Supreme Court Decides Bona Fide Error Defense Not Applicable to FDCPA

April 21, 2010

On April 21, 2010, the Supreme Court handed down its decision in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, et al., holding that the bona fide error defense provided by the Fair Debt Collection Practices Act (“FDCPA”) does not apply to mistaken interpretations of the legal requirements of the FDCPA. Justice Sotomayor delivered the opinion and was joined by Chief Justice Roberts, and Justices Stevens, Thomas, Ginsburg, and Breyer. Justice Breyer wrote a separate concurrence, as did Justice Scalia who concurred in part and in the judgment. Justice Kennedy filed a dissenting opinion, which was joined by Justice Alito.

This bulletin provides a summary of the Jerman decision and some important points regarding the FDCPA and the bona fide error defense.

In 2006, Karen Jerman was served with a complaint by the Carlisle collections law firm, seeking to recover a debt. The complaint informed Jerman that she must dispute the debt in writing, or else the debt would be assumed valid. Jerman provided written notice of her dispute, the debt was investigated, and it was discovered that it had already been satisfied. Jerman then filed suit alleging violations of the FDCPA for Carlisle’s statement that Jerman must dispute the debt in writing because the FDCPA does not require that the debt be disputed in writing. Carlisle moved for summary judgment, arguing that its actions should be shielded from liability because of the bona fide error defense of the FDCPA. The bona fide error defense exempts debt collectors from liability if they can prove that “the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such error.” 15 U.S.C. § 1692k(c). It is widely held that errors of fact (procedural and clerical) are covered by the FDCPA’s bona fide error defense. The issue in Jerman was whether that same defense extends to errors of law. The collections firm argued that their violation of the FDCPA was not intentional because the firm believed that the Act permitted the demand of written disputes. Further, Carlisle demonstrated the adoption of reasonable procedures to avoid legal errors. The district court and the 6th Circuit sided with the debt collector, finding that the bona fide error defense includes mistakes of law, such as the one committed by Carlisle.

The Supreme Court reversed the 6th Circuit and held that the bona fide error defense does not apply to mistakes of law in interpreting the legal requirements of the FDCPA. The Court reasoned that it would be counter to the well-understood maxim that ignorance of the law is not an excuse. Further, the Court explained that the requirement that there be procedures in place to avoid errors makes it clear that the errors covered by the defense are more clerical or procedural in nature, rather than legal. Additionally, the Court explained that the advisory role of the FTC would be eliminated if debt collectors could avoid liability using the bona fide error defense for mistakes of law. The Court also addressed the concern that debt collection attorneys may have in zealously representing their clients if they can be held personally liable for their reasonable misinterpretations of the FDCPA’s requirements, noting that the statute protects against abusive lawsuits, limits damages, vests courts with discretion in adjusting damages and fixing reasonable attorneys’ fees, and provides debt collection attorneys with other defenses.

Arguably, the Court’s decision addressed the narrow question of whether the bona fide error defense applied to a “debt collector’s mistaken interpretation of the legal requirements of the FDCPA,” but left open whether a mistaken interpretation of law other than the FDCPA (for example, a state statute of limitations) can still fall within the bona fide error defense. But, whether courts ultimately broadly or narrowly construe this decision, it will significantly impact the debt collection industry, likely causing debt collection attorneys to be more cautious in pursuing the collection of debts due to the increased potential FDCPA exposure, and reducing the value of debt portfolios in the secondary debt-buying market.