Tuesday, June 19, 2018

FYI: 9th Cir Rejects ID Theft Putative Class Action for Lack of Spokeo Standing

The U.S. Court of Appeals for the Ninth Circuit recently held the plaintiff did not allege Article III standing for her claim under the federal Fair Credit Reporting Act ("FCRA") where there were no specific factual allegations plausibly tying the inclusion of her debit card expiration date on her receipt to her alleged identity theft. 

Moreover, the Court held, leave to amend would be futile because this action against the National Park Service was barred by sovereign immunity. 

Accordingly, the Ninth Circuit affirmed the ruling of the district court dismissing the complaint. 

A copy of the opinion is available at:  Link to Opinion

The plaintiff ("Plaintiff") filed a complaint on behalf of herself and a putative class alleging that when she purchased an entrance pass to Yellowstone National Park, the National Park Service ("Park Service") printed a receipt bearing her full debt card expiration date.  The receipt otherwise complied with FCRA and did not include more than the last five digits of her debit card number. 

Plaintiff claimed that the Park Service violated FCRA's prohibition that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction."  15 U.S.C. § 1681c(g). 

Plaintiff further alleged that after the transaction, and because of the inclusion of the expiration date on her receipt, her debit card was used fraudulently and she suffered damages from her stolen identity.
The Park Service filed a motion to dismiss which was granted by the district court on the grounds that FCRA does not waive the U.S. government's sovereign immunity.  This appeal followed. 

On appeal, the Ninth Circuit analyzed both whether Plaintiff had Article III standing to bring her claim, and whether sovereign immunity applied. 

For Article III standing, Plaintiff was required to allege that she "(1) suffered an injury in fact, (2) that is fairly traceable to the alleged conduct of [the Park Service], and (3) that is likely to be redressed by a favorable judicial decision."
   
The Ninth Circuit stated that although Plaintiff alleged a sufficient injury of identity theft and fraudulent charges, there was a question of whether that was "fairly traceable" to the Park Service's issuance of the receipt.

At the pleading stage, Plaintiff did "not need to prove proximate causation," but she had the burden of "demonstrating that her injury-in-fact [was] . . . fairly traceable to" the Park Service's issuance of the receipt.

In the Complaint, Plaintiff alleged only that "[a]fter this debit card transaction Plaintiff['s] [] personal debit card was used fraudulently and she suffered damages from the stolen identity," and "[b]ased on information and belief, the fraudulent use of Plaintiff['s] [] debit card was caused in part by the inclusion of the expiration date of her debit card on the receipt of her purchase from Defendant National Park Service." 

The Ninth Circuit concluded that the latter allegation was a legal conclusion that was not entitled to the presumption of truth at the pleading stage, and the former allegation presented "no specific factual allegations plausibly tying the Park Service receipt to her identity theft." 

The Ninth Circuit noted that Plaintiff did not allege another copy of the receipt existed, that her copy was lost or stolen, or that anyone other than her lawyers ever viewed the receipt.

The Court therefore concluded that it was "left with an allegation of a 'bare procedural violation' of the FCRA and a generic allegation of later harm that is 'divorced from' that violation." 

Thus, the Ninth Circuit held that Plaintiff failed to allege standing.

The Court went on to explain that in a typical appeal it would consider whether amendment to the complaint could cure the defects in the standing allegations, but it did not reach the question here because it also held that Plaintiff's "suit [was] also barred by sovereign immunity," so any amendment would be futile.

In reaching this conclusion, the Ninth Circuit first noted that sovereign immunity shields the United States from suit "absent a consent to be sued that is 'unequivocally expressed' in the text of a relevant statute." 
FCRA defines a "person" as "any individual, partnership, corporation, trust, estate, cooperative, association, government or governmental subdivision or agency, or other entity." 

As the Park Service is an agency of the United States, "the sovereign immunity question boils down to whether the inclusion of 'governmental . . . agency' in the FCRA's definition of 'person' constitutes an unequivocal waiver of the federal government's immunity from money damages and subjects the United States to the various provisions directed at 'any person' who violates the law."

The Ninth Circuit determined that "[c]onstruing the FCRA as a whole – including the different contexts in which 'person' is used, and the inclusion of a clear waiver of sovereign immunity in an unrelated provision," the FCRA was "ambiguous as to whether Congress waived immunity for [Plaintiff's] suit." 

Moreover, because "[a]ny ambiguities in the statutory language are to be construed in favor of immunity," the Court held that Plaintiff's suit was properly dismissed. 

Accordingly, the Ninth Circuit affirmed the ruling of the district court dismissing the lawsuit.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Saturday, June 9, 2018

FYI: 9th Cir Rejects FCRA Putative Class Action Relating to Short Sale Credit Reporting

In a putative class action alleging violations of the federal Fair Credit Reporting Act (FCRA), the U.S. Court of Appeals for the Ninth Circuit recently held that:

(1) the credit reporting agency's reporting of short sales was not inaccurate or misleading, even though it knew that a government sponsored enterprise misinterpreted its short sale code as a foreclosure, because FCRA does not make credit reporting agencies liable for the conduct of its subscribers;

(2) the credit reporting agency's consumer disclosures were clear and accurate, and 15 U.S.C. § 1681g did not require the credit reporting agency to disclose its proprietary codes that could confuse unsophisticated consumers; and

(3) the plaintiffs failed to establish a right to statutory damages because the credit reporting agency conduct was not objectively unreasonable.

A copy of the opinion is available at:  Link to Opinion

The plaintiffs brought this action against a credit reporting agency ("Credit Reporting Agency") alleging violations of the federal Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. ("FCRA") based on the Credit Reporting Agency's reporting of short sales and its related consumer disclosures.

The Credit Reporting Agency delivered its credit reports in a proprietary computer-generated format that displays credit information "in segments and bits and bytes," but the Credit Reporting Agency provides technical manuals that enable its subscribers to read and understand the credit reports they receive.

As you may recall. a short sale is a derogatory credit event that furnishers report to the credit reporting agencies.  When the Credit Reporting Agency receives data reporting a short sale, it translates the data into its proprietary coding before it can export the data to subscribers.  The Credit Reporting Agency's technical manual coded short sales as follows:

(1)  Account type:  A mortgage-related account, such as a first mortgage or home equity line of credit.
(2)  "Account condition" and "payment status" code: 68, which corresponds to a Special Comment of "Account legally paid in full for less than the full balance."  The 68 automatically populates a 9 into the first position on the payment history grid to display the "Settled" status.
(3)  Payment history grid showing the final status ("Settled") in the first digit, followed by 24 months of payment history information.
(4)  Date in 25th month in the payment history grid corresponds to the date the furnisher reported the "Settled" status to the Credit Reporting Agency.

In other words, the Credit Reporting Agency reported account condition code 68 ("Account legally paid in full for less than the full balance") for short sales, which then automatically inserted the number 9 into the payment history grid (to display a "Settled" status).  However, a lead payment history code of 9 can represent multiple, derogatory, non-foreclosure statuses, including "Settled, Insurance Claim, Term Default, Government Claim, Paid by Dealer, BK Chapter 7, 11 or 12 Petitioned, or Discharged and BK Chapter 7, 11 or 12 Reaffirmation of Debt Rescinded."

Foreclosures are reported with a lead payment history code of 8 and an account condition and payment status code of 94 ("Creditor Grantor reclaimed collateral to settle defaulted mortgage").  According to the Credit Reporting Agency's technical manuals, it was impossible for its credit reports to reflect a foreclosure with a lead payment history code of 9.

A government sponsored enterprise ("GSE") that purchased mortgage loans from certain lenders used a proprietary underwriting software.  Its rules required that a consumer a with a prior foreclosure must wait seven years before obtaining a new mortgage, but consumers with a prior short sale need wait only two years.

The GSE's underwriting software analyzed credit report data from the credit reporting agencies.  In doing so, the software relied on the GSE's payment code, which corresponded to the Credit Reporting Agency's lead payment history code.  Until 2013, the software "identified [mortgage accounts] as a foreclosure if there [was] a current status or [payment history code] of '8' (foreclosure) or '9' (collection or charge off)."

Thus, the GSE elected to treat code 9 the same as it treated code 8, even though it knew from the instructions the Credit Reporting Agency that code 9 did not represent a foreclosure, and that it was "necessarily capturing accounts that [were] not actually foreclosures."  The GSE's treatment of lead payment history code 8 and 9 imposed a seven year waiting period on consumers with a prior short sale, when the waiting period should have only been two years.

In 2010, consumers and the Credit Reporting Agency raised this issue with the GSE, but neither entity changed its coding.

Between 2012 and 2013, the plaintiffs disputed the Credit Reporting Agency's reporting of their prior short sales.  However, the plaintiffs were able to obtain new loans after their prior short sales because their lenders either understood that they had a prior short sale, not a foreclosure, or the lender did not use the GSE's underwriting software.  

In June 2013, the plaintiffs filed a putative class action against the Credit Reporting Agency asserting claims for:  (1) a reasonable procedures claim pursuant to 15 U.S.C. § 1681e; (2) a reasonable reinvestigation claim pursuant to 15 U.S.C. § 1681i; (3) a file disclosure claim pursuant to 15 U.S.C. § 1681g.  The plaintiffs requested damages pursuant to 15 U.S.C. § 1681n.

The case was stay pending the Supreme Court's resolution of Spokeo, Inc. v. Robins, 135 S. Ct. 1892 (2015).  After the stay was lifted, the Credit Reporting Agency moved for summary judgment.  The trial court granted summary judgment in favor of the Credit Reporting Agency.  

This appeal followed.

The Ninth Circuit began its analysis on the plaintiffs' reasonable procedures and reasonable reinvestigation claims.

As you may recall, FCRA's compliance procedures provide that: "[w]henever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates."  15 U.S.C. § 1681e(b).

Liability under this reasonable procedure provision "is predicated on the reasonableness of the credit reporting agency's procedures in obtaining credit information."  Guimond v. Trans Union Credit Info. Co., 45 F.3d 1329, 1333 (9th Cir. 1995).  To bring a section 1681e claim, the "consumer must present evidence tending to show that a credit reporting agency prepared a report containing inaccurate information."  Id., 45 F.3d at 1333.

Additionally, a credit reporting agency must conduct a free and reasonable investigation within thirty days of a consumer informing the agency of disputed information.  15 U.S.C. § 1681i(a)(1)(A).  Consumers must show that "an actual inaccuracy exists" for a section 1681i claim.  Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 890 (9th Cir. 2010).

The plaintiffs argued that the Credit Reporting Agency's short sales code combination 9-68 was "patently incorrect" because it caused the GSE to treat short sales as a potential foreclosure.

However, the Ninth Circuit noted that the Credit Reporting Agency reported short sales with code combination of 9-68.  Account status code 68 automatically inserted 9 into the lead payment history spot, signifying that the account was "Settled" and "legally paid in full for less than the full balance."  This, according to the Ninth Circuit, was the very definition of a short sale.

Further, the Ninth Circuit explained that even if code combination 9-68 stood for other derogatory events, and thus could be misleading, that alone did not render the Credit Reporting Agency's reporting actionable.  The reporting must be "misleading is such a way and to such an extent that it can be expected to adversely affect credit decisions."  Gorman v. Wolpoff & Abramson, LLP, 584 F.3d 1147, 1163 (9th Cir. 2009).

As the Ninth Circuit explained, the Credit Report Agency reported foreclosures with code 8-94, which meant "[c]reditor [g]rantor reclaimed [the] collateral to settle defaulted mortgage."  And, as the Ninth Circuit further explained, a foreclosure did not occur where a mortgage account is "legally paid in full for less than the full balance" like a short sale.  Thus, in the Ninth Circuit's view, the Credit Reporting Agency's code system accurately distinguished short sales and foreclosures.

The plaintiffs also argued that the Credit Reporting Agency's reports were misleading because it knew the GSE was misreading its technical manuals and failed to take remedial action.  However, the Ninth Circuit rejected this argument because FCRA did not make the Credit Reporting Agency liable for the misconduct of its subscribers.

Thus, because the Ninth Circuit determined that the plaintiffs failed to point to any inaccuracies on their credit reports, it did not have to consider whether the Credit Reporting Agency had reasonable procedures or conducted reasonable reinvestigations.

Next, the Ninth Circuit turned to the plaintiffs' arguments regarding the Credit Reporting Agency's consumer disclosures.

As you may recall, 15 U.S.C. § 1681g(a) provides, in relevant part, that "[e]very consumer reporting agency shall, upon request, clearly and accurately disclose to the consumer:  [a]ll information in the consumer's file at the time of the request."  "A consumer's file includes "all information on the consumer that is recorded and retained by a [credit reporting agency] that might be furnished, or has been furnished, in a consumer report on that consumer."  Cortez v. Trans Union, LLC, 617 F.3d 688, 711-12 (3d Cir. 2010).

First, the plaintiffs argued that Credit Reporting Agency's consumer disclosures violated section 1681g(a)(1), because it placed the designation "CLS" (Closed) in the lead spot on the payment history grid on each consumer disclosures, instead of one of the code 9 statuses.  The plaintiffs argued that because the status category on a consumer disclosure ("Paid in settlement") was a separate category from the lead digit in the payment history grid on a credit report, these categories served different purposes.

The Ninth Circuit disagreed.  It found that the Credit Reporting Agency complied with section 1681(g) because it provided the plaintiffs with all information in their files at the time of their requests in a form that was both clear and accurate.  Specifically, the Credit Reporting Agency's consumer disclosures conveyed the same information it reported to its subscribers.

Additionally, the Ninth Circuit determined that the Credit Reporting Agency was not required to report the actual code 9 in a consumer disclosure.  Requiring the Credit Reporting Agency to provide its proprietary code, in the Ninth Circuit's view, would contradict section 1681g(a)'s requirement that the disclose be "clear."  In order for a consumer to understand code 9, the Credit Reporting Agency would have to report account status code 68 and release its complicated technical manual, which would further confuse unsophisticated consumers.

Moreover, the Ninth Circuit was unpersuaded by the plaintiffs' argument that the Credit Reporting Agency violated section 1681g(a)(1), because "there was a material disconnect between the information displayed in [their] consumer reports and the information displayed in [their] consumer disclosures due to the presence of the catchall code 9."  As the Ninth Circuit explained, this was in essence the same argument based on an incomplete interpretation of the Credit Reporting Agency's coding system.  The Credit Reporting Agency's account status code 68 clarified the account's status and the specific derogatory event attached to it.

Thus, the Ninth Circuit held that the plaintiffs failed to identify what information the Credit Reporting Agency improperly excluded from its disclosures.

Additionally, the Ninth Circuit found that the plaintiffs failed to establish a right to statutory damages under 15 U.S.C. § 1681n, which required a showing that the Credit Reporting Agency willfully failed to comply with FCRA.  

The Ninth Circuit stated that even if the Credit Reporting Agency had violated section 1681g, it did not act in an objectively unreasonable manner by electing not to list code 9 in its consumer reports.  Further, the Ninth Circuit noted that the Consumer Financial Protection Bureau investigated the shorts sale-foreclosure problem and determined that the underlying issue was not due to inaccurate reporting by furnishers or credit reporting agencies.

Accordingly, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the Credit Reporting Agency.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Friday, June 1, 2018

FYI: 9th Cir Holds Party With Pecuniary Interest Has Standing to Appeal BK Order

The U.S. Court of Appeals for the Ninth Circuit held that a party with a pecuniary interest affected by a bankruptcy court order satisfies the "person aggrieved" requirement for appellate standing even where the party fails to appear and object in the bankruptcy proceeding.

Accordingly, the Ninth Circuit reversed the district court's dismissal of the appeal for lack of standing and remanded the case.

A copy of the opinion is available at:  Link to Opinion

The debtor in this action was an originator and servicer of residential mortgage loans ("Lender").  The Lender obtained funding for the loans through private investors.  In the event of a default, the Lender would initiate foreclosure proceedings, and if the Lender purchased the property at the foreclosure sale, then the Lender would create a limited liability company to hold title to the property.  The original loan investors would then get a membership interest in the newly created limited liability company.  

After a borrower defaulted on one such loan, the Lender formed a limited liability company ("Company") to hold title to the property.  The investors who provided money for the original loan exchanged their interest in the loan for membership interests in the Company.

The Company's operating agreement designated the Lender as manager of the Company. 

The Lender subsequently filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, which proceeding was later converted to a Chapter 7 proceeding.  The bankruptcy trustee ("Trustee") was given a deadline to assume the or reject the Lender's executory contracts, which included the Company's operating agreement. 

The Trustee did not assume the operating agreement by the deadline, but it subsequently filed an assumption motion ("Assumption Motion") asking the bankruptcy court to enter an order authorizing him to, among other things, assume the operating agreement.

The Trustee provided a notice of motion to the members ("Members") of the Company.  The notice stated that any response to the Assumption Motion was be served at least 14 days prior to the hearing date.  No one filed an opposition to the Assumption Motion, and none of the Members appeared at the hearing. 

As none of the Members filed an opposition or appeared at the hearing, the bankruptcy court granted the Assumption Motion as unopposed.  The transcript from the hearing made it clear that the court contemplated that the Trustee's counsel would draft an order for the court's signature. 

One week later, before the court had issued an order on the Assumption Motion, the Members filed an emergency motion for reconsideration and sought an expedited hearing on the motion.  The bankruptcy court denied the Members' application for an order setting a hearing on the emergency motion and ruled that the Members had not shown either that the oral ruling granting the Trustee's motion was manifest error or that they were likely to prevail on appeal.

The Members appealed to the district court, where the Trustee moved to dismiss on the ground that the Members lacked standing to appeal because they did not file an objection to the Assumption Motion or attend the hearing despite having received adequate notice.  The district court granted the Trustee's motion and dismissed the appeal for lack of standing.  The matter was then appealed to the Ninth Circuit.

On appeal, the Ninth Circuit explained that "[a]ll circuits, including this one, limit standing to appeal a bankruptcy court order to 'person[s] aggrieved' by the order."  A "person aggrieved" is someone who is "directly or adversely affected pecuniarily" by a bankruptcy court's order. 

The Ninth Circuit noted that in ruling that the Members lacked standing, the "district court relied . . . on Brady v. Andrew (In re Commercial Western Finance Corp.), 761 F.2d 1329, 1335 (9th Cir. 1985), which stated in dicta that 'attendance and objection' at the bankruptcy court proceedings 'should usually' be prerequisites to meeting the 'person aggrieved' bankruptcy standing rule." 

However, the Court further noted that "[t]his court's suggestion In re Commercial Western Finance Corp. (Commercial) that 'attendance and objection should usually be prerequisites to the person aggrieved standard' was not a holding and does not bind us." 

Next, the Ninth Circuit observed that other circuits courts that had addressed the issue disagreed regarding whether attendance and objection are prerequisites for satisfying the "person aggrieved" standing requirement. 

In determining that attendance and objections are not prerequisites for standing, the Ninth Circuit stated that "[b]ankruptcy standing concerns whether an individual is 'aggrieved,' not whether one makes that known to the bankruptcy court," and "one need not have attended and made objections at the hearing to be directly and adversely affected by a bankruptcy court's decision." 

Thus, "an appellant's failure to attend and object at a bankruptcy court hearing has no bearing on the question of whether that appellant has standing to appeal a bankruptcy court order." 
Instead, "[f]ailure to attend and object may result in waiver or forfeiture of the right to make certain arguments or object to certain claims, but it does not present a jurisdictional standing issue." 

As a result, the Members did not "waive[] their challenge to the propriety of the underlying Assumption Order, though the question of forfeiture is open for determination on remand." 

The Ninth Circuit concluded that "[b]ecause there is no question that [the Members'] pecuniary interests are directly and adversely affected by the bankruptcy court order in question, we reverse the district court's dismissal of the appeal for lack of standing.  We therefore remand the case to the district court" where the "court may consider whether [the Members] forfeited their opposition to the Assumption Motion and, if so, whether the bankruptcy court's granting of the Motion should be reviewed for plain error."


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Thursday, May 10, 2018

FYI: 9th Cir Rejects FDCPA Claim That Collector Did Not "Meaningfully Participate" in Collection

The U.S. Court of Appeals for the Ninth Circuit recently rejected a so-called “flat-rating” claim, holding that a company that sent letters demanding that hospital patients pay their overdue medical bills did not create a false or misleading impression that the company was actually participating in collecting the debts in violation of the federal Fair Debt Collection Practices Act (FDCPA), because the company meaningfully participated in the hospital’s efforts to collect debts.

A copy of the opinion is available at:  Link to Opinion

The plaintiff received treatment at a hospital but failed to pay the medical bills.  After the plaintiff ignored multiple requests for payment, the hospital referred her delinquent accounts to a collection agency.

The hospital and the collection agency operated together under a Subscriber Agreement where the hospital would refer delinquent patient accounts to the collection agency. For a fixed fee, the collection agency would send letters requesting payment by check, credit card, or online at the hospital’s website.

The collection agency sent three demand letters to the plaintiff.  In response to the third letter, the plaintiff disputed the debt and the collection agency marked the account as disputed and returned the account to the hospital.

In March 2014, the plaintiff filed a putative class action against the collection agency and hospital alleging violations of the federal Fair Debt Collection Practices Act (FDCPA), including but not limited to 15 U.S.C. §§ 1692e and 1692j.

The plaintiff alleged that the letters she received “created a false or misleading belief that [the collection agency] was meaningfully involved in the collection of a debt prior to the debt actually being sent to collection” -- a practice commonly known as flat-rating.

The hospital and collection agency moved for summary judgment.  In response to the motions, the plaintiff argued that even if her flat-rating claim failed, the defendants’ practices violated 15 U.S.C. § 1692e(5) by falsely threatening to take further action against her if she refused to pay her debt.  The plaintiff argued that the collection agency had no actual authority to take any action against her outside of sending the demand letter.

The trial court granted the defendants’ motion for summary judgment.  It ruled that the evidence established that the collection agency meaningfully participated in the collection of the plaintiff’s debt, thereby precluding any flat-rating claim.  The trial court also struck the section 1692e(5) claim because it was raised too far into the litigation, plaintiff did not formally amend her complaint, and the claim was barred by the FDCPA’s one year statute of limitations.

The plaintiff appealed and challenged the trial court’s rejection of both her flat-rating and § 1692e(5) claims.  The plaintiff also argued that she had a viable claim under §1692e(10) for the collection agency’s allegedly deceptive acquisition of her information.

The Ninth Circuit began its analysis by reviewing the flat rating claim.

As you may recall, § 1692j prohibits “flat-rating -- the practice where a third party (usually for a flat rate) sells form letters to a creditor -- which creates the false impression that someone (usually a collection agency) besides the actual creditor is ‘participating’ in collecting the debt.”  See White v. Goodman, 200 F.3d 1016, 1018 (7th Cir. 2000).  Flat-rating essentially involves a creditor using a third party’s name for intimidation value.

Because it was undisputed that the collection agency furnished form letters to create the belief that it was participating in the collection of debts owed the hospital, the question presented to the Ninth Circuit was whether there was sufficient evidence in the record to support the plaintiff’s contention that this impression was false.

Section 1692j does not define what it means for a person to participate in the collection of or in an attempt to collect a debt.  The statute makes it unlawful to:

design, compile, and furnish any form knowing that such form would be used to create the false belief in a consumer that a person other than the creditor of such consumer is participating in the collection of or in an attempt to collect a debt such consumer allegedly owes such creditor, when in fact such person is not so participating.

15 U.S.C. § 1692j(a).

The plaintiff argued that the collection agency must do more than merely mail form letters to “participate” sufficiently in debt-collection efforts.  For example, the plaintiff argued that the collection agency did not have authority to negotiate or to process payments from debtors, it received no proceeds from payments that were made, and it was not involved in any further action that was pursued against debtors whose accounts remained delinquent.

The Ninth Circuit noted that meaningful participation in the debt collection process may take a variety of forms.  It considered the amount of control the entity exercised over the collection letters it sends, the amount of contact the entity had with the debtors, whether the entity invited and responded to debtor inquiries, whether the entity received or negotiated payments, whether the entity received or retained full debtor files, and whether the entity was involved in further collection activities if the debt remained unpaid. 

Above all, the Ninth Circuit stated that the key is whether the entity genuinely contributed to an effort to collect another’s debt. 

The Ninth Circuit found that while the collection agency did not process payments, it participated in the attempts to collect debts owed to the hospital because: (1) it independently screened accounts for barriers to collection, (2) it drafted and mailed the collection letters without input from the hospital, (3) its letters invited the debtor to contact the collection agency and its personnel handled such inquiries, (4) it in fact received approximately 500 calls a week from debtors and received hundreds of pieces of mail from debtors, (5) it provided debtors with information about the debt and how to repay them, (6) it maintained a website where debtors could access information about their debts and submit documents, and (7) it sometimes received and forwarded to the hospital payments it received from debtors.

Therefore, the Ninth Circuit determined that the collection agency’s efforts were enough to have participated meaningfully in the attempts to collect debts like the plaintiff’s.

The plaintiff argued that the trial court’s conclusion was inconsistent with two out of circuit cases in which attorneys who mailed collection notices on a creditor’s behalf were deemed not to have participated meaningfully.

In Nielsen v. Dickerson, the Seventh Circuit considered whether certain form collection letters falsely represented that the letters came “from an attorney” in violation of 15 U.S.C. § 1692e(3).  Nielsen v. Dickerson, 307 F.3d 623, 634-35 (7th Cir. 2002).  The question in Nielsen turned on whether the attorney who composed and mailed the letters in an “assembly-line fashion” was actually involved in the debt collection process.  Id., at 635.

The Ninth Circuit noted that Nielsen only briefly addressed the attorney’s potential liability as a flat-rater under 1692j, stating that the attorney might “seem to be a natural candidate for flat-rating liability pursuant to section 1692j.”  Id., at 639.  However, the Seventh Circuit in Nielsen ultimately did not decide whether the attorney violated section 1692j because any such liability would have been redundant to the attorney’s liability under section 1692e(3).  Id., at 640.

Thus, the Ninth Circuit found that Nielsen did not support the plaintiff’s argument.

In Vincent v. Money Store, the Second Circuit considered whether a creditor that hired a law firm to mail debt collection notices could be held liable for violation of section 1692e as its own debt collector under the FDCPA’s false name exception, because the law firm was not meaningfully involved in collection efforts.  Vincent v. Money Store, 736 F.3d 88, 91 (2nd Cir. 2013). 

The Second Circuit applied the analysis in Nielsen and concluded that “a jury could find” that collection letters mailed by the law firm “falsely implied that [the firm] was attempting to collect [the creditor’s] debts and would institute legal action against debts,” when the firm “acted as a mere conduit for a collection process [the creditor] controlled.” Id., at 104.

The Ninth Circuit was not persuaded by Vincent either because the collection agency in this case participated to a greater degree in collection efforts than the law firm in Vincent did.  The plaintiffs in Vincent presented evidence that the law firm drafted the letters jointly with the creditor, directed debtors to send nearly all communications to the creditor itself, and after mailing the demand letters “performed virtually no role in the actual debt collection process” besides verifying the existence of the debt or the identity of the creditor.  Id., at 93-95, 104.

Given the greater degree of participation by the collection agency in this case, the Ninth Circuit determined that Vincent was distinguishable and did not support the plaintiff’s position.

Therefore, the Ninth Circuit held that the collection agency in this case meaningfully participated in the attempts to collect the plaintiff’s debts.

Next, the Ninth Circuit turned to the plaintiff’s arguments regarding the FDCPA’s prohibition against “threat[ening] to take any action that cannot legally be taken or that is not intended to be taken.” 15 U.S.C. § 1692e(5).

The plaintiff argued that her complaint gave the collection agency adequate notice of its need to defend against the claim, and even if it did not, she should have been given leave to amend the complaint.

However, the Ninth Circuit found that the plaintiff’s complaint focused narrowly on her flat-rating allegations.  It never cited § 1692e(5) and did not mention the FDCPA’s prohibition against threatening to take an action that is not intended or legally authorized.  And, the Ninth Circuit found that the complaint expressly disavowed such a claim by alleging that the collection agency “was not acting as a debt collector when it sent the Letters.”

Because the plaintiff’s theory of liability was that the collection agency was a flat-rater, not a true debt collector, the Ninth Circuit held that the trial court did not err in striking the claim.

The plaintiff further argued that she should have been granted leave to amend the complaint, and the amended claim should “relate back” to the date of her original complaint.

The Ninth Circuit rejected this argument because an amended complaint relates back to the date of the original complaint only where the claim arose out of the same conduct in the original pleading. 

The plaintiff’s § 1692e(5) claim, in the Ninth Circuit’s view, would not rely on the same facts and evidence because the plaintiff complaint did not allege (1) that the collection agency was a debt collector, and (2) that the collection agency threatened to take any action against her that it had no authority or intention to take.  These issues, according to the Ninth Circuit, would involve different witnesses and the trier of fact would need to determine what, if anything, the collection letters threatened to do.

Additionally, the Ninth Circuit determined that the plaintiff waived her claim under § 1692e(10) because the claim in nowhere to be found in the complaint, and she did not argue the claim in opposing the defendants’ motions for summary judgment.

Accordingly, the Ninth Circuit affirmed the trial court’s grant of summary judgment in favor of the defendants.


Eric Tsai
Maurice Wutscher LLP 
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Email: etsai@MauriceWutscher.com

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