A law firm representing a creditor in a consumer bankruptcy can violate the federal Fair Debt Collection Practices Act simply by making an erroneous factual allegation in a motion to modify the automatic stay, according to Chicago’s Chief District Judge Rubén Castillo.
Assuming Judge Castillo’s opinion is correct, making a factual mistake in court papers could more than take the profit out of a creditor representation in a consumer bankruptcy because violating the FDCPA automatically entitles the debtor up to $1,000 in damages plus attorneys’ fees.
Judge Castillo’s case involved a law firm that filed a motion to modify the automatic stay on behalf of a condominium association. The motion alleged that the debtors had not paid condominium assessments after being in chapter 13 for a year. The motion also alleged that the unpaid post-petition assessments were about $750.
Three months later, the debtors filed suit in district court alleging violations of the FDCPA. They contended the motion was factually incorrect because they had only been in chapter 13 for six months, not a year, when the firm filed the lift-stay motion. To show that the arrears at the time were only $550, they attached a letter from the law firm alleging arrears in the lower amount.
The parties disagreed on the standard to be applied to the factual inaccuracies. The debtors pushed for the “unsophisticated consumer standard,” while the firm argued it should be the “competent attorney” standard since the motion was directed to the lawyer for the chapter 13 debtors.
When a complaint alleges that a communication was false but not deceptive, Judge Castillo said in his Dec. 12 opinion that the “unsophisticated consumer” standard applies “‘no matter the targeted recipient.’” Citing Seventh Circuit authority, the judge said the more stringent standard applies to false statements because even a lawyer may be unable to discern the falsehood except by conducting an investigation that may not be possible.
Applying the standard, Judge Castillo said that the incorrect allegation about defaulting for a year in chapter 13 did not violate the FDCPA because even an unsophisticated consumer would know the bankruptcy was only six months old, not a year old, given that the motion itself said when the petition was filed. Therefore, the error was “readily apparent on the face of the filings,” the judge said.
On the other hand, inflating the arrears by $200 did state an FDCPA claim that could withstand a motion to dismiss. The $200 overstatement was material, Judge Castillo said, and was likely to mislead an unsophisticated consumer.
Judge Castillo ended his opinion by directing the parties to “reevaluate their settlement positions” and “exhaust all settlement possibilities.”