REQUIRED READING: At a time when the default servicing industry has perhaps had to evolve faster and more efficiently than ever before, mortgage brokers, servicers, attorneys and other servicing professionals can sometimes find themselves on ambiguous or uncertain legal or procedural ground. There are few certainties in the current marketplace, and legislative and judicial changes can have a significant impact that ripples its way across the industry.
One such decision by the U.S. Supreme Court has the potential to do exactly that. That decision – Jerman v. Carlisle – will certainly influence the policies, processes and procedures of debt collectors and attorneys nationwide.
In April 2010, the Supreme Court ruled in the Carlisle case that the bona fide error provision of the Fair Debt Collection Practices Act (FDCPA) does not apply to a debt collector's errors involving a mistake of law. Under the provision, a debt collector that demonstrates an FDCPA violation was not intentional and instead resulted from a bona fide error (notwithstanding the maintenance of procedures reasonably adapted to avoid any such error) is subsequently immune from liability. The Supreme Court ruling limits the extent to which this provision can be applied and, therefore, has the potential to have a significant impact on debt collectors and servicing professionals.
The Carlisle case began with a lawsuit to foreclose a mortgage encumbering property owned by Karen Jerman. The lender's counsel maintained that Jerman's debt would be assumed valid unless she disputed the debt in writing. The District Court for the Northern District of Ohio, Eastern Division found that such an assertion violates the FDCPA, and that the FDCPA does not contain such a requirement.
Although the court determined that the lender's counsel violated the FDCPA, it ultimately found the attorney was immune from liability under the bona fide error affirmative defense. Prior to the Carlisle decision, multiple appellate courts had recognized that the bona fide error defense is not restricted to mistakes of fact (i.e., clerical errors) and, in fact, also applies to mistakes of law (misinterpretations of the FDCPA's requirement) – a determination echoed in the Sixth Circuit Carlisle ruling.
The U.S. Supreme Court decision, however, reversed the Sixth Circuit decision and held that the bona fide error defense does not apply to an error in interpreting the FDCPA's requirements. The Supreme Court reasoned that "ignorance of the law" is no excuse for failing to comply with the provisions of the FDCPA, citing the failure of Congress to explicitly include mistakes of law when crafting the FDCPA statute.
Perhaps ironically, the central question of the Carlisle case – the issue of whether requiring debtors to dispute their debt in writing – was not presented on appeal and was, therefore, not addressed by the Supreme Court. Language within the FDCPA is open to interpretation on this issue, and circuit courts have been split on whether such a requirement is, in fact, an FDCPA violation.
What is uncertain – and, from the perspective of servicing professionals, potentially troubling – about the Carlisle decision is the effect it may ultimately have on law firms' clients, such as loan servicers or purchasers of debt portfolios. The unsettled legal issues at hand may have profound ongoing implications for the attorney-client relationship by potentially increasing their respective exposure to FDCPA violations.
By way of example, the Supreme Court dismissed in Carlisle the policy concern that lawyers may not be able (or would be reluctant) to act in the best interests of their clients if faced with personal liability when relying on a good-faith interpretation of the FDCPA's requirements that were subsequently rejected by the court. In doing so, the court noted that lawyers' interest in avoiding violations of the FDCPA might not always be adverse to their clients, because some courts have held a law firm's client vicariously liable for its attorney's violation of the FDCPA.
Because the exclusion of legal errors from the bona fide error defense subjects an attorney's clients to potential shared liability for the attorney's legal interpretations of the FDCPA, the Carlisle decision will almost certainly shape the policies and practices of default servicing professionals who must now consider liability issues in the context of a heightened potential for inadvertent exposure.
Although the FDCPA does not directly address the issue of whether an attorney's client is vicariously liable for the attorney's violations, federal courts that have considered the issue have concluded that an attorney's client who is deemed a debt collector under 15 U.S.C. Section 692a(6) is vicariously liable for the attorney's violation of the FDCPA.
In other words, if the attorney's client is a debt collector under the statute, it will be held accountable for its attorney's FDCPA violations. The FDCPA defines a debt collector as any person who uses any instrumentality of interstate commerce or the mails in any business, the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect directly, or indirectly, debts owed or due or asserted to be owed or due another. The FDCPA exempts creditors from the definition of "debt collector." However, lenders or their servicers that purchase post-default debts do not enjoy the creditor exemption and are subject to vicarious liability as debt collectors for FDCPA purposes.
The Tenth Circuit has previously considered the vicarious liability issue in the case of First Interstate Bank of Fort Collins NA v. Soucie. The Tenth Circuit set forth a test for determining whether a client is a debt collector as defined by the FDCPA as to be held liable for its attorney's violations of the FDCPA. The defendant asserted that the bank was vicariously liable as a principal for violations of the FDCPA by its attorney.
In response, the bank claimed that the FDCPA did not apply, because the bank was seeking to collect its own debt. The Tenth Circuit relied upon the findings in the 1994 case of Fox v. Citicorp Credit Corp. Services Inc., which held that a debt collector does not include a consumer's creditor or an assignee of a debt, provided such debt was not in default at the time of the assignment. Based upon this definition, the Tenth Circuit held that the bank, as assignee, was not a debt collector for purposes of the statute. The Tenth Circuit reasoned that the note was not in default at the time the bank acquired the note. Accordingly, the bank was a creditor, not a debt collector and, thus, could not be held vicariously liable under the FDCPA for its attorneys' violations, if there were any.
While this may provide somewhat of a silver lining from the perspective of banks, servicers are not so fortunate. For them, the context of past legal precedent is less forgiving in light of the Carlisle decision. The Ninth Circuit's conclusions reached in Fox v. Citicorp Credit Services Inc., in contrast to the Tenth Circuit's decision in First Interstate Bank of Fort Collins v. Soucie, ultimately concluded that a loan servicer could be held vicariously liable for the attorney's violations of the venue provisions of the FDCPA.
The Ninth Circuit reasoned that Congress intended the actions of attorneys be imputed to the client on whose behalf they are taken, further finding that the loan servicer is vicariously liable for the attorney's violations of the venue provision of the FDCPA if it qualified as a debt collector under the statute.
The long-term impact of this significant and potentially stifling liability expansion has yet to be seen. But in the short term, the collective sentiment from experienced servicing professionals is clear. As the law firm in Carlisle articulated when it argued its case before the U.S. Supreme Court, the concern from servicing professionals across the industry is that such a ruling will have a significant impact on creditors' access to legal representation based upon attorneys' fear of personal liability.
Although the court ultimately rejected this argument, Carlisle's elimination of the bona fide error defense for legal misinterpretations of the FDCPA's requirements by lender's counsel does leave creditors unprotected under the shared-liability concept. As a result, many creditors may feel newly, and perhaps unduly, exposed to FDCPA violations based upon their attorney's good-faith legal interpretations of unsettled law, such as the "in writing" dispute that originally sparked the Carlisle case.
Attorneys will almost certainly become more cautious in pursuing debt collection due to the potential exposure to FDCPA violations for attorneys and clients. Although the U.S. Supreme Court's decision in Carlisle and the unsettled law on the "in writing" requirement are just the latest developments in an evolving legal landscape, they are representative of the kind of profound change that turbulent times can exert on the default servicing industry, and they have the potential to present a range of new challenges and thorny issues that all responsible servicing professionals must account for in the years ahead.
Kimberly L. Martinez is an associate attorney, and Elizabeth S. Marcus is a partner, at Denver-headquartered Castle Stawiarski LLC. The multijurisdictional law firm provides legal representation in finance-, foreclosure-, bankruptcy- and mortgage-related litigation in both state and federal courts. Martinez and Marcus can be reached at (303) 865-1400, or at kmartinez@cmsatty.com or lmarcus@ cmsatty.com, respectively.
