The recent Ninth Circuit decision, Gonzalez v. Arrow Financial Services, LLC, — F.3d —, 2011 WL 4430844 (9th Cir Sept. 23, 2011), addresses several issues relating to claims brought under the Fair Debt Collection Practices Act (“FDCPA”) and examines that statute’s interaction with the corresponding California debt collection statute, the Rosenthal Act.
Defendant and Appellant, Arrow Financial Services (“Arrow”), is in the business of buying and collecting consumer debt. In 2002, Arrow purchased a portfolio of debt comprised of receivables more than seven years old. The age of the purchased debt is significant because the Fair Credit Reporting Act (“FCRA”) prohibits any adverse credit report associated with a debt that is more than seven years old, deemed “obsolete.”
In 2004, Arrow attempted to collect on the debts in the portfolio by sending similar notifications to the 40,000 corresponding California debtors. The relevant portions of the collection notice sent to the named plaintiff (and typical of those sent to unnamed class members), informed him that he owed a “Past Due Balance” and further stated (relevant portions underlined):
At this time we are willing to settle your past due account for 50% of the full balance and accept this amount as settlement of the referenced account. The settlement amount must be made in one payment and received by our office on or before May 28, 2004. * * * Settlement Amount $276.48 You Save $276.49 * * * Upon receipt of the settlement amount and clearance of funds, and if we are reporting the account, the appropriate credit bureaus will be notified that this account has been settled. Please mark the appropriate box below.
The referenced “box below” stated that:
1. [ ] Enclosed find payment for the above-stated settlement amount. By depositing this payment in the sum of $276.48, you have accepted this as settlement. When my funds clear, and if you are reporting the account, you will notify the appropriate credit bureaus of this settlement.
The notice also stated: “Please see reverse side for important information.” The “important information” was the following:
NOTICE TO CALIFORNIA RESIDENTS: As required by law, you are hereby notified that a negative credit report reflecting on your credit record may be submitted to a credit reporting agency if you fail to fulfill the terms of your credit obligations.
After conducting an investigation, the named plaintiff, Gonzalez, learned that the outstanding debt could not be reported to a credit agency because it was more than seven years old. Accordingly, he filed a class action lawsuit alleging that the notice that he, and approximately 40,000 other Californians, received violated the FDCPA as well as California’s parallel statute, the Rosenthal Act. After certifying the class, the district court granted the plaintiffs’ summary judgment motion finding liability on both claims and held a separate jury trial to determine the amount of damages. The jury awarded Gonzales $250 on the FDCPA claim and an additional $250 on the Rosenthal Act claim. It awarded the unnamed class members a total of $112,500 on the FDCPA claim and $112,500 on the Rosenthal Act claim for a grand total of $225,500 in class damages. The decision does not elaborate on how the jury arrived at the total class award.
On appeal, Arrow first challenged the district court’s ruling that it had violated two subsections of the FDCPA, Section 1692e(5) and (10). In general, Section 1692e prohibits the use of “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” The Ninth Circuit first articulated the general standard used to determine whether conduct violates Section 1692e. Under that standard, the court conducts “an objective analysis that takes into account whether the least sophisticated debtor would likely be misled by a communication.” Id. at *3 (quotations omitted). This “standard is lower than simply examining whether particular language would deceive or mislead a reasonable debtor.” (quotations). Rather, the “standard is designed to protect consumers of below average sophistication or intelligence, or those who are uninformed or naive, particularly when those individuals are targeted by debt collectors.” (quotations).
In affirming Arrow’s liability under Subsection 1692e(10) of the FDCPA, which specifically prohibits the “use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer,” the court first recognized that “it is well established that [a] debt collection letter is deceptive where it can be reasonably read to have two or more different meanings, one of which is inaccurate.” As such, under the least sophisticated consumer standard, the phrase “if we are reporting the account, the appropriate credit bureaus will be notified that this account has been settled” suggests two possibilities, only one of which was true. The phrase could be interpreted to mean “that Arrow was not reporting the debt to a credit reporting agency, and would accordingly make no further report in the event of settlement” or, that “under some set of circumstances applicable to the recipient, Arrow could and would report the account.” As noted above, this second possibility would be false because “there is no circumstance under which Arrow could legally report an obsolete debt [more than seven years old] to a credit bureau” and, accordingly, “the implication that Arrow could make a positive report in the event of payment is misleading.” Id. at *4.
Next, Arrow challenged the district court’s finding of liability under Subsection (5) which prohibits a debt collector from making a “threat to take any action that cannot legally be taken or that is not intended to be taken.” 15 U.S.C. § 1692e(5). A threat, according to the court, need not be overt to fall within this provision. As such, again applying the least sophisticated consumer standard, the court determined that “Arrow’s letters, read as a whole, would be interpreted by the least sophisticated debtor as threatening to report (or continue to report) obsolete debts.”
Thus, despite Arrows argument that “the letters promise only to make a ‘positive’ report indicating full payment of the debt once payment cleared,” the logical implication would be that, setting aside the fact that no report could be made on these debts, “Arrow could only make a ‘positive’ report if it had already placed, or would shortly place, a report of the obsolete debt in the debtor’s file. Such a report would be ‘negative’—it would show that the debt was delinquent and unpaid.” The court of appeals also noted that one of the letters specifically stated “that a negative credit report reflecting on your credit record may be submitted to a credit reporting agency if you fail to fulfill the terms of your credit obligations.” Such statements, whether express or implied, constituted an impermissible threat under the FDCPA.
The court next proceeded to address Arrow’s argument that that the California analog to the FDCPA, the Rosenthal Act, did not permit recovery via a class action. The Rosenthal Act as initially enacted expressly limited recovery to only individual actions. However, a 1999 amendment to the Rosenthal Act states that “[n]otwithstanding any other provision of this title, every debt collector collecting or attempting to collect a consumer debt shall comply with the provisions of Sections 1692b to 1692j, inclusive, of, and shall be subject to the remedies in Section 1692k of” the FDCPA. Section 1692k permits class relief of actual or statutory damages. Thus, the Ninth Circuit interpreted the Rosenthal Act amendment language, “notwithstanding any other provision of this title,” to indicate legislative intent to supercede the previous bar to class actions and, instead, permit recovery through a class device as provided by Section 1692k. The court also noted that the legislative history and holdings by several California district courts were in accord with that interpretation.
Finally, the court rejected Arrow’s challenge to the jury instruction permitting a cumulative award of statutory damages under both the FDCPA and the Rosenthal Act. Id. at *7. The court first considered whether the FDCPA would preempt simultaneous recovery under the analogous state law and concluded that both the FDCPA’s statutory language “coupled with the FDCPA’s express purpose to ‘promote consistent State action,’ 15 U.S.C. § 1692(e), establishes that Congress did not intend the FDCPA to preempt consistent state consumer protection laws.” The court, likewise, held that the “Rosenthal Act specifically provides that its remedies are intended to be cumulative and … in addition to any other … remedies under any other provision of law.” Id. at *8.
The Gonzalez case is of interest for several reasons. First, while the case presents two interesting examples of the Ninth Circuit’s application of the “least sophisticated debtor” standard, the notices under review may not have presented a close call. In truth, the references made to credit reporting, despite the obsolete nature of the debts, may have been found misleading even under a less permissive reasonable borrower standard.
Second, the court’s decision leaves room for a potential conflict between the damages limitations in the FDCPA and the unlimited statutory damages permitted by the Rosenthal Act. While class recovery of statutory damages under the FDCPA cannot exceed the lesser of $500,000 or 1 per centum of the net worth of the debt collector, 15 U.S.C. § 1692k, the Rosenthal Act permits statutory damages up to a maximum of $1000 per violation with no cap on total class recovery. Thus, if a jury were to award maximum statutory damages under the Rosenthal Act, the amount could easily exceed the $500,000 permitted by the FDCPA. The Ninth Circuit, however, opted to save for another day the question of whether a cumulative award pursuant to the Rosenthal Act could exceed the limitation in Section 1692k of the FDCPA, stating that “[t]hose concerns are not at issue in this case. Here, the total damages awarded were $225,500: significantly less than the statutory limit. In this case, permitting recovery under the Rosenthal Act and the FDCPA is not inconsistent with section 1692k of the FDCPA.”