In a case of first impression, the U.S. Court of Appeals for the Ninth Circuit held that a debt collector’s mistake about the time-barred status of a debt under state law can qualify as a bona fide error within the meaning of the Fair Debt Collection Practices Act.
In Kaiser v. Cascade Capital, LLC, after an Oregon state court dismissed a collection lawsuit filed against the plaintiff by the defendants because it was barred by the state’s four-year statute of limitations (SOL) for sale of goods contract claims, the plaintiff filed a putative FDCPA class action against the defendants in an Oregon federal district court. The plaintiff alleged that the defendants violated the FDCPA by threatening to sue to collect the time-barred debt in a collection letter and by actually filing a collection lawsuit. The district court dismissed for failure to state a claim, finding that the defendants did not violate the FDCPA because they could not have known the debt was time-barred since it was unclear which Oregon SOL applied when they attempted to collect the debt.
In reversing the district court’s dismissal of the lawsuit, the Ninth Circuit panel, after reviewing Oregon law, “predict[ed] that the Oregon Supreme Court would hold that the four-year statute of limitations would apply to a suit to collect on [the plaintiff’s] debt.” It then held that attempts to collect on time-barred debt violate the FDCPA because lawsuits to collect time-barred debt are both unfair and misleading and threats to sue on time-barred debt are, at a minimum, always misleading. The Ninth Circuit noted that its holding was consistent with the CFPB’s final debt collection rule which adopted a strict liability standard for time-barred debt collection lawsuits.
While holding that whether the defendants were unsure of the debt’s legal status under state law did not affect whether they had violated the FDCPA, the Ninth Circuit also held that mistakes about the time-barred status of a debt can be bona fide errors under the FDCPA. Accordingly, it reversed the district court’s dismissal and indicated that on remand, the defendants could attempt to invoke the bona fide error defense.
In holding that mistakes about a debt’s time-barred status can qualify for the FDCPA’s bona fide error defense, the Ninth Circuit distinguished the U.S. Supreme Court’s 2010 decision in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA. The Supreme Court held in Jerman that mistakes about the FDCPA’s meaning could not be bona fide errors, relying on the “ignorance of the law is not an excuse” maxim. The Ninth Circuit contrasted the debt collector’s mistake in Jerman, which involved the FDCPA’s requirements for disputing a debt, from the defendants’ uncertainty about the debt’s time-barred status. Citing to Supreme Court and other case law, it observed that the “ignorance of the law” maxim normally applied when a defendant intended to engage in certain conduct but was unaware of the law proscribing such conduct; it did not normally apply when the defendant’s mistake about “a collateral matter” caused the defendant to misunderstand the full significance of its conduct.
According to the Ninth Circuit, the plaintiff’s claims that the defendants violated the FDCPA prohibitions that bar misrepresenting the legal status of a debt and using unfair collection practices “necessarily implicate a legal element entirely collateral to the FDCPA; the time-barred status of the debt under state law.” In its view, such collateral legal mistakes should be treated as mistakes of fact and “the bona fide error defense is the most natural way to address good-faith mistakes regarding state statutes of limitations.” (In the discussion accompanying its final debt collection rule, the CFPB indicates that a collector who threatens to bring or brings a legal action to collect a time-barred debt may, depending on the reasons for the collector’s error, be able to rely on the bona fide error defense to avoid civil liability.)