A new decision from the U.S. Court of Appeals for the Seventh Circuit in two consolidated cases analyzes the requirements for Article III standing in a FDCPA case. It also addresses what a debt collector must show to establish that it maintained procedures reasonably adapted to avoid an error as required by the FDCPA’s bona fide error defense. Under the bona fide error defense, a debt collector is not liable for a FDCPA violation if it shows by a preponderance of the evidence that (1) the violation was not intentional, (2) the violation resulted from a bona fide error, and (3) it maintained procedures reasonably adapted to avoid the error.
In Ewing v. MED-1 Solutions, LLC, the plaintiff sought to dispute a medical debt by faxing a letter to MED-1, a debt collector. MED-1’s receptionist misrouted the fax by forwarding it to the client care department rather than the legal department. MED-1’s fax distribution policy provided that any faxed legal communication regarding disputed debts should be forwarded to the legal department. The receptionist received on the same day, and correctly forwarded, five other dispute letters. As a result of the plaintiff’s misdirected fax, her dispute was never recorded. Two years later, she obtained a copy of her credit report and saw that her debt as reported by MED-1 was not marked disputed.
She subsequently filed a lawsuit against MED-1 in which she alleged it had violated the FDCPA (15 U.S.C. Section 1692(e)(8)) by reporting her debt to a consumer reporting agency (CRA) without noting it had been disputed. Having admitted the underlying facts, MED-1 asserted that it was entitled to rely on the bona fide error defense because the failure to report the dispute arose from an unintentional error and it maintained procedures reasonably adapted to ensure that it reported faxed disputes. The district court granted summary judgment to MED-1 based on the bona fide error defense.
In Webster v. Receivables Performance Management, LLC, the plaintiff sought to dispute a debt she discovered on her credit report that she did not believe she owed. Her attorney faxed a dispute notice to Receivables, a debt collector, after verifying that the fax number (which he had used on behalf of other clients) remained listed with the Multistate Licensing System & Registry, the entity through which debt collectors are licensed in Indiana. Receivables had decided several months earlier to stop monitoring its fax inbox after removing the fax number from its website. Receivables had general policies for handling known disputes but no procedure to check the fax inbox periodically for new disputes or to notify senders that the inbox was unmonitored. As a result, Receivables was unaware of the plaintiff’s fax but because it had not disabled the fax number, confirmations continued to be sent upon receipt of faxes, including to the plaintiff’s attorney.
After obtaining an updated credit report that showed her debt but not her dispute, the plaintiff filed a lawsuit against Receivables alleging a violation of FDCPA Section 1692(e)(8). Receivables claimed that even if it violated the FDCPA, the bona fide error defense excused its violation. The district court granted Receivables’ motion for summary judgment based on the bona fide error defense.
On appeal, both debt collectors asserted that under the U.S. Supreme Court’s decision last year in TransUnion LLC v. Ramirez (which was decided while the appeals were pending), the plaintiffs did not have Article III standing because any risk of future harm they faced was not sufficiently concrete to support a suit for damages. According to the Seventh Circuit, TransUnion made clear that a risk of future harm without more is insufficiently concrete to provide standing to sue for damages in federal court.
The plaintiffs argued that the injury was concrete because the dissemination of false information to a CRA bears a close relationship to reputational harms long recognized in U.S. courts and at common law, such as defamation. The debt collectors argued that the plaintiffs could not have suffered a concrete harm because there was no evidence the CRA sent their credit reports to potential creditors. Calling the collectors’ argument “a red herring,” the Seventh Circuit stated that if the plaintiffs’ harm is analogous to defamation, they must show that the debt collectors disseminated false information about them to a third party (i.e. reports to a CRA of debts not being disputed) but do not have to make the further showing that the third party also shared the false information.
Agreeing with the plaintiffs that the harm Congress sought to remedy through Section 1692(e)(8) is analogous to the harm caused by defamation, the court found that the plaintiffs had demonstrated third-party dissemination that constituted “publication” of the false statements. According to the Seventh Circuit, “publication” requires the third party to understand the defamatory significance of the disseminated information.
The court found that the CRA understood the defamatory significance of the reported debts. First, the CRA would have included the disputes with the debts shown on the plaintiffs’ credit reports if the debt collectors had communicated them. Second, by showing that their credit scores rose once the debts were reported as disputed, the plaintiffs provided evidence that the CRA’s assessment of their creditworthiness took into account whether or not a debt was disputed.
Based on these findings, the Seventh Circuit concluded that the plaintiffs suffered an intangible, reputational injury that was sufficiently concrete to provide Article III standing.
Turning to the merits, the Seventh Circuit affirmed the district court’s decision determining that regardless of whether MED-1 violated the FDCPA, its mistake was a bona fide error that shielded it from liability. However, it reversed the district court’s decision determining that Receivables violated the FDCPA but could rely on the bona fide error defense to excuse the violation.
The Seventh Circuit found that MED-1 had implemented procedures reasonably adapted to avoid the error of a misdirected fax by including a step-by-step explanation in its written policies of how a receptionist should properly direct legal faxes. The court rejected the plaintiff’s argument that to have “reasonably adapted” procedures, MED-1 needed to have a policy requiring departments to identify and forward misdirected faxes. In the Seventh Circuit’s view, it was sufficient that the error that gave rise to the case would have been avoided if the step-by-step fax procedures had been followed.
With regard to Receivables, the Seventh Circuit found it did not have reasonably adapted procedures in place to avoid the error that occurred—not reporting a faxed dispute. According to the court, it was not reasonable for Receivables to stop monitoring its fax inbox while allowing the system to continue to send confirmations that faxes had been received. The court rejected Receivable’s attempt to rely on its “unspecified FDCPA training for employees and general policy of reporting disputes,” stating that “[r]egardless of these imprecise policies, Receivables had no reasonable policy in place to ensure that faxed disputes were reported. Nor did Receivables implement any reasonable procedure to ensure that it would no longer receive faxed disputes in the first place.” (emphasis included.)
The decisions, particularly the decision involving Receivables, should serve as a reminder to debt collectors to consider the impact of operational changes on FDCPA compliance and make sure that their practices and policies for FDCPA compliance are revised appropriately.