In McCullough v. Johnson, Rodenburg & Lauinger, (— F.3d —-, C.A.9 (Mont.), March 4, 2011), the United States Court of Appeals for the Ninth Circuit considered whether a law firm violated the federal Fair Debt Collection Practices Act by continuing to prosecute a lawsuit against a debtor after it was clear the statute of limitations had run on the debt and by sending discovery requests that asked the debtor to admit facts that were not true. The court of appeals held that the law firm’s continued litigation of the matter and its discovery requests violated the federal law.
Sometime in 1990, former school custodian Tim McCollough (“McCollough”) opened a credit card account with Chemical Bank. McCollough continued to make purchases on the account after Chemical Bank merged with Chase Manhattan Bank (“Chase”). After McCollough allegedly suffered a brain injury at work and his wife underwent surgery, they fell behind on their credit card bills. McCollough made his last payment on this Chase account in 1999. Chase “charged off” the unpaid balance of $3,000.
Collect America, Ltd (“Collect America”) is a company that attempts to collect debt that has been purchased by its subsidiary, CACV of Colorado, Ltd. (“CACV”). CACV purchased McCollough’s delinquent debt from Chase in 2001 and in 2005 it sued McCollough in state court for $3,816.80. McCollough, who was acting pro se, replied to the lawsuit by stating “that the statute of limitations is up.” CACV dismissed the case and documented the service of the complaint on McCollough and his response in its electronic files.
Collect America retained the law firm of Johnson, Rodenburg & Lauinger (“JRL”) to purse collection of McCollough’s outstanding debt. JRL is a law firm that specializes in debt collection. Charles Dendy (“Dendy”) handled JRL’s cases in Montana. JRL filed 2,700 collection lawsuits in Montana from January 2007 through July 2008. Approximately 90% of the lawsuits filed by JRL resulted in a default judgment. Collect America’s contract with JRL provides: (1) “Collect America makes no warranty as to the accuracy or validity of the data provided,” and (2) JRL is expressly “responsible to determine [its] legal and ethical ability to collect these accounts.”
CACV sent JRL its electronic file and information regarding McCollough’s account. JRL’s “screening procedures flagged a statute of limitations problem with McCollough’s debt.” Grace Lauinger (“Lauinger”) wrote to CACV on January 4, 2007, to inform CACV that “[i]t appears that the Statute of Limitations has expired on this file as of August 21, 2005.” Lauinger asked CACV to provide JRL “with an instrument in writing to extend the Statute of Limitations.” CACV responded to JRL that McCollough made a $75 partial payment on June 30, 2004, and offered to provide further information if needed. Based on a 2004 payment, the applicable five-year statute of limitations in Montana would not have expired until 2009.
The information provided by CACV regarding the 2004 payment was incorrect. The event that actually “took place on June 30, 2004, was the return of court costs to CACV for a collection complaint and summons that CACV had prepared in 2003.” JRL, however, did not request additional information from CACV regarding the 2004 payment. Relying on these latest representations by CACV, JRL filed a lawsuit against McCollough in Montana state court on April 17, 2007, which included a request for attorneys’ fees.
In his pro se answer to the complaint, McCollough stated the statute of limitations “is up” because he had not had any dealings with this credit card in over eight years. In July 2007, Dendy stated that the firm needed “to get what the client has for docs on hand.” Lauinger sent an email to Collect America asking for further documentation, but Collect America informed her that because of the age of the account, it could not get any further information other than what had been sent to JRL. Despite the fact that Collect America could not provide any further information, Dendy continued to prosecute the lawsuit against McCollough. In August 2007, CACV informed Lauinger that McCollough had not made a partial payment in 2004. Lauinger noted this new information in JRL’s file on McCollough. Lauinger could not recall whether she directly informed Dendy of this new information, but the information was accessible in McCollough’s electronic file. Dendy continued to prosecute the lawsuit. In October 2007, Dendy served requests admissions which requested that McCollough admit facts that were not true such as that he had never disputed the debt, he had no defense, and he had made a payment in 2004.
Dendy attempted to obtain information on the account from Chase but Chase told him they had no records of the account. CACV explained to Dendy that the last payment on the account preceded the 2000 charge-off. CACV instructed Dendy to dismiss the lawsuit. Upon JRL’s request, the Montana court dismissed the lawsuit against McCollough with prejudice.
McCollough brought a lawsuit against JRL in federal district court in which he alleged violations of the federal Fair Debt Collection Practices Act (“FDCPA”) and other state law causes of action. The federal district court granted partial summary judgment in favor of McCollough on his FDCPA claim after finding that JRL filed a time-barred lawsuit against McCollough and continued to prosecute the lawsuit after it knew that the lawsuit was time-barred. A jury found in favor of McCollough on his remaining claims.
The court of appeals rejected JRL’s claim that the district court erred in granting summary judgment in favor of McCollough on his FDCPA claims. “The FDCPA prohibits debt collectors from engaging in various abusive and unfair practices.” Lawyers who regularly collect debts through litigation are included within the FDCPA’s definition of “debt collector.” The FDCPA is a strict liability statute but it does provide a narrow defense “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 such error.” JRL claimed that it had maintained adequate preventive measures by using a system that flags potential statute of limitations problems.
The court of appeals found that JRL’s bona fide error defense failed as a matter of law. “[T]he procedures that support a valid bona fide error defense must be ‘reasonably adapted to avoid the specific error at issue.'” The court found “JRL erred by relying without verification on CACV’s representation and by overlooking contrary information in its electronic file JRL thus presented no evidence of procedures designed to avoid the specific errors that led to its filing and maintenance of a time-barred collection suit against McCullough.”
The court further found that JRL’s reliance on CACV’s email that stated a partial payment had been made was unreasonable as a matter of law because JRL’s contract with Collect America expressly disclaimed the accuracy and validity of the information provided by Collect America and provided that JRL was responsible for determining its ethical and legal ability to collect the account. Also, the electronic file confirmed that a payment had not been made; that instead, the 2004 event was a return of unused costs; and also that McCollough had asserted a statute of limitations defense in the previous lawsuit against him. Finally, McCollough informed JRL that the debt fell outside the statute of limitations.
The court of appeals also held that the trial court did not err in granting summary judgment in favor of McCollough on his claim that JRL violated the FDCPA by requesting attorney fees in its Montana collection action. The FDCPA does not allow “the use of ‘unfair or unconscionable means to collect or attempt to collect any debt,’ including ‘[t]he collection of any amount (including any interest, fee, charge, or expense . . .) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” JRL had presented all cardmember agreements, each of which contained an attorneys’ fees provision, but admitted that CACV could not identify the specific cardmember agreement to which McCullough had agreed. The court held that this was insufficient, and that JRL presented no evidence that it had a contractual entitlement to seek fees. JRL could not rely on CACV’s assertion that all cardmember agreements permit the recovery of attorney fees.
The trial court also correctly held that the requests for admission served by JRL violated the FDCPA as a matter of law. JRL asserted “that the FDCPA should not be read to cover discovery procedures such as requests for admission” even though it covers the filing of complaints and the service of settlement letters during litigation. JRL failed to include in its requests for admission a warning that under Montana law, McCollough’s failure to respond within 30 days would cause the requests to be deemed admitted. The court noted that it was required to consider the conduct of the debt collector “from the standpoint of the least sophisticated debtor.” The court stated, “[W]e must conclude that the service of requests for admission containing false information upon a pro se defendant without an explanation that the requests would be deemed admitted after thirty days constitutes ‘unfair or unconscionable’ or ‘false, deceptive, or misleading’ means to collect a debt.” In its requests for admission, “JRL effectively requested that McCullough admit JRL’s entire case against him and concede all defenses.” The court concluded that “[t]he least sophisticated debtor cannot be expected to anticipate that a response within thirty days was required to prevent the court from deeming the requests admitted.”
The court of appeals affirmed the trial court’s grant of partial summary judgment and also affirmed the jury’s verdict in favor of McCullough.
If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.