Suing creditors and debt buyers under the FDCPA when they also violate a discharge injunction issued by a bankruptcy court may not be the panacea most newly minted consumer lawyers think. (The same thing is true when considering automatic stay litigation).
Lawyers tend to like the FDCPA because they believe they can recover statutory damages for the debtor on top of actual damages and possible punitive damages. The problem is that the FDCPA and litigating a typical discharge injunction violation have different defenses, with the FDCPA being more liberal. Also, the extra money that can be recovered is limited to $1,000.00.
A case in point is the recent decision handed down by 7th Circuit Court of Appeals on March 13, 2007 entitled Ross v. RJM Acquisition Funding.
In this case a debt buyer sent dunning letters to the Debtor discharged in bankruptcy. The Debtor filed suit under the FDCPA in order to obtain statutory damages greater than any action damages, including attorneys' fees and costs. It is important to point out that litigation of a discharge injunction violation, although not statutory (and as a result often not referred to as a "private cause of action") allows for all the same recoveries under FDCPA, with the exception of the statutory damages of up to a $1,000.00, but the discharge injunction violation does not allow the creditor the same liberal defenses.
As pointed out by the 7th Circuit in Ross, because the FDCPA allows a recovery of greater than actual damages (even though the amount is not very much in dollar amount), the law provides for a "safety hatch", or a complete defense to any debt collector who “shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” 15 U.S.C. § 1692k(c).
Although Courts have been loath to allow debt collectors off the hook under the "safety hatch" defense, with the ratcheting up of consumer law based lawsuits, more effort appears to be undertaken to defend on this basis.
In this case, the Defendant debt buyer conducted a computerized search and did not locate Ms. Ross as a debtor in any bankruptcy. They had procedures to minimize errors. They employed an outside company to search for and report to them if a bankruptcy is filed or discharge injunction entered on there accounts. The collector's "algorithms" might have noticed the debtor using the name "Lisa" instead of "Delisa" but it did not matter to the Court. The reason was that, as offered, only 1 in every 10,000 cases referred to collection was have a bankruptcy impediment to collection. Therefore, the 7th Circuit believed that the efforts taken were enough, or were reasonable under the circumstances, to forgive the activities of the debt buyer under the circumstances. As such no money was awarded.
As pointed out by the Court, a section 1692k(a) defense forgives mistakes, even though they inflict harm, when the cost of avoiding a mistake would be disproportionate to the harm.
As stated, a pure discharge injunction does not allow for this "safety hatch" defense. All that must be shown is that the creditor knew of the bankruptcy and intended to send out the letters or undertake the collection activity. There is no "good faith defense" and the only real defense is "a present inability to comply with the order of the court that goes beyond a mere allegation of a present inability". See Jove Engineering v. IRS, which was handed down by the 11th Circuit in 1996. Although Jove deals primarily with automatic stay violation matters, it concerns itself with the enforcement of general federal injunction law because it found that Jove Engineering did not have standing to sue under 11 U.S.C. § 362(h) (which is now 11 U.S.C. § 362(k)) because it was a corporation.
An argument can obviously be made to pursue both causes of action in any litigation. However, the warning is that the Court has the ability to adjust damages, including attorneys' fees and costs, based upon a victory under only one statute and not the other. To piggyback a weaker statute places the debtor in eventually having his or her fees and damages cut -- maybe by up to half.
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