Hyman, Cheryl L. v. Tate, Dick

In the

United States Court of Appeals

For the Seventh Circuit

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No. 03-2106

CHERYL L. HYMAN,

Plaintiff-Appellant,

v.

DICK TATE and HARRY KIRLIN, d/b/a/

TATE & KIRLIN ASSOCIATES,

Defendants-Appellees.

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Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 02 C 242—Matthew F. Kennelly, Judge.

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ARGUED JANUARY 22, 2004—DECIDED APRIL 1, 2004

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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