Hyman, Cheryl L. v. Tate, Dick ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-2106
CHERYL L. HYMAN,
Plaintiff-Appellant,
v.
DICK TATE and HARRY KIRLIN, d/b/a/
TATE & KIRLIN ASSOCIATES,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 C 242—Matthew F. Kennelly, Judge.
____________
ARGUED JANUARY 22, 2004—DECIDED APRIL 1, 2004
____________
Before EASTERBROOK, MANION, and ROVNER, Circuit Judges.
MANION, Circuit Judge. Cheryl Hyman sued Dick Tate and
Harry Kirlin, doing business as Tate & Kirlin Associates (“T
& K”), alleging that the defendants violated the Fair Debt
Collection Practices Act, 15 U.S.C. §§ 1692 et seq. (“FDCPA”)
by sending her a collection letter after she had filed for
bankruptcy. Following a bench trial, the district court found
that even if the defendants had violated the terms of the
2 No. 03-2106
FDCPA, they were protected from liability by the bona fide
error defense. Hyman appeals. We affirm.
I.
Cheryl Hyman incurred a credit card debt to Cross
Country Bank in the amount of $427.61. On January 14,
2000, Hyman filed a Chapter 13 bankruptcy petition, listing
the debt owed Cross Country Bank, but incorrectly listing it
in the amount of $437.61. On September 7, 2001, Cross
Country Bank referred Hyman’s debt to T & K for collec-
1
tion. On September 11, 2001, T & K sent Hyman a collection
letter for the $427.61 owed Cross Country Bank. The letter
advised Hyman that she had the right to dispute the
validity of the debt and to request and obtain verification of
the debt. At the time T & K sent the letter to Hyman, it did
not know that she had filed for bankruptcy. On October 2,
2001, Hyman telephoned T & K and informed an employee
that she had filed for bankruptcy. The collector who took
the call asked Hyman the case number, the chapter under
which she had filed the case, and her attorney’s name. T &
K quickly closed Hyman’s account and did not make any
further collection attempts.
Nonetheless, Hyman filed a complaint against T & K,
2
alleging violations of §§ 1692e and 1692f of the FDCPA.
15 U.S.C. §§ 1692(e), (f). T & K asserted the “bona fide error”
1
The Social Security number provided to T & K also differed
from the one used in the bankruptcy filing, although it is unclear
whether that was due to a mistake by the bank or Hyman.
2
Hyman also alleged a claim under § 1692c(a)(2), but later with-
drew that claim.
No. 03-2106 3
defense under § 1692k(c) of the FDCPA. After denying
cross-motions for summary judgment, the district court held
a bench trial.
At trial, the district court heard testimony that T & K
trains its employees in collection procedures and the re-
quirements of the FDCPA, including telling its collectors
that once they learn a debtor has filed for bankruptcy, all
collection activities must stop. At trial, T & K also explained
that although there was no formal agreement with Cross
Country Bank, it understood that the bank would not
forward accounts for collection where the debtor had filed
for bankruptcy. Moreover, T & K’s general manager, Gerald
Smith, testified that creditors would not refer such accounts
for collection because it would not be in their best business
interests to do so. Smith further testified that three primary
sources provide notice of a bankruptcy filing: the bank-
ruptcy court, a debtor’s call or letter, or the creditor-client.
Based on this testimony, the district court concluded that
even if T & K’s collection letter technically violated the
FDCPA because it was sent after her bankruptcy filing, it
was a “bona fide error,” an affirmative defense under the
FDCPA. Accordingly, the district court ruled in favor of the
defendants on Hyman’s FDCPA claims. Hyman appeals.
II.
Although Hyman sued T & K for violations of §§ 1692e
and 1692f of the FDCPA, on appeal Hyman concedes that
her § 1692f claim is not viable under this court’s ruling in
Turner v. J.V.D.B. & Associates, Inc., 330 F.3d 991 (7th Cir.
4 No. 03-2106
3
2003). However, Hyman claims that the district court erred
in rejecting her § 1692e claim.
Section 1692e prohibits a debt collector from using “any
false, deceptive, or misleading representation or means in
connection with the collection of any debt.” 15 U.S.C.
§ 1692e. In her complaint, and at trial, Hyman maintained
that T & K’s collection letter for payment of a $427.61 credit
card debt violated § 1692e because that claim was barred by
her bankruptcy filing. Without definitively deciding that the
collection letter was a violation of § 1692e, the district court
concluded that, even if it was, T & K was protected from
liability by the “bona fide error” defense of § 1692k(c) of the
FDCPA. That section provides:
A debt collector may not be held liable in any action
brought under this subchapter if the debt collector
shows by a preponderance of evidence that the violation
was not intentional and resulted from a bona fide error
notwithstanding the maintenance of procedures reason-
ably adapted to avoid any such error.
15 U.S.C. § 1692k(c).
On appeal, Hyman does not challenge the district court’s
finding that the error was “not intentional” and instead
“resulted from a bona fide error.” Rather, Hyman argues
that the district court erred in finding that the defendants
had maintained “procedures reasonably adapted” to avoid
the erroneous mailing of collection letters to accounts in
bankruptcy.
3
In Turner, this court held that § 1692f, which prohibits a debt
collector from using “unfair or unconscionable means to collect
or attempt to collect any debt,” is not violated where a collector
merely mails a letter to a consumer, noting that a debt had been
referred to it for collection, even though the debt had previously
been discharged in bankruptcy. Id. at 997-98.
No. 03-2106 5
Following a bench trial, we review the district court’s
findings of fact for clear error. Reynolds v. Commissioner of
Internal Revenue, 296 F.3d 607, 612 (7th Cir. 2002). In this
case, the district court found that T & K had in place
reasonable procedures to avoid such erroneous collection
efforts, namely “reliance on its creditor not to refer debtors
who are in bankruptcy, and immediate cessation of collec-
tion efforts once T & K learns of a bankruptcy filing.” Trial
evidence supports this finding. Gerard Smith, T & K’s
General Manager, testified that T & K had an understanding
with Cross Country that the bank would not refer accounts
for collection if those accounts were in bankruptcy. Smith
also testified that upon learning that an account was in
bankruptcy, the account is cancelled that day or the next
business day at the latest, and that, in this case, Hyman’s
account was removed from collection within one minute of
her call.
Hyman responds by arguing that the district court’s
finding was clearly erroneous because Smith conceded at
trial that he had never specifically discussed the issue of
bankruptcy accounts with anyone at Cross Country and
because no one at Cross Country told him that they would
not send over accounts on which a bankruptcy petition had
been filed. But Smith also emphasized the obvious—that no
client would send them “bankruptcy accounts because that
is just not good business to do that.” Additionally, Smith
testified that if Cross Country at some point received infor-
mation that an account previously referred was in bank-
ruptcy, the bank would promptly notify T & K. Because
forwarding bankrupt accounts was not only a bad business
practice but also because Cross Country would immediately
notify T & K if an account in bankruptcy slipped through,
the district court could reasonably conclude that the bank
would not intentionally forward accounts in bankruptcy in
the first instance. Moreover, the defendants presented
6 No. 03-2106
evidence that of the accounts referred to it for collection,
only .01% of those accounts were later found to have been
in bankruptcy. Given this evidence, the district court did not
commit clear error in concluding that T & K reasonably
relied on Cross Country not to forward accounts in bank-
ruptcy.
Hyman next argues that T & K could not merely rely
on the bank not to forward accounts in bankruptcy. Instead,
Hyman asserts that prior to mailing collection letters, T & K
had to establish its own proactive procedure (such as
checking the bankruptcy records or using the on-line service
of “Banko”) to assure that the accounts forwarded for
collection were not in bankruptcy. However, the FDCPA
does not require collectors to independently verify the
validity of the debt to qualify for the “bona fide error”
defense. See 15 U.S.C. § 1692k(c). Cf. Jenkins v. Heintz,
124 F.3d 824, 834-35 (7th Cir. 1997) (collector qualified for
“bona fide error” defense where it had in place procedures
to prevent violations of the FDCPA, and the collector was
not required to independently investigate and evaluate
the validity of forced placed insurance charges); Smith v.
Transworld Sys., Inc., 953 F.2d 1025, 1032 (6th Cir. 1992)
(concluding that the “bona fide error” defense does not re-
quire a collector to conduct an independent investigation of
the debt referred for collection). Therefore, the district court
did not commit clear error in finding that T & K had
adequate procedures in place, first by relying on Cross
Country not to forward accounts in bankruptcy, and then by
assuring that any accounts mistakenly referred for collection
were promptly removed from the collection list. See Turner,
330 F.3d at 996 (the defendant “could also show that it had
taken reasonable preventive measures to avoid such
mistakes (such as an agreement with its creditor-clients that
debts are current and the demand letter was sent soon after
the assignment)”).
No. 03-2106 7
Although T & K could have done more to assure that
bankruptcy proceedings had not been initiated, § 1692k(c)
only requires collectors to adopt reasonable procedures, and
as the district court found, it would not be reasonable to
require T & K to independently confirm that the accounts
forwarded by the bank were not in bankruptcy, where the
bank, in the first instance, limited the accounts forwarded to
those not in bankruptcy. Mistakes can occasionally happen,
but, as the district court further found, it would cost T & K
about $1.5 million per year to request a credit report on
every account referred to it for collection. As it is, even
without such an expensive review system, only .01% of all
accounts referred are later learned to be in bankruptcy.
Moreover, any potential harm to the debtors is slight, given
that T & K also has procedures in place to assure that
accounts in bankruptcy are promptly removed from their
collection lists. Under these circumstances, the district court
did not commit clear error in concluding that T & K was not
required to independently research each account for
bankruptcy filings before sending collection letters. Accord-
ingly, the district court’s further findings that T & K insti-
tuted reasonable procedures to avoid such errors, and that
T & K were entitled to the “bona fide error” defense, were
not clearly erroneous.
III.
Hyman should not have received a collection letter from
T & K because she had filed for bankruptcy. However,
rather than violating the FDCPA, T & K’s conduct in this
case illustrates the proper functioning of the FDCPA:
The collection letter provided Hyman with the information
necessary for her to understand her rights and to stop col-
lection activities in the event an unintentional error oc-
curred. All it took from Hyman was a quick telephone call
8 No. 03-2106
and T & K immediately rectified the error. Based on these
facts, the district court properly found that T & K’s mistake
was a bona fide error and that the defendants were not
liable under the FDCPA. We AFFIRM.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—4-1-04