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9th Cir. Holds FDCPA ‘Bona Fide Error’ Defense Can Be Raised in ‘Out of Statute’ (Time-Barred) Debt Cases

collection letterThe U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court’s dismissal of allegations that the defendant violated the federal Fair Debt Collection Practices Act (FDCPA) by sending a collection letter threatening litigation over a time-barred or “out-of-statute” debt and filing a lawsuit seeking to collect the debt.

In so ruling, the Ninth Circuit held that the FDCPA’s prohibitions against filing or threatening to file a lawsuit on “out-of-statute” debts apply even if it was unclear at the time of the filing or threat of filing whether the debt was barred by any applicable statutes of limitations under state law.

However, the Ninth Circuit left it up to the trial court on remand to determine whether the defendant may avoid liability by asserting a bona fide error defense.

A copy of the opinion in Kaiser v. Cascade Capital, LLC is available at:  Link to Opinion.

The plaintiff purchased a car under a retail installment sale contract. He subsequently defaulted on his payments, and his car was repossessed and sold. The proceeds from the sale failed to cover the outstanding balance under the contract, and the plaintiff did not pay the remaining amount due.

The defendant attempted to collect the debt by sending a letter and ultimately filing a lawsuit in Oregon state court. These collection attempts occurred between four to six years after the plaintiff’s default.

The plaintiff responded to the defendant’s state court lawsuit by arguing that the debt was barred under Oregon’s four-year statute of limitations for sale-of-goods contract claims, Or. Rev. Stat. § 72.7250. The defendant countered that Oregon’s six-year statute of limitations for other contract claims, Or. Rev. Stat. § 12.080, applied instead. The state court ruled in favor of the plaintiff.

The plaintiff then filed a putative class action in federal court. He alleged that the defendant violated the FDCPA by threatening litigation over an “out-of-statute” debt in the collection letter and by filing a lawsuit to collect the “out-of-statute” debt. The trial court dismissed for failure to state a claim, reasoning in part that the defendant did not violate the FDCPA because the state statute of limitations had been unclear at the time the defendant attempted to collect the debt. The plaintiff timely appealed.

First, the Ninth Circuit addressed whether the plaintiff’s debt was in fact “out-of-statute” under Oregon law. If the lawsuit more closely related to portion of the contract for the underlying sale of the car, then a four-year statute of limitations would apply; however, if the focus was the portion of the contract creating a security interest in the car, a six-year statute of limitations would apply. See Or. Rev. Stat. § 72.7250 (requiring claims of breach of contract for a sale of goods to be brought within four years), and Id. § 12.080 (requiring other contract claims to be brought within six years).

The Ninth Circuit used a passing statement from the Oregon Supreme Court case Chaney v. Fields Chevrolet Co., 503 P.2d 1239 (Or. 1972) to inform its decision: “[A]n action [by a creditor] for part of the purchase price is more closely related to the sale portion of the contract than it is to the security portion.” Id. at 1241.

Furthermore, the Court noted that the four-year statute of limitations for breaches of contract for a sale of goods originated from Oregon’s codification of Article 2 of the Uniform Commercial Code (U.C.C.). See Or. Rev. Stat. § 72.7250. Oregon applies Article 2 to sales transactions with a security element unless the “collateral is transferred by a debtor to a creditor solely as security.” AllStates Leasing Co. v. Ochs, 600 P.2d 899, 907 n.9 (Or. Ct. App. 1979).

Additionally, the Court observed that Oregon prefers interstate uniformity when interpreting the U.C.C., see Or. Rev. Stat. § 71.1030(1)(c), and that a clear majority of other states apply the Article 2 statute of limitations for sales of goods to actions to recover deficiency balances after repossession of the goods. See, e.g., Suntrust Bank v. Venable, 791 S.E.2d 5, 7–9 (Ga. 2016) (describing and adopting the majority view); Coastal Fed. Credit Union v. Brown, 790 S.E.2d 417, 420–22 (S.C. Ct. App. 2016) (same); see also Assocs. Disc. Corp. v. Palmer, 219 A.2d 858, 860–61 (N.J. 1966) (holding the same, and cited by Chaney, 503 P.2d at 1240–41). Therefore, the Court held that a four-year statute of limitations applied to the plaintiff’s debt under Oregon law.

Given that the plaintiff’s debt was “out-of-statute” at the time the defendant attempted to collect it, the Ninth Circuit held that the defendant’s conduct violated the FDCPA, even though the defendant was unsure of the legal status of the debt during its collection attempts.

The FDCPA prohibits debt collectors from using any “unfair or unconscionable means to collect or attempt to collect any debt.” 15 U.S.C. § 1692f. It also prohibits using “any false, deceptive, or misleading representation” to collect a debt, including any “false representation of the character, amount, or legal status of any debt” and any “threat to take any action that cannot legally be taken.” Id. § 1692e, (2)(A), (5).

The Ninth Circuit concluded that suing to collect on an “unenforceable” debt is patently unfair to the consumer. Additionally, according to the Ninth Circuit, both suing and threatening to sue on “out-of-statute” debts misrepresents the legal enforceability of those debts, and thus are false or misleading under 15 U.S.C. § 1692e.

The Ninth Circuit also noted that, while the collection letter the plaintiff received did not explicitly threaten to sue on the debt, “a threat need not be express: it can be implied when interpreting a letter as a whole.” Gonzales v. Arrow Fin. Servs., LLC, 660 F.3d 1055, 1064 (9th Cir. 2011).

Additionally, the Court interprets communications from debt collectors through the eyes of the “least sophisticated debtor.” Id. at 1061. The Court was persuaded that the letter would be read as a threat by the least sophisticated debtor because it stated that a lawyer has been retained with the authority to file a lawsuit and that interest will not accrue on the debt until ordered by a court of competent jurisdiction.

In the view of the Ninth Circuit, these statements would indicate to the least sophisticated debtor that there is a real risk of litigation and that a court could potentially order interest to accrue on the unpaid balance. The Court held that this impression would not be dispelled by the letter’s disclaimer that “no attorney has personally reviewed the particular circumstances of [the plaintiff’s] account.”

The defendant countered that unless a debt collector knew or should have known that the litigation was time barred, its filing of litigation or threating litigation cannot violate the FDCPA. The Ninth Circuit rejected this argument because the FDCPA makes debt collectors strictly liable for misleading and unfair debt collection practices. Clark v. Cap. Credit & Collection Servs., Inc., 460 F.3d 1162, 1175–76 (9th Cir. 2006).

However, the Ninth Circuit also concluded that the defendant may nonetheless be able to avoid liability through the FDCPA’s affirmative defense for bona fide errors. To successfully invoke the defense, a debt collector must “show[] by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” 15 U.S.C. § 1692k(c).

In Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573 (2010), the U.S. Supreme Court adopted the rule announced in Baker v. G.C. Servs. Corp., 677 F.2d 775 (9th Cir. 1982) that legal mistakes about the meaning of the FDCPA itself cannot be bona fide errors. Id. at 604–05.

In this case, the Ninth Circuit concluded that mistakes about the status of a debt under a state statute of limitations are substantively different from mistakes about the requirements of the FDCPA itself and therefore can be bona fide errors.

The Ninth Circuit stated that Jerman relied on the presumption that “ignorance of the law will not excuse any person, either civilly or criminally.” Id. at 581 (quoting Barlow v. United States, 32 U.S. (7 Pet.) 404, 411 (1833)). “This maxim . . . normally applies where a defendant has the requisite mental state in respect to the elements of the crime but claims to be ‘unaware of the existence of a statute proscribing his conduct.’” Rehaif v. United States, 139 S. Ct. 2191, 2198 (2019) (quoting 1 Wayne R. LaFave & Austin W. Scott, Jr., Substantive Criminal Law § 5.1(a) (1986)).

However, the Court recognized that in such cases “where the defendant is ignorant of an independently determined legal status or condition that is one of the operative facts of the crime… the mistake of the law is for practical purposes a mistake of fact.” United States v. Fierros, 692 F.2d 1291, 1294 (9th Cir. 1982). Thus, the Court concluded that when a crime has a mens rea requirement, a defendant must have that mens rea as to such “a ‘collateral’ question of law.” Rehaif, 139 S. Ct. at 2198.

The defendant here allegedly violated the prohibition against misrepresenting the legal enforceability of a debt, 15 U.S.C. § 1692e, and the prohibition against “unfair” collection tactics, Id. § 1692f. The Ninth Circuit stated that these allegations necessarily implicate a legal element entirely collateral to the FDCPA, the “out-of-statute” status of the debt under state law, and that this collateral legal element falls outside the ignorance-of-the law maxim described in Jerman.

Furthermore, while the strict liability offenses at issue lack a mens rea requirement, the Court pointed out that the bona fide error defense is the FDCPA’s “narrow exception to strict liability.” Clark, 460 F.3d at 1177. It relieves liability for certain “unintentional” violations, thereby functioning similarly to a mens rea requirement. See Vangorden v. Second Round, Ltd. P’ship, 897 F.3d 433, 441 n.5 (2d Cir. 2018). These background legal principles therefore suggested to the Court that the bona fide error defense should be available for mistakes about the time-barred status of a debt.

Accordingly, the Ninth Circuit concluded that the plaintiff has stated a claim for relief under the FDCPA. Therefore, the Court reversed the trial court’s dismissal of the action and remanded for further proceedings, wherein the defendant may attempt to invoke the bona fide error defense.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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