No bona fide error defense for legal errors

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Ignorance of the law is no excuse.

Pursuant to that rule, attorneys and debt collectors in Wisconsin will no longer be able to escape liability for a violation of the Fair Debt Collection Practices Act (FDCPA) by arguing that the violation was the result of a mistaken interpretation of the law.

The U.S. Supreme Court held (PDF) on April 21 that the bona fide error defense, provided in 15 U.SC. 1692k(c), is limited to clerical or factual errors.

The Seventh Circuit has never directly decided the issue, but has assumed in several cases that the defense applied to good faith legal errors as well.

In the Supreme Court case, the law firm of Carlisle, McNellie, Rini, Kramer & Ulrich, L.P.A., filed a complaint in Ohio state court seeking foreclosure of a mortgage for its client, Countrywide Home Loans, Inc.

In fact, the defendant, Karen L. Jerman, had already paid the debt in full, and the Carlisle firm withdrew the complaint. Jerman then filed a class action against the Carlisle firm, alleging that it violated sec. 1692g because the complaint contained a notice stating that the debt would be assumed valid unless she disputed it in writing.

Whether this was an accurate statement of the law when the complaint was filed in 2006 was a question that had divided various courts that considered it.

The district court concluded that, although the notice incorrectly stated the law, it was the result of a bona fide error. The Sixth Circuit affirmed, holding that the defense extends to mistakes of law. 538 F.3d 469.

In an opinion by Justice Sonia Sotomayor, the Supreme Court reversed, with Justices Anthony Kennedy and Samuel Alito dissenting.

Sotomayor noted that the FDCPA contains an explicit exemption for any acts committed in reliance on an advisory opinion from the Federal Trade Commission.

Because there is no explicit exemption for actions based on incorrect legal advice, the court concluded that mistakes of law are not a basis for a defense from liability.

“Debt collectors would rarely need to consult the FTC if sec. 1692k(c) were read to offer immunity for good-faith reliance on advice from private counsel,” the court concluded.

The court acknowledged that the Truth in Lending Act (TILA) explicitly rejects a defense for errors of legal judgment, while the FDCPA contains none.

Nevertheless, it rejected the Carlisle firm’s argument that this indicated Congressional intent to permit the defense in FDCPA cases.

First, the court speculated that Congress may have been merely codifying existing interpretations of TILA. Second, the court found no reason why Congress would create a broader defense from FDCPA claims than from TILA claims. Finally, the court noted that Congress has never explicitly included mistake of law as a defense in any statute.

The Carlisle firm argued that the lack of a defense for mistakes of law would be unworkable and have a chilling effect on practicing law — when the law is uncertain, an attorney would have to choose between zealous representation of his client and exposing himself to liability.

But the court noted that many states, including Wisconsin, have debt collection statutes without any exemption, yet the firm presented no evidence lawyers have been stifled under those laws.

The court wrote, “To the extent debt collecting lawyers face liability for mistaken interpretations of the requirements of the FDCPA, Carlisle, its amici, and the dissent have not shown that ‘the result [will be] so absurd as to warrant’ disregarding the weight of textual authority.”

Justice Stephen Breyer wrote a concurrence, agreeing that the law presents an untenable dilemma for lawyers. But, because a lawyer faced with uncertainty can get immunity by seeking an advisory opinion from the FTC, he concurred with the lead opinion.

Justice Antonin Scalia also concurred in the result, but wrote separately to dismiss the lead opinion’s discussion of legislative intent as a “legal fiction.”

In dissent, Justice Kennedy began, “The Court … adopts a questionable interpretation and rejects a straightforward, quite reasonable interpretation of the statute’s plain terms. Its decision aligns the judicial system with those who would use litigation to enrich themselves at the expense of attorneys who strictly follow and adhere to professional and ethical standards.”

Kennedy found that the purpose of the FDCPA — guarding against abusive suits brought in bad faith — is not served by a rule that deters suits brought in good faith.

Kennedy further found the exception for attorneys who obtain an advisory opinion from the FTC to “misconceive[] the practical realities of litigation.”

In addition, the attorney’s ethical dilemma is not resolved if the FTC adopts a position unfavorable to the client. “[U]nder today’s decision, the attorney who in good faith continues to assert a reasonable position to the contrary does so at risk of personal liability. This alters the ethical balance central to the adversary system.”

Case analysis

The opinion resolves an issue the Seventh Circuit has long avoided.

Time and again, the Seventh Circuit has declared that it need not resolve the question definitively, because even if the bona fide error defense applies to legal errors, the defendants would not qualify for it. Jenkins v. Heintz, 124 F.3d 824, 834 (7th Cir. 1997); Nielsen v. Dickerson, 307 F.3d 623, 641 (7th Cir. 2002); Kort v. Diversified Collection Servs., Inc., 394 F.3d 530, 538, fn. 9 (7th Cir.2005); Seeger v. AFNI, Inc., 548 F.3d 1107, 1114 (7th Cir. 2008); and Ruth v. Triumph Partnerships, 577 F.3d 790, 803 (7th Cir. 2009).

Arguably, however, the Seventh Circuit has adopted the defense for legal errors, but simply didn’t call it that in the Kort opinion.

In Kort, the debt collector was attempting to collect on a student loan, and sent the debtors a notice prescribed by the Department of Education.

The Seventh Circuit assumed without deciding that the form did violate the FDCPA, but that adherence to the DOE form entitled the debt collector to assert the bona fide error defense.

The court likened reliance on the form to adherence to “safe harbor” language it has occasionally formulated on which debt collectors are entitled to rely on as correct. Kort, 394 F.3d at 537, citing Chuway v. Nat’l. Action Fin. Servs. Inc., 362 F.3d 944, 949 (7th Cir. 2004), et al.

However, the only explanation in the Kort opinion why reliance on a government form, or safe harbor language issued by a court would not be a legal error is a statement that, by following the DOE form verbatim, it did not exercise any legal judgment of its own and any mistake was by the DOE, rather than the debt collector.

Suppose, however, that, in some case, the U.S. Supreme Court held that “safe harbor language” issued by the Seventh Circuit incorrectly stated the law. Anyone who relied on the language would have made a legal error, not a factual or clerical one, and would be liable under the FDCPA.

In the case before the Supreme Court, for example, the law firm relied on U.S. District Court opinions that its interpretation of the law was correct.

Admittedly, that may involve more legal judgment than relying on safe harbor language from the Court of Appeals, or a notice from the Department of Education. But all three would have to be considered legal errors if the action ultimately is found to violate the FDCPA.

The Supreme Court’s opinion permits only one means to assert
the defense for legal errors — obtain an advisory opinion from the FTC.

Accordingly, while the Seventh Circuit has purportedly deferred ever deciding whether legal errors can be protected by the bona fide error defense, it arguably held they could in Kort. In light of the Supreme Court’s opinion, the continued validity of Kort is questionable.