 9 Collections and Credit Risk Conference November 2, 2011

10 United States Supreme Court Enters Cert was granted by the United States Supreme Court to resolve the conflict of the authority as to the scope of the FDCPA s bona fide error defense. 10 Collections and Credit Risk Conference November 2, 2011

11 Supreme Court Decides BFE Does Not Apply To Mistakes of Law The Supreme Court reversed the judgment of the Sixth Circuit. They held that the bona fide error defense in the FDCPA does not apply to a violation of the Act resulting from a debt collector s incorrect interpretation of the legal requirements of the FDCPA. 11 Collections and Credit Risk Conference November 2, 2011

12 Case Goes Back To District Court Plaintiff sought summary judgment on the issue previously decided by the District Court, whether Defendants Notice violates the FDCPA because it states that disputes must be made in writing. Court granted Plaintiff s summary judgment on the merits. Plaintiff also moved for summary judgment for the award of statutory damages under 1692k(a)(2)(B). Plaintiff argued that the Court should award the maximum amount of statutory damages up to the statutory cap $1, to Ms. Jerman $13, to the class 12 Collections and Credit Risk Conference November 2, 2011

13 15 U.S.C. 1692k(a)(2)(A) Except as otherwise provided by this section, any debt collector who fails to comply with any provision of this title [15 USC 1692 et seq.] with respect to any person is liable to such person in an amount equal to the sum of (2) (A) in the case of any action by an individual, such additional damages as the court may allow, but not exceeding $ 1,000; or (B) in the case of a class action, (i) such amount for each named plaintiff as could be recovered under subparagraph (A), and (ii) such amount as the court may allow for all other class members, without regard to a minimum individual recovery, not to exceed the lesser of $ 500,000 or 1 per centum of the net worth of the debt collector; 13 Collections and Credit Risk Conference November 2, 2011

14 Threshold Issue #3 Is Plaintiff Entitled To Actual Damages? Judge Gaughan analyzed the five factors under the statute to determine whether the class was entitled to actual damages. 14 Collections and Credit Risk Conference November 2, 2011

15 Five Factors Under 15 U.S.C. 1692k(b)(2) Frequency and Persistence of Noncompliance by the Debt Collector Nature of the Noncompliance Resources of the Debt Collector Number of Persons Adversely Affected Extent to Which the Debt Collector s Noncompliance was Intentional 15 Collections and Credit Risk Conference November 2, 2011

16 1) Frequency and Persistence of Noncompliance by the Debt Collector Court determined that this factor weighs in favor of Defendants Notice with in writing language only sent to Jerman and each class member. Single Notice so cannot be badgered or harassed by one notice. 16 Collections and Credit Risk Conference November 2, 2011

17 2) Nature of the Noncompliance Court determined that this factor did not weigh in anyone s favor. Defendants argued that the nature of noncompliance was trivial, technical, and harmless evidenced by the fact that Plaintiffs and the Class suffered no actual damages. Court did not agree that the Defendants noncompliance was trivial since Camacho focuses on the importance of the right to orally dispute a debt, however, there was no readily apparent harm caused and accordingly this factor did not weigh in either party s favor. 17 Collections and Credit Risk Conference November 2, 2011

18 3) Resources of the Debt Collector Court found this factor weighed in favor of the Plaintiff Net worth of Defendants was $1,305, which would mean the maximum amount of statutory damages that could be awarded was $1,000 for Jerman and $13, for the class. Court determined that the award sought would not have a severe impact on the Law Firm s ability to operate and since the statute is strict liability, damages may be awarded in the absence of actual damages for the violation of the statute. 18 Collections and Credit Risk Conference November 2, 2011

19 4) Number of Persons Adversely Affected Court found this factor weighed in favor of Defendants Court agreed that the Plaintiff failed to show the number of persons adversely affected. 19 Collections and Credit Risk Conference November 2, 2011

20 5) Extent to which the Debt Collector s Noncompliance was Intentional Court held that this factor weighed in favor of the Defendants. Court stated that Defendants had relied in good faith upon their interpretation of the requirements of the FDCPA and the Defendants noncompliance was not intentional. 20 Collections and Credit Risk Conference November 2, 2011

21 Zero Damages Awarded in Jerman Because the factors tilt in Defendants favor, additional damages were not awarded to Plaintiff. Other Relevant Factors under 1692k(b) Plaintiff urged the Court to consider the reasonableness of awarding the statutory maximum which comes out to: $1,000 to Jerman A little over $3.00 per class member 21 Collections and Credit Risk Conference November 2, 2011

22 Where Does Jerman Stand Now? Plaintiff s have filed the following: Motion for an Incentive Award ($3,000.00) Motion for an Award of Costs and Attorney Fees Attorney Fees = $329, Costs = $13, Total = $ Notice of Appeal to the 6th Court of Appeals 22 Collections and Credit Risk Conference November 2, 2011

23 Incentive Award Plaintiff is requesting an award of $3,000 for her involvement and participation in this case, as the representative plaintiff. Defendants argue that she is not entitled to an incentive award since she did not recover for the class and accordingly did not create a communal pool of funds to be distributed. 23 Collections and Credit Risk Conference November 2, 2011

24 Plaintiff s Argument for Attorney Fees and Costs Plaintiff argues that she was successful in the litigation by obtaining Judgment on the underlying claim (whether Carlisle s verification notice violated the FDCPA). Success does not mean there has to be 100% recovery of what they sue for 24 Collections and Credit Risk Conference November 2, 2011

25 New Threshold Issue Is Plaintiff Entitled to Attorneys Fees? Court had directed the parties to brief the issue of whether attorneys fees are mandated under the FDCPA when no actual or additional damages have been awarded. Jerman filed an Appeal with the 6th Circuit Court. Issue: Whether the District Court erred in not awarding statutory damages to Plaintiff and the Class. Judge Gaughan has stayed the District Court Case pending the Appeal. 25 Collections and Credit Risk Conference November 2, 2011

26 Entitlement to Attorneys Fees Edwards v. First American Corp. is currently before the U.S. Supreme Court. It is not an FDCPA case but instead it involves RESPA. This is a case to watch! 26 Collections and Credit Risk Conference November 2, 2011

27 Successful Actions = Award of Damages? Successful action to enforce the foregoing liability REQUIRES an award of damages Successful action to enforce the foregoing liability DOES NOT REQUIRE an award of damages CIRCUIT COURTS Johnson v. Eaton, 80 F. 3d 148 (5th Cir. 1996) Dechert v. Cadle Co., 441 F.3d 474 (7th Cir. 2006) Thornton v. Wolpoff & Abramson, LLP, 312 Fed. Appx. 161 (11th Cir. 2008) (Unreported dicta) CIRCUIT COURTS Emanuel v. American Credit Exchange, 870 F.2d 805 (2d Cir. 1989) Pipiles v. Credit Bureau of Lockport, Inc., 886 F.2d 22 (2d Cir. 1989) Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991)(Dicta) 27 Collections and Credit Risk Conference November 2, 2011

28 Lessons From Jerman 1. Consider A Settlement Up Front As A Cost Of Doing Business 2. Get Enough Insurance 3. Do Not Give Up On Bona Fide Error Defense 4. Relief To Debt Collectors May Be Determined On Standing To Sue Requirement 5. Determine and Raise Defenses 6. REACT! 28 Collections and Credit Risk Conference November 2, 2011

29 Questions & Answers Any Questions? 29 Collections and Credit Risk Conference November 2, 2011

30 30 Collections and Credit Risk Conference November 2, 2011