FYI: 3rd Cir Reverses Dismissal of FCBA Billing Error and TILA Unauthorized Use Claims

The U.S. Court of Appeals for the Third Circuit recently reversed the dismissal of a consumer's complaint for unauthorized use of his credit card, holding that he stated claims for relief under the federal Fair Credit Billing Act's (FCBA) correction of billing errors provisions, and the federal Truth in Lending Act's ("TILA") unauthorized-use provisions.

 

In so ruling, the Court held that:

 

-When "a creditor removes a disputed charge from a billing statement and later reinstates that charge, the 60-day period in which a consumer must file a written dispute begins when the consumer receives the first statement reinstating the charge."

 

-"A cardholder incurs 'liability' for an allegedly unauthorized charge when an issuer, having reason to know the charge may be unauthorized, bills or rebills the cardholder for that charge. When an issuer does so, it must comply with the requirements of § 1643, and when a cardholder alleges those requirements were violated, those allegations may state a claim under § 1640."

 

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

 

A consumer's home computer was hacked remotely and his credit card information stolen. He called the card issuer, who told him there was nothing they could do until the charge appeared on the next billing cycle. He called again when he noticed the unauthorized charge on his next statement and was told his account would be credited pending an investigation.

 

On his next statement, the consumer noticed a credit had been posted for the unauthorized amount, and he considered the matter settled. However, shortly thereafter he received a letter from the card issuer stating that their investigation revealed the charge in question had been authorized, despite the fact that the charge was made by a person identified by name in Mumbai, India.

 

The subject charge re-appeared on his next statement, and the consumer promptly sent a letter to the card issuer describing the sequence of events and again requesting removal of the unauthorized charge.

 

The card issuer sent the consumer a letter denying his request because the home address, phone, and e-mail address matched those provided by the vendor whose services were paid for with the card.

 

The consumer filed suit in state court and the card issuer removed the case to federal court. The amended complaint alleged that the card issuer 1) violated the FCBA by failing to conduct a reasonable investigation after receiving written notice of the billing error and credit the account for the unauthorized charge; and 2) violated TILA's unauthorized-use provision by deciding that the consumer was liable for the unauthorized charge, which exceeded $50.

 

The trial court dismissed the amended complaint with prejudice, reasoning that the FCBA claim failed because the billing statement that triggered the statutory 60-day period to dispute the debt was the first letter the consumer sent, and that letter was sent more than sixty days after the first statement where the charge appeared. The trial court rejected as fanciful the consumer's argument that the 60-day period should have been calculated from the second statement in which the issuer reinstated the disputed charge.

 

The trial court construed the consumer's unauthorized-use TILA claim as "seeking 'reimbursement' only" and, based on Third Circuit case law holding that section 1643 of TILA "does not provide a cardholder with a right to reimbursement nor a private cause of action[,]" held that the TILA claim also failed.

 

On appeal, the consumer argued that that the 60-day period should have been calculated from the second statement in which the issuer reinstated the disputed charge.

 

The Third Circuit first addressed the consumer's FCBA claim, explaining that "[t]o trigger a creditor's obligation either to credit a disputed charge or to conduct a reasonable investigation into the matter, a consumer must submit a written notice of billing error within 60 days after receiving the statement that contains the error. 15 U.S.C. § 1666(a)."

 

The Court agreed with the consumer, holding that "where, as here, a creditor removes a disputed charge from a billing statement and later reinstates that charge, the 60-day period in which a consumer must file a written dispute begins when the consumer receives the first statement reinstating the charge."

 

The Third Circuit reasoned that the text of the FCBA supported its conclusion because only after the card issuer reinstated the charge was the consumer's obligation to notify triggered. In addition, the Consumer Financial Protection Bureau's guidance provides that "even where there is an existing error that the consumer would have reason to dispute so that the 60-day period has started to run, the clock is reset once the charge actually appears on a statement."  

 

The Court noted it would not make sense if the 60-day period re-started under such circumstances, but "not where, as here, as creditor has affirmatively removed a disputed charge (so that the consumer no longer has any reason to file a dispute) and only reinstates it on a later statement."  The Court continued that, "a]fter all, if a subsequent statement restarts the clock even where a creditor fails to communicate the charge by mistake, surely the same result obtains where a creditor fails to communicate the charge by design."

 

Finally the Court reasoned that because TILA was enacted "to require full disclosure of credit charges … so that a reasonable consumer can decide for himself whether the charge is reasonable … and, together with the FCBA, to 'protect the consumer against … unfair credit billing and credit card practices, …" it would view the facts from the consumer's "perspective and ask what a 'reasonable consumer … would … be entitled to assume." Using this standard, the Court reasoned that a reasonable consumer would have considered the matter resolved when the charge was removed from the next statement he received after he complained.

 

In the case at bar, the consumer sent his letter disputing the charge only 11 days after it reappeared on his statement.  Therefore, the Court concluded that "his notice was timely."

 

The Court rejected the trial court's interpretation of Regulation Z as requiring the court "to look only to the 'first periodic statement that reflects the alleged billing error.'" "While the language of [Regulation Z] may be plain as applied to a billing error reflected on regularly recurring statements, it has little bearing on the circumstances of this case." Applying Regulation Z "where an issuer makes an alleged billing error on one statement, then eliminate that error on subsequent statements by crediting and not rebilling the charge, and then introduces the error into a new series of statements at a later date—would be in tension with [Regulation Z's] text and contrary to both common sense and broader policy concerns."

 

The Third Circuit then turned to the consumer's unauthorized-use claim under TILA section 1643, "which provides that a credit card issuer may not hold a cardholder liable for the unauthorized use of a credit card without complying with specific requirements—among them that in no circumstances may liability exceed $50."

 

The Court characterized the trial court's reasoning in support of dismissal as "miscontru[ing] the nature of [the consumer's] claims and misread[ing] our case law interpreting § 1643." This is because section 1640 provides a private right of action against "any creditor who fails to comply with any requirement imposed under [15 U.S.C. §§ 1631-1651], which includes requirements of section 1643.

 

Because the consumer alleged that the card issuer violated section 1643 and caused him actual damages by failing to conduct a reasonable investigation and imposing liability in excess of $50, the consumer "did state an unauthorized use claim, and in dismissing that claim on the ground that § 1643 itself does not provide consumers with a private right of action, the District Court failed to recognize that § 1640 does."

 

The Third Circuit also held that the trial court erred by rejecting the consumer's claim under § 1643 "as an attempt to seek 'reimbursement' … [because] § 1643 'does not provide a cardholder with a right to reimbursement,' but only 'limit[s] a card issuer's potential recovery for fraudulent purchases.'" The Court noted that the two Third Circuit cases relied upon by the card issuer and trial court were inapposite because neither one "addressed an issuer's violation of § 1643 by imposing over $50 in liability on a cardholder even after it was notified that the charges had been unauthorized. Nor did they mention, much less address, a cardholder's right under § 1640 to recover 'actual damages.'" Finally, the Court noted, the consumer was seeking actual damages § 1643 in addition to reimbursement of the subject unauthorized charge.

 

The Court rejected the issuer's final argument that section 1643 only applies if the card issuer sues rather than just demanding payment billing statements, reasoning that since "a cardholder is … legally obligated to pay the charges that appear on his bill, … the notion that he does not unless and until the issuer brings an action against him in court no doubt would come as a surprise to Congress, which enacted § 1643 in part to address the 'problem of liability' where an issuer dis not sue over a disputed charge but only 'insisted on being paid.'"

 

In addition, the notice and reasonable investigation requirements imposed by TILA "would make no sense if 'liability were viewed as not being 'imposed[d]' until the issuer obtained a judgment in court."  This "would thwart TILA's purpose of giving consumers 'meaningful guidance' early in the process, … and 'enablng [them[ to shop around for the best cards.'" Finally such a result "would contravene the purpose of § 1643: consumer protection. This goal is decidedly not served by forcing every cardholder bill for an unauthorized charge to pick between twin evils: (1) refusing to pay, and risking late fees, interest, and rate increases, … or (2) paying, and forfeiting his right to limited liability altogether."

 

The Court concluded "that a cardholder incurs 'liability' for an allegedly unauthorized charge when an issuer, having reason to know the charge may be unauthorized, bills or rebills the cardholder for that charge. When an issuer does so, it must comply with the requirements of § 1643, and when a cardholder alleges those requirements were violated, those allegations may state a claim under § 1640."

 

The trial court's order of dismissal was reversed that the case remanded for further proceedings.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Mass. SJC Holds Mass. Debt Collection Regs Apply to Creditors that Auto Dial or Don't Leave Messages

The Massachusetts Supreme Judicial Court (SJC) recently held that Massachusetts debt collection regulations, which limit how often a creditor may attempt to contact a debtor via telephone in order to collect a debt, apply to creditors that use automatic dialing devices or voluntarily decide not to leave voicemail messages.

 

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

 

The plaintiff initiated a matter in Superior Court, alleging the defendant violated 940 Code Mass. Regs. § 7.04(1)(f), which provides that "[it] shall constitute an unfair or deceptive act or practice for a creditor to contact a debtor…[by] [i]nitiating a communication with any debtor via telephone, either in person or via text messaging or recorded audio message, in excess of two such communications in each seven-day period to either the debtor's residence, cellular telephone, or other telephone number provided by the debtor as his or her personal telephone number…"

 

The material facts were not in dispute. The plaintiff obtained a store-branded credit card, which she used to incur a debt at the defendant's store. The defendant subsequently telephoned the plaintiff numerous times in order to collect the debt, including instances where the defendant telephoned the plaintiff more than twice in a seven-day period.

 

No person from the defendant physically placed the calls to the plaintiff. Instead, the defendant used a "predictive dialer," which is an automated telephone dialing system (ATDS). Although the defendant was able to leave the plaintiff voicemail messages, it did not do so based on company policy not to leave voicemail messages.

 

The defendant did not deny that it telephoned the plaintiff more than twice in a seven-day period. Instead, the defendant maintained the regulation did not apply to all calls, but rather, only calls that are "initiat[ed]…either in person or via text messaging or recorded audio message."

 

According to the defendant, it did not "initiate" any communication within the meaning of the regulation because it telephoned the plaintiff with an ATDS, which only plays recorded messages after the call is answered and no live representative is available. The defendant also argued that the majority of the calls went unanswered, and thus did not constitute "communications" within the meaning of the regulation because they did not convey any information since they did not leave voicemail messages.

 

In the alternative, the defendant argued that it was exempt from the regulation under the Attorney General's (AG) guidance, which provides that "unsuccessful attempts by a creditor to reach a debtor via telephone may not constitute initiation of communication if the creditor is truly unable to reach debtor or leave a message for the debtor." According to the defendant, it was exempt since, although it was able to reach the plaintiff, it could not, as a practical matter, leave her voicemail messages without violating state and federal law.

 

The Superior Court granted the defendant's motion for summary judgment, reasoning that the defendant's unsuccessful attempts to speak with the plaintiff via telephone did not constitute "communications" as defined by the regulations, and that there was no indication the plaintiff heard a prerecorded message from the defendant more than twice in a given week. The plaintiff appealed and the SJC transferred the case on its own motion.

 

On appeal, the SJC held that the defendant's interpretation of the regulation was inconsistent with its plain meaning and AG's guidance, and contrary to its purpose of preventing creditors from harassing, oppressing, or abusing debtors.

 

As the SJC noted, the defendant's "reading would create a loophole so large as to swallow the rule, such that nearly every creditor would be able to evade the limits imposed by the regulation simply by changing its dialing technology."  Thus, the SJC held that it makes no difference what technology a creditor uses to dial the debtor's telephone or at what point a prerecorded message begins playing.

 

Next, the SJC held that the defendant's argument that unanswered calls were not "communications" under the regulation was unavailing because the regulation does not limit "communication[s]," but the initiation of communications. According to the SJC, the mere fact that the defendant did not successfully convey information to the plaintiff was insignificant because the defendant initiated the process of conveying information to the plaintiff via telephone.

 

Finally, the SJC held the defendant's exemption argument was unpersuasive because Massachusetts regulations are not as restrictive as the defendant contended and because the defendant did not fall within the purview of the FDCPA.

 

Although Massachusetts regulations prohibit a creditor from implying "the fact of a debt" to anyone who is not the debtor, the SJC disagreed with the defendant's claim that it could not leave a voicemail because it could not know who would listen to the voicemail.

 

As the SJC noted, the defendant was not prevented under Massachusetts regulations from leaving the plaintiff a message, so long as the defendant refrained from implying that the telephone call concerned a debt. Although, unlike Massachusetts regulations, the FDCPA requires debt collectors to disclose that any "communication is from a debt collector," the defendant was not prevented from leaving a voicemail under the FDCPA because it was attempting to collect a debt on its own behalf and, therefore, did not fall within the statute's definition of a debt collector.

 

Accordingly, the SJC held that, at times the defendant was able to reach the plaintiff or leave a voicemail message, it initiated telephone communications within the meaning of the regulation. Since the defendant initiated such telephone communications more than twice in a seven-day period, the SJC held that the plaintiff was entitled to summary judgment on the issue of liability and remanded the case for a determination on the plaintiff's request for damages, costs, and injunctive relief.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 5th Cir Holds Debt Collector Affiliate of Debt Buyer Still FDCPA "Debt Collector"

In a recently issued unpublished opinion, the U.S. Court of Appeals for the Fifth Circuit rejected the argument of the attorney defendant who owned a law firm and a debt-buying company that he was exempt under the federal Fair Debt Collection Practices Act (FDCPA) because he was a creditor "by proxy."

 

Specifically, the Fifth Circuit determined that the attorney, his law firm, and his debt-buying company were all distinct entities as a matter of law, such that his argument that he, as the owner of the debt-buying company, owned the debt and thus he did not qualify as a debt collector under the FDCPA, failed. 

 

The Fifth Circuit also rejected the attorney's argument that the plaintiff had not sufficiently established a that a "debt" covered by the FDCPA was being collected.  Under the FDCPA, a covered debt is any "obligation or alleged obligation," and the attorney's demand letters to the plaintiff and the complaint filed easily established an alleged obligation. 

 

Because the attorney was a debt collector, and the debt at issue was covered by the FDCPA, the Fifth Circuit affirmed the trial court's award of the plaintiff's motion for summary judgment. 

 

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

 

The defendant was an attorney and the sole owner of his law firm.  He and his wife also owned a limited liability company that was in the business of buying debts and then referring them to the law firm for collection. 

 

Between 2008 and 2012, the defendant filed nearly 2,000 cases on his company's behalf, many of which were against debtors who lived far away from Houston, where he filed the lawsuits.  The attorney was such a frequent filer of lawsuits that the court in Houston had given him his own "frequent filer" number. 

 

The defendant's filing tactics eventually landed him in controversy.  The Fifth Circuit noted this was not their first encounter with him.  In particular, in 2015 the Fifth Circuit affirmed a judgment against the attorney for violations of federal consumer protection laws, including an award of $1,000 in statutory damages and over $72,000 in fees and costs.  Moreover, according to the Fifth Circuit, in 2017 the State of Texas secured a $25,000,000 judgment against him in state court, along with over $500,000 in attorneys' fees.

 

For the case that formed the basis of this opinion, shortly after the State of Texas filed its lawsuit against the defendant, his law firm initiated a lawsuit against the plaintiff, who resided far away from Houston.  The plaintiff enlisted the services of a legal aid organization and filed an answer to the defendant's complaint.  Approximately six months after the plaintiff filed her answer, the defendant non-suited the matter. 

 

The plaintiff then sued the attorney, his law firm, and his debt-buying company, alleging violations of the FDCPA.  The defendants filed a motion to dismiss and a motion for summary judgment, and the plaintiff filed her own motion for summary judgment. 

 

The trial court denied the defendants' motions, and granted the plaintiff's motion for summary judgment.  The lower court conducted a trial on damages and ultimately awarded plaintiff the maximum of $1,000 in statutory damages.  The defendant attorney and law firm appealed.

 

On appeal, the Fifth Circuit identified the four issues the defendants raised on appeal. 

 

First, the defendants argued that they were not a "debt collector" under the FDCPA.  For their second and third arguments, the defendants asserted that two of the statutory exceptions to the "debt collector" definition applied.  And for the fourth argument, the defendants asserted that plaintiff had not sufficiently established a covered debt under the FDCPA. 

 

As to the second and third arguments, the Court concluded defendants had forfeited those arguments on appeal because the attorney had not adequately developed any arguments or facts regarding how the exceptions applied.  The Court noted that defendants had not only failed to adequately develop their arguments during the lower court briefing, but the Court had admonished the defendant attorney in a prior case that it was his responsibility to articulate his arguments and provide evidence to support them, and he had again failed to do so here.  The Court concluded "[defendant] once again asks this court to consider half-baked arguments devoid of legal citation or factual support." Thus, his second and third arguments failed.

 

In addressing defendants' first argument that they were not debt collectors under the FDCPA, the Court, relying on the statutory definitions, established that there are two types of debt collectors: those whose "principal purpose" is debt collection, and those who "regularly collect" debts of others.  See 15 U.S.C. § 1692a(6).  A "creditor," the Fifth Circuit held, is one "who offers or extends credit creating a debt or to whom a debt is owed."  See 15 U.S.C. § 1692(4).

 

While the summary judgment motions were pending, the Supreme Court held that debt purchasers who collect for their own accounts are not "debt collectors" under the "regularly collects" alternative.

 

On appeal, the attorney argued that he should be deemed a "creditor" under the FDCPA "by proxy".  Specifically, he argued that the debt-buying company owned the debt, and he owned the company, and therefore he owns the debt.  Based on this argument, the attorney asserted he was not attempting to collect the debt of another. 

 

The Fifth Circuit rejected this argument, stating it "defies logic."  Under Texas law, the attorney, his law firm and the limited liability company are all distinct entities.  Although the attorney could have purchased the debt himself, he instead chose to have his limited liability company purchase it.  And, as a matter of Texas law, the members of a limited liability company do not have any interest in the property of the company.

 

Finally, the Court added, two demand letters the defendant sent to the plaintiff contained a disclaimer stating it was an attempt to collect a debt by a debt collector, so the attorney was attempting to collect the debt of another. Accordingly, the Court rejected the attorney's argument that he was a creditor by proxy.

 

As to the defendants' final argument, that the plaintiff has not sufficiently established a debt covered by the FDCPA, the Court rejected this argument.  Under the FDCPA, a debt is defined as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes." See 15 U.S.C. § 1692a(5).

 

The Court criticized defendants argument and the "semantic game" the attorney was playing by attempting to assert plaintiff had failed to adequately prove a debt covered by the FDCPA. 

 

First, the Fifth Circuit noted, the FDCPA applies to any "alleged debt," and it was undisputed defendants had sent two demand letters to plaintiff and filed a lawsuit stating she owed a debt and demanding payment.  In addition, the plaintiff produced two retail installment contracts with the original creditor.  Because the FDCPA covers alleged debts, the defendants' fourth argument also failed.

 

The Court was very critical of the defendants arguments, their history of violating consumer protection laws, and their attempts to engage in semantics.  As a matter of law, the Fifth Circuit noted, the defendant attorney and law firm did not own the debt at issue, and defendants' own evidence established there was an "alleged debt" covered by the FDCPA.  Accordingly, the Fifth Circuit affirmed summary judgment in favor of plaintiff. 

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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