Sepulvado v. CSC Credit Services, Inc. , 158 F.3d 890 ( 1998 )

Revised November 10, 1998
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 97-50423
EDWARD C. SEPULVADO; SHEREE D. SEPULVADO,
Plaintiffs - Appellees-Cross-Appellants,
VERSUS
CSC CREDIT SERVICES, INC.; ET AL.,
Defendants,
CSC CREDIT SERVICES, INC.,
Defendant - Appellant-Cross-Appellee.
Appeals from the United States District Court
for the Western District of Texas
October 23, 1998
Before KING, EMILIO M. GARZA, and DeMOSS, Circuit Judges.
DeMOSS, Circuit Judge:
CSC Credit Services, Inc. (CSC) appeals from judgment entered
in favor of plaintiffs Sheree and Edward Sepulvado, after a bench
trial, in this matter brought pursuant to the Fair Credit Reporting
Act, 15 U.S.C. §§ 1681 - 1681(t). We reverse, and render judgment
in favor of the defendant, CSC.
BACKGROUND
The Sepulvados' claim that an erroneous credit item on a
report prepared by CSC caused Texas Homestead Mortgage Company
(Texas Homestead) to deny them a mortgage for the purchase of a new
home. The material facts relating to the parties’ conduct are
essentially undisputed.
I. The Prior Foreclosure and the New Purchase
In 1984, Edward and Sheree Sepulvado purchased a home. In the
summer of 1988, the Sepulvados were unable to make timely payments.
In July 1988, the mortgage lender, the now-defunct University
Savings, foreclosed on the home. University Savings sold the home
for less than was owed by the Sepulvados, which created a
deficiency on their account of $12,333. Sometime around June 1989,
University Savings reported the foreclosure to certain credit
reporting agencies, including the defendant CSC. University
Savings did not report any deficiency at that time.1 In July 1989,
University Savings notified the Sepulvados that they were
responsible for the $12,333 deficiency and attempted collection by
a form letter dated July 21, 1989. The Sepulvados never paid the
deficiency, and University Savings did not reduce the obligation to
1
The record contains the form filed by University Savings
to report the foreclosure to CSC. That form does not mention any
deficiency. The record also contains credit reports from two other
credit reporting agencies that were issued in June 1989. Although
those reports reflect the foreclosure, neither report indicates
that there was any deficiency associated with the foreclosure.
2
judgment by commencing legal action.
Under the provisions of the Fair Credit Reporting Act, the
Sepulvados foreclosure and the resulting deficiency could have been
reported on their credit for a period of seven years. See 15
U.S.C. § 1681c(a). The Sepulvados knew this, and for more than six
years lived in rental property while waiting for the foreclosure to
drop off of their credit report. Then in March 1995, approximately
six years and eight months after the foreclosure, the Sepulvados
signed an earnest money contract to purchase a new home. The
Sepulvados were referred by the builder to Texas Homestead to
finance that purchase.
II. The Mortgage Application
The Sepulvados informed the Texas Homestead loan officer,
Wendy Jamison, about the earlier University Savings foreclosure.
The Sepulvados did not inform Ms. Jamison about the deficiency
resulting from the foreclosure. Ms. Jamison told the Sepulvados
not to include any information about the foreclosure on their
application.2 That advice was apparently based upon the
2
This fact was disputed at trial. Ms. Jamison conceded
that the Sepulvados told her about the foreclosure during the
application process, but denied that she told them to omit the
information from their application. Her testimony at trial was
contrary to Mrs. Sepulvado’s testimony. The district court
resolved the factual dispute in favor of the Sepulvados. On the
basis of the entire record, that finding is not clearly erroneous.
See Stevenson v. TRW Inc., 987 F.2d 288, 292 (5th Cir. 1993).
3
possibility that the foreclosure had already been removed from
their credit report, or would be removed before the purchase of the
new home was closed. Ms. Jamison also told the Sepulvados that
Texas Homestead might approve the mortgage even if the aging
foreclosure appeared on the credit report, provided that their
credit report was otherwise as they had represented it in the
application. Once again, there was no conversation concerning
either the existence of the deficiency or the effect that a
deficiency would have on their application. The Sepulvados did not
include any information about the foreclosure in the Texas
Homestead application, although that information was clearly called
for by the language of the application.
III. The Negative Credit Report
On or about March 13, 1995, Texas Homestead obtained a credit
report on the Sepulvados from Advanced Credit Technology (ACT).
The report contained an entry that was ultimately determined to be
related to the deficiency created by the 1988 University Savings
foreclosure. On its face, however, the ACT entry indicated that
Mr. Sepulvado owed $12,333 on an account with an “open date” of
March 1994, and that no payments had ever been made.
ACT retrieved the information made the basis of that entry
from a database maintained and provided by Equifax. Equifax is an
4
affiliate of the defendant, CSC.3 ACT made certain material
changes to the CSC entry before sending its own report to Texas
Homestead. For example, whereas the ACT entry reported an “open
date” of March 1994, the CSC entry reported that an obligation in
the amount of $12,333 had been “assigned” to “CSC/TCCP” in March
1994.4.5 At trial, ACT President James Fuchs confirmed that the
3
CSC stipulated at trial that ACT had access to the
Equifax database. The record is otherwise silent with regard to
the precise relationship between Equifax and CSC. Neither ACT, who
provided the report relied upon by Texas Homestead, nor Equifax,
who provided the database accessed by ACT, were sued in this
litigation.
4
Neither the ACT report submitted to Texas Homestead nor
the CSC report from which ACT derived its own entry are in the
record. The district court’s order drew its description of the ACT
entry from Plaintiff’s trial exhibit 1. Plaintiff’s exhibit 1
contains two documents, one of which is an updated and amended ACT
report that was issued about one month after the original report to
Texas Homestead, and one of which is a notice in letter form that
ACT sent directly to the Sepulvados. The two documents contain
slightly different versions of the entry, and neither of those
versions correspond exactly with the rendition given in the
district court’s order. Nonetheless, the district court found, and
the parties do not dispute that the ACT entry contained the
following information:
Account Designation A; Creditor TCCP; Account Number
1150; Open Date 03/94; Report Date 03/95; High Credit
$12333; Last Activity 03/94; Balance $12333; Months past
due $12333; Late Payments COLLECT; Comment: For Telacu
Carpenter Coll Partners, Date of last activity 03/94;
Collection For; TCCP Texas; Unpaid, 07/94; 713-918-5756
Sharon Rice.
The district court’s order drew its description of the CSC
entry from Plaintiff’s exhibit 2. That document is a credit report
issued by CSC in July 1995, several months after ACT retrieved the
CSC entry from the Equifax database. Nonetheless, the district
court found, and the parties do not dispute, that the CSC entry
contained the following information:
5
information ACT retrieved from credit repositories was often
reformatted before the issuance of an ACT report.
When Texas Homestead received the ACT report, Ms. Jamison read
the described entry to reflect that the Sepulvados had taken out a
$12,333 loan in March 1994, and then immediately defaulted without
making any payments. Ms. Jamison informed Mrs. Sepulvado that the
mortgage would not be approved as long as the outstanding account
remained on the credit report. Testimony from both Ms. Jamison and
a mortgage banker produced by the defense established that mortgage
lenders will not approve a mortgage when there is a collection item
reported on the credit report. In making that decision, industry
practice requires that the mortgage lender be guided primarily by
information on the face of the credit report, rather than by any
explanatory statements that might be provided by the applicant.
Accordingly, Ms. Jamison further informed Mrs. Sepulvado that
neither Texas Homestead nor Ms. Jamison herself could assist the
COLLECTION REPORTED 07/94; ASSIGNED 03/94 TO CSC/TCCP
(713) 918-5799 CLIENT-TCCP TEXAS; AMOUNT-$12,333; UNPAID
07/94; BALANCE-$12,333 07/94 DATE OF LAST ACTIVITY 03/94;
INDIVIDUAL; ACCOUNT NUMBER 1150.
Although there is no sound basis in the record for verifying the
precise format or content of either entry, there is no active
dispute about the material content of either entry, and therefore,
no basis for finding the district court’s rendition of those
entries clearly erroneous. Stevenson, 987 F.2d at 292 (“Our
standard of review is deferential to the district court. We uphold
findings of fact unless we are left with the firm and definite
conviction that they were ‘clearly erroneous.’").
6
Sepulvados with regard to removing the negative entry. Rather, Ms.
Jamison encouraged the Sepulvados to contact the creditor and the
credit reporting agency to determine whether the entry was being
erroneously reported.
Near the same time, ACT also sent the Sepulvados a letter
informing them that adverse credit history had been reported to
Texas Homestead. The letter contained a version of the ACT entry
which showed an outstanding collection item in the amount of
$12,333. Although the letter reported that Texas Homestead had
requested additional information about the item, the undisputed
testimony at trial, from both the President of ACT and Ms. Jamison,
was that Texas Homestead never instigated any request for
information from ACT.
IV. The Sepulvados’ Attempts to Clear their Credit Report
The Sepulvados began their investigation by calling the number
listed for “CSC/TCCP” in the credit report. As suggested by the
entry, TCCP is also affiliated with CSC. TCCP was formed in
January 1994 as a partnership between CSC and the Resolution Trust
Corporation (RTC) for the purpose of collecting mortgage
foreclosure debts. The CSC entry at issue in this case was
submitted by the RTC when the debt was assigned by the RTC to
“CSC/TCCP” in March 1994.6 Thus, defendant CSC was in the peculiar
6
There is no evidence that the deficiency was ever
reported against the Sepulvados’ credit prior to that time.
7
position of acting as both the creditor and the credit reporting
agency with respect to the objectionable entry.
That duplicity was compounded by the fact that CSC apparently
maintained little, if any, functional separation between the credit
reporting division and the collection division. When Mrs.
Sepulvado called the number provided in the entry for CSC/TCCP on
March 14, she was transferred to CSC employee Mark Lewis. Mr.
Lewis represented to the Sepulvados that he was in a position to
change their credit reports. Mr. Lewis was also attempting to
collect the debt.7 After some investigation, Mr. Lewis told Mrs.
Sepulvado that the entry related to the $12,333 deficiency
resulting from the 1988 University Savings foreclosure. Mr. Lewis
did not explain to Mrs. Sepulvado why CSC was entitled to collect
on that debt.
The following day, March 15, 1995, Mrs. Sepulvado called Mr.
Lewis and offered to settle the account for ten percent of the
deficiency owed. Mr. Lewis rejected the offer, but countered that
CSC would accept fifty percent of the deficiency. Mrs. Sepulvado
rejected the counteroffer and the conversation was ended.
On March 16, 1995, Mr. Sepulvado contacted Mr. Lewis and
explained that the entry on the credit report was inaccurate
because it did not reflect that the obligation arose from a 1988
7
Mr. Lewis was an employee of CSC’s collection division.
Whatever internal separation may have existed between CSC’s
collection division and its reporting division, CSC has not argued
that it is not bound by the actions of its agent, Mark Lewis.
8
mortgage foreclosure. Mr. Lewis responded that CSC could report
the item “in any manner [CSC] saw fit,” that the entry could “be
reactivated any time,” and that CSC could report the item for the
rest of the Sepulvados’ lives if it saw fit. Mr. Lewis also
informed Mr. Sepulvado that the entry would continue to impede
their attempts to get a new mortgage. In spite of Mr. Sepulvado’s
request that the entry be amended to reflect that the obligation
related to a 1988 mortgage foreclosure and resulting deficiency,
Mr. Lewis did not supplement the entry to reflect those facts, did
not inform Mr. Sepulvado that he had a right to supplement the
report with his own statement about the debt, and did not make any
notation in the credit report that the obligation was disputed.
On April 10, shortly before the final mortgage decision by
Texas Homestead, Mrs. Sepulvado called CSC directly for the last
time to complain again that the CSC entry was inaccurate because it
led the mortgage company to believe that the $12,333 entry related
to a 1994 personal loan rather than a 1988 mortgage foreclosure.
Once again, CSC refused to correct or supplement the entry to
indicate that the obligation actually arose from the 1988
foreclosure.
9
V. Rejection of the Mortgage Application and
Subsequent Efforts to Obtain Documentation
The Sepulvados informed Texas Homestead, through Ms. Jamison,
that the negative item related to the 1988 University Savings
foreclosure. That information from the Sepulvados was of minimal
effect. Following industry practice, Texas Homestead made its
decision on the basis of the credit report, rather than anecdotal
or explanatory information from the Sepulvados. The Sepulvados’
application was formally denied on or about April 11, 1995. Texas
Homestead issued a letter stating that the decision was made on the
basis of negative credit entries, but Ms. Jamison told the
Sepulvados that the rejection of their application was primarily
due to the $12,333 collection item.
After the mortgage was declined, the Sepulvados continued in
their efforts to obtain information about the objectionable entry,
this time with the aid of their attorney. On April 12, the
Sepulvados’ attorney called Mr. Lewis and requested documentation
confirming the Sepulvados’ debt. On April 26, having received no
response, the attorney renewed that request. Mr. Lewis responded
by fax the same day, sending (1) a copy of the form letter sent to
the Sepulvados by University Savings in July 1989, and (2) a copy
of a form that may have been executed when the mortgage was opened,
which shows the applicable interest rate and the schedule of
payments due under the contract. Mr. Lewis did not send, although
CSC had a complete file on the foreclosure in its possession,
10
documentation explaining how the deficiency was calculated or
documentation demonstrating that CSC was authorized to collect the
debt.
On May 12, the attorney contacted Mr. Lewis again, explaining
that thirty days had elapsed without an adequate response to the
Sepulvados’ request for documentation of the loan and CSC’s right
to collect. Around that time, CSC sent one additional document.
The source of this document is not immediately clear. However, it
reflects that the Sepulvados’ outstanding balance at the time of
foreclosure was $48,333.65, and that University Savings received a
bid on the property of $45,000. Whatever else it may have proved,
that documentation did nothing to establish the validity of a
$12,333 deficiency on the Sepulvados’ property.
VI. The Lawsuit
The Sepulvados brought this suit pursuant to the Fair Credit
Reporting Act, 15 U.S.C. § 1681 - 1681(t), alleging that the CSC
entry made the basis of the ACT entry was inaccurate and
misleading. Specifically, the Sepulvados claimed that CSC failed
to maintain reasonable procedures to assure “maximum possible
accuracy” in its report, in violation of 15 U.S.C. § 1681e(b),
failed to comply with the statutory procedure for reinvestigating
the accuracy and completeness of an entry, in violation of
15 U.S.C. § 1681i, and failed to provide adequate documentation
concerning the entry when requested, in violation of 15 U.S.C.
11
§ 1681g. The Sepulvados further claimed that CSC’s negligent
violation of the Fair Credit Reporting Act caused them to lose the
opportunity to buy their dream home, which resulted in mental
anguish and will cause them to pay a higher interest rate if they
ever choose to buy another home.
After the matter was tried to the bench, the district court
entered judgment in favor of the Sepulvados. CSC appealed. On
appeal, CSC argues that the district court unfairly held it liable
on the basis of language that appeared in the ACT report, but not
the CSC report. CSC also claims that its own report was neither
inaccurate nor misleading, and that the district court’s award of
damages was not supported by sufficient evidence.
The Sepulvados respond that CSC’s report was inaccurate
because it failed to disclose that the $12,333 obligation assigned
in 1994 actually arose in 1988. The Sepulvados also filed a cross-
appeal, in which they argue that the district court erred by
failing to award additional compensatory damages and punitive
damages.
To the limited extent that our review requires a
reconsideration of the district court’s fact findings, our review
is for clear error only. Stevenson, 987 F.2d at 292. We review
the district court’s conclusions of law de novo. Hammack v. Baroid
Corp., 142 F.3d 266, 270 (5th Cir. 1998).
12
CSC’S LIABILITY
The Fair Credit Reporting Act requires “consumer reporting
agencies [to] adopt reasonable procedures for meeting the needs of
commerce for consumer credit . . . in a manner which is fair and
equitable to the consumer.” 15 U.S.C. § 1681. The Act defines a
complex set of rights and obligations that attend the relationships
among and between the provider of a credit report, the user of that
information and the consumer who is made the subject of such a
report. The Act also provides remedies for negligent or willful
failure to comply with the requirements of the Act. See id.§§ 1681n, 1681o.
The district court based its finding of liability upon
§ 1681e(b). Section 1681e(b) provides that a consumer reporting
agency must use “reasonable procedures to assure maximum possible
accuracy” when preparing a consumer report. Id. § 1681e(b); see
also Pinner v. Schmidt, 805 F.2d 1258, 1262 (5th Cir. 1986)
(Section 1681e(b) “imposes a duty of reasonable care in the
preparation of a consumer report.”). A credit entry may be
“inaccurate” within the meaning of the statute either because it is
patently incorrect, or because it is misleading in such a way and
to such an extent that it can be expected to adversely affect
credit decisions. See Pinner, 805 F.2d 1258 (finding violation of
§ 1681e(b) where, notwithstanding consumer reporting agency’s
actual knowledge of the true facts, it marked a credit entry
13
“litigation pending” without specifying that it was the
plaintiff/obligor who had initiated suit against the creditor).
But the Fair Credit Reporting Act does not impose strict liability
for inaccurate entries. Rather, the plaintiff must show that the
inaccuracy resulted from a negligent or willful failure to use
reasonable procedures when the report was prepared. Thompson v.
San Antonio Retail Merchants Assoc., 682 F.2d 509, 513 (5th Cir.
1982).
The district court concluded that CSC failed to use reasonable
procedures when preparing the entry that reflected the $12,333
deficiency. The district court first found that CSC’s consumer
report was, in all material respects, correct. The district court
concluded, however, that CSC’s report was incomplete because it did
not reveal (1) that University Savings was the original debtor on
the assigned obligation, and (2) that the “assigned” debt dated
back to a 1988 mortgage foreclosure. The district court further
concluded that CSC’s failure to include these details about the
assigned debt rendered the CSC report so misleading that it was
“inaccurate” within the meaning of the statute. Finally, the
district court concluded that the inaccuracy was caused by CSC’s
failure to adopt reasonable procedures because CSC could have
easily eliminated any ambiguity by simply supplying additional
information about the nature of the $12,333 entry.
14
We disagree. CSC’s report may have been incomplete, but it
was not, as the district court found, facially misleading or
inaccurate when prepared. CSC’s use of the term “assigned” (as
compared to the phrase “open date” in ACT’s report) would have
placed a creditor on notice that the obligation existed before the
March 1994 assignment date.
The Sepulvados attempt to support the judgment by arguing that
completeness, as a principle separate and apart from whether a
particular entry or report is misleading, may also lead to
liability under § 1681e(b). In support of that proposition, the
Sepulvados cite Koropoulos v. Credit Bureau, Inc., 734 F.2d 37(D.C. Cir. 1984). While it is true that Koropoulos recognizes
completeness as an aspect of accuracy under § 1681e(b), that case
also suggests that only a truly extraordinary case would justify
liability on the basis of an incomplete, but not misleading, credit
report. See id. at 45. Indeed, Koropoulos states that it may
often be a reasonable procedure within the meaning of the Act to
rely upon the potential creditor or the credit applicant to supply
information that is alleged to have been omitted from a credit
entry that was incomplete, but otherwise accurate, when it was
prepared. Koropoulos, 734 F.2d at 45.
We decline, at least in this case, to construe § 1681e(b) in
a way that would require completeness without regard to whether the
disputed entry was misleading. To frame the issue this way would
15
require the Court to choose in this case between a rule that
consumer reporting agencies may not report an assignment or
secondary collection effort without independently investigating and
then reporting on the details of the underlying obligation, and a
rule that they are always excused from doing so. Such an approach
ignores both the statutory balance adopted in the “reasonable
procedures” language of § 1681e(b) and the effect of other
statutory procedures, which are intended to govern the resolution
of a consumer dispute about the content or completeness of an
entry. See generally 15 U.S.C. § 1681i. We hold that CSC did not
negligently fail to follow reasonable procedures when preparing the
credit entry that reported the $12,333 deficiency.8 Therefore, CSC
8
At trial, the Sepulvados claimed both that the CSC entry
was inaccurate, in violation of § 1681e(b), and that CSC failed to
respond appropriately once they registered their disagreement with
the content of the entry, in violation of certain provisions of
§ 1681i and § 1681g of the Fair Credit Reporting Act. See id.
§ 1681i(a)(5) (requiring the agency to promptly delete or modify
information that is unverifiable or incomplete); id. § 1681i(a)(3)
(requiring the agency to provide written notice concerning the
disposition of the dispute within five days); id. § 1681i(a)(6)
(requiring written notice of results of reinvestigation); id.
§ 1681i(a)(6)(B)(iv) (requiring the agency to provide notice that
the consumer has the statutory right to supplement the disputed
information with the consumer’s own statement disputing the
accuracy or completeness of the report); id. § 1681i(b) & (c)
(permitting the consumer to supplement the entry with a statement
setting forth the nature of the dispute); id. § 1681i(c) (requiring
that the consumer’s own statement be carried forward with the
entry). The district court found that the Sepulvados failed to
prove a violation of § 1681i or § 1681g, and that CSC was entitled
to judgment as to those claims. On appeal, the Sepulvados have
failed to brief, and therefore abandoned, any claim that the
district court’s disposition of their claims under § 1681i or §
1681g is error. See, e.g., MacArthur v. University of Texas Health
16
did not violate § 1681e(b) of the Fair Credit Reporting Act.
Without liability there can be no damage award, and we need not
review those damage issues raised by CSC on appeal and by the
Sepulvados in their cross-appeal.
For the foregoing reasons, the district court’s judgment in
favor of plaintiffs Edward C. and Sheree D. Sepulvado is REVERSED,
and judgment is RENDERED in favor of defendant CSC Credit Services,
Inc.
REVERSED AND RENDERED.
Ctr., 45 F.3d 890, 895 (5th Cir. 1995). We therefore express no
opinion concerning whether CSC’s conduct once the Sepulvados
registered their disagreement with the content of the entry
violated the Fair Credit Reporting Act.
17