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FDCPA Class Action Defense Cases–Seeger v. AFNI: Seventh Circuit Affirms Summary Judgment Against Debt Collector In FDCPA Class Action Holding Fee Sought To Be Recovered By Debt Collector Were Not Authorized

District Court Properly Granted Plaintiffs’ Summary Judgment Motion in Class Action Under Fair Debt Collection Practices Act (FDCPA) because Fees Debt Collector Sought to Recover and Underlying Class Action Claims were not Proper Seventh Circuit Holds

Plaintiffs filed a class action against AFNI, a debt collection company, alleging violations of the federal Fair Debt Collection Practices Act (FDCPA) and the Wisconsin Consumer Act; the class action complaint asserted that AFNI’s collection practices violated state and federal law because ANFI sought to collect a 15% that was not authorized by either statute or contract. Seeger v. AFNI, Inc., 548 F.3d 1107, 1109-10 (7th Cir. 2008). According to the class action complaint, plaintiffs had entered into contracts with various cellular telephone service providers, and each contract advised customers of the possibility that a debt collection agency may be retained in the event of a payment default, id., at 1109-10; for example, Cingular’s contracts provided that customers would be required to pay “the fees of any collection agency, which may be based on a percentage at a maximum of 33% of the debt, and all costs and expenses, including reasonable attorneys’ fees and court costs,” incurred in collecting payments owed, id., at 1110. Additionally, each service contract “contained various provisions making it clear that failure to pay was cause for termination of the contract and that an early termination fee or cancellation fee would be imposed.” Id. Each plaintiff fell behind on payments owed under the cell phone contracts, id., at 1109. AFNI purchased the accounts, and sent debt collection letters to plaintiffs “informing each one that he owed a debt and that Cingular was the original creditor” and that each “was responsible for paying AFNI a collection fee of 15% of the ‘original balance.’” Id., at 1109-10. Plaintiffs filed the class action complaint “alleging that [ANFI’s] attempt to include a separate collection fee in the amount due violated the FDCPA”; an amended class action complaint added party plaintiffs and added also the Wisconsin Consumer Act claim. Id., at 1110. Plaintiffs’ attorneys moved the district court to certify the litigation as a class action, and the district court agreed that class action treatment was warranted. Id., at 1110. The parties then filed cross motions for summary judgment; the district court ruled in favor of plaintiffs and ANFI appealed. Id., at 1109. The Seventh Circuit affirmed.

In ruling on the summary judgment motions, the district court concluded that AFNI violated both the FDCPA and Wisconsin state law “because neither AFNI’s contracts with its customers nor Wisconsin law authorized it to charge the type of collection fee it was using.” Seeger, at 1109. Specifically, the district court ruled that ANFI “violated the FDCPA because neither the contracts nor Wisconsin law permitted the owner of a debt to impose a separate fee for collection, if the fee was for the purpose of reimbursing the owner itself as opposed to a third-party debt collector.” Id., at 1110. Defense attorneys first argued that Wisconsin law permits debt collectors to charge “incidental or consequential damages” for customer breaches of the cell phone service contracts, and by extension that the 15% fee it sought to charge plaintiffs “may be collected by an entity that purchases the contract for collection purposes.” Id., at 1111. The Seventh Circuit disagreed. The Court recognized that all states “permits recovery of losses that are the natural and probable result of the breach of a contract and that were within the reasonable contemplation of the parties” and that “[t]his rule applies to service contracts like the plaintiffs’ cell phone contracts,” id. (citations omitted), but it found ANFI’s reliance on this general proposition to be insufficient. Rather, to recover the 15% fee it sought to impose, ANFI “must show that this rule permits a third-party purchaser of an account to recover its internal costs to recover the debt in this manner, and, if so, that the 15% fee it charged to the plaintiffs reflected AFNI’s actual costs.” Id. The defense argument failed, the Circuit Court concluded, because (1) “Neither a law expressly permitting a collection fee on behalf of a person in the position of a seller of cellular telephone services nor an agreement between the class members and their cellular providers exists here”; and (2) ANFI failed to establish that the fee it sought to charge “can properly be characterized as incidental or consequential damages resulting from the plaintiffs’ breach of their cellular phone contracts with Cingular.” Id., at 1112.

The Seventh Circuit observed that the defense presented no evidence as to what ANFI paid for the delinquent accounts, and that “the incidental or consequential damage” suffered by the cell phone company from the customer default would be “the discount it had to absorb, if any existed, when it sold the debt to AFNI.” Seeger, at 1112. ANFI, however, presented no evidence as to whether the 15% fee should be characterized as a cost of collecting the debt or as an “incidental or consequential expense” resulting from the customer’s failure to pay. Id. Additionally, the Circuit Court noted that the 15% fee was tied to the amount of plaintiffs’ debts, which ranged from $15 – $190, even though the costs itemized by defense attorneys “appear to be constant across accounts.” Id., at 1112-13.

The Circuit Court rejected also AFNI’s second argument, “that the contracts between Cingular and the plaintiffs authorized Cingular to charge a collection fee, and thus, as Cingular’s assignee, it was also authorized to charge such a fee.” Seeger, at 1113. The language in the service contracts are drafted to cover the situation where Cingular incurs debt collection fees so that its customers are “reimbursing Cingular”; the contract language would not permit Cingular to charge such fees for handling collection efforts internally. Id. Cingular could not charge plaintiffs collection fees in these cases because it sold the debts to ANFI rather than referring the accounts out for collection – in other words, there was nothing for plaintiffs to reimburse. Id. Moreover, and in any event, the 15% fee ANFI sought to charge “was not a cost that Cingular would ‘incur.’” Id.

Lastly, the Seventh Circuit rejected AFNI’s efforts to assert the bona fide error defense under the FDCPA. See Seeger, at 1113-15. The Circuit Court noted that it had not yet addressed “whether the bona fide error defense applies to mistakes of law,” but found it unnecessary to resolve the issue because, on the record, as a matter of law ANFI failed to follow reasonable procedures to prevent the error at issue. Id., at 1114. The Court explained at page 1114,

AFNI’s steps do not amount to reasonable procedures, as the statute uses that term. To the contrary, applying the bona fide error defense here would essentially reward a business’s ignorance of the law. [The deposition testimony of an ANFI employee] deposition implies that AFNI never knew that charging a fee as the owner of a debt was different from charging a fee as a service provider for another entity: [¶] In the end, AFNI is not arguing that it relied on an informed, but mistaken, legal opinion. It is saying that its ignorance of the law should be excused because it attempted to keep itself informed about the law through the various trade association communications. This is not enough, in our view, to support the bona fide error defense.

Accordingly, the Circuit Court affirmed the judgment of the district court, id., at 1115.

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