The “above my pay grade defense” to FCRA liability: The 10th Circuit weighs in.

When someone is faced with a decision that he doesn’t think he has the right to make, he can respond that “it’s above my pay grade.”  The phrase appears to have originated in the US military – which has pay grades – and spread from there.

About a decade ago, the First Circuit and Ninth Circuit both discussed what could be called the “above my pay grade” defense to FCRA liability.  More recently, the 10th Circuit has joined the conversation.  This post will discuss what the “above my pay grade” defense is, and how the three courts have discussed it.

The “above my pay grade” defense applies to claims that a consumer reporting agency (CRA) did not conduct a “reasonable reinvestigation” of a consumer’s dispute, and thereby violated 15 U.S.C. Sec. 1681i.

As far as I can tell, the defense first came up* in DeAndrade v. Trans Union LLC, 523 F.3d 61 (1st Cir. 2008).    In that case, the plaintiffs alleged that a mortgage on their house had been procured through fraud; that they had asked the CRAs to report it that way; and that the CRAs’ refusal to do so was a violation of 15 U.S.C. Sec. 1681i.  Trans Union moved for summary judgment, the district court granted the motion, and the First Circuit affirmed.

The First Circuit found that to resolve claims under Section 1681i, “the decisive inquiry is whether the defendant credit bureau could have uncovered the inaccuracy if it had reasonably reinvestigated the matter.”  Id. at 68 (citation omitted).  It then stated that a CRA’s duty to “reasonably reinvestigate” a consumer’s dispute does not extend to deciding whether a lender procured a loan through fraud:  “DeAndrade has crossed the line between alleging a factual deficiency that Trans Union was obliged to investigate pursuant to the FORA and launching an impermissible collateral attack against a lender by bringing an FCRA claim against a consumer reporting agency.”  Id.

Two years after the First Circuit decided DeAndrade, the Ninth Circuit issued a similar decision in Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876 (9th Cir. 2010).  In Carvalho, the plaintiff did not pay a medical bill because she thought her insurance should cover it.  She asked the CRAs to stop reporting that she owed the debt, and when they didn’t, she sued them for violating Sec. 1681i.  All three CRAs moved for summary judgment; the district court granted the motion; and the Ninth Circuit affirmed.  It followed DeAndrade and stated that the CRAs were not in a position to determine whether plaintiff’s insurance company should or should not have paid her medical bill, and that “reinvestigation claims are not the proper vehicle for collaterally attacking the legal validity of consumer debts.”  Id. at 892.

For several years, no federal appeals courts took up this issue.  But in 2015, the Tenth Circuit did so in Wright v. Experian Info. Solutions, Inc., 805 F.3d 1232 (10th Cir. 2015).  In Wright, the IRS issued a lien for unpaid taxes against “Attorneys Title Insurance Agency of / Wright Gary A Member,” which Pitkin County, Colorado recorded as a lien against Mr. Wright personally (as opposed to a lien against AITA the corporation, which Mr. Wright owned and operated).  The CRAs issued consumer reports about Mr. Wright which showed that he owed the lien, and when he disputed that, they changed their reports to show that the lien had been paid (because it had).  But they still showed the lien as pending against Mr. Wright personally.  He sued them under Sec. 1681i, but the district court found that their reinvestigation had been reasonable, and the Tenth Circuit affirmed.

The Tenth Circuit found that because the IRS’s lien named both Mr. Wright and his corporation, it was reasonable for the CRAs to think that the lien was against Mr. Wright personally.  Mr. Wright contended that the CRAs should have gone further than that and asked the IRS, or a tax law expert, whether the lien really applied to him.  The Tenth Circuit disagreed and stated that “Like the consumers in Carvalho and DeAndrade, Mr. Wright’s argument would require the CRAs to do more than a reasonable reinvestigation requires.”  Id. at 1245.

You can see the pattern here.  In DeAndrade, Carvalho, and Wright, a consumer asked the CRAs to change the way they were reporting something and sued them when they didn’t.  The courts ruled that the CRAs had not violated the FCRA because they were not in a position to decide whether the basis of the consumer’s dispute (fraud in DeAndrade; breach of insurance contract in Carvalho; tax lien interpretation in Wright) was sound.

The opinion in DeAndade suggested that there is a “line” between consumer disputes that CRAs have the power to resolve (like “the credit card on my consumer report belongs to my dad, not me”) and disputes that CRAs do not have the power to resolve (like “yes, my name is on that loan, but it was procured through fraud”).

I don’t know where the line will be drawn:  three appellate court cases are not enough of a sample to tell us.  But those three opinions suggest that CRAs who have been sued under 15 U.S.C. Sec. 1681i should consider whether the “above my pay grade” defense could apply in their cases.

*I said above that the “above my pay grade” defense appears to have first come up in DeAndrade.  I say that because while the DeAndrade court cited prior cases, those cases did not involve the “above my pay grade” defense as I have outlined it here.  For example, both DeAndrade and Carvalho cited prior cases in which a consumer sued a creditor under 15 U.S.C. 1681s-2 and the court, in the course of resolving that lawsuit, issued some dicta about the limits to what a CRA could and couldn’t do.  Those prior exist and are helpful, but they don’t make the same point that three cases that I’ve discussed here make.

FCRA defendants hit back: sanctions motions in FCRA discharge cases

In recent months, bankruptcy lawyers have begun to bring strikingly similar FCRA lawsuits on behalf of former clients who went through Chapter 13 bankruptcy.  This post will discuss these cases and how defendants are responding to them by winning on the merits, then moving for sanctions.  The first few paragraphs will set the stage by explaining a few aspects of bankruptcy, and then we’ll get to the gusto.

When a debtor goes through Chapter 13 bankruptcy, he or she follows a court-approved “plan” by paying money to a bankruptcy trustee each month for about 3-5 years.  The trustee uses that money to pay off a portion of the debtor’s debts, plus the various fees and costs of the bankruptcy case itself.  If the debtor follows the plan from beginning to end, he or she is rewarded by a court order which discharges all debts that were paid through the plan.

Debtors who have home mortgages and who want to keep their homes post-bankruptcy can go through Chapter 13, but with a twist:  the plan will list the home mortgage as a debt, but it will clarify that the borrower will pay it outside the plan.  Specifically, the debtor will pay the trustee one monthly payment, and then the mortgage company a second monthly payment.  If the debtor completes the plan, any non-mortgage debts will be discharged, but the home mortgage won’t be.

Bankruptcy lawyers can and do file hundreds of Chapter 13 cases each year, which means that they have hundreds and even thousands of former clients.  Recently, some bankruptcy lawyers have begun to file numerous FCRA lawsuits on behalf of these former clients – collectively, they have been filing dozens of them every month.  The lawsuits allege that because the former client completed a Chapter 13 plan and received a discharge order:  a) the mortgage should be reported as discharged, with a $0 balance; and/or b) any late payments that the borrower made on the mortgage before or during the plan should not be reported at all.

The legal theory behind these cases isn’t completely clear to me, but it appears to be that if a mortgage was listed on a Chapter 13 plan – even if it wasn’t paid by the trustee as part of the plan – then it should be reported as though it was discharged at the end of the plan (even though it wasn’t).

These lawsuits present FCRA defendants with a true dilemma.  The defendants know that the lawsuits are meritless:  case law states that if a mortgage isn’t paid by the trustee during a Chapter 13 plan, then it isn’t discharged and remains an open debt.  Moreover, and as we discussed last year, a borrower’s late payments before and during bankruptcy can be reported, because bankruptcy doesn’t erase a debt – it just removes the debtor’s obligation to pay it.

However – and here’s the dilemma for defendants – hiring a lawyer to argue these points and get the case dismissed can be expensive – especially if you’re facing dozens of these each month.  So many defendants settle them – although that’s expensive, too, and it’s annoying to pay to settle a case that you don’t think had merit in the first place.

So, if you are a defendant faced with one or more lawsuits, all of which allege that you should have reported a mortgage as having a $0 balance and as having never been late, simply because the debtor went through Chapter 13 bankruptcy, what do you do?

A few of the larger defendants – the nationwide consumer reporting agencies – have responded by winning a few cases in court, and then filing sanctions motions against the lawyers who brought them.  Here’s the status of three of those cases:

1.  In Pappas, Case No. 1:15-cv-08115  (N.D. Illinois), Experian prevailed on a motion for summary judgment and recently filed a motion for sanctions.  That motion is pending; Experian’s reply brief will be due in a couple weeks;
2. In Jackson, Case No. 1:15-cv-11140  (N.D. Illinois), Experian likewise prevailed on a motion for summary judgment and then filed a motion for sanctions.  That motion has been fully briefed and is pending; and
3. In LeTren, Case No. 8:15-cv-03361 (D. Maryland), Trans Union filed a motion for sanctions, and the court will hear oral argument on May 16, 2017.

There are other ways to approach these cases from the defense perspective, and smaller defendants – including smaller reporting agencies and mortgage servicers – have been considering them.  As a lawyer in some of these cases (but not the three just mentioned!), I am very curious to see what the courts will do.

 

 

 

The FCRA does not apply to plaintiffs who are turned down for business credit

This month’s post will attempt to establish something that I’ve always vaguely known to be true, but never had occasion to fully research:  the FCRA applies to consumers who are trying to get personal credit, not credit for their business.

Most courts treat this as a well-established point.  See, e.g.,  Frydman v. Experian Info. Solutions, Inc., No. 14-cv-9013, 2016 U.S. Dist. LEXIS 107139, *29 (S.D.N.Y. Aug. 11, 2016) (stating that “[T]he FCRA does not apply to consumers’ business transactions” ); Boydstun v. U.S. Bank Nat’l Ass’n ND, 187 F. Supp. 3d 1213, 1217 (D. Or. May 11, 2016) (citing 14 cases and referring to “many others” which support the proposition that “the statutory text, legislative history, and administrative interpretation of the FCRA and concluded that it “does not cover reports used or expected to be used only in connection with commercial business transactions”).

The point is well-established because courts have been making it since just after the FCRA became law in 1970.  See, e.g., Wrigley v. Dun & Bradstreet, Inc., 375 F. Supp. 969, 970-971 (N.D.Ga. 1974) (“The court is constrained to the view that both the legislative history of the Act and the official administrative interpretation of the statutory terminology involved compel the conclusion that the Act does not extend coverage to a consumer’s business transactions.”).

The point is also well-established because several circuit courts have made it as well.  See, e.g., Bacharach v. Suntrust Mortg., 827 F.3d 432, 435 (5th Cir. 2016) (“Numerous courts have concluded that the FCRA does not cover reports used or expected to be used only in connection with commercial business transactions”); Matthews v. Worthen Bank & Trust Co., 741 F.2d 217, 219 (8th Cir. 1984).

The point sometimes gets muddied, because there are a number of court cases which involve an entity that pulls someone’s credit report not to help him (or his business) get credit, but rather in hope of finding some dirt to use to discredit him.

Defendants in those cases have sometimes argued that precisely because they didn’t pull the credit report to help the plaintiff get a loan, the report was not a “consumer report” and plaintiff’s FCRA claims must therefore be dismissed.

At least one court has looked to those cases and come away unsure of whether a plaintiff who fails to get credit for his business can sue  under the FCRA.  Breed v. Nationwide Ins. Co., No. 3:05CV-547-H, 2007 U.S. Dist. LEXIS 30714, *5 (W.D. Ky. April 24, 2007)  (citing such cases and then claiming that “The Circuits are split as to whether the consumer’s purpose in obtaining credit [i.e., for personal or business purposes] necessarily determines whether the report is a consumer report under the FCRA”).

However, the cases that Breed cited all involved plaintiffs who never sought a loan, but rather learned that someone had pulled their credit report without their permission, and filed suit for damages.  See, e.g.,  St. Paul Guardian Ins. Co. v. Johnson, 884 F.2d 881 (5th Cir. 1989); Heath v. Credit Bureau of Sheridan, Inc., 618 F.2d 693, 696 (10th Cir.1980); Hansen v. Morgan, 582 F.2d 1214 (9th Cir. 1978); but see Ippolito v. WNS, Inc., 864 F.2d 440, 452 (7th Cir. 1988) (cited by Breed as support for what Breed called a circuit split, but actually finding that a credit report that a franchisor pulled to evaluate a franchisee did not give the franchisee a viable FCRA claim, and stating that “In enacting the FCRA, Congress sought to regulate the dissemination of information used for consumer purposes, not business purposes”).  For this reason, one district court expressly declined to follow what it called Breed‘s “cautious approach.”  Tilley v. Global Payments, Inc., 603 F. Supp. 2d 1314, 1329 (D. Kan. 2009) (noting that the rule against FCRA claims applying to business loans applies even where the plaintiffs are running unincorporated businesses under their own names).

Before closing, I feel that I should address the fact that in one case, the Ninth Circuit held that a plaintiff who “hoped to start a business” had a viable FCRA claim when he was turned down for a loan due to incorrect information on his credit report.  Dennis v. BEH-1, LLC, 520 F.3d 1066, 1068 (9th Cir. 2008).  But in that case, the plaintiff was turned down for a personal loan, not a business loan:  he applied for the personal loan in the hope of establishing “a clean credit history when he sought financing for [his] venture.”  Id.

Dennis doesn’t really pertain to the proposition here, which is that if a plaintiff gets turned down for a business loan due to inaccurate information on his credit report, he doesn’t have a valid claim under the FCRA.

 

 

Crazy FCRA case in NJ illustrates some common themes

The District of New Jersey just resolved two FCRA cases that, in my view, combine all of the best (or worst) features of FCRA litigation:  they involve a confusing issue on a credit report; a threat of sanctions; a judge that didn’t get the facts she needed when she needed them; and parties and lawyers who had better things to do than get, or really think about, those facts.  Grab a drink, and I’ll tell you all about them.

Glenn and Lorissa Williams each filed a separate FCRA lawsuit against Experian. (Why two lawsuits?  It’s hard to say; in a world where just filing one lawsuit can cost $450+, you’d think the plaintiffs would’ve tried to sue just once, and to save the second fee).  The Williamses’ lawyer alleged that someone had filed for bankruptcy on the Williamses’ behalf but without their knowledge or consent; that Experian reported these bankruptcies as having been filed by the Williameses; that the Wililamses eventually noticed the bankruptcies on their credit reports and brought them to Experian’s attention; and that Experian failed to respond properly to their disputes.   See Williams v. Experian, No. 14-cv-8115, No. 14-cv-8116 (D.N.J. 2016) (full citations below).

The court and the parties learned the facts gradually, but having read the opinions, I think I can tell the story chronologically.  The Williamses were facing foreclosure and asked a credit counselor named Andrew Bartok for assistance.  Mr. Bartok specialized in helping people avoid foreclosure, and he did this by filing for bankruptcy on their behalf without telling them much about it.  He likely filed for bankruptcy on the Williamses’ behalf, which involved his paying filing fees, his submitting signed documents that contained their correct dates of birth and social security numbers, and the bankruptcy court’s sending various documents to the Williamses at their home.  Through all of this, the Williamses did not read their mail from the court, so they never had any idea that Mr. Bartok had filed for bankruptcy on their behalf.

Later on, the Williamses obtained copies of their Experian credit reports, which stated that they had filed for bankruptcy.  The Williamses asked Experian to delete the bankruptcies from their credit reports, without success.  They eventually turned to a lawyer , Brent Vullings, for help.  Mr. Vullings discovered that Andrew Bartok had helped a number of people delay foreclosure by filing false bankruptcy petitions on their behalf; that he’d eventually been indicted for this; and that he may well have done the same thing to the Williamses.  So he sued Experian on their behalf.

When litigation moved into the discovery and dispositive motions phase, counsel took a strangely passive approach.  He doesn’t seem to have conducted much if any discovery, and when Experian filed for summary judgment (on the basis that the bankruptcy petitions matched the Williamses’ names, dates of birth, social security numbers, home address, etc., which made it reasonable to assume that the bankruptcies were theirs and to report them as such), he didn’t tell the court about Mr. Bartok or provide the court with the information that led him to sue Experian in the first place.

The court – faced with facts which showed that the Williamses were disputing bankruptcies which really did appear to be theirs – granted summary judgment to Experian, and threatened to sanction Mr. Vullings for filing suit without a reasonable basis.  Williams v. Experian, No. 14-cv-8115, 8116, 2016 U.S. Dist. LEXIS 80383 (D.N.J. June 21, 2016).  In response to that threat, Mr. Vullings finally told the court about what Mr. Bartok had done to other people, why he thought Bartok might’ve done it to the Williamses, and why Experian should therefore reinvestigate whether the Williamses’ bankruptcies should appear on their credit reports.  The court decided that this was enough to hold off on imposing sanctions.   Williams v. Experian, No. 14-cv-8115, 8116, 2016 U.S. Dist. LEXIS 112105 (D.N.J. Aug. 23, 2016).

What common themes do these events illustrate?  Here are a few:

1.  As the court stated in both opinions, “Federal Courts are often presented with strange or seemingly incredible factual predicates, and some of those predicates are ultimately supported by the factual record.”  Sometimes truth is stranger than fiction.  In FCRA litigation, it often is.
2. Both Experian and the Court thought that plaintiffs’ counsel had failed to undertake any kind of investigation before filing suit – to them, it looked like the Williamses noticed some bankruptcies on their credit reports which they hadn’t remembered filing,  and that the plaintiffs’ lawyer filed suit on that basis without more.  As a defense lawyer, this sort of thing happens to me all the time – I’ll get a case in which the allegations don’t seem to add up, and I’ll start to suspect that the lawyer on the other side took his client’s word and filed suit without doing any more diligence.
3. The plaintiffs themselves had apparently not paid much attention to their financial advisor (Mr. Bartok) or their lawyer (Mr. Vullings).  In the summary judgment opinion, the court said that it was “incredulous” by the allegation that someone had gone to the trouble to file for bankruptcy on the plaintiffs’ behalf (as that costs money and takes effort) and just as incredulous by the fact that “Plaintiffs would continually receive notices of a bankruptcy proceeding being litigated on his or her behalf by a supposed impostor, yet do nothing.”  I have had any number of cases in which the plaintiff, while ably represented by a lawyer who knew what he or she was doing, had not done a very good job of staying on top of his or her financial affairs, and had done an even less good job of reading his or her mail.  The Williams cases are an extreme example of this.
4. Deciding what should ultimately appear on the post-lawsuit credit reports was difficult.  In its second opinion (the one that declined to sanction plaintiffs’ counsel), the court stated that it “feels compelled to point out that it hopes Experian will reevaluate whether it can continue to report these bankruptcies as legitimately belonging to Plaintiffs,” because at the end of the day, it really seemed as though Bartok had filed for bankruptcy on their behalf but without their consent.  But this begs the question of how Experian should report the bankruptcies.  If the plaintiffs’ debts were discharged, shouldn’t the bankrupcties be reported unless and until the plaintiffs come forward and ask the bankruptcy court to undo that, so that they can start paying on their debts?  If the plaintiffs actually did that, would the bankruptcy court have any way of unringing the bell / unfiling the bankruptcy?
5. The whole process took two years to complete.  Plaintiffs filed suit in 2014, but the court didn’t decide the summary judgment and sanctions issues until 2016.  The wheels of justice grind slowly.

This has been a longer post than usual, but it didn’t take long to write.  The issues that the Williams cases presents are, as I say, common themes in FCRA litigation.  They may suggest to readers both why FCRA litigation exists, why I like handling it, and why courts and defendants do not.

 

Why creditors and CRAs can report debts that were discharged in bankruptcy

Last month’s post was about Bailey v. FNMA, and the question of whether a mortgage company can pull a credit report on a mortgage borrower, even after the borrower has discharged his mortgage in bankruptcy.  Soon after I wrote it, I heard from a lawyer in California who pointed out an issue that I hadn’t mentioned, namely, the law on when and why a debt can keep being reported, even though it has been discharged in bankruptcy.  With thanks to my correspondent for the inspiration (and for a couple of case cites that got me started), I will address that issue here.

The issue is:  Can creditors and consumer reporting agencies report a consumer’s pre-bankruptcy debts, even after those debts have been discharged in bankruptcy?  This is not a hypothetical question:  I was recently involved in a case that presented this issue (i.e., the defendant reported that a judgment against plaintiff was open and unsatisfied, and plaintiff contended that the reporting was inaccurate because the judgment had been discharged in bankruptcy).  What have the courts said about reporting debts that have been discharged?

My correspondent noted that in several bankruptcy cases, the bankruptcy courts have clarified that a bankruptcy discharge doesn’t wipe away the debt or reduce the balance to zero; the discharge merely enjoins the creditor from trying to make the discharged debtor pay it.  These bankruptcy courts have held that when a creditor continues to report a discharged debt as due and owing, the creditor is NOT attempting to collect the debt and is therefore NOT violating the discharge injunction.  See Small v. Univ. of KY, No. 08-52114, 2011 Bankr. LEXIS 1868, at *12 (E.D. Ky. Bankr. May 13, 2011); Vogt v. Dynamic Recovery Servs. (In re Vogt), 257 B.R. 65 (Bankr. D. Colo. 2000).

The Vogt court explained, helpfully, that:

It is apparent from the complaint in this case that the Plaintiffs believe that the effect of the order of discharge is to wipe away the debt. But that clearly is not the case … the discharge does not wipe away the debt. It only serves to eliminate the debtor’s personal responsibility to pay the debt.

The distinction is important, because the initial suggestion here is that the Defendant was somehow in error, or, perhaps, in violation of some provision of the Bankruptcy Code, when it continued to report that, in its records, the Dallas debt was still due and owing, notwithstanding the order of discharge in the Plaintiffs’ bankruptcy case. But the Court cannot fault the Defendant for taking this position.

In re Vogt, 257 B.R. at 70.

Federal district courts have recently made the same point.  In Abeyta v. Bank of Am., N.A., No. 15-cv-02320, 2016 U.S. Dist. LEXIS 43602, (D. Nev. Mar. 30, 2016), a plaintiff alleged that because she filed for bankruptcy in 2010, and was discharged in 2014, a number of creditors and CRAs violated the FCRA by reporting that she had had a “major delinquency” on her debts back in 2010.  The defendants moved to dismiss an amended complaint, and the court granted their motion, because:  a) “Plaintiff did not allege that the fact of the previous delinquency was untrue”; b) “bankruptcy does not prevent the reporting of debt”; and c) “the Bankruptcy Code prevents certain collection activities, but it does not alter the fact of delinquency.”  Id. at ** 5, 7-8; see also Riekki v. Bayview Fin. Loan Servicing, No. 2:15-CV-2427, 2016 U.S. Dist. LEXIS 99527 (D. Nev. July 28, 2016) (following Abeyta and granting motion to dismiss).

Long story short, “Bankruptcy does not prevent the reporting  of a previous debt. If the fact of the previous delinquency in this case is true, the FCRA explicitly declines to prohibit its reporting for at least seven years. The Court is unaware of any statute or case providing that discharge in bankruptcy makes a debt unreportable (as opposed to uncollectable) so long as only the fact of the previous delinquency is reported.”  Abeyta v. Bank of Am., N.A., No. 15-cv-02320, 2016 U.S. Dist. LEXIS 8918 (D. Nev. Jan. 25, 2016) (citation omitted) (granting motion to dismiss the original complaint; the motion to dismiss an amended complaint was discussed by the same court at 2016 U.S. Dist. LEXIS 43602, above).

 

Are banks unable to pull credit reports post-bankruptcy?

A reporter recently contacted me to talk about a new FCRA class action which alleges that banks may not obtain credit reports on consumers, even after those consumers have discharged their debts to the banks in bankruptcy.  The case is Bailey v. Federal National Mortgage Association, Case No. 1:16-cv-01155 (D.D.C).  For this month’s blog entry, I’m going to post her questions and my answers:

Reporter:

It’s a FCRA case about a borrower filing a class-action suit against Fannie Mae for unauthorized credit inquiries post-bankruptcy. The borrower filed Chapter 7 and was discharged from his debt in 2013 but alleges 3 years after the discharge, Fannie made an unauthorized inquiry on to Equifax. [My note: the claim appears to be that Bailey obtained a mortgage from Bank of America that was transferred to Fannie Mae; that he filed for bankruptcy in April 2013; that he was discharged in July 2013; and that Fannie Mae pulled his report in July 2015.  The claim would be that Fannie Mae lacked a permissible purpose to do this and thus violated the FCRA at 15 U.S.C. Sec. 1681b.].

Just talking to a couple of people to get their take on the issue. Do companies have a right to do so? Does the borrower have a strong case or no? Could this set off a trend for other borrowers to file a similar suit?

Me:

There are two big hurdles that this lawsuit will have to overcome, and I doubt that it will be able to do so.

First, the plaintiff will have to show that there are no circumstances under which a mortgage lender can check a credit report post-discharge.  If there are some circumstances when that’s okay, and others where it isn’t, then you have to look at the details of each check, which would make a class action impossible.  My impression is that after a consumer files for bankruptcy and gets his mortgage discharged, the lender still needs to service the mortgage for a period of time, and it may need to check the consumer’s credit as part of that process.  Am I surprised that Fannie Mae checked this guy’s credit three years after his loan was discharged?  Yes.  But I think that some checks post-discharge may be permissible, and if that’s true, then a class action would not make sense.

Second, the plaintiff will have to show that Fannie Mae’s alleged FCRA violation caused him real harm.  This is a big issue – the Supreme Court just stated in Robins v. Spokeo that sometimes an FCRA violation will not cause any harm, and when that happens, the plaintiff lacks standing, and any lawsuit should be dismissed.  Here, the plaintiff seems to be alleging that when Fannie Mae checked his credit report, it:  i) invaded his privacy; ii) lowered his credit score; and/or iii) made him scared about a possible data breach in the future.  This is exactly the kind of intangible harm that the Spokeo decision talked about.  It makes the lawsuit look like something that lawyers are doing to get money, as opposed to a call to stop truly problematic behavior.

Last words:

It’ll be interesting to see how this case proceeds.  Law360 says that “Joshua B. Swigart of Hyde & Swigart and by Abbas Kazerounian of Kazerouni Law Group APC.”  I have dealt with Hyde & Swigart before, and they are good plaintiffs’ lawyers.

Target gets rare win in “stand-alone disclosure” class action

For the past few years, plaintiffs’ lawyers have been filing – and winning – class actions against employers who routinely obtain criminal background reports about potential employees.  These suits allege that the employer violated  the FCRA at 15 U.S.C. § 1681b(b)(2)(A), which states that employers can only obtain these reports if “a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes.”

In the recent past, most companies gave potential employers a disclosure to sign before  obtaining a background report about them.  But these disclosures often contained waivers of liability, which essentially asked the applicant to agree that:  i) the employer could pull a background report; and ii) the applicant could not sue the employer or the background reporter for anything that the report contained, or anything they did in obtaining it.  In the late 1990s, the FTC suggested that waivers like this went too far; and in the past few years, plaintiffs’ lawyers have realized this and begun filing class actions against employers who included these waivers.

These class actions don’t allege that the employer “negligently” violated the FCRA, because then the plaintiffs would only be able to collect “actual damages,” and it is hard to say that a disclosure with a liability waiver that would likely never be enforced will actually damage anyone.  Rather, the plaintiffs allege that the employer “willfully” violated the FCRA, as that entitles each member of the class to statutory damages of $100 to $1,000 – which can add up to millions of dollars in cases against national employers.  Most companies named in these class actions have either settled outright, or else tried to dismiss the lawsuit, failed, and then settled.

A class action against Target – Just v. Target Corp., Case No. 0:15-cv-04117, slip. op. at ECF No. 23 (D. Minn. May 12, 2016) – has ended differently.  Crucially, Target’s disclosure did not contain a liability waiver, so it didn’t contain the one thing that the FTC has said is inappropriate.  Target’s disclosure did say things about the importance of trust and honesty among its employees, the fact that any job that it offered could be terminated at will, and how applicants could get a copy of the report that Target obtained, if they wanted one.  Did these kinds of statements “willfully” violate the FCRA’s stand-alone disclosure provision?

Target argued that they didn’t, and a federal judge agreed:  he dismissed the class action.  (His decision is on appeal).  Following Supreme Court precedent, he judge noted that to “willfully” violate the FCRA, a company must do something that is “objectively unreasonable”in light of the statutory text and of any opinions from the FTC or the federal courts of appeals about that text.

The judge then found that the statutory text isn’t as clear as it seems – while the provision at 15 U.S.C. § 1681b(b)(2)(A)(i) requires a stand-alone disclosure that the employer will pull a background report, the very next provision, at 15 U.S.C. § 1681b(b)(2)(A)(ii), allows the disclosure form to contain a place for the job applicant to consent to a background report. The courts of appeals haven’t said anything about whether adding other language to one of these disclosure forms is or isn’t appropriate, and the FTC has suggested that adding language that explains what the employer is doing and why is probably okay.  For all these reasons, the judge found that Target had not “willfully” violated the FCRA and dismissed the claims that it violated 15 U.S.C. § 1681b(b)(2)(A)(i).

Will this decision stand up on appeal?  It’s an interesting question.  My initial instinct, like the judge’s, is that the language that Target included in its disclosure is appropriate:  the FCRA’s obvious goal here is to put people on notice that an employer is going to look at their criminal record, and Target’s form did not detract from that notice.

Having said that, I would make one caveat.  The objection to the liability waivers is that they don’t enhance or clarify a notice that a background report will be pulled, so the waivers are “objectively unreasonable” under the statute.  But, while Target’s form didn’t contain a liability waiver, it did contain a statement that “You understand if you disagree with the accuracy of any information in the report, you must notify [the company that created the report for Target] within five business days of your receipt of the report.”  This sentence seems to be a bit like the liability waivers in that: i) it does not help clarify that Target is planning to obtain a background report; and ii) it does not have any basis in the FCRA.  [Under the FCRA, a person who gets an inaccurate consumer report can dispute it months or even years later – there is no time limit to dispute a report, per 15 U.S.C. Sec. 1681i].

I can see why Target included this sentence – if a job applicant doesn’t dispute an inaccurate report within a few days, Target will almost certainly have given the job to someone else.  Maybe that’s enough to mean that this sentence is not “objectively unreasonable” either.  But I think it presents a closer question than the other things in Target’s disclosure.

Pleading and proving the FDCPA’s bona fide error defense

I don’t generally write blog posts about just one case, but I’m going to make an exception this month and discuss Arnold v. Bayview Loan Servicing, LLC, No. 14-cv-0543, 2016 U.S. Dist. LEXIS 10509 (S.D. Ala. Jan. 29, 2016).

In Arnold, the plaintiff alleged that Bayview violated the FDCPA by sending him two mortgage billing statements in December 2013, even though the plaintiff’s debt had been discharged in bankruptcy (September 2012), and even though Bayview foreclosed on plaintiff’s former home (November 2013).  Bayview admitted sending the statements, but it argued that it had not violated the FDCPA because sending them was a “bona fide error,” which if true would be a complete defense to FDCPA liability under 15 U.S.C. § 1692k(c).  Specifically, Bayview argued that when it began to service plaintiff’s mortgage loan, it had coded the loan file in its computer system so as not to send plaintiff any billing statements, but then, following the November 2013 foreclosure, an employee reviewed the file and inadvertently (i.e., she was not told or instructed to do this) changed the code to allow new billing statements to be sent.

I found Arnold to be interesting because it granted a defense motion for summary judgment (which doesn’t happen every day, and which is good news if you’re a defense lawyer like me), and because it made two points about the FDCPA’s bona fide error defense that I think are worth remembering.  They are:

I.  THE BONA FIDE ERROR DEFENSE MUST BE PLEADED WITH PARTICULARITY

To raise the bona fide error defense, the defendant must include it as an affirmative defense in its initial pleading, and the defendant must plead it with particularity.  Bayview’s initial pleading was an answer that listed a number of affirmative defenses, none of which were pleaded with particularity.  It raised the bona fide error defense by simply stating that “Plaintiff’s individual and class claims are barred by the bona fide error defense pursuant to the FDCPA, 15 U.S.C. § 1692, et seq.”

The court ruled that Bayview’s pleading was insufficient:  it didn’t state the who/what/when/where/why of the bona fide error, so it wasn’t a pleading with particularity.  However, the court held that Bayview’s mistake was a technical one, and it wasn’t willing to preclude Bayview from raising the defense unless plaintiff could show that either:  a) he had challenged the pleading as insufficient within 21 days per Rule 12; or b) he had been deprived of an opportunity to take discovery related to the defense.  Plaintiff could not show either of these things:  he hadn’t moved to strike the pleading per Rule 12, and he had been given information about the defense in discovery (through interrogatory responses and depositions of Bayview personnel).

I think that this was the right result – cases should be won or lost on the merits, and not due to technical mistakes by counsel.  That said, I am going to make a point of trying to plead the bona fide error defense with more particularity in the future.

II.   THE BONA FIDE DEFENSE IS ABOUT PARTICULAR ERRORS, NOT GENERAL ONES

The Arnold court found that the plaintiff could not and did not challenge the facts of Bayview’s bona fide error defense:  i.e., it was uncontested that Bayview had initially coded plaintiff’s loan in such a way as to prevent any billing statements from being mailed to him, but then an employee had inadvertently changed that code while reviewing his loan post-foreclosure.  Rather, the plaintiff argued that Bayview’s error was that it sent mortgage bills to consumers even after they had their debts discharged through bankruptcy.  In other words, plaintiff’s counsel contended that Bayview should have had a policy in place to never send a billing statement to anyone whose mortgage loan was discharged in bankruptcy.  Because Bayview didn’t do that, counsel contended that its mistake was not a “bona fide error” but rather an intentional error due to a bad internal policy.

The court found for the defendant, and made two points which, again, are worth remembering.  The first point is that “the bona fide error defense does not require a defendant to exhaust all possible means of preventing the specific error. Again, the legal standard is that the defendant “maintain procedures reasonably adapted to avoid readily discoverable errors.”  The second point is that “plaintiff’s fixation on Bayview’s purported practice of billing borrowers whose debts have been discharged is unavailing because that general practice was not the specific error that caused Arnold to receive billing statements. It is undisputed that, during the first ten months that Bayview serviced the loan, Bayview never sent a single monthly billing statement to Arnold [until] a single
Bayview employee made a single processing error that changed the code on Arnold’s loan ….  That is the “specific error” on which the bona fide error defense analysis appropriately centers.”

In short, when a defendant raises a bona fide error defense, defense counsel should focus on the precise mistake that caused the problem, and attempt to show that such mistakes are rare and against company practice.

When is a report “in connection with an investigation?”

Last month, I discussed two federal court cases that considered whether a criminal background report that Wells Fargo obtained from First Advantage was a “consumer report” that had to comply with the FCRA.  One court found that the report wasn’t a consumer report; the other found that it was.  In both cases, the question was whether Wells Fargo obtained it “in connection with an investigation of … compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer.”  15 U.S.C. Sec. 1681a(y).  Reports that fall within that definition are not “consumer reports” and are not subject to (most) other provisions in the FCRA.

As I pointed out last month, the Martin court in Minnesota held that because Wells Fargo obtained its reports to comply with its obligations under two federal laws (FIRREA and the SAFE Act), the report fell within the Sec. 1681a(y) exception to the FCRA. But the Manuel court in Virginia held that, to the contrary, reading Sec. 1681a(y) that way would essentially mean that Wells Fargo never had to comply with the FCRA – and the court was unwilling  to take that position.

This month, I thought I would mention two other points that other courts have made about Sec. 1681a(y).  Neither of them resolves the conflict between Martin and Manuel; if anything, they indicate that the issue is a complex one, which no one court has yet definitively considered or decided.

First, some courts have held (as the Martin court itself did) that if an employer or a background screening agency wants to argue that its reports are not regulated by the FCRA because they fall within the exception at Sec. 1681a(y), that’s fine, but it needs to be done on a factual record at the summary judgment stage, and not at the motion to dismiss stage.  Simply saying that “I’m the kind of institution that has to comply with federal law, so my reports are exempt from FCRA” – which is essentially what a defendant would do at the motion to dismiss stage – is not good enough for these courts.

See Freckleton v. Target Corp., 81 F. Supp. 3d 473 (D. Md. 2015) (denying motion to dismiss, and stating that “Target was not running the check to be compliant with state or federal regulations. Cf. Martin … (if Wells Fargo ran background checks to be compliant with the SAFE Act then the exclusion would apply; however, this was a question of fact inappropriate for a motion to dismiss)”); Rawlings v. ADS Alliance Data Sys., 2015 U.S. Dist. LEXIS 81055 (W.D. Mo. June 23, 2015) (denying motion to dismiss and stating that “[If] background checks are excluded based on its need to comply with federal banking law, the record must be developed to so demonstrate … Martin is distinguishable inasmuch as Martin was resolved on a summary judgment record”).

From a defendant’s perspective, this is annoying – it should be obvious that some employers have to get criminal record reports under some laws (banks under federal law, or perhaps schools under state law), and the litigation cost of preparing a full factual record is not trivial.  But I think defendants can live with this.  Indeed, if the Manuel court had known the details of Wells Fargo’s compliance program, the result in that class action case might have been different.

Second, the Manuel court had stated that for Sec. 1681a(y) to apply, a report had to be obtained “in connection with” some larger investigation; a report that was pulled merely as a matter of routine compliance (and without any additional inquiry or investigation) did not fall within the Sec. 1681a(y) provision.

One court has followed up on that point by suggesting that one can tell whether a report is part of a larger investigation by asking whether the employer, before it pulled a background report, had some reason to believe that the employee or job applicant had violated the law – if yes, then there is a larger investigation and Sec. 1681a(y) applies; if no, then the report is subject to the FCRA.  See Freckleton, 81 F. Supp. 3d at 481 n.11 (citing Mattiaccio v. DHA Grp., 21 F. Supp. 3d 15, 2014 WL 717780, at *3 (D.D.C. 2014) (whether employer gathered information “in connection with an investigation of . . . suspected misconduct” depended on whether the employer made the request after “receiv[ing] information indicating that [the] Plaintiff had previously been convicted of perjury” or in retaliation for a complaint); Russell v. Shelter Fin. Servs., 604 F. Supp. 201, 202-03 (W.D. Mo. 1984) (finding that report was not “in connection with” an employment decision under Sec. 1681a(h) if the subject of the report resigned before the report was pulled)).

I question whether the statutory phrase “in connection with an investigation” necessarily means “because of an investigation,” “as part of an investigation,” or “due to an investigation” – which is how the Manuel, Mattiaccio and Freckleton courts seem to read it.  If I go to a restaurant to get some pizzas for a party, and I buy a hoagie as well, one  could say that I bought the hoagie “in connection with” my purchase of the pizzas, even though I bought everything at the same time.  Also, a review of “in connection with” at thesaurus.com suggests that the phrase means “about,” as opposed to “before.”

 

When is a report not a “consumer report?” When it’s for the banking industry. Maybe.

This month’s post will comment on the FCRA’s provision at 15 U.S.C. Sec. 1681a(y), which says that a report is not a “consumer report” (and thus not subject to FCRA liability) if it “is made to an employer in connection with an investigation of— (i) suspected misconduct relating to employment; or (ii) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer.”

Federal law requires banks to check the criminal backgrounds of their employees.  Two separate statutes – FIRREA and the SAFE Act – both tell banks not to employ certain employees if they have been “involved” in a “dishonesty crime.”  I put those words in quotes because the statutes provide fairly lengthy and convoluted definitions of what it means to be involved in a dishonesty crime.  For present purposes, the important thing is that a person is “involved” in such a crime if he was either:  a) convicted of it; or b) sentenced pursuant to a pretrial diversion program (e.g., pled guilty per a deal that there would be no jail time, and the charge would be dismissed if he completed probation without incident).  This is important because normally, a consumer report cannot contain arrest records that are more than seven (7) years old.  15 U.S.C. Sec. 1681c(a)(5).  But here, the banks have to look at arrest records, to assess whether a person went through a pretrial diversion program.

This background presents the following question:  if a bank, in its effort to comply with FIRREA and the SAFE Act, contracts with a background screening company to obtain special reports that will contain any arrest records, even ones that normally could not be reported per Sec. 1681c(a)(5), are those reports “consumer reports?”  Or are they excluded per the exception at Sec. 1681a(y)?

Two federal courts (at least) have answered this question in two different ways.  The District of Minnesota held that such reports are NOT consumer reports in Martin v. First Advantage Background Servs. Corp., 2014 U.S. Dist. LEXIS 41098 (D. Minn. Mar. 26, 2014).  The Eastern District of Virginia held that such reports ARE consumer reports in Manuel v. Wells Fargo Bank, 123 F. Supp. 3d 810 (E.D. Va. 2015).  Full disclosure:  I was the defense lawyer in Martin.  Notably, both cases involved the reports that Wells Fargo (a bank) obtained from First Advantage (a background reporting company).

In Martin, First Advantage presented evidence that Wells Fargo asked it to create reports that were designed to comply with FIRREA and the SAFE Act (by including arrest records that would otherwise be precluded in a consumer report), and that these reports were not “consumer reports” because they were created and obtained “in connection with an investigation of … compliance with Federal, State, or local laws and regulations” under Sec. 1681a(y).  The Court agreed.

In Manuel, Wells Fargo argued that it was not required to have job applicants sign special FCRA-compliant consent forms before it pulled reports on them from First Advantage, because the First Advantage reports were not “consumer reports” per Martin.  The court disagreed on multiple grounds, two of which seem especially salient:  a) the provision in Sec. 1681a(y) refers to a report “in connection with an investigation,” and Wells Fargo conducted no larger investigation (it just ordered the report); and b) “the exception would swallow the rule with respect to employment uses of background checks under the FCRA, because there are a number of federal, state, and local laws excluding certain individuals from certain types of employment” (i.e., every report that Wells Fargo pulled would be exempt from the FCRA).

Both courts wrote reasonable and thoughtful opinions:  you can see the merits of each position when you read them.  Ultimately, though, I wonder if the Manuel court considered – or if Wells Fargo’s lawyers asked it to consider – the flip side of its argument.

The Manuel court was obviously worried about the repercussions of saying that criminal background reports in the banking industry are not subject to the FCRA:  the FCRA is a consumer-protection statute, and it would seem odd to exclude a huge group of consumers (people who want to work for banks) from its protections.  I get that.

But consider the flip side.  Under FIRREA and the SAFE Act, banks MUST obtain and review arrest records that normally cannot be reported under Sec.  1681c(a)(5).  If the reports that the banks pull have arrest records in them, then those reports automatically violate the FCRA.  That leaves the banks in an impossible position:  if they don’t review arrest records, they violate FIRREA and the SAFE Act, but if they do review arrest records, they violate the FCRA.  It seems reasonable to me to construe Sec. 1681a(y) as Congress’s answer to this difficulty:  it allows banks to get the records they need under FIRREA and the SAFE Act, without having to worry that they will violate the FCRA in the process.

If Wells Fargo raised this issue to the Manuel court, there is no mention of it in the opinion.  Lawyers in future cases might do well to make it.