Herbert Vs Credit Technologies

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
------------------------------x
:
CAROLYN HERBERT, :
:
Plaintiff, :
:
v. : Civ. No. 3:96CV00665(AWT)
:
MONTEREY FINANCIAL :
SERVICES, INC., :
:
Defendant. :
:
------------------------------x
MEMORANDUM OPINION
Plaintiff Carolyn Herbert (“Herbert”) claims that the
defendant, Monterey Financial Services, Inc. (“Monterey”),
violated the Fair Debt Collection Practices Act, 15 U.S.C.
§ 1692(e), (“FDCPA”) and the Connecticut Unfair Trade Practices
Act, Conn. Gen. Stat. § 42-110a et seq. (“CUTPA”) by (1)
reporting that Herbert owed a debt, without reporting that the
debt was disputed and (2) failing to notify the credit bureaus
that the debt owed by Herbert had been discharged. The
defendant contends, as to the first claim, that any violation
was the result of a bona fide error which occurred in spite of
Monterey’s adoption of procedures designed to avoid such an
error, as contemplated by 15 U.S.C. § 1692k(c). As to the
second claim, the defendant contends that it reported the debt
as discharged immediately after receiving notification that the
-2-
debt had been discharged.
After a bench trial, the court makes the following
findings of fact and conclusions of law, and finds for the
defendant on all claims.
I. FACTUAL BACKGROUND
In 1990, the plaintiff entered into an “Interval Ownership
Purchase and Sale Agreement” with Inn Group Associates (“Inn
Group”) for the purchase of a “time-share” vacation home. The
plaintiff financed this purchase with a promissory note which
was secured by a mortgage on the time-share. In August 1992,
the mortgage securing the promissory note issued by Herbert was
foreclosed on by the Inn Group for non-payment. The
foreclosure sale of the plaintiff’s vacation time-share
produced proceeds of $1,000, which was applied against the debt
owed by Herbert to the Inn Group.
In September 1992, Monterey, a debt collection agency that
had been hired earlier by the Inn Group to collect its
delinquent accounts, commenced taking steps to collect the
remaining amount owed by Herbert to the Inn Group. The parties
agree that Monterey is a “debt collector” within the meaning of
the FDCPA. 15 U.S.C. § 1692a(6).
After attempting to collect the debt, without success,
Monterey designated Herbert’s account as “uncollectible”.
Pursuant to Monterey’s Collection Agency Manual, it is standard
-3-
procedure to continue to report uncollected accounts to credit
bureaus unless Monterey is informed by its client – in this
case, the Inn Group – to do otherwise. Therefore, Monterey
continued to report the debt as delinquent to credit bureaus
after designating it “uncollectible”. Further, it is
Monterey’s standard practice not to delete credit information
from its files unless its client makes a written request that
Monterey do so.
Herbert’s attorney notified Monterey, in two letters dated
October 1992 and November 1992, that Herbert’s position was
that the debt was not valid, that Monterey’s records did not
reflect a $1,000 payment made on August 7, 1992, and that
Herbert refused to pay. The letters stated that Herbert
“vigorously dispute[d]” the debt.
In May 1993, the plaintiff’s debt to the Inn Group was
discharged, and the original promissory note executed by
Herbert was returned to her marked “void”. The Inn Group did
not notify Monterey that the debt had been discharged. Neither
Herbert nor her attorney notified the defendant at that time
that the debt had been discharged.
It is Monterey’s policy that when a debtor indicates in
correspondence that a debt is disputed, the debtor’s
correspondence is referred to a manager. During the period
relevant here, the manager would verify the debt and then go to
the information system office and give an instruction that an
-4-
indication be made in the account file that the debt was
disputed by entering a particular code in the computer. This
policy is covered in Monterey’s operating manual, and
collectors and managers at Monterey are instructed as to this
policy during their training. Also, one or two Monterey
managers walk around at all times in the area in which
collectors sit as they place and receive telephone calls, in
order to listen in on those calls and ensure that this and
other policies are being followed. This policy has been in
place as described since at least 1992, when the events at
issue here took place. However, in this case, Herbert’s
dispute was not referred to a manager, and although the
correspondence was placed in Herbert’s file, the computer
record of Herbert’s account was never updated to indicate that
the debt was disputed.
The policy as to disputed debts was not the only instance
where Monterey required collectors to notify a manager. Not
only did all attorney letters have to be reviewed by
management, but collectors had to also notify a manager of any
correspondence from any government department or the media, any
unusual threats of violence, any viable lawsuits and any
important issues or problems related to the client (e.g., the
Inn Group). Thus, this information as to how to handle
disputed debts was presented to collectors as being something
that was important to Monterey.
-5-
Although the plaintiff was aware that Monterey was
servicing her account for the Inn Group, neither the plaintiff
nor her attorney notified Monterey of the discharge of the debt
until March 18, 1996, when Monterey received a letter from
Herbert’s attorney indicating that the debt had been
discharged. When Monterey received this letter, it contacted
the Inn Group to confirm that the debt had in fact been
discharged. Monterey then took action to stop reporting
Herbert’s account to credit bureaus as delinquent. Herbert’s
account nonetheless was reported as being delinquent in a
credit report dated May 1996.
II. DISCUSSION
A. Count One: FDCPA
It is a violation of the FDCPA for a debt collector to
make a “false representation of . . . the character, amount, or
legal status of any debt . . ..” 15 U.S.C. § 1692e(2)(A) (West
2001). The plaintiff argues that Monterey committed two such
violations: one when it failed to report that the debt was
disputed after receiving notice from the plaintiff’s attorney
of a dispute in November 1992, and a second when it reported
Herbert’s account as being delinquent after receiving notice in
March 1996 that the debt had been discharged.
The FDCPA provides that “any debt collector who fails to
comply with any provision of this subchapter with respect to
-6-
any person is liable to such person” for actual damages
suffered plus an additional amount not to exceed $1,000. 15
U.S.C. § 1692k(a) (West 2001). However, the statute also
contains an affirmative defense:
A debt collector may not be held liable in any action
brought under this subchapter if the debt collector
shows by a preponderance of the evidence that the
violation was not intentional and resulted from a bona
fide error notwithstanding the maintenance of
procedures reasonably adapted to avoid any such error.
15 U.S.C. § 1692k(c) (West 2001).
First Claim: Failure to Report Debt as Disputed
The defendant concedes that it failed to properly report
that the plaintiff’s claim was disputed after receiving notice
of the dispute in November 1992. However, the defendant
produced evidence at trial showing that the failure to report
the debt as disputed was not intentional, but was the result of
a bona fide error which occurred in spite of Monterey’s
maintaining procedures reasonably adapted to avoid such errors.
Robert Steinke (“Steinke”), the president of Monterey,
testified at trial, in detail, regarding the defendant’s
policies and procedures relating to the marking of records when
a debt is disputed. As set forth above, when a debtor or her
representative reports that a debt is disputed, the collector
who receives that information is supposed to refer the case to
a manager. Monterey’s procedure is that the manager then
confirms that the debt is valid and makes a notation in the
-7-
file that the debt is disputed. In addition, the manager takes
appropriate steps to see that a code is entered into the
debtor’s computer file indicating that the debt is disputed.
All collectors and managers receive training in this procedure.
In this case, the collector who received the
correspondence from Herbert’s attorney stating that the debt
was disputed apparently did not follow Monterey’s established
procedure. Although the collector made a notation in Herbert’s
file regarding the correspondence, he did not refer the case to
a manager. Consequently, there was never notification to the
person who was charged with the responsibility for making sure
that the computer file for Herbert was updated to reflect the
fact that the debt was disputed. As a result, the debt was
subsequently reported numerous times to credit bureaus without
any notation that it was disputed. This happened despite the
fact that Monterey had in place a procedure reasonably adapted
to avoid such a mistake. The changing of the computer file was
entrusted to a manager, and collectors were under instructions
to report a series of significant occurrences to their manager
-– not just this one item. In addition, Monterey periodically
monitored the collectors while they were at work, to ensure
that Monterey’s policies and procedures were being followed.
The evidence establishes that Monterey did not
intentionally fail to designate Herbert’s debt as disputed.
The file maintained at Monterey did, in fact, reflect the
-8-
dispute; the error came in a failure to enter a particular
computer code which would have flagged the debt as disputed
when it was reported to credit bureaus. Every indication in
this record is that had the collector referred the
correspondence to a manager, the appropriate information would
have been entered in the computer concerning Herbert’s account.
The court finds that Monterey has established, by a
preponderance of the evidence, that this was a bona fide error
which occurred notwithstanding the fact that Monterey had in
place “procedures reasonably adapted to avoid any such error”,
as required by the statute. The court also finds that Monterey
has proven that the violation was not intentional. Therefore,
the defendant has met its burden pursuant to 15 U.S.C.
§ 1692k(c), and is entitled to judgment in its favor on this
claim.
Second Claim: Failure to Report Debt as Discharged
The defendant presented evidence that it promptly notified
the credit bureaus that Herbert’s debt had been discharged and
instructed the credit bureaus to remove Herbert’s account from
their databases once it received confirmation that the debt had
in fact been discharged. This evidence was in the form of
computer backup disks which contain copies of the information
sent by Monterey to the credit bureaus on April 11, 1996.
Monterey sends reports to the credit bureaus once a month,
-9-
indicating the current status of each account for which it is
responsible. The April 11, 1996 report to the credit bureaus
was the first report issued by Monterey after receiving the
March 18, 1996 letter indicating that Herbert’s debt had been
discharged. The computer backup disks show that in the April
11, 1996 report, Monterey instructed each of the credit bureaus
to remove the Herbert account from their databases, because the
debt had been discharged. Thus, Monterey did not report
Herbert’s account to the credit bureaus as active and
delinquent at any time after March 18, 1996, and the April 11,
1996 report did not contain any false or misleading information
regarding Herbert’s account.
The plaintiff contends that Monterey should have taken
additional steps to see that the credit bureaus corrected their
records sooner as to the status of the plaintiff’s debt, but
the defendant has shown that its procedure was reasonable. The
plaintiff’s argument amounts, under the circumstances of this
case, to a position that daily updates should be sent by a
collection agency to the credit bureaus. There is no support
for such a proposition.
Therefore, the plaintiff has failed to establish a
violation of the FDCPA on this ground, and the defendant is
entitled to judgment in its favor on this claim.
B. Count Two: CUTPA
-10-
In Count Two, the plaintiff claims that Monterey’s actions
constitute unfair and deceptive acts in the conduct of trade or
commerce in violation of CUTPA. CUTPA provides in relevant
part that “[n]o person shall engage in unfair methods of
competition and unfair or deceptive acts or practices in the
conduct of any trade or commerce.” Conn. Gen. Stat. § 42-
110b(a) (2001). The Connecticut Supreme Court has stated:
It is well settled that in determining whether a
practice violates CUTPA we have adopted the criteria
set out in the 'cigarette rule' by the federal trade
commission for determining when a practice is unfair:
(1) Whether the practice, without necessarily having
been previously considered unlawful, offends public
policy as it has been established by statutes, the
common law, or otherwise -- whether, in other words, it
is within at least the penumbra of some common law,
statutory, or other established concept of unfairness;
(2) whether it is immoral, unethical, oppressive, or
unscrupulous; (3) whether it causes substantial injury
to consumers (competitors or other businessmen).
All three criteria do not need to be satisfied to
support a finding of unfairness. A practice may be
unfair because of the degree to which it meets one of
the criteria or because to a lesser extent it meets all
three. Thus a violation of CUTPA may be established by
showing either an actual deceptive practice or a
practice amounting to a violation of public policy.
Furthermore, a party need not prove an intent to
deceive to prevail under CUTPA.
Cheshire Mortgage Serv. Inc. v. Montes, 612 A.2d 1130, 1143-44
(Conn. 1992).
The court has found that Monterey did not make any false
representation regarding Herbert’s account after it was
notified that the debt had been discharged; therefore, the
plaintiff can not prevail on her CUTPA claim on that ground.
-11-
As to the failure to indicate that the debt was disputed, the
court has found that Monterey made a bona fide error, of the
sort that is bound to occur even when safeguards, such as those
instituted by Monterey, are in place. This error does not
“offend[] public policy”, nor is it “immoral, unethical,
oppressive, or unscrupulous”. Nor is there any evidence that
Monterey’s error caused “substantial injury to consumers”.
Thus, the error in failing to report the debt as disputed does
not constitute a violation of CUTPA. The defendant is entitled
to judgment on the CUTPA claim.
III. CONCLUSION
For the reasons set forth above, the court finds for the
defendant, Monterey Financial Services, Inc., as to all claims.
Accordingly, judgment shall enter in favor of the defendant.
It is so ordered.
Dated this 28th day of September, 2001, at Hartford,
Connecticut.
Alvin W. Thompson
United States District Judge