In McCullough v. Johnson, et. al., here, the Court of Appeals for the Ninth Circuit affirmed a large jury verdict against a debt collection law firm arising from the Firm’s prosecution of a debt collection lawsuit. The facts, briefly stated, are as follows: A debt collection law firm in Montana was retained by a creditor to collect a credit card debt that, on its face, appeared to be outside Montana’s statute of limitations. The law firm flagged the issue and inquired of its client, who informed the law firm that there was no statute of limitations issue because the debtor made an additional payment within the statute. The law firm filed suit. The debtor answered the Complaint, pleading that he was a disabled person with a head injury who had been harassed on the debt. The debtor also pleaded the statute of limitations. On receipt of the answer, the law firm went back to its client again about the statute of limitations and about the single payment made within the statute. The client responded that the payment was related to something else. The law firm propounded discovery (RFAs) to the debtor asking him to admit that he had in fact made a payment within the statute of limitations. The debtor retained counsel who defended the debt collection action, and propounded discovery asking for all documents relating to the debt. The law firm inquired to its client again. The client informed the law firm that it had no other documents. The client instructed the law firm to dismiss the collection action, which it did.

The debtor sued the law firm in federal court for FDCPA violations, for malicious prosecution, and for abuse of process. The Plaintiff/debtor moved for partial summary judgment on those claims, which was granted. The Order established that the law firm filed suit on a time-barred debt and had contrary information, but continued to prosecute it. The remainder of the case was tried to a jury who awarded a $1,000 FDCPA penalty, $250,000 in emotional distress, and $60,000 in punitive damages. The Court of Appeals affirmed.

First, the Court of Appeals rejected the application of the bona fide error rule (i.e. that the law firm had policies and procedures in place designed to prevent a violation of the FDCPA). The Court held that a law firm debt collector can rely on its client, but its reliance must be reasonable. The Court of Appeals did not focus on the filing of the lawsuit, but on the law firm’s continued prosecution notwithstanding having contrary information from the client and an assertion of the defense by the debtor. The Court held that the law firm had an ethical and legal obligation to determine the collectability of the debt.

Second, the Court of Appeals held that the law firm violated the FDCPA because it could not produce the original contract signed by the debtor to justify the law firm’s claim to attorneys’ fees. The Court of Appeals rejected the contention that production of generic evidence that all contracts at the time contained attorneys’ fees clauses, so therefore the plaintiff’s contract must have had such a clause too. The Court of Appeals explained:

The district court correctly concluded that JRL failed to meet its burden to show a genuine issue for trial because it presented no admissible evidence of a contract authorizing a fee award. The FDCPA prohibits “[t]he collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law.” 15 U.S.C. § 1692f(1) (emphasis added). JRL produced no evidence of express authorization of its fee request from McCollough; the presentation of generic evidence that all credit cards contain attorney’s fees provisions was insufficient to create a genuine issue of material fact for the jury. The district court correctly granted summary judgment on the claim.

Third, the Court of Appeals held that the discovery (the RFAs) propounded to the Plaintiff were unfair and deceptive, and hence violated the FDCPA. The Court of Appeals adopted caselaw from other jurisdictions holding that the litigation privilege does not protect against an FDCPA violation as well as decisions holding that abusive discovery can violate the FDCPA.

Fourth, the Court of Appeals found that the district court did not err in admitting evidence of other debtors who had been sued by the law firm on debt collection activities. The Court of Appeals found the evidence relevant to the punitive damages claim on the common law claims, as well as to refute the law firm’s bona fide error claim.

Fifth, the Court of Appeals found substantial evidence to support the jury’s findings of malicious prosecution and abuse of process.

Finally, the Court of Appeals found substantial evidence to support the $250,000 emotional distress award based on physician’s testimony as to the exacerbation of Plaintiff’s already vulnerable emotional state.