Monday, February 17, 2020

Sixth Circuit Side Steps the Bona Fide Error Defense

A recent opinion issued by the Sixth Circuit should prove helpful to attorneys facing unsettled issues of state law.  As drolly described by the Court, “[a] lawyer sued two lawyers, and each side hired more lawyers.  Five years later, after ‘Stalingrad litigation’ tactics, discovery sanctions, and dueling allegations of professional misconduct, we are left with $3,662 in damages and roughly $180,000 in attorney’s fees.”  Van Hoven v. Buckles & Buckles, 2020 U.S. App. LEXIS 1483, *2 (6th Cir. Jan. 16, 2020).   So what caused this apocalyptic litigation war?  A series of post judgment garnishments.

In Van Hoven, a law firm enforced a judgment by filing a series of garnishments.  With each garnishment, the law firm included within the post-judgment costs accrued to date their garnishment filing fees.  The consumer contended that the law firm violated §1692e of the FDCPA by seeking the costs of each garnishment, contending that doing so violated Michigan law because: (a) the law firm was not allowed to include the costs of the present garnishment within the amount due; and (b) the law firm was not allowed to include the costs of prior unsuccessful garnishments.  Michigan law, at the time, was unclear as to whether a creditor could include the costs of the present garnishment in their calculation of costs.  At the trial court level, the consumer and the class she represented were successful and were awarded a total of $3,662.00 in damages and $186,600.00 in attorney’s fees.  The law firm appealed.

On appeal, the Sixth Circuit was left to address whether “an inaccurate statement about state law counts as a ‘false … representation’?”  Id. at *8.  The Court started by noting that not every violation of state law is a violation of the FDCPA.  In order for an inaccurate statement about state law to be actionable, the statement must be both inaccurate and material.

While the Court quickly determined the statements at issue were material, it ultimately concluded they were not false.  “Even though the Act covers ‘false’ material statements about state law, that does not mean it extends to every representation about the meaning of state law later disproved.”  Id. at *9.  While the Court considered the Supreme Court’s holdings in Jerman v. Carlisle, 559 U.S. 573 (2010) and Heintz v. Jenkins, 514 U.S. 291 (1995), it veered away from employing the bona fide error defense when considering the law firm’s interpretation of Michigan law.  In doing so, the Court explained that “[t]he key question … is not whether the bona fide error defense applies to interpretations of state law; it is whether this is a cognizable “false representation.”  Id. at *21.

Instead, the Court turned to Rule 11, stating that “[m]ore helpful is the analogy to sanctions based on attorneys’ statements in litigation” and noting that it is only sanctionable to advance legal contentions that are not warranted by existing law.  Id. at *13.   Key to the Court’s determination that the statements were not false was the fact that at the time the statements were made (and the costs sought), the law was unsettled.[1]  The Court noted that

[i]n dealing with open questions of state law, excellent arguments sometimes will appear on either side.  And we generally don’t think of a position on the meaning of state law as false at the time it was issued whenever a higher court over time takes a different position in a later case … A representation of law is not actionably false every time it turns out wrong.”

Id. at *14.  Drawing from Rule 11 and its threshold for sanctions, the Court held that “a lawyer does not ‘misrepresent’ the law by advancing a reasonable legal position later proved wrong. This logic applies with even more force to representations of law given the frequent before-the-case difficulty, sometimes indeterminacy of legal questions.”  Id.

Applying this rationale, the Court reversed the district court on the issue as to whether the law firm made misrepresentations in seeking its current garnishment costs.  The Court additionally remanded the remaining issue (whether the law firm improperly sought costs for prior unsuccessful garnishments) to the district court to determine whether that claim was subject to the bona fide error defense.

The opinion provides an excellent road map for law firms dealing with unsettled areas of law and should provide law firms with additional avenues for defense.

[1] Michigan later amended its rules to clarify that creditors may include their current costs in their garnishment requests.

Monday, February 10, 2020

CFPB Issues Semi-Annual Report to Congress

The CFPB has issued its semi-annual report to Congress.  The Report, which covers April through September of 2019, is mandated by Dodd-Frank and was released in conjunction with Director Kraninger’s testimony to the House Financial Services Committee.  Here are a few of our key take-aways.

Credit Reporting is a Focus of the Bureau.  The Report identifies credit scoring and credit reporting as a source of major concern for consumers.  Specifically, the report notes that the reporting of collections and bankruptcies have a significant impact on consumer credit scores and upon consumer lending. The Report also confirms what litigation trends are showing - credit reporting has surpassed debt collection as the most complained of consumer product.  In the twelve-month period ending September 30, 2019, credit reporting accounted for 43% of all consumer complaints.

Debt Collection Rule – Mum is the Word.  The Report is silent as to when a final debt collection rule will be forthcoming.  The Report simply indicates that the proposed rule was published and that the Bureau is reviewing the submitted comments with no indication as to when the final rule will be forthcoming.  Keeping in mind that the reporting period covered ended in September, perhaps that is not unusual except for the fact that the Report includes footnoted updates as to other issues addressed in the report.  Moreover, debt collection complaints no longer are the most complained of consumer product, having been surpassed by credit reporting.  For the year ending September 30, 2019, debt collection only accounted for 24% of all consumer complaints.