FDCPA Bona Fide Error Defense Did Not Protect Debt Collector Despite Following Controlling Precedent, En Banc Seventh Circuit Rules

This article previously appeared on Ballard Spahr’s CFPB Monitor and is re-published here with permission.

In a 7-4 en banc decision, the U.S. Court of Appeals for the Seventh Circuit ruled that the bona fide error defense in the Fair Debt Collection Practices Act (FDCPA) did not protect a debt collector who complied with then-controlling Seventh Circuit precedent—which was subsequently overruled by that court.

The FDCPA provides that a debt collector suing to collect a consumer debt must file the lawsuit in the "judicial district or similar entity" where the contract was signed or where the debtor resides. A Seventh Circuit panel ruled in 1996 that the Circuit Court of Cook County, Illinois—which consists of multiple municipal districts—was a single "judicial district" for purposes of the FDCPA's venue provision. In December 2013, the debt collector defendant in Olivia v. Blatt, Hasenmiller, Liebsker & Moore LLC filed a collection lawsuit in the First Municipal District of the Circuit Court of Cook County against the debtor, who resided in the Fifth Municipal District.

In July 2014, while the collection lawsuit was still pending, the Seventh Circuit issued an en banc decision in another case in which it overruled the panel's 1996 decision and held that a "judicial district or similar entity" for purposes of the FDCPA venue provision is "the smallest geographic area that is relevant for determining venue in the court system in which the case is filed." The en banc court also held that its decision applied retroactively.

Although the debt collector's choice of venue for its 2013 lawsuit complied with the 1996 panel decision, it did not comply with the subsequently enacted rule retroactively applied by the en banc court (which would have required the lawsuit to be filed in the Fifth Municipal District). After the debt collector dismissed the lawsuit to comply with the new rule, the debtor filed a complaint in federal court alleging that the defendant was retroactively liable under the FDCPA for filing suit in the wrong venue.

In vacating the district court's grant of summary judgment for the defendant on the grounds that it was protected by the FDCPA's bona fide error defense, the Seventh Circuit concluded that the U.S. Supreme Court's 2010 decision in Jerman v. Carlisle, McNellie, Rini, Kramer &Ulrich LPA did not allow the defense to protect any "mistake of law" regardless of how understandable or reasonable it might have been. According to the majority, even though the defendant was relying "on admittedly substantial precedent," its conduct reflected a mistake in the law because "[t]he fact that different sets of lawyers, including those with judicial commissions, made a legal error does not make it less a legal error."

The dissenting judges disagreed with the majority's characterization of the debt collector's choice of venue as a "mistake of law." In their view, the 1996 panel decision represented the controlling law and the debt collector had correctly interpreted the FDCPA's venue provision in accordance with the controlling law at the time of its conduct. According to the dissent, "[i]t is not a mistake of law to follow controlling law, even when that law is later overruled." The dissent characterized the majority’s ruling—which "punishes [the debt collector] for doing exactly what the controlling law explicitly authorized [the debt collector] to do at the time it did it"—as an "almost surreal inversion of law and logic" that "is not only inconsistent with the FDCPA's bona fide error defense; it is inconsistent with the judicial function and the rule of law."

Attorneys in Ballard Spahr's Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. The group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.