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Debt Management Law News

May 14, 2010

Debt-Collection Firms Are Denied Defense of Legal Error

In a suit involving a debt-collection law firm, the U.S. Supreme Court held yesterday that debt collectors and their lawyers do not have a good-faith defense to liability when they misinterpret the legal requirements of the federal Fair Debt Collection Practices Act.

In Jerman v. Carlisle McNellie, Rini, Kramer & Ulrich, No. 08-1200, Justice Sonia Sotomayor, writing for a 7-2 majority, said nothing in the law's language, context or history supported applying its bona fide error defense to legal mistakes.

She also rejected arguments by the law firm—Carlisle, McNellie, Rini, Kramer & Ulrich of Cleveland—a number of debt-collection law firm associations and the dissenting justices that the decision would impose "unmanageable burdens" on debt-collecting lawyers, including a "flood of lawsuits" against creditors' lawyers seeking damages and attorney's fees.

"The suggestion that our reading of [the bona fide error provision] will create unworkable consequences is also undermined by the existence of numerous state consumer protection and debt collection statutes that contain bona fide error defenses that are either silent as to, or expressly exclude, legal errors," she wrote, adding that neither the law firm and its amici nor the dissent "demonstrate that lawyers have suffered drastic consequences under these state regimes."

The case arose from a complaint filed by Carlisle McNellie in state court in 2006 on behalf of Countrywide Home Loans, which sought to foreclose on a mortgage for property owned by Karen Jerman.

The complaint included a "Notice," later served on Ms. Jerman, stating that the mortgage debt would be assumed to be valid unless Ms. Jerman disputed it in writing. She disputed it in writing, and Countrywide subsequently acknowledged that she had, in fact, already paid the debt in full. Carlisle withdrew the foreclosure lawsuit.

Ms. Jerman then filed her own lawsuit against the law firm in federal court. She alleged the firm's requirement that she dispute the debt "in writing" violated the Fair Debt Collection Practices Act. Ms. Jerman sought class certification for all consumers served with a similar notice, actual damages, penalties under the act consisting of the lesser of either $500,000 or 1 percent of respondents' net worth, and attorney's fees.

The district court found that the "in writing" requirement did violate the act. However, the court granted summary judgment to Carlisle McNellie, holding that a section of the act shielded the firm from liability because the violation was not intentional, resulted from a bona fide error, and occurred despite the firm's maintenance of procedures reasonably adapted to avoid any such error.

The U.S. Court of Appeals for the Sixth Circuit in Jerman v. Carlisle McNellie, Rini, Kramer & Ulrich, 538 F. 3d 469, acknowledged that a majority of circuits have held that the bona fide error defense is available only for clerical and factual errors. But the appellate court held that the defense extends to mistakes of law.

In reversing, Justice Sotomayor said that when Congress intends to provide a mistake-of-law defense to civil liability it has done so more explicitly than appeared in this particular act. She also noted that Congress did not confine liability under the act to willful violations, a term, she explained, more often understood to exclude mistakes of law.

In a concurring opinion, Justice Stephen Breyer said the decision may create a "dilemma" for debt-collection lawyers.

"Can those lawyers act in the best interests of their clients if they face personal liability when they rely on good-faith interpretations of the Act that are later rejected by a court?" he asked. "Or will that threat of personal liability lead them to do less than their best for those clients?"

Justice Anthony Kennedy, in a dissent joined by Justice Samuel Alito Jr., said the Court's decision "aligns the judicial system with those who would use litigation to enrich themselves at the expense of attorneys who strictly follow and adhere to professional and ethical standards."

Ms. Jerman's counsel, Kevin Russell, a partner at Howe & Russell in Bethesda, Md., said, "Today's decision treated debt collectors the same way the law treats anyone else who violates a federal statute that provides a private right of action. And it keeps in place an important incentive for debt collectors to abide by the law, when they otherwise have very strong financial incentives to press the envelope of lawful behavior in attempting to collect debts."

If the decision had been in favor of Carlisle McNellie, he added, "It would have been the first time the Supreme Court had ever recognized a mistake-of-law defense to civil liability."

Carlisle McNellie was represented in Court by George Coakley, a partner at Reminger in Cleveland.

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