Reichert v. Nat'l Credit Systems ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ROBERT REICHERT, an individual, 
Plaintiff-Appellee,
v. No. 06-15503
NATIONAL CREDIT SYSTEMS, INC., a
foreign corporation doing business  D.C. No.
CV-03-01740-RGS
in Arizona; JIM NORTH, an
OPINION
individual; FAYE MILES, an
individual,
Defendants-Appellants.

Appeal from the United States District Court
for the District of Arizona
Roger G. Strand, District Judge, Presiding
Argued and Submitted
January 16, 2008—San Francisco, California
Filed July 7, 2008
Before: Procter Hug, Jr., Mary M. Schroeder, and
Richard R. Clifton, Circuit Judges.
Opinion by Judge Schroeder
8135
REICHERT v. NATIONAL CREDIT SYSTEMS 8137
COUNSEL
Deepak Gupta, Washington, DC, for plaintiff-appellee Robert
Reichert.
David J. Kaminski, Los Angeles, California, for defen-
dants-appellants National Credit Systems, Inc., et al.
OPINION
SCHROEDER, Circuit Judge:
Introduction
This is an action by a debtor against a debt collection
agency for statutory damages and attorney’s fees in connec-
tion with attempts to collect a debt that the debtor owed his
former landlord. It requires us to interpret the bona fide error
defense provision of the Fair Debt Collection Practices Act
(“FDCPA”) that we most recently considered in Clark v. Cap-
ital Credit & Collection Services, Inc., 460 F.3d 1162 (9th
Cir. 2006).
8138 REICHERT v. NATIONAL CREDIT SYSTEMS
The problem with the debt that the debt collection agency
tried to collect in this case is that it included, on its face, a
$225 fee that the landlord’s attorney charged for writing a let-
ter. Under the terms of the residential lease, and consistent
with most contracts and leases in Arizona, see, e.g., Andrews
v. Blake, 69 P.3d 7, 22 & n.15 (Ariz. 2003); see also Lisa v.
Strom, 904 P.2d 1239, 1242 & n.2 (Ariz. Ct. App. 1995), the
landlord was not entitled to collect any attorney’s fee unless
it was incurred in connection with pursuing successful litiga-
tion. The district court granted summary judgment for the
debtor, holding that the debt collection agency had violated a
provision of the FDCPA, 15 U.S.C. § 1692f(1), and that it had
not met its burden of proof for the statutory “bona fide error”
defense.
After the district court ruling, and after this appeal was
briefed, our court decided Clark, which made clear that the
FDCPA is a strict liability statute in that a plaintiff need not
prove an error was intentional. See 460 F.3d at 1176 & n.11.
The opinion provides that the defendant bears the burden of
showing the violation can be excused. Id. at 1177. The debt
collection agency now contends that under Clark, the
landlord-creditor’s submission of accurate information in the
past entitled the agency to rely on the creditor’s representa-
tions in this case, even though the information was question-
able on its face. Alternatively, it contends that it established
a bona fide error defense by filing an affidavit stating it relied
on adequate procedures it had in place that should have
caught the error.
The debtor contends that the provision of accurate informa-
tion in the past is insufficient to excuse a debt collector from
liability under the FDCPA, and that the district court correctly
held that the conclusory declaration asserting that it had ade-
quate procedures in place to catch errors was insufficient in
this case to qualify the agency for the bona fide error defense.
We agree and affirm the district court’s summary judgment
for the debtor.
REICHERT v. NATIONAL CREDIT SYSTEMS 8139
I. Background
On October 14, 2001, Robert Reichert and his wife entered
into a residential lease with La Privada Apartments, LLC (“La
Privada”). The lease agreement included a provision entitled
“Attorney’s Fees,” which stated: “In the event of legal action
to enforce compliance with this Rental Agreement, the pre-
vailing party may be awarded court costs and reasonable
attorney’s fees.” Reichert terminated the lease before it
expired. On September 10, 2002, La Privada notified him that
he owed $1,899.20 under the lease agreement.
La Privada assigned the debt to National Credit Systems,
Inc. (“NCS”) in October 2002 for collection. NCS’s first
demand letter, dated October 10, 2002, stated that the debt
was $1,899.20. In response, on November 10, 2002, Reichert
sent NCS a letter disputing the debt and requesting verifica-
tion of the debt. NCS sent Reichert written verification of the
debt on November 20, 2002. The verification stated that the
amount owed was $2,124.20 because, at La Privada’s direc-
tion, NCS had added a $225 charge, along with the handwrit-
ten notation “Atty Fee, Letter,” to the itemization of charges.
Reichert then filed suit against NCS, alleging that NCS had
violated the FDCPA by, among other things, seeking to col-
lect amounts not expressly authorized by the lease (the $225
fee charge) in violation of 15 U.S.C. § 1692f. He moved for
summary judgment. NCS also moved for summary judgment,
arguing that it had properly relied on La Privada’s representa-
tion of the debt, or, alternatively, that it had established a bona
fide error defense. NCS did not argue that the attorney’s fee
was authorized by the agreement or permitted by law. Rather,
NCS argued that the FDCPA did not impose strict liability
and that its violation had been unintentional. The district court
proceedings took place before our decision in Clark.
The district court granted Reichert’s motion for summary
judgment, holding that NCS had violated § 1692f(1) by
8140 REICHERT v. NATIONAL CREDIT SYSTEMS
attempting to collect an amount not authorized by the agree-
ment or permitted by law, regardless of NCS’s intent. The
court rejected NCS’s bona fide error defense because NCS
had failed to prove that it maintained procedures reasonably
adapted to avoid such an error, as the defense requires. The
only evidence of such procedures presented by NCS was the
declaration of its general manager, which stated that La
Privada had never previously provided incorrect information
to NCS, and that NCS had “extensive procedures” in place.
The district court awarded damages of $1,000, and attorney’s
fees of $11,000, to Reichert. NCS appealed.
II. Discussion
[1] Under the FDCPA, a debt collector cannot collect “any
amount (including any interest, fee, charge, or expense inci-
dental to the principal obligation) unless such amount is
expressly authorized by the agreement creating the debt or
permitted by law.” 15 U.S.C. § 1692f(1). The FDCPA makes
debt collectors liable for violations that are not knowing or
intentional. See Clark, 460 F.3d at 1176 & n.11. It provides
a “narrow exception to strict liability,” however, for bona fide
errors. Id. at 1177. The statutory bona fide error defense pro-
vides:
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 viola-
tion was not intentional and resulted from a bona
fide error notwithstanding the maintenance of proce-
dures reasonably adapted to avoid any such error.
15 U.S.C. § 1692k(c). In concluding that the FDCPA imposes
strict liability, we reasoned in Clark that allowing a debt col-
lector to escape liability for unintentional violations would
render the bona fide error defense superfluous. 460 F.3d at
1176.
REICHERT v. NATIONAL CREDIT SYSTEMS 8141
[2] The bona fide error defense is an affirmative defense,
for which the debt collector has the burden of proof. Fox v.
Citicorp Credit Servs., Inc., 15 F.3d 1507, 1514 (9th Cir.
1994). The defense does not protect a debt collector whose
reliance on a creditor’s representation is unreasonable. Clark,
460 F.3d at 1177. The defense requires the defendant to show
that it maintains procedures to avoid errors. Id. at 1176-77.
We have held that a debt collector failed to meet its burden
under the defense when it did not produce evidence of “rea-
sonable preventive procedures” aimed at avoiding the errors.
See Fox, 15 F.3d at 1514.
A case from the Seventh Circuit illustrates the type of evi-
dence of procedures that has been held to be sufficient. In
Jenkins v. Heintz, that court held that evidence of a debt col-
lector’s “elaborate procedures” satisfied the debt collector’s
burden under the defense. See 124 F.3d 824, 834-35 (7th Cir.
1997). The procedures included a requirement that the credi-
tor verify under oath that each charge was accurate, as well
as “the publication of an in-house fair debt compliance man-
ual, updated regularly and supplied to each firm employee;
training seminars for firm employees collecting consumer
debts; and an eight-step, highly detailed pre-litigation review
process to ensure accuracy and to review the work of firm
employees to avoid violating the Act.” Id. at 834.
The Tenth Circuit, in Johnson v. Riddle, specifically
addressed the requirement that the procedures be adapted to
avoid the error: “As the text of § 1692k(c) indicates, the pro-
cedures component of the bona fide error defense involves a
two-step inquiry: first, whether the debt collector ‘maintained’
—i.e., actually employed or implemented—procedures to
avoid errors; and, second, whether the procedures were ‘rea-
sonably adapted’ to avoid the specific error at issue.” 443
F.3d 723, 729 (10th Cir. 2006). The Eighth Circuit also
recently discussed the issue, affirming summary judgment for
a debt collection agency based on its showing that its proce-
8142 REICHERT v. NATIONAL CREDIT SYSTEMS
dures were reasonably adapted to prevent the type of error
that occurred there:
That leaves the question whether Credico made a
sufficient showing that it employed procedures “rea-
sonably adapted to avoid” the error that occurred.
This is a fact-intensive inquiry that few prior cases
have addressed. . . . The affidavits and supporting
documents establish that Credico’s employees
received specific instructions to segregate principal
and interest in setting up the accounts received from
Pinnacle so as to avoid charging interest on interest.
The procedures were not as elaborate as those in
some cases that have upheld a bona fide error
defense, but the error to be avoided in this case was
not complex.
Wilhelm v. Credico, Inc., 519 F.3d 416, 421 (8th Cir. 2008).
NCS concedes that the attorney’s fee was not authorized by
the lease agreement or permitted under Arizona law, but nev-
ertheless contends that it should escape liability. First, it
argues that the creditor’s submission of accurate information
in the past allowed NCS to rely on the creditor’s representa-
tions in this case. Urging that this reliance was reasonable, it
points to this court’s statement in Clark that “[l]ogically, if a
debt collector reasonably relies on the debt reported by the
creditor, the debt collector will not be liable for any errors.”
460 F.3d at 1177. Alternatively, NCS contends that its manag-
er’s affidavit satisfied the “procedures” requirement of the
statutory bona fide error defense.
[3] The fact that the creditor provided accurate information
in the past cannot, in and of itself, establish that reliance in the
present case was reasonable and act as a substitute for the
maintenance of adequate procedures to avoid future mistakes.
The declaration submitted by NCS said only that the creditor
“has never previously given NCS incorrect information.” The
REICHERT v. NATIONAL CREDIT SYSTEMS 8143
fact that the creditor had not made errors in calculating
amounts due does not speak to the problem here, the addition
of the attorney’s fee. NCS did not give reason to justify its
reliance on the creditor for the erroneous premise that the
attorney’s fee could properly be added. As a result, NCS
failed to carry its burden of establishing that its reliance upon
the creditor was reasonable.
[4] When we spoke in Clark of the nonliability of a debt
collector who “reasonably relies” on the reported debt, we
were referring to a reliance on the basis of procedures main-
tained to avoid mistakes. A debt collector is not entitled under
the FDCPA to sit back and wait until a creditor makes a mis-
take and then institute procedures to prevent a recurrence. To
qualify for the bona fide error defense under the FDCPA, the
debt collector has an affirmative obligation to maintain proce-
dures designed to avoid discoverable errors, including, but not
limited to, errors in calculation and itemization. The latter
would include errors in claiming collection expenses of the
creditor that could not legitimately be part of the debt owed
by the debtor.
[5] If the bona fide error defense is to have any meaning in
the context of a strict liability statute, then a showing of “pro-
cedures reasonably adapted to avoid any such error” must
require more than a mere assertion to that effect. The proce-
dures themselves must be explained, along with the manner
in which they were adapted to avoid the error. See Wilhelm,
519 F.3d at 421. Only then is the mistake entitled to be treated
as one made in good faith. Because NCS submitted only a
conclusory declaration stating that it maintained procedures,
we hold that it failed to establish a bona fide error defense
under the FDCPA.
AFFIRMED.