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Ask any basic banking student and they'll tell you: The Fair Debt Collection Practices Act ("FDCPA") applies only to debt collectors -- not to creditors. As a case decided October 9, 2002 by the U.S. Court of Appeals for the Seventh Circuit shows, however, that statement is not always correct. There are some circumstances where the creditor can be held liable under the FDCPA, as the defendants learned in Nielsen v. Dickerson, et al.

In the Nielsen decision, the court affirmed a decision of the lower court granting summary judgment to the plaintiffs in a class action suit brought against an attorney who sent collection letters and the financial institution on whose behalf he sent them. The plaintiffs successfully argued that the attorney's collection letter falsely suggested that an attorney had become actively involved in the financial institution's debt collection efforts, when in fact the attorney had done little more than lend his name and firm letterhead to the collection effort. The lower court and the 7th Circuit Court of Appeals agreed with the plaintiffs contention that the defendants violated the Fair Debt Collection Practices Act, as explained below.

The Facts Household Bank (SB), N.A. ("Household") issued GM credit cards and entered into an arrangement with the law firm of David D. Dickerson under which Dickerson agreed to issue a form "past due" letter to delinquent GM Card holders. Household approved Dickerson's form letter and typically sent Dickerson approximately 2,000 accounts per month to send collection letters to. Dickerson was compensated by a flat fee of $2.45 per account. His compensation was not tied to the effect his letters had, and even in cases where the cardholder failed to subsequently make payments, Dickerson's services were not utilized by Household for filing legal proceedings against any of the debtors.

Dickerson was apparently a very experienced attorney, with more than 30 years in practice and more than 25 years working with debt collection activities. When Household contracted with Dickerson, he signed a 9-page agreement under which he agreed to render legal services consistent with applicable laws, including the FDCPA.

The arrangement worked like this:

• * Household would send Dickerson a disk containing delinquent account date, including the account number, name, address, account balance, and the amount past due;
  
• * Dickerson's firm would reformat the data, then pull it up to check for any obvious gaps or errors;
  
•  * After eliminating obvious gaps or errors, the firm would transmit the data to a third-party printing and mailing service, which then provided a hard copy back to Dickerson;
  
• * The hard copy list would then be subjected to a three-level review by the firm to: o ensure duplicate letters were not sent to the same debtor o flag any instances where there was incomplete or inaccurate debtor information; o check the data against a database of recent bankruptcy filings so that letters were not be sent to debtors who had declared bankruptcy. The firm also flagged any debtors in one of three "prohibited" states to which Dickerson did not send letters.
  
• * Dickerson reviewed nearly all the printouts of pertinent data himself, although the court noted that the time he spent would indicate that he devoted only a few seconds to each account.
  
• * After these reviews were completed, the firm would send an acknowledgement report to household listing the debtors to whom a delinquency letter would be sent. After transmitting the information to Household, the firm would wait a minimum of 24 hours before sending a letter to give Household the opportunity to make corrections or strike names from the list.
  
• * After the waiting period expired for Household review, the firm would forward the data to the third-party printing firm, which would then print and mail the letters on firm letterhead with a facsimile of the lawyer's signature.

• * receive a copy of a debtor's file;
  
• * have access to Household's account system;
  
•  * pursue judgment on behalf of Household with respect to any of these debtors.

The form letter told debtors that if they did not dispute the debt, they should make payment to the client GM card or call GM Card at GM Card's 800 number to discuss payment arrangements. If the debtor disputed the debt, he was told to "notify us" (meaning the law firm). A payment coupon with GM Card's address was attached to the bottom of each letter.

While Dickerson's firm did receive calls from delinquent debtors, he had no authority to resolve matters on Household's behalf and did not attempt to do so. The firm had six different form transmittal letters that they would send to Household highlighting the nature of the response. Each time a debtor would contact the law firm by phone or letter, the appropriate form letter was selected, signed by Dickerson, and sent to Household, along with a copy to the debtor. Once Dickerson handed the responses over to Household, he took no further action.

One recipient of one of the collection letters was Ann Nielsen, a resident of Chicago. Upon receiving the letter from Dickerson, she noted he was a lawyer and assumed she might be sued on her unpaid debt. She did not respond to the letter, and subsequently filed bankruptcy. Then, she filed suit against Dickerson and Household on behalf of herself and other GM Card holders who had also received delinquency letters from Dickerson. The lower court certified a class that included every GM cardholder residing at an address in Illinois who were sent these letters between certain dates in 1997 to 1999 -- over 3500 individuals. The parties filed cross-motions for summary judgment and the lower court ruled in favor of the plaintiffs on the FDCPA claims.

The Court's Ruling The District Court ruled

• * that Dickerson and Household each qualified as a "debt collector" that could be held liable under the FDCPA for misleading communications with debtors;
  
•  * although Household would not normally constitute a debt collector under the Act, it qualified as one under what is known as the "false name" exception to this rule. A creditor or an affiliate of a creditor who uses someone else's name so as to suggest to the debtor that a third party is involved in the debt collection process, when in fact that party is not involved, can be treated as a "debt collector" for FDCPA purposes;
  
• * Dickerson played no genuine role as an attorney in Household's debt collection efforts;
  
• * Dickerson's letter to Nielsen and the other class members was in reality from Household and Household was simply using Dickerson's name to suggest that he and his firm were involved in the attempt to collect the debts;
  
•  * Household should be treated as a debt collector and held liable to the extent the letter was false or misleading;
  
•  * in order for the letter not to mislead the recipient as to the nature of the attorney's involvement with the debt, the attorney must have direct and personal involvement in the mailing of the letter -- e.g., by reviewing the file to determine whether the letter should be sent, or by approving the mailing based on recommendations by others;
  
• * the firm's "review" was no more than a deceptive "veneer of compliance" with FDCPA.

According to the lower court, this type of letter suggests that the attorney is familiar with the facts of the case and is prepared to pursue the case himself, but Dickerson did not have this level of involvement with the debt. His review of the data was superficial and amounted to little more than proofreading. The fact that after the letter was sent Dickerson was not even informed by Household about whether it received a response to the letter and Dickerson had never pursued a judgment on Household's behalf or even been asked to do so was also telling in the Court's view. The court said "We find this lack of litigation activity contradicts the impression given to an unsophisticated consumer; namely, that if she does not pay, the attorney sending her the collection letter will pursue a collection suit against her."

The court went on to say that a key factors is that the letters themselves are objectionable. The lawyer just sent a form letter that was modified to reflect what little information he was furnished by Household. He didn't even personally sign the letters. They were prepared en masse by the printing company who affixed his facsimile signature to them. In a previous 2nd Circuit case the court pointed to, the 2nd Circuit suggested that mass mailings prepared in this manner will frequently be false to the extent that they suggest that an attorney was directly involved in the process by which the letter was prepared and sent.

After the summary judgment ruling on liability, the parties reached a settlement as to damages, but defendants reserved the right to appeal the liability ruling. [In terms of the settlement, the defendants agreed to pay a total of $250,000.]

The appellate court affirmed the ruling on liability. In its opinion, it goes into great detail about Household's liability as a debt collector, the violations of section 1692(e)(3) and (10) and Household's unsuccessful assertion of the "Bona Fide Error defense" under FDCPA. It makes for some interesting reading . . .

In the wake of this decision, all financial institutions would be well-advised to review this decision and the Act to determine what changes, if any, should be made to their debt collection practices in order to avoid potential liability as a debt collector.

by Mary Beth Guard First

published on BankersOnline.com 10/10/02