7th Cir. Divided Panel Holds Debt Collector Liable Under FDCPA Despite Changes in Underlying Law at Issue

In a deeply divided opinion, the U.S. Court of Appeals for the Seventh Circuit, in an en banc review, reversed its previous opinion, Oliva v. Blatt, Hasenmiller, Leibsker & Moore, LLC, 825 F.3d 788, 791 (7th Cir. 2016), holding this time that a debt collector that relied upon circuit precedent interpreting the federal Fair Debt Collection Practices Act (FDCPA) venue provision was not protected by the bona fide error defense.

In so ruling, the Court also held that for purposes of compliance with the FDCPA, reliance on court precedent is permitted, but only if there can be no doubt whatsoever as to the accuracy of the prior court’s interpretation of the law.

A link to the opinion is available at:  Link to Opinion.

As you may recall, the FDCPA requires that a debt collector who sues to collect a consumer debt must sue in the “judicial district or similar legal entity” where the debtor lives or signed the contract in question. 15 U.S.C. § 1692i.  In 1996, the Seventh Circuit interpreted “judicial district” to mean a county court, such that when debt collectors were filing suit in Cook County, they could file suit in any of the county’s six municipal districts as long as the debtor resided in Cook County or had signed the underlying contract there. Newsom v. Friedman, 76 F.3d 813, 819 (7th Cir. 1996).

In 2013, relying on Newsom, a debt collection law firm filed suit against a debtor in the First Municipal District of Cook County in downtown Chicago. The debtor did not reside in that district at the time the lawsuit was filed, although he had been a student there when he opened the account and had worked in downtown Chicago.

While the lawsuit was pending, the Seventh Circuit issued a new ruling in Suesz v. Med-1 Solutions, LLC, 757 F.3d 636, 638 (7th Cir. 2014) (en banc), in which it held that the “judicial district or similar legal entity” in § 1692i is “the smallest geographic area that is relevant for determining venue in the court system in which the suit is filed,” which can be smaller than a county if the court system there uses smaller districts. The Suesz Court explained that § 1692i “should prevent debt collectors from choosing venues that are inconvenient for the debtor and/or particularly friendly to the debt collector,” and noted that the “venue provision applies even where the debt collector’s venue selection is permissible as a matter of state law.”  The Suesz Court further explained that “§ 1692i must be understood not as a venue rule but as a penalty on debt collectors who use state venue rules in a way that Congress considers unfair or abusive.”

Thus, Suesz overruled NewsomEight days later the debt collector dismissed the pending lawsuit against the debtor.

The debtor then sued the debt collector under the FDCPA alleging that the debt collector had violated the venue provision in  § 1692i. The parties filed cross-motions for summary judgment and the trial court ruled in favor of the debt collector reasoning that it had shown that its violation of the venue provision was the result of a bona fide error in relying on incorrect circuit precedent. The trial court rejected the debtor’s argument that Suesz should apply retroactively.

The debtor appealed and the Seventh Circuit affirmed, concluding that the safe harbor of the bona fide error defense prevented retroactive application of Suesz. That original holding by the Seventh Circuit would have overruled a string of trial court cases in the U.S. District Court for the Northern District of Illinois in which Suesz was held to retroactively apply to venue under § 1692i. The debtor requested an en banc review asserting that the ruling conflicted with Suesz and the Supreme Court’s ruling in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573, 576 (2010), which held that the bona fide error defense does not apply to mistakes of law.

The debt collector argued that the FDCPA’s bona fide error defense protected it from liability when it relied in good faith on Newsom in choosing the venue for the collection lawsuit. In addressing that argument, the appellate court read Jerman to mean that a debt collector’s own mistaken interpretation of the law prevented application of the bona fide error defense. The panel, however, read Jerman more broadly, concluding that the bona fide error defense does not apply where a debt collector relies in good faith on a court’s reasonable but mistaken interpretation of the law.

The Seventh Circuit panel explained that Jerman offered no indication that some mistakes of law were protected and others were not. In doing so, the panel removed the Jerman holding from its context and applied it more broadly to decide that the bona fide error defense does not apply where a debt collector relies in good faith on reasonable court precedent where the precedent is later overruled.  The panel adopted the reasoning in Jerman that because there can be different interpretations of the FDCPA, a “broad exception for good-faith legal errors…would allow debt collectors to resolve all legal uncertainty in their own favor…” which runs against the purpose of the FDCPA. The panel concluded that the FDCPA puts “the risk of legal uncertainty on debt collectors, giving them incentives to stay well within legal boundaries.”

The panel further justified its holding by explaining that, although court precedent may be considered “the law,” the statute itself is the controlling law even where judges mistakenly interpret it, which is why an overruling of precedent can be retroactive. The panel explained that Suesz was applied retroactively because, while civil rulings are permitted to have a prospective-only effect “to avoid injustice or hardship to civil litigants who have justifiably relied on prior law,” it was not persuaded to give Suesz a prospective-only effect because doing so “would be impermissible unless the law had been so well settled before the overruling that it had been unquestionably prudent for the community to rely on the previous legal understanding.”

Essentially, the Seventh Circuit reasoned that reliance on court precedent is permitted but only if there can be no doubt whatsoever as to the accuracy of the court’s interpretation of the law.

The debt collector also argued that the debtor had signed the underlying contract in the First District such that venue there was proper, but the trial court did not address that argument in its ruling, and therefore the appellate court did not address it either.

The Seventh Circuit panel attempted to mitigate the harsh consequences of its ruling by pointing out that the FDCPA permits a court, when determining damages, to consider the extent to which the non-compliance was intentional. 15 U.S.C. § 1692(b)(1).

Accordingly, the trial court’s judgment in favor of the debt collector was vacated and the case was remanded for further proceedings.

The dissent vehemently disagreed, pointing out that the panel majority’s ruling had created “an unprecedented new rule—one that punishes debt collectors for doing exactly what the controlling law explicitly authorizes them to do at the time they do it.”

The dissent accused the majority panel of repeatedly misreading the Supreme Court’s and the Seventh Circuit’s prior rulings on multiple issues, including its interpretation and application of Suesz and Jerman, pointing out that the debt collector’s choice of venue was lawful when made based on Newsom. The dissent continued that the debt collector met each of the three elements of the bona fide error defense — its violation was unintentional despite its maintenance of reasonable procedures to avoid the error and resulted from its good faith mistake of complying with the controlling law of Newsom. The dissent noted that while retroactive application of Suesz may have created a cause of action for retroactive violations, it did not “retroactively proscribe the application of the bona fide error defense.”

The dissent further disagreed with the panel majority on its interpretation of Jerman, pointing out that the Jerman Court held that the bona fide error defense does not apply only where a debt collector incorrectly interprets the FDCPA, not where the debt collector follows established precedent interpreting the statute. The dissent reasoned that a court’s mistaken interpretation of the FDCPA cannot be attributed to the debt collector who follows it.

The dissent neatly summed up the panel majority’s dissonant ruling: the debt collector “correctly interpreted (and did not violate) Newsom’s controlling determination of the legal requirements of § 1692i, but incorrectly interpreted (and violated) § 1692i itself,” which doesn’t make any sense and should not prevent the application of the bona fide error defense.

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Amy Jonker is a commercial litigator whose practice focuses on defending consumer financial services companies in class actions, individual matters, and regulatory investigations, representing employers in investigations and litigation, and successfully resolving commercial disputes. She has extensive experience delivering positive outcomes in complex commercial litigation in state and federal courts across the country, including for many financial institutions and law firms for claims filed under the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), the Fair and Accurate Credit Transactions Act (FACTA), the Telephone Consumer Protection Act (TPCA), UDAAP and state consumer protection laws, under the Family and Medical Leave Act (FMLA), Title VII, the Americans with Disabilities Act (ADA), whistleblower claims, and in complex insurance disputes. Her experience covers all phases of litigation at both federal and state levels, including obtaining dismissals of complaints, obtaining summary judgment on claims and defenses, handling all phases of discovery in both individual and class actions, negotiating individual and class action settlements, preparing for and participating in trials and arbitrations, conducting oral arguments, and federal and state court appellate work.