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FINDING CONSUMER CLAIMS IN BANKRUPTCY CASES

Richard Tomlinson — Thu, 07 Sep 2006 14:00:00 GMT

Chapter Nine

Finding Consumer Claims in Bankruptcy Cases

Attorneys representing debtors in bankruptcy court are probably more exposed to a wider gamut of consumer law issues than any other sub-set of attorneys. Bankruptcy debtors are often a desperate and yet unsophisticated lot that are subject to many abuses not visited upon sophisticated, middle class consumers with prime credit ratings. Being short of money and convinced that conventional lending sources are unavailable, debtors who file for bankruptcy protection are more likely, in my experience, to seek payday loans with interest rates that commonly exceed 500%, apply for auto title loans with interest rates in excess of 100% and to be subject to yo-yo spot deliveries of automobiles. Likewise, such debtors are often treated, both before and after bankruptcy, as “second chance finance” customers who are more likely to be sold automobiles with odometer rollbacks and undisclosed wreck damage and to be sold products on the “back end” such as credit life insurance, credit disability insurance and third-party extended warranties which are usually over-priced and rarely provide the promised benefits without litigation. In addition, this class of consumers are more vulnerable to wrongful repossessions, improper attempts at foreclosure, deceptive attempts at credit repair and outrageous debt collection tactics.

What follows are my ruminations on a number of practical consumer and debtor issues that can be addressed by consumer protection laws.

A. Abusive or Predatory Lending

1. Payday Loans

Payday loans are the modern version of salary-buying. Typically, a company advertises that it offers personal loans of $100 to $500 (or even $1000) “without a credit check.” Assuming the loan applicant has worked for the same employer, lived at the same residence and maintained a checking account for a minimum period of time without any pending hot check charges, these lenders will make loans without actually pulling any credit report. Until recently, the consumer would be required to provide one or two checks for the amount of the loan plus a fee of 15-20%, and the lender promised not to deposit the check or checks for 14 days, or after the next payday, and only if the consumer failed to pay off the full amount or fails at least to pay the fee and to roll over the loan. Now, payday lenders usually obtain authorization to debit the consumer’s checking account if no cash payment is made by the due date. In effect, these are one-payment term loans that are secured by postdated or undated checks or by an authorization to seek electronic payments from the consumer’s bank account. Many consumers are unable to pay off the full amount of the loan in 14 days, so they “renew” the loan and pay the fee repeatedly until they are able to come up with the full amount or they tire of paying and simply cease their payments. A number of surveys have shown that consumers renew these loans, due to an inability to pay off the loan in full, 10 to 12 times. At 15% every two weeks, the annualized cost of this credit is 26 X 15 or about 390%. At 20% every two weeks, the annualized cost of this credit is 26 X 20 or about 520%.

Given the high rate of interest, the absence of any reduction of the principal amount owed unless the full sum is repaid, and the financial tight-wire walked by many consumers who take out these loans, many of these loans eventually fall into default. To induce payment, payday lenders explicitly state, or at least implicitly suggest, that if a check is deposited or a debit is made, the practice when no other payment is received, and then bounces, the consumer has committed a criminal offense and could be arrested on the job. In fact, however, the consumer has not passed a hot check or committed theft, because the lender knows when it receives the check or the debit authorization that there will be insufficient funds in the account at the time the transaction is done. See Jones v. Kunin, 2000 U.S. Dist. LEXIS 6380, *3-4 (S.D. Ill. 2000); Turner v. E-Z Check Cashing, 35 F.Supp.2d 1042, 1051-1052 (M.D. Tenn. 1999); Hartke v. Ill. Payday Loans, Inc., 1999 U.S. Dist. LEXIS 14937, *9 (C.D. Ill. 1999). Otherwise, why would a consumer be seeking the loan? Likewise, there can be no presumption of criminal intent if the check is post-dated and probably not if it is undated. In practical terms, I have not heard of a criminal hot check or theft prosecution arising out of a payday loan transaction brought against a consumer in the Houston area, even in J.P. Court, in over 10 years. In effect, the explicit or implicit threat of criminal prosecution which induces many consumers to renew loans and to pay fees has no teeth. What can be done about such loans? In the best of all worlds, all of these transactions would be considered usurious, any failure to give credit disclosures would be treated as a Truth-in-Lending Act (TILA) violation and much of the efforts at collection would be viewed as violations of the Fair Debt Collection Practices Act (FDCPA) and/or the Texas Debt Collection Act (TDCA). Every loan transaction has to be reviewed differently. The validity of potential claims varies a great deal, depending upon the business model utilized by the lender. See § 7.5.5 of the 2004 Supplement to The Cost of Credit (NCLC 2004).

a. Rent-a-charter transactions

Until recently, the most difficult payday loan transactions to attack were those involving a purported principal-agent relationship between the actual lender, usually a state bank in Delaware, South Dakota, Illinois or Kentucky, and companies with local offices that purport to be acting as loan brokers. Many of the larger payday loan operations purported to act as brokers of payday loans and arranged for loans from banks, such as the County Bank of Rehoboth Beach, that were located in states in states with no usury limits. Since federal banking law allowed the exporting of rates permitted in the jurisdiction where banks were located, these loans facially appeared to be immune to attack for usury, even though the disclosed APR exceeded 500%. Nevertheless, a number of public and private suits were filed, arguing that the payday lender chains were carrying all of the risk, being required to buy back all notes in default, and that, in substance, the true lender was the purported local broker. In effect, these suits argued that the banks whose names were on the notes were only renting their charters to permit the purported brokers to evade local usury laws. The one case in which the plaintiffs prevailed involved a settlement. Purdie v. Ace Cash Express, 2002 U.S. Dist. LEXIS 20910, 2002 WL 31730967 (N.D. Tex. 2002)(case dismissed), 2003 WL 21447854 (N.D. Tex. 2003)(dismissal vacated), 2003 U.S. Dist. LEXIS 22547, 2003 WL 22976611 (N.D. Tex. 2003)(class certified and settlement approved). While Congress has not acted on this issue, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the FDIC issued policies to discourage such arrangements. When the FDIC issued its policy directive in 2005, all of the lenders using this model in Texas switched to a new model, relying on the Texas Credit Services Organizations Act (“CSOA”).

b. Use of the CSOA as a dodge

When the rent-a-charter model failed in 2005 due to policy directives from federal bank regulatory authorities, all of the payday lenders using this model had some time to find a new model. In Texas, all of the larger payday lending operations switched to a CSOA model. Entities like Advance America, Cash America and Ace Cash Express all follow this model. Under this model, the company with local offices registers as a “credit services organization” (“CSO”) with the Texas Secretary of State and provides the disclosures required by the CSOA, Tex. Fin. Code § 393.001 et seq., and lists a separate entity as the lender on the actual loan documents. Since there is no limit on the fees that can be charged by CSO’s for acting as loan brokers, the theory is that the passage of the CSOA in the early 1980's constituted an implied repeal of a portion of the usury laws that would permit broker fees to be treated as interest when the broker was a “general agent” of the lender. In effect, the payday loan operations argue that the CSOA was passed in part to serve as a tort reform measure. While I strongly disagree with this theory, I lost in the one case in which this theory was challenged. See Lovick v. Ritemoney, Ltd., 378 F.3d 433 (5th Cir. 2004).

Practice Pointer: While the CSOA usury defense theory is subject to attack in state court, an action can only be filed in state court if the omni-present arbitration clauses are invalid and unenforceable. Since courts in Texas are loath to refuse enforcement of arbitration agreements, there may be no practical means of attacking this theory of usury avoidance by any means other than a public enforcement action by the State of Texas. Unfortunately, I doubt that any such action will ever be filed. If there is a claim in these cases, it is most likely to involve the payday loan brokers’ collection activity. Since the big operators are all registering as CSO’s and claiming to be loan brokers, they are clearly third-party debt collectors who are subject to the FDCPA as well as the Texas Debt Collection Act. Thus, for example, explicit threats of criminal prosecution or arrest could be subject to attack under those statutes. See section A.1.c. below.

c. Lenders pretending not to be lenders

Another sub-set of payday lenders pretend to be selling a product or a service when, in fact, they are only making a loan. For example, some payday lenders have unsuccessfully claimed to be selling catalog gift certificates, Cashback Catalog Sales, Inc. v. Price, 102 F.Supp.2d 1375 (S.D. Ga. 2000) and Upshaw v. Ga. Catalog Sales, 206 F.R.D. 694 (M.D. Ga. 2002)(class certification granted), advertisements, Henry v. Cash Today, Inc., 199 F.R.D. 566 (S.D. Tex. 2000)(class certification granted), and internet service, State of North Carolina v. NCCS Loans, Inc., 620 S.E.2d 697 (N.C. App. 2005), Department of Financial Institutions v. Mega Net Services, 833 N.E.2d 477 (Ind. App. 2005) and Short on Cash.Net of New Castle, Inc. v. Department of Financial Institutions, 811 N.E.2d 819, 2004 Ind. App. LEXIS 1210 (Ind. App. 2004). See also Austin v. Alabama Check Cashers Ass’n, 2005 Ala. LEXIS 197 (Ala. 2005)(covering catalog gift certificate and telephone calling card schemes). The issue in all of these cases is whether, in substance, the transactions are loans or sales or, in other words, whether the form of the transaction as a sale is merely a guise or sham to evade the usury laws. See Tex. Fin. Code §§ 342.008 and 342.051. Since § 342.008 explicitly states that “[c]haraterization of a required fee as a purchase of a good or service in connection with a deferred presentment transaction is a device, subterfuge or pretense” to evade the law, there may be no factual issue when such transactions are completed in Texas.

For a long time in Houston, many payday lenders engaged in sale-leaseback transactions whereby they would purchase a consumer’s television or refrigerator, e.g., for $200 and then agree to lease the property back for 2 weeks in return for a “rental” fee of 20-25% with an option price of $200. With amendments to the Finance Code effective September 1, 2001, however, the Legislature specifically declared that these transactions were to be treated as loans and the rentals as interest. See Tex. Fin. Code § 341.001(10). That led many of the sale-leaseback operations to change their business model.

Besides usury, payday lenders that pretend to be sellers often violate the Truth-in-Lending Act as well. Since the Federal Reserve Board’s issuance of an official interpretation on March 24, 2000, 65 Fed. Reg. 17129 (2000), it has been undisputed that TILA applied to deferred presentment transactions as extensions of credit. Arrington v. Colleen, 2000 U.S. Dist. LEXIS 20651 (D. Md. 2000). Even if this official interpretation need not be followed until October 1, 2000, Clement v. Amscot Corp., 176 F.Supp.2d 1292 (M.D. Fla. 2001), there is no doubt that all payday loan transactions consummated on or after that date must comply with TILA. Nevertheless, it has been my experience that those businesses pretending to be sellers instead of being lenders fail to give any TILA disclosures, exposing themselves to federal jurisdiction and statutory damages equal to twice the finance charge not to exceed $1000 and not less than $100. Koons Buick Pontiac GMC, Inc. v. Nigh, 2004 U.S. LEXIS 7979 (2004).

The operations pretending to be sellers may also violate the Texas Debt Collection Act by threatening hot check arrest or criminal prosecution when the check or checks, serving as security, are deposited and then bounce. See, e.g., Turner v. E-Z Check Cashing, 35 F.Supp.2d 1042 (M.D. Tenn. 1999). Such threats by a third-party, such as an attorney, violate the federal Fair Debt Collection Practices Act, assuming the third party meets the statutory definition of a “debt collector.” Nance v. Ulferts, 282 F.Supp. 2d 912 (S.D. Ind. 2003). At least one payday lender based in a foreign country has attempted to threaten defaulting Texas borrowers with wage garnishment, and that is the subject of a private lawsuit in Harris County District Court.

Practice pointer: One way for payday lenders to discourage claims is to place an arbitration agreement in the loan documents. These arbitration agreements, however, are not always enforced, particularly in bankruptcy court when there is a core proceeding involving the payday loan. See The Cost of Credit § 10.6.10 (NCLC, 2004 Supplement); Consumer Arbitration Agreements § 5.2.3 (NCLC, 4th ed.).

2. Car Title Loans

These transactions work much like payday loans, but the security is a lien on a paid-off vehicle (instead of a check), the amount being lent is usually at least $1000 (instead of $100 to $500), the interest rate is usually around 100% (instead of 400% or more) and the term is usually at least 6 months with multiple payments (instead of a 2-week term with one payment). Like the case of many payday lenders, title lenders often try to evade the usury laws through the use of form, but these efforts at evasion are often unsuccessful. See Sal Leasing, Inc. v. State ex rel. Napolitano, 10 P.3d 1221 (Ariz. App. 2000)(sale-leaseback of automobiles actually car title loans); Aple Auto Cash Express Inc. of Okla. v. State ex rel. Oklahoma Dep’t of Consumer Credit, 78 P.3d 1231 (Okla. 2003)(transactions in form rent-to-own deals but, in reality, were car title loans).

As mentioned earlier, one local group of businesses have attempted to avoid usury liability for such transactions by having one business act as a broker, register under the Credit Services Organizations Act, do all the work, place the loan with a lender. Specifically, they have disclosed in their paperwork that the finance charge for TILA purposes was over 100%, but they argued that the 75% fee paid to the broker could not be treated as interest even in the face of allegations that there was a principal-agent relationship between the lender and the broker. So far, the Fifth Circuit Court of Appeals has accepted the lenders and brokers’ argument in affirming a Rule 12(b)(6) dismissal. See Lovick v. Ritemoney Ltd., 378 F.3d 433 (5th Cir. 2004). Should the Lovick opinion remain in place, form will be more important than substance and successful usury cases in this area will be few and far between unless the lenders use a different business model.

3. High-interest, high-fee loans

One other form of predatory loan is the home equity, home improvement or re-fi loan secured by a homestead with very high fees or interest that is subject to the Home Ownership Equity Protection Act (HOEPA), a part of TILA. Money Mortgage used to broker a large number of HOEPA loans every year, but I have not seen many of these type of loans since Money Mortgage failed and filed for bankruptcy protection back in September of 2001. If you find one of these loans with fees in excess of 8% or an interest rate 8% in excess of the T-bill rate for notes with similar terms, see 15 U.S.C. § 1602(aa), then the lender is required to comply with a number of mandates set forth in 15 U.S.C. § 1639, such as a required written notice before closing, limitations on prepayment penalties, a partial ban of balloon payments, a complete ban on negative amortization and a prohibition on the making of loans without regard to the borrower’s ability to repay (in other words, the loan was made solely on the basis of the borrower’s equity in his home). When HOEPA applies, it is often violated, and it provides a special penalty equal to all payments to date for interest and fees. 15 U.S.C. § 1640(a)(4). Moreover, HOEPA provides unlimited assignee liability. 15 U.S.C. § 1641(d). In short, HOEPA provides the plaintiff’s counsel with a substantial weapon, even where federal law has preempted all state usury regulation in the context of residential construction mortgages.

Practice pointer: When raising claims for consumers in adversary proceedings or otherwise during the pendency of a bankruptcy proceeding, it is essential that bankruptcy practitioners amend schedules to reflect the existence of consumer claims as soon as they are discovered and raise in Chapter 13 plans. Failure to take these precautions can lead to dismissal of a consumer claim on judicial estoppel and res judicata grounds.

B. Outrageous collection tactics

Besides threats of criminal prosecution related to payday loan collections, bankruptcy attorneys should be alert to other debt collection practices that can be attacked under the federal Fair Debt Collection Practices Act or the Texas Debt Collection Act. For example, you should recognize that attorneys can be liable under the FDCPA for failing to provide validation and Miranda notices within 5 days of their first contact, by filing suit to collect consumer debts in a distant forum and by permitting non-attorneys to utilize their signed letterhead without any direct involvement in the process of collection. For a discussion of these issues, see the paper entitled “Federal Fair Debt Collection practices Act and Texas Debt Collection Act” at my website located at www.HoustonConsumerLaw.com.

C. Yo-Yo/Spot Delivery Transactions

After choosing a particular car to purchase and permitting his trade-in vehicle to be appraised, the consumer will be asked to provide a substantial cash downpayment, and sometimes a trade-in, and sign all of the usual paperwork, including a buyer’s order, a retail installment contract, a title application, a promise to obtain insurance sheet and odometer disclosure documents, and, in addition, the consumer will be asked to sign a document usually referred to as a “bailment agreement” or “courtesy delivery agreement.”

In the bailment agreement, the dealer typically promises to seek financing on the terms set forth in the other documents, but, if the dealer is unable to obtain financing on those terms, then the consumer is obligated to return the vehicle upon request and the dealer can apply daily and mileage use charges against any cash downpayment provided by the consumer. Many of these bailment agreements even provide that the trade-in may be sold immediately, even if the dealer later claims the deal was not completed due to the failure to “obtain financing.” Leaving his trade-in, if any, with the dealer, the consumer then drives away, often with a temporary dealer plate stating that a sale occurred that day, but often the consumer is only allowed to retain a copy of one document, the bailment agreement. Frequently, consumers in these transactions are told that they will receive a copy of the retail installment contract in the mail or when they come to pick up their permanent license plates. Most of these consumers drive away assuming that the deal is final.

After driving off in a new vehicle, the dealer attempts to sell the retail installment contract, and the right to receive the monthly payments, to a sub-prime finance company. If the dealer is unable for any reason to sell the contract or at least not on the terms set forth in the contract, the dealer will usually call the consumer and ask for either the car to be returned or the consumer to sign a new retail installment contract, frequently back-dated to the date of delivery, with terms less favorable to the consumer, such as a higher downpayment, a higher interest rate and consequently higher monthly payments, or the addition of a co-signor. In fact, sometimes dealers ask consumers to return and sign several different retail installment contracts. When the retail installment contract is not sold or renegotiated and sold, the dealer takes the position that no sale was ever consummated, as it has not transferred title (which only occurs when the dealer is paid in full by a finance company). Instead, because no financing has occurred, the argument goes that the transaction was merely a form of rental and an objecting consumer will have daily and mileage rental charges assessed against their downpayment. When such a deal goes south and a consumer demands the return of the trade-in and cash downpayment, the dealer frequently says the trade-in has already been sold and that the consumer is not entitled to any refund due to significant use, relying on the “bailment agreement.” (Marvin Zindler of Channel 13 in Houston calls this process “dehorsing” when consumers are denied the return of their trade-in.) To avoid arguments over the existence of a sale on specific terms, dealers have alternated between providing no copies of the retail installment contract until after funding at the time of assignment and providing a copy of the retail installment contract with no dealer signature (based on the feeble argument that it was not a final agreement without such a signature).

Not surprisingly, the dealer will typically assert that the retail installment contract was consummated on the day the consumer signed when it is able to sell that contract and obtain funding from a finance company, but, on the other hand, the dealer will assert that no sales transaction was ever consummated if it was not able to sell the finance contract even though the consumer has already signed. Talk about a one-sided agreement! This is one of the best examples of a “tails I win/heads you lose” transaction.

For ways to obtain for injured consumers in these transactions, see the paper presented to a State Bar CLE in November of 2004 entitled “Representing Consumers in Failed Yo-Yo Transactions” at my website, www.HoustonConsumerLaw.com. Please note as well that the Office of the Consumer Credit Commissioner proposed a rule in 2004 to regulate these transactions, based on the Commissioner’s licensing authority over dealers that enter into retail installment transactions. That proposed rule, however, has not yet been promulgated.

D. Car Title Disputes Arising out of Sales out of Trust

In the typical automobile sales transaction, there are a number of parties that serve particular roles. First, whether the transaction involves a new or used vehicle, there is a floorplanner which provides financing for the dealer to put the automobile on the lot for sale, secured by a purchase money security interest (PMSI) in the dealer’s inventory. Second, there is the dealer that is offering to sell the vehicle. Third, there is the consumer who agrees to purchase the vehicle off the lot of the dealer. Finally, there is the retail finance source which ultimately provides the funding for the purchase of the automobile from the dealer by the consumer, secured by a PMSI in the vehicle which is the subject of the sale. This retail financing usually comes in one of two forms. A retail lender can provide direct financing to consumers who seek their own funding or indirect financing by purchasing a retail installment contract executed by the dealer and the consumer.

What happens when a vehicle is sold by a dealer without payment of the inventory lender’s PMSI? This is commonly known as a “sale out of trust.” Such sales out of trust are very common, especially with failing used car dealers who must steal from Peter to pay Paul. The law must determine who must suffer or share the risk of loss when such a sale out of trust occurs. Attorneys representing consumers can make at least modestly decent money in such cases, as long as careful case selection analysis is conducted before offering to be retained. On the one hand, consumers in these cases are sympathetic even to very conservative judges and jurors, because they are often truly innocent and yet have suffered a loss of title or even possession of a vehicle that they had purchased. On the other hand, there can be substantial risk in these cases as well, however, because there may be no deep pocket defendant that can afford to pay damages or afford other relief. Before agreeing to represent a consumer in a sale out of trust case, consumer attorneys must be sure that their prospective consumer is innocent and that there is a target defendant with the resources to pay damages. With the right facts, the right client and the right defendant, an attorney representing an innocent consumer can do well for his client and himself. A paper entitled “Car Title Disputes Arising Out of Sales Out of Trust,” soon to be on my website, www.HoustonConsumerLaw.com, endeavors to survey how the law has addressed the burden of risk in sales out of trust and, thereby, to give attorneys the tools to identify those cases which are worth handling.

E. Deceptive Auto Sales: Odometer

Rollbacks and Undisclosed Wrecks In my experience, odometer rollbacks and undisclosed wrecks are the most common consumer complaints about automobiles after failed yo-yo transactions. For a discussion of the law in this area, see the paper entitled “Deceptive Auto Sales: Odometer Rollbacks and Undisclosed Wreck Damage,” on my website, www.HoustonConsumerLaw.com.

F. Wrongful Repossessions and Sales after Repossession

Another fertile area for consumer litigation are wrongful repossession and post-repossession sales made without proper notice, using the UCC as both your shield and sword. First, if the repossession was made without a default (this actually happens!) or with some form of breach of the peace in violation of Tex. Bus. & Com. Code § 9.609(b)(2), your consumer client is entitled to minimum damages under Tex. Bus. & Com. Code § 9.625(c)(2) equal to 10% of the cash price and the entire finance charge. A breach of the peace during a repossession occurs when the repossession is accomplished over the vocal protest of the consumer debtor (this is why many repossessions occur in the middle of the night), the repossessing agent breaks into a garage or cuts through a locked gate to recover a vehicle, or the repossessing agent calls upon the assistance of a police officer to assist them in controlling the consumer. See official comment 3 following Tex. Bus. & Com. Code § 9.609. Keep in mind that the creditor that arranged for the repossession is the responsible party, not the purported independent agent that accomplished the repossession, because the duty to conduct self-help repossessions without a breach of the peace cannot be delegated. MBank v. Sanchez, 836 S.W.2d 151, 152 (Tex. 1992); State Bar Committee Comment following Tex. Bus. & Com. Code § 9.609.

After the repossession, the creditor is obligated to send notice of intended disposition under Tex, Bus. & Com. § 9.611 and the prescribed timing and form of the notice is set out in Tex. Bus. & Com. Code §§ 9.612-9.614. There are even some safe-harbor forms set out in these provisions for use by creditors. In short, all they have to do is fill in the blanks and give at least 10 days’ notice. My experience is that some creditors regularly make mistakes in this area by failing to give 10 days’ notice, by giving inadequate notice through non-use of the statutory forms, or by even failing to send the notice. Not only does such behavior act as a complete defense to any deficiency claim in consumer cases, see Tanenbaum v. Economics Laboratory, Inc., 628 S.W.2d 769 (Tex. 1982) and State Bar Committee Comment following Tex. Bus. & Com. Code § 9.626, it also allows you to make an affirmative claim for minimum damages under Tex. Bus. & Com. Code § 9.625(c)(2), see, e.g., All Valley Acceptance v. Durfey, 800 S.W.2d 672 (Tex. App. - Austin 1990, writ denied). Also after the repossession, the creditor must give a post-sale accounting within 14 days after receiving a written request signed by your client under Tex. Bus. & Com. Code § 9.616, and the failure to provide such an accounting under these circumstances could entitle your client to a $500 penalty under Tex. Bus. & Com. Code § 9.625(e).

While the UCC does not accord the right to recover attorney fees on these claims, there may be a right to recover such fees under Tex. Civ. Prac. & Rem. Code § 38.001 if the underlying contract is violated. For example, many retail installment contracts provide, like the UCC, that the creditor can repossess the collateral through self-help means if this can be done without a breach of the peace and that notice of disposition will be sent after repossession. If the repossession was accomplished without a breach of the peace or a sale occurred without written notice, the contract was then breached, rendering § 38.001 applicable. First City Bank – Farmers Branch, Texas v. Guex, 677 S.W.2d 25, 29-30 (Tex. 1984).

G. Conclusion

I urge bankruptcy practitioners who represent debtors to become familiar with the consumer laws applicable to their clients, partly because I want to encourage more lawyers to handle consumer claims and partly to encourage lawyers to recognize consumer issues and then to refer their clients when necessary to attorneys with consumer law experience.

7-Sep-06 9:00 AM

CONSUMER ADMINISTRATIVE LAW

Richard Tomlinson — Thu, 07 Sep 2006 14:00:00 GMT

A. Introduction

In my almost 27 years of practice, I spent 12 years in the Consumer Protection Division of the Office of the Attorney General from 1985 to 1997. During my time with the OAG, one of my most unpleasant tasks was responding to what we called ORA’s, short for Open Records Act requests. If there was a request for information on a business being investigated or sued by the OAG for DTPA violations, I was forced to comb the file for responsive documents, to consider what documents were exempt from disclosure and which ones could be disclosed and then to ship copies of the responsive documents to an Open Records Act officer in the Austin office of the CPD in Austin who would send the actual response after redacting either names or social security and credit card numbers, all in a very short time period. I viewed this work as a diversion and also as a possible boon to target defendants who might recover documents that were otherwise exempt from disclosure in the discovery process but could become discoverable through the Open Records Act by means of a failure on my part to respond faithfully and promptly. In short, what I saw was that responding to many of these requests was not only a possible diversion but even a trap for the unwary.

Since entering private practice in the fall of 1997 to concentrate on the representation of consumers and debtors, my opinion of this process has radically changed. What used to be called the Open Records Act, and frankly I still call it that, helps to assure that consumer laws are more completely enforced through private means. Given the limited resources of the OAG and all other state agencies in enforcing state consumer protection laws, some private enforcement is necessary or those laws become superfluous, and providing generous responses to Open Records Act requests can assist consumer lawyers in providing such private enforcement. As I remember well at the OAG, we constantly had to use prosecutorial discretion to winnow out the cases worthy of a public enforcement action, and that often meant that we had to ignore hundreds of unresolved, and many times legitimate, consumer complaints.

Obtaining records of complaints from the OAG, the Office of the Consumer Credit Commissioner, the Department of Insurance and numerous other state regulatory bodies can assist counsel representing consumers in a number of ways. First, it can be used for Tex.R.Evid. 404(b) purposes to locate evidence to establish a pattern of misconduct to prove motive, intent, knowledge and absence of mistake or accident, even though the information obtained from complaints is not directly admissible to prove that the defendant operated in the same manner in the case at issue. Second, it can be used to help establish numerosity when seeking class certification. While class certification under the DTPA is now virtually impossible given the imposition of a reliance requirement for laundry list claims in 1995, class actions may still be certified under other statutes lacking a reliance requirement, such as the usury statutes, the Texas Debt Collection Act (Chapter 392 of the Finance Code) and the Home Solicitation Transactions Act (Chapter 39 of the Business and Commerce Code). Third, when injunctive relief is sought, either for an individual or a class, the existence of complaints and/or testimony from other complainants can persuade a judge to enjoin wrongful practices. Fourth, the existence of similar complaints can be relevant to the size of a statutory penalty. For example, under the DTPA, certain relief like additional damages and mental anguish cannot be obtained absent proof of knowledge, and the existence of other, similar complaints can help to establish such knowledge. Likewise, the amount of any additional damages which can be awarded under the DTPA is likely affected by the frequency of the misconduct at issue, and this is where the information from consumer complaints to state agencies could also prove helpful. Moreover, under the Fair Debt Collection Practices Act, the size of the statutory penalty is supposed to be based at least in part on "the frequency and persistence of noncompliance by the debt collector." See 15 U.S.C. § 1692k(b). Finally, the details in complaints can be a form of dynamite discovery about a target defendant, which can be obtained even before suit is filed.

B. Usury

One of the first cases in private practice where I used consumer complaints was Henry v. Cash Today. See Henry v. Cash Today, Inc., 199 F.R.D. 566 (Tex. 2000). Given the OAG’s action against Cash Today, a payday lender pretending to be an advertising service, there were a vast number of consumer complaints. This demonstrated that a class action raising claims under the Truth-in-Lending Act and RICO, which could not be raised by the OAG, could be filed. In addition, these complaints provided lots of factual details on the operations of Cash Today, guiding our discovery. While requesting copies of the many complaints was probably difficult for the OAG, the private parallel class action filed against Cash Today provided welcome reinforcement to the OAG in its efforts to bring this usurious payday lender to heel.

C. Debt Collection

I have used complaints against debt collectors and creditors to considerable effect in several cases. For example, in an FDCPA and DTPA cases against a law firm that filed about 15 lawsuits to collect consumer debts against residents of Tyler and Houston in Dallas, even though there was no basis for venue there. An Open Records Act request revealed that at least one complaint had been received by the OCCC which was accompanied by a letter from the agency to the law firm noting that this conduct violated the DTPA. Given the fact that this law firm filed at least one more suit in violation of the distant forum abuse provisions of the FDCPA and the DTPA, this information allowed me to argue for a more substantial statutory penalty, because it helped to establish that the misconduct at issue was persistent and knowing, if not intentional.

D. Conclusion

Given the very limited resources accorded to state agencies for public enforcement of consumer protection laws, those laws, such as the DTPA and its various tie-in statutes, cannot be effectively enforced without private enforcement. One way to assist such private enforcement without allocating any substantial resources is providing generous responses to Open Records Act requests.

7-Sep-06 9:00 AM

Defending Yourself in a Credit Card Lawsuit

Richard Tomlinson — Fri, 24 Mar 2006 15:00:00 GMT

What was once almost unheard of has now become common practice: individuals being sued over credit card debt. Increasingly, credit card companies and third party debt collectors are filing lawsuits against consumers in small claims and county courts. Public records searches reveal some parties suing in hundreds of cases each month in Harris County alone. Is it all bad news or is there some light at the end of the tunnel for consumers defending themselves on defaulted debts? From the perspective of the newly-served consumer, it is all a nightmare. From the vantage point of consumer attorneys, a lawsuit is just another tactic used by debt collectors, oftentimes one that can be defended against and possibly disposed of.

Lawsuits are last ditch efforts by creditors or third party debt collectors to get the consumers to pay their debt. Some suits are brought by original creditors and some are brought by third party debt collectors who purchase the debt at a discount. Original creditors might include the banking institution that extended credit, for example Citibank or Chase, or a retailer, like Macy’s or a furniture store. Third party collectors suing consumers over credit card debt have purchased the debt from the original creditor or from previous debt collectors as holders of the account.

The value of the debt decreases over time as its “collect-ability” declines over time. While the dollar amount of debt in default will continue to grow because of interest and penalties, its value drops. Debt collectors buy a portfolio of defaulted credit card accounts at a discount for much less than the amount of the initial debt. Since they purchase the debt at a discount, they can still make a profit even if the consumer pays less than the full amount of the debt.

When an original creditors or third party collectors determine that their collection efforts are not garnering the desired settlement of the account, they sue the consumer. Consumers in default on their credit card debts are not the deadbeats collectors might have you believe. Research indicates that most consumers in debt have gotten to that point because of unemployment, divorce or mounting medical bills. Being sued for a debt only adds insult to injury for a battered consumer.

Lawsuits have strict answer deadlines. If a consumer fails to meet an answer deadline, the debt collector may seek a default judgment. If consumers finds themselves the subject of a lawsuit, the first course of action should be to consult with an attorney as quickly as possible as to avoid missing the answer date. Next, check your credit report to determine who has collected on the particular account in the past and when the account went into default. That information, plus any other letters or other material related to the account, should be reviewed by an attorney to determine if there are defenses available. One example of a good defense on a credit card debt would be the tolling of the statute of limitations. In Texas, the statute of limitations for suing over a credit card is four years. If more than four years have passed since the last payment was made, the lawsuit is time-barred.

Finally, many debt collectors, especially third party debt collectors, may have difficulty proving details regarding a debt. Defense strategy is the key in such cases. An experienced attorney, familiar with various debt collectors and their practices, will be able to assess the possibility of settling the debt out of court for less than the original amount as well as the possibility of getting a case dismissed altogether. Consumers may want to settle a credit card lawsuit because of the potential liability to their credit report and credit scores. This is particularly significant for consumers interested in making a big purchase, such as a house or a car.

As lawsuits over debt become more common, you should keep in mind you may have valid defenses to the suit. An experienced attorney may be able to find defenses you did not know existed.

24-Mar-06 10:00 AM

How Consumers Should Handle Illegal and Unethical Debt Collection Situations

Richard Tomlinson — Thu, 16 Feb 2006 17:00:00 GMT

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Embarrassing calls at work. Threats of jail and even violence. Improper withdrawals from bank accounts. An increasing number of consumers are complaining of abusive techniques from some debt collectors.

If you are having debt problems, a collector or collection agency may contact you seeking payment. While they have a right to do so, it doesn't mean you have lost your right to be treated fairly. The Fair Debt Collection Practices Act helps consumers fight back against unfair, unethical and illegal debt collection tactics. This includes attorneys who collect debts on a regular basis. Stopping harassment by debt collectors begins with learning about your rights. The Act clearly defines the rules that bill collectors and collection attorneys must obey when collecting debts.

The debt collection industry is one of the most complained-about industries to the Federal Trade Commission (FTC). This is because, despite the Fair Debt Collection Practices Act, most debt collectors know they will get away with their illegal tactics and behavior because (1) most consumers are uninformed about debt collection laws; (2) it's hard to prove the behavior occurred and its hard to prosecute it; and (3) too many debt collectors are poorly trained and informed and work in an industry with a very high turnover rate.

Debt collectors are not allowed to use the following harassing or abusive tactics:

Use of or threatening violence or criminal means to harm you;
Use of obscene or profane language;
Advertising your debt for sale;
Telephoning you repeatedly or continuously with the intent to annoy or harass; or
Placing telephone calls without meaningful disclosures of their identity.

Likewise, debt collectors are not allowed to deceive consumers with the following:

False representations that they are government representatives;
Falsely represent that they will seize, garnish or sell any property or wages unless such action is lawful;
False representations that you have committed a crime or that you will be arrested or imprisoned;
Threats to communicate false credit information with any other person;
Falsely implying that the debt collector is employed by a credit bureau;
False representations implying that they are attorneys or that there is the involvement of an attorney in collecting a debt;
Falsely indicating the legal status of papers or forms sent to you;
Use of a false name;
Misrepresenting the amount of the debt; or
Sending you something resembling an official document from a court or governmental agency when it is not.

If a creditor or collector sends you a legal notice, do not ignore it. Most collection suits and arbitration proceedings against consumers result in default judgments because consumers fail to respond to the legal notices. When they fail to respond, collectors may proceed to request a payment order from the court, even if the debt is not valid. On the other hand, cases are often dismissed when a consumer challenges the validity of the claim.

Click here to view a comprehensive list of debt collectors operating in Texas. If you've experienced problems with any of them, contact the Law Office of Richard Tomlinson.

16-Feb-06 11:00 AM

Pursuing the Debt Collector Instead of Being Pursued

Richard Tomlinson — Fri, 10 Feb 2006 15:00:00 GMT

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We are a society of buyers surrounded by offers of easy credit. Minors get solicitations for credit cards through the mail. College students are flooded with credit card offers. It’s easy to buy on credit and plan to pay later what you can’t afford today. Reports show the average American household carries over $9,000 in credit card debt. Unfortunately, some people fall behind on their payments and end up hounded by debt collectors. You should know there are laws that define what debt collectors can not do. When the line is crossed and debt collectors violate the law, consumers may actually sue the debt collector.

Once you fall behind in payments, your debt can be turned over for collection, either in-house by the creditor or to a third-party collector. In the past, credit card companies rarely went past the stage of requesting payment through debt collectors. Recently, though, companies are suing debtors over credit card debt, and there has been an increase in illegal collection activities before a lawsuit is filed.

While some collection practices are allowed, many are prohibited by law. Both federal and Texas law regulate collection activity and prohibit unfair and deceptive collection practices. If these laws are violated, consumers can sue the debt collector.

The federal Fair Debt Collection Practices Act (FDCPA) was enacted to protect individual consumers. Business debt is not covered under the Act. The FDCPA also only covers third-party debt collectors and companies that buy debts after consumers have defaulted on payment. Violations by an original creditor are not covered.

Certain conduct by debt collectors constitutes flat-out violations. This includes communication with a third party without the consumer’s authorization and harassment or abuse used to force a person into paying the debt. Even if you owe money on a credit card, the debt collection company cannot call your parent or sibling, for instance, and talk to them about the debt. A debt collector cannot use profanity or threaten the use of violence. Repeated calls with the intent to annoy the individual are also prohibited. Any written collection attempts must contain certain notices required by law. Failure to include these notices violates the law.

Often, debt collectors push the boundaries of what is legal and count on consumers being unaware of what is and is not allowed. For example, debt collectors cannot garnish wages in Texas for consumer debts, nor can they usually attach a lien to your homestead. If a debt collector threatens to collect a consumer debt through wage garnishment or by attaching a lien on your homestead, he may have violated the law. Threatening a lawsuit or arrest may also be a violation. Unless the debt collector can sue and actually intends to sue over a debt, that threat is illegal. Threats to sue on very old debts barred by legal limitations are deceptive under the law. Consumers who encounter such threats or who are actually sued should consult an attorney

Individuals may want to contact debt collection agencies in two situations. First, a consumer can request that the debt collector stop contacting them about a debt. Pursuant to federal law, if a debtor makes that request, any subsequent phone call and more than one written communication to the consumer would violate the law. Second, a debtor who receives notice that a debt is in collection may request that the debt be validated. In response to a validation request, the debt collector should disclose the amount of debt and the original creditor. Until the debt collector validates the debt in writing, all collection activity must cease if the request to validate was made in writing.

A consumer being harassed on a debt is protected by the FDCPA and can file a lawsuit against the violating debt collector. Federal law allows plaintiffs to recover actual damages plus up to $1,000 as a statutory penalty against third-party collectors. The Texas Debt Collection Act, the Texas counterpart to the FDCPA, has fewer consumer protections, but violations of the Texas act sometimes allow for a $100 penalty. Both the federal and the Texas acts allow plaintiffs to recover their attorney’s fees and costs. When confronted with an abusive debt collector, consult an attorney to explore your rights to see if you can pursue the pursuer.

Richard Tomlinson is Board Certified in Commercial and Consumer Law by the Texas Board of Legal Specialization. In this series on consumer issues, they will focus on consumer issues such as defending yourself if sued for credit card debt, car warranty and title issues, violations of law by debt collectors and consumer’s rights under arbitration agreements. Richard Tomlinson is married to Ann Pinchak.

10-Feb-06 9:00 AM

Federal Fair Debt Collection Practices Act and Texas Debt Collection Act

Richard Tomlinson — Thu, 12 Jan 2006 19:00:00 GMT

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I. Introduction

Any attorney seeking to enforce and or collect money judgements in Texas needs to be aware that the federal Fair Debt Collection Practices Act (“FDCPA”) and the Texas Debt Collection Act (“TDCA”) may apply to his or her enforcement activities. Failure to be cognizant of the scope of these laws and their proscriptions may well impose monetary liability on the attorney and even his or her client.

II. FDCPA

A. Scope

The prohibitions set forth in the FDCPA only apply to parties who meet the definition of a “debt collector” set forth in 15 U.S.C. § 1692a(6) as follows:

The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

Following this definition are two sentences which impose liability on parties that might not otherwise meet the definition. First, creditors who collect their own debts under a name other than their own name are treated as “debt collectors.” Second, the definition of “debt collector” includes any person who uses the mail or other instrumentality of interstate commerce to engage in a business the principal purpose of which is the enforcement of security interests.

The definition of “debt collector” is followed by 6 exceptions covering (1) officers and employees of a creditor while collecting debts for the creditor, (2) persons collecting debts for an affiliated corporation when collection of debts is not the principal business of such a person, (3) any officer or employee of the federal state government collecting a debt as part of his official duties, (4) any person serving or attempting to serve process, (5) any nonprofit organizations engaged in consumer credit counseling services, and (6) any person collecting a variety of debts such as, inter alia, those incidental to escrow arrangements, debts originated by that person, and debts not in default at the time they were obtained by such person.

Under 15 U.S.C. § 1692a(5), covered “debts” include “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.” The reference to “consumer” means any natural person obligated or allegedly obligated to pay any debt.” 15 U.S.C. § 1692a(3).

In short, the FDCPA covers third-party debt collectors attempting to collecting debts arising out of obligations with a consumer (i.e. personal, family or household) purpose. Covered collectors can include those who are collecting consumer debts owed to others as well as consumer debts that have been assigned after default to the collector by the original creditor. The Act does not cover creditors attempting to collect their own debts inhouse (as long as they use their own name in collection), government employees attempting to collect debts owed to the government or process servers attempting service of process.

Note: A party that violates 15 U.S.C. § 1692j by providing a form that falsely represents that a third party, like an attorney, is involved in the debt collection process, is liable even without meeting the defined requirements of 15 U.S.C. § 1692a(6). Taylor v. Perrin, Landry, deLaunay & Durand, 103 F.3d 1232, 1239 (5th Cir. 1997).

1. Coverage of Attorneys

If you are as old as me, 52, you may wonder why the FDCPA has any relevance to attorneys seeking to enforce judgments. For almost 10 years after its enactment, the FDCPA specifically exempted “any attorney-at-law collecting a debt as an attorney on behalf of and in the name of a client.” That exemption, however, was repealed in 1986, and suddenly attorneys became subject to liability for violations of the FDCPA when they met the definition of “debt collector.” Despite the repeal of the attorney exemption, a number of courts, and even the Federal Trade Commission, were unwilling to find that the FDCPA applied to the activities of attorneys engaged in litigation. Green v. Hocking, 9 F.3d 18, 22 (6th Cir. 1993); Fireman’s Ins. Co. v. Keating, 753 F.Supp. 1137, 1141-1144 (S.D.N.Y. 1990); Federal Trade Commission, Statements of General Policy or Interpretation, Staff Commentary on the Fair Debt Collection Practices Act,” 53 Fed.Reg. 50,097, 50,100-50,102 (1988). For example, the Sixth Circuit unabashedly stated that “the actions of an attorney while conducting litigation are not covered by the [FDCPA.]” 9 F.3d at 22.

Likewise, the FTC informally opined that attorneys “that engage in traditional debt collection activities (sending dunning letters, making collection calls to consumers) are covered by the FDCPA, but those whose practice is limited to legal activities are not covered.” 53 Fed.Reg. 50,097, 50,100. A number of courts of appeals, however, had found that there was no residual “litigation” exception for attorneys after the repeal of the express exception in 1986. Jenkins v. Heintz, 25 F.3d 536 (7th Cir. 1994); Fox v. Citicorp Services, Inc., 15 F.3d 1507, 1512-1513 (9th Cir. 1994); Scott v. Jones, 964 F.2d 314, 316-317 (4th Cir. 1992). Finally, the Supreme Court addressed this issue and specifically held that “[t]he Act does apply to lawyers engaged in litigation.” Heintz v. Jenkins, 514 U.S. 291, 294, 115 S.Ct. 1489, 1490 (1995). The Supreme Court primarily relied on the plain language of the “debt collector” definition and the repeal of the explicit attorney exemption in reaching its conclusion. As for the FTC’s interpretation, the Court noted that it was not considered binding on the Commission or the public and was not a reasonable reading of the statute, one of the few times the Court has been unwilling to defer to the statutory interpretation of an administrative agency.

Conceding that there is no “litigation” exception for attorneys, when are attorneys covered by the FDCPA? The Fifth Circuit has ruled that there are two ways in which an attorney may meet the definition of a debt collector: (1) by engaging in any business “the principal purpose of which is the collection of any debts” or (2) by regularly collecting or attempting to collect debts owed to another or assertedly owed to another. Garrett v. Derbes, 110 F.3d 317, 318 (5th Cir. 1997). In other words, there are two alternative prongs in the definition, the “principal purpose” prong and the “regularly collect” prong. Finding a substantial difference between these two prongs, the court held that “a person may regularly render debt collection purposes, even if these services are not a principal purpose of his business. Indeed, if the volume of a person’s debt collection services is great enough, it is irrelevant that these services only amount to a small fraction of his total business activity; the person still renders them ‘regularly.’ “ Id.

Thus, in that case, an attorney who attempted to collect debts owed to another by 639 consumers in one 9-month period met the “regularly collect” prong of the “debt collector” definition, even though this work only constituted 0.5% of his entire practice during that time period. Id. For examples of attorneys found to be “debt collectors,” see Goldstein v. Hutton, Ingram, Yuzek, Gainen, Carroll & Bertollotti, 374 F.3d 56, 60-61 (2nd Cir. 2004)(law firm was a “debt collector” when it sent 145 3-day notices to vacate in a one-year period, despite receiving only 0.05% of its revenue during the same time period); Cashman v. Ricigliano, 2004 U.S. Dist. LEXIS 17027, *18-20 (D. Conn. 2004)(20 demand letters per month demonstrated “regularity”); Derenick v. Cohn, 2004 U.S. Dist. LEXIS 25548, *7-9 (E.D. Tenn. 2004)(277 lawsuits demonstrates “regularity”);Crossley v. Lieberman, 90 B.R. 682 (E.D. Pa. 1988)(Act applied to attorney whose collection work is a minor but regular part of his general practice), aff’d, 868 F.2d 566 (3rd Cir. 1989); Kolker v. Sanchez, Clearinghouse No. 46,774 (D. N.M. 1991) 991)(attorney, whose collection actions constituted approximately 30% of her practice, who during an 18-month period initiated about 150 suits for a debt collection agency and who regularly sent collection letters was a debt collector); Cacace v. Lucas, 775 F.Supp. 502 (D. Conn. 1990)(attorney who represented 4 collection agencies, filed over 150 collection suits in 2 years, and sent over 125 collection letters over 14 months was a debt collector, even though debt collection was merely incidental to his primary law practice).

On the other hand, courts are unwilling to find that attorneys are “debt collectors” when they engage in only incidental work collecting consumer debts. Catherman v. First State Bank, 796 S.W.2d 299, 302-303 (Tex. App. - Austin 1990, no writ); Franco v. Maraldo, 2000 WL 288378 (E.D. La.). For example in Catherman, neither a law firm that had only about 5 consumer credit cases out of its 750 to 1000 active files and worked on 10 to 15 consumer credit accounts for one client over the past 5 years nor an individual attorney who spent less than ½ of 1% of his time collecting consumer debts, had sent less than 5 consumer credit demand letters in the past 5 years and spent less than an hour every month on such collection met the definition of a “debt collector.” 796 S.W.2d at 303.

Likewise in Franco, an attorney who worked on only 2 collection matters during apparently his entire career did not meet the definition of a “debt collector.” 2000 WL 288378. For other cases refusing to find that an attorney or a law firm qualified as a “debt collector,” see Schroyer v. Frankel, 197 F.3d 1170 (6th Cir. 1999)(to prove regular collection, must show debt collection was a substantial, if not principal, part of his practice); White v. Simonson & Cohen P.C., 23 F.Supp.2d 273 (E.D.N.Y. 1998)(firm that sent 35 demand letters on one occasion was not a debt collector); Argentieri v. Fisher Landscapes, 15 F.Supp.2d 55 (D. Mass. 1998), later opinion, 27 F.Supp.2d 84 (D. Mass. 1998)(attorney who spent only 0.4% of time on consumer debt collection was not a debt collector); Mladenovich v. Cannonito, 1998 WL 42281 (N.D. Ill. 1998)(attorney who only sent 23 collection letters for 2 clients was not a debt collector).

Recently, a number of courts have found that enforcement of security interests, such as the filing of judicial foreclosure actions, is not “debt collection,” thereby precluding law firms from being found to be “debt collectors.” Beadle v. Haughey, 2005 U.S. Dist. LEXIS 2473, *7-12 (D.N.H. 2005); Rosado v. Taylor, 324 F.Supp.2d 917-924-925 (N.D. Ind. 2004); Bergs v. Hoover, Bax & Slovacek, L.L.P., 2003 U.S. Dist. LEXIS 16827 (N.D. Tex. 2003); Hulse v. Ocwen Fed. Bank, FSB, 195 F.Supp.2d 1188, 1203-1204 (D. Or. 2002); Heinemann v. Jim Walter Homes, Inc., 47 F.Supp.2d 716, 722 (N.D. W. Va. 1998). This argument, however, only works if the lawsuits make no attempt to collect any debt, such as a deficiency judgment. In other words, it is effective only when the law firm files suit only to enforce a security interest. Thus, when a law firm sued to foreclose and to recover unpaid debt, it is engaged in “debt collection” and may be covered by the FDCPA. McDaniel v. South & Associates, P.C., 325 F.Supp.2d 1210, 1216-1218 (D. Kan. 2004).

2. Is the underlying debt a consumer obligation or not?

Another way of avoiding the application of the FDCPA is by proving that the debt being collected is not a consumer debt. Most obviously, an attempt to collect a commercial or business debt would not be covered by the Act. First Gibraltar Bank, FSB v. Smith, 62 F.3d 133, 135-136 (5th Cir. 1995). The Seventh Circuit has held that the relevant time for a determination of the purpose of the transaction is when the debt obligation is incurred, not when the debt collection activity occurred. Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, 214 F.3d 872, 874-875 (7th Cir. 2000). Thus, where an individual originally purchased a house to live in but was renting it out at the time collection activities commenced, the debt was considered consumer in nature rather than commercial. Id.

Despite many efforts to limit the application of the FDCPA, the courts have been willing to apply the Act to a wide variety of consumer debts. Recently, many debt collectors have argued that dishonored checks are not “debts” under the FDCPA, because payment by check is the equivalent of payment in cash and that there is no “debt” under the Act unless credit has been extended. While this argument has found some support by a few district courts, see, e.g., Krevsky v. Equifax Check Services, Inc., 85 F.Supp.2d 479, 480-482 (M.D. Pa. 2000) and Cederstrand v. Landberg, 933 F. Supp. 804, 805-806 (D. Minn. 1996), every court of appeals that has directly addressed this issue has found that dishonored checks are “debts” for purposes of the FDCPA, Duffy v. Landberg, 133 F.3d 1120, 1123-1124 (8th Cir. 1998); Charles v. Lundgren & Assoc., P.C., 119 F.3d 739, 742 (9th Cir. 1997); Bass v. Stolper, Koritzinsky, Brewster & Neider, S.C., 11 F.3d 1322, 1324-1330 (7th Cir. 1997). The courts of appeal have simply refused to limit the definition of “debt” under the Act to debt in which credit was extended, recognizing that the plain language of the definition was not that limited. Charles, 119 F.3d at 741-742; Bass, 111 F.3d at 1325-1330. Likewise, most courts have found debt for past due rent for residential space to be a “debt” covered by the FDCPA. Romea v. Heiberger & Associates, 163 F.3d 111,114-116 (2d Cir. 1998). Similarly, water and sewer bills are covered debts under the Act. Piper v. Portnoff Law Associates, Ltd., 396 F.3d 227, 232-236 (3rd Cir. 2005); Pollice v. National Tax Funding, L.P., 59 F.Supp.2d 474, 485 (W.D. Pa. 1999), aff’d, 2000 U.S.App. LEXIS 22153 (3d Cir. 2000).

On the other hand, certain debts have been found to be outside the scope of the FDCPA. For example, child support obligations are not debts covered by the FDCPA, because these debts are not incurred to receive consumer goods or services. Mabe v. G.C. Services Ltd. Partnership, 32 F.3d 86, 88 (4th Cir. 1994); Campbell v. Baldwin, 90 F.Supp.2d 754, 756-757 (E.D. Tex. 2000); Battye v. Child Support Services, 873 F.Supp. 103, 105 (N.D. Ill. 1994); Brown v. Child Support Advocates, 878 F. Supp. 1451, 1454-1455 (D. Utah 1994). Similarly, a tort claim arising out of the illegal reception of microwave television signals has been held not to be a “debt” under the FDCPA, because it did not involve a consensual transaction. Zimmerman v. HBO Affiliate Group, 834 F.2d 1163, 1168 (3d Cir. 1987). Likewise, tax obligations are not “debts” for purposes of the FDCPA. In re Westberry, 215 F.3d 589 (6th Cir. 2000); Staub v. Harris, 626 F.2d 275, 278 (3d Cir. 1980); Pollice v. National Tax Funding, L.P., 59 F.Supp.2d 474, 485 (W.D. Pa. 1999).

3. Other possible exemptions for attorneys

Attorneys and other debt collectors have also attempted to assert the remaining exemptions to avoid application of the FDCPA. In the context of student loan collection, now largely handled by private collection firms and private attorneys, several courts have uniformly refused to apply the government actor exception set forth in 15 U.S.C. § 1692a(6)(C) to private parties engaged in the collection of student loan debts owed to the government, because the collectors were not employees of the government. Brannan v. United Student Aid Funds, Inc., 94 F.3d 1260, 1262-1263 (9th Cir. 1996), cert. Denied, 521 U.S. 1106, 117 S.Ct. 2484, 138 L.Ed.2d 992 (1997); Knight v. Schulman, 102 F. Supp.2d 867, 875-876 (S.D. Ohio 1999)(exception not available to private attorney collecting student loan debts for the government). Contra: Games v. Cavazos, 737 F.Supp. 1368 (D. Del. 1990). In a similar vein, another court refused to apply this government actor exception to a private party collecting utility debts initially owed to a local governmental entity. Pollice v. National Tax Funding, L.P., 59 F.Supp.2d 474, 486 (W.D. Pa. 1999). On the other hand, at least one district court was affirmed when it held that a guaranteed student loan agency was exempt from the Act under 15 U.S.C. § 1692a(6)(F)(i) regarding collection by a fiduciary. Pelfrey v. Educational Credit Management Corporation, 71 F.3d 1161 (N.D. Ala. 1999), aff’d, 208 F.3d 945 (11th Cir. 2000).

One law firm sued for FDCPA violations asserted that in mailing of notice-to-vacate letters to defaulting tenants, a prerequisite to an eviction action in New York, it was acting as a process server and thereby entitled to rely on the exception in 15 U.S.C. § 1692a(6)(D). Finding these letters not to be legal process, the Second Circuit refused to permit the firm to rely upon this exception. Romea v. Heiberger & Associates, 163 F.3d 111, 116-118 (2d Cir. 1998).

B. What does the FDCPA prohibit and require?

1. General Requirements and Prohibitions

The FDCPA is a detailed regulatory scheme. There are 9 separate provisions which impose certain requirements and prohibit certain conduct. What follows is a brief description of each of these provisions:

(1) Acquisition of Location Information: § 1692b regulates the acquisition of location information from non-debtor parties. Generally, it is intended to preclude debt collectors from mentioning the existence of a debt in any efforts at obtaining location information from friends and relatives. In attempting to obtain location information about a debtor with any person other than the debtor, this provision requires a debt collector to identify himself and to state that he is trying to obtain location information on the debtor. The debt collector is prohibited from revealing his employer unless asked and from mentioning that the debtor owes any debt.

Moreover, the debt collector should never make more than one contact with each non-debtor individual unless the debt collector reasonably believes the individual gave incorrect information previously and possesses accurate information. In addition, the debt collector may not use a postcard to make such non-debtor contacts and in using other forms of mail shall not use any language or symbol which indicates that the sender is in the debt collection business. Finally, if the debt collector knows the debtor is represented by an attorney, all non-debtor contacts aimed at locating the debtor shall be suspended unless the attorney fails to respond within a reasonable time to a communication from a debt collector.

(2) Debt Collection Communication: § 1692c regulates direct contacts with the debtor as follows:

Subsection (a) provides that, unless prior consent is given by the debtor or leave is granted by a court, a debt collector may not contact a debtor about a debt (a) at any unusual time and place known to be inconvenient to the consumer (and contacts before 8 a.m. and after 9 p.m. are deemed to be inconvenient), (b) if the debt collector is aware the debtor is represented by an attorney with respect to the debt in question (unless the attorney fails to respond within a reasonable time to a communication from the debt collector), (c) at the debtor’s place of employment if the debt collector has
reason to know that the debtor’s employer prohibits such contacts.

Subsection (b) prohibits contact with any third parties regarding collection of the debt unless agreed to by the debtor, leave is granted by a court or it is reasonably necessary to effectuate a post-judgment judicial remedy. The following are not treated as third parties: the debtor, his attorney, a credit bureau, the creditor, the attorney of the creditor and the attorney for the debt collector.

Subsection (c) requires a debt collector to cease communications with a debtor once the debtor informs the debt collector in writing that he refuses to pay the debt or that he wishes the debt collector to cease further communication regarding the debt. Thereafter, the debt collector is allowed one more contact, traditionally provided by mail, to advise the consumer that the debt collector has terminated collection efforts, to specify certain remedies available to the creditor or to state a specific remedy, like a lawsuit, that a creditor intends to invoke.

Practice tip: One of the most common forms of advice that I dispense to consumers is that I inform them that they can force a debt collector to cease further communication with them by sending a letter by certified mail to that effect. Most debt collectors comply, although I had a recent case in which a debt collection firm totally ignored several of these “cease communication” letters, leading to a lawsuit in federal court.

(3) Harassment or Abuse: § 1692d generally prohibits any unreasonably harassing, oppressive or abusive conduct in debt collection. It specifically prohibits the use of threats of violence or other criminal means to harm any person, the use of obscene language, publication of any list of consumer debtors who allegedly fail to pay their debts (other than by reporting to a credit bureau pursuant to the Fair Credit Reporting Act), advertising the sale of any debt to coerce payment of the debt, making repeated telephone calls to annoy or harass any person, and making any telephone call without identifying the caller.

(4) False or Misleading Representations: § 1692e bans any false, misleading or deceptive representation in connection with an attempt at debt collection. The following specified practices are deemed a violation of this provision:

(A) false representing or implying that the debt collector is vouched for or affiliated with the government, including the use of any false badge or uniform;

(B) falsely representing the character, amount or legal status of any debt or any services rendered or any compensation which might be received by the debt collector;

(C) falsely representing that anyone is an attorney or that a communication is from an attorney;

(D) representing or implying that non-payment of a debt will result in arrest or imprisonment of any person or the seizure, garnishment, attachment or sale of any property or wages of any person UNLESS such action is lawful and the debt collector or creditor intends to take such action;

(E) threatening to take any action that is illegal or that is not intended to be taken;

(F) false representing that sale or assignment of the debt causes a debtor to lose any claim or defense or to become subject to any practices prohibited by the FDCPA;

(G) falsely representing that a debtor committed a crime;

(H) communicating or threatening to communicate information known to be false or which should be known to be false, including the failure to communicate that a debt is disputed;

(I) use of any written communication that falsely implies issuance by a court or governmental entity or which creates a false impression as to its source, authorization or approval;

(J) use of any false or deceptive representation as part of an attempt to collect a debt or to obtain information concerning a debtor;

(K) falsely representing or implying that accounts have been transferred to innocent purchasers for value;

(L) false representing or implying that certain documents are legal process;

(M) use of any name other than the true name of the debt collector’s business;

(N) falsely representing that documents are not legal process or do not require any action; and

(O) falsely representing that a debt collector operates or is employed by a credit bureau.

In addition, this provision has one far-reaching subsection (11) that requires disclosure in the initial communication with the debtor that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose and in all subsequent communications that the communication is from a debt collector, except that this does not apply to formal pleadings in court actions. This notice is often referred to as a “Miranda warning” like the similar warning given in the criminal context.

NOTE: Debt collectors from outside of Texas need to be particularly careful about threatening wage garnishment, as they commonly do, because Texas only permits wage garnishment for the collection of child support and alimony.

(5) Unfair Practices: § 1692f prohibits the use of unfair and unconscionable means to collect or attempt to collect consumer debts, including but not limited to the following practices:

(A) collection of any amount for any fee unless this expense is authorized by the agreement creating the debt or permitted by law;

(B) acceptance of a check postdated by more than 5 days unless the debtor receives written notice of the debt collector’s intent to deposit such check at least 3 days and no more than 10 days before the deposit occurs;

(C) solicitation of any postdated check for the purpose of threatening or instituting a criminal prosecution;

(D) depositing or threatening to deposit any postdated instrument before the date on the instrument;

(E) causing a debtor to be charged collect telephone and telegraph fees by concealing the true purpose of the communication;

(F) taking or threatening to take any nonjudicial action to repossess or disable property if (a) there is no present right to possession of the collateral
through an enforceable security interest, (b) there is no present intention to repossess or (c) the property is exempt by law from such action;

(G) communicating with a debtor regarding a debt by postcard; and

(H) using any language or symbol other than the debt collector’s address on the outside of an envelope when communicating by mail or telegram, although the business name may be listed if it does not indicate that the debt collector is in the debt collection business.

NOTE: More commonly now, debt collectors solicit periodic direct withdrawals from checking accounts rather than soliciting post-dated checks.

(6) Validation of Debts: § 1692g deals with the right of debtors to obtain validation of debts. Specifically, it provides that, within 5 days of the initial communication, a debt collector shall send to the debtor a written notice containing:

(A) the amount of the debt;

(B) the name of the creditor to whom the debt is owed;

(C) a statement that unless the debtor, within 30 days after receipt of the notice, disputes the validity of the debt or any portion thereof, the debt will be assumed to be valid by the debt collector (NOTE: the failure to dispute the validity of a debt in response to any such communication may not be construed as an admission of liability by the debtor);

(D) a statement that if the debtor notifies the debt collector within the 30-day period that any portion of the debt is disputed, the debt collector will obtain verification of the verification and a copy of such verification shall be sent to the debtor; and

(E) a statement that, upon the consumer’s written request within the 30-day period, the debt collector will provide the debtor with the name and address of the original creditor is different from the current creditor.

This provision further provides that if a debtor, in writing, disputes any debt or requests the name and address of the original creditor, the debt collector shall cease all debt collection efforts until the debt is verified or the original creditor is identified.

(7) Multiple Debts: § 1692h provides that when a debtor owes multiple debts and makes a single payment, the debt collector shall not apply the payment to any debt in dispute and shall apply the payment in accordance with the debtor’s instructions.

(8) Legal Action by Debt Collectors: § 1692i basically prohibits debt collectors from bringing a debt collection suit in a distant or inconvenient forum. In the case of debts secured by an interest in real estate, such actions must be filed in the judicial district where the real estate is located. With all other debts, such actions must be filed in the judicial district (a) in which the debtor signed the contract sued upon or (b) in which the debtor resides at the commencement of the action.

NOTE: Likewise, the DTPA has a similar prohibition against distant forum abuse that applies to creditors as well as debt collectors. See Tex. Bus. & Com. Code § 17.46(b)(22).

(9) Furnishing Certain Deceptive Forms: § 1692j makes it unlawful for any person (instead of any debt collector) to design, compile and furnish any form knowing that such form would be used to create the false belief in a debtor that a person other than the creditor, such as an attorney, is participating in the collection of a debt when they are not so participating.

2. Compliance Issues of Interest to Attorneys

There are a number of compliance issues that apply to attorneys seeking to collect consumer debts, even when they are acting in litigation.

a. Venue: Attorneys who fit the definition of “debt collector” must be careful to bring consumer debt collection actions only where provided by § 1692i. In the context of debts unrelated to real estate, that means that suit should only be filed where the underlying contract was signed or where the consumer resides. If the underlying contract is oral, the debtor can only be sued in the judicial district where he resides. Crawford v. Credit Collection Services, 898 F. Supp. 699 (D. S.D. 1995); Martinez v. Albuquerque Collection Services, 867 F. Supp. 1495, 1502 (D. N.M. 1994). Even the post-judgment filing of an application for a writ of garnishment is considered a judicial action covered by the FDCPA venue provision, meaning that, if the application is filed in a jurisdiction other than one of the two permitted venues, the FDCPA is violated. Fox v. Citicorp Credit Services, Inc., 15 F.3d 1507, 1515 (9th Cir. 1994). See the following cases where attorney debt collectors were held liable under the FDCPA for filing collection actions in a distant forum: Addison v. Braud, 105 F.3d 223, 224 (5th Cir. 1997); Fox v. Citicorp Credit Services, Inc., 15 F.3d 1507, 1511 (9th Cir. 1994); Scott v. Jones, 964 F.2d 314, 316-318 (4th Cir. 1982).

Note: If the attorney filing a collection action is acting at the behest of a “debt collector” as opposed to a “creditor,” the debt collector client can be vicariously liable for the violation of the venue provision by their attorney. Fox, 15 F.3d at 1516; Martinez, 867 F.Supp. at 1502. The creditor may be separately liable for violating DTPA § 17.46(b)(22) if the suit was brought in the creditor’s name.

b. Notice of validation rights and Miranda warning: Attorneys who fit the definition of “debt collector” must give the Miranda warning required by § 1692e(11) in their initial communication and must give an adequate written notice of the debtor’s validation rights under § 1692g within 5 days of the initial communication.

Some attorneys who have failed to give the Miranda warning have been held liable for violating § 1692e(11). Romea v. Heiberger & Associates, 163 F.3d 111, 113-119 (2nd Cir. 1998)(failure to give § 1692e(11) notice not excused in notice-tovacate letter); Frey v. Gangwish, 970 F.2d 1516, 1519-1520 (6th Cir. 1992)(post-judgment letter to judgment debtor was initial communication with debtor despite prior communications in underlying suit with debtor’s attorney, thereby requiring the giving of the notice required by this subsection).

Compliance with the validation provisions of § 1692g is much more complicated. The most common violation is that the notice of the right to obtain validation of a purported debt within 30 days has been overshadowed or contradicted by other language in the communication. Savino v. Computer Credit, Inc., 164 F.3d 81, 85 (2d Cir. 1998); Bartlett v. Heibl, 128 F.3d 497, 500 (7th Cir. 1997); U.S. v. National Financial Services, Inc., 98 F.3d 131, 139 (4th Cir. 1996); Graziano v. Harrison, 950 F.2d 107, 111-112 (3rd Cir. 1991); Miller v. Payco-General American Credits, Inc., 943 F.2d 482, 483-485 (4th Cir. 1991); Swanson v. Southern Oregon Credit Service, Inc., 869 F.2d 1222, 1224-1226 (9th Cir. 1988); Gervais v. Riddle & Associates, P.C., 2005 U.S. Dist. LEXIS 5395, *14-24 (D. Conn. 2005); Brown v. Law Offices of Butterfield, Joachim, Schaedler & Kelleher, 2004 U.S. Dist. LEXIS 9822, 811-14 (E.D. Pa. 2004); Rhoades v. West Virginia Credit Bureau Reporting, 96 F.Supp.2d 528, 531-532 (S.D. W.Va. 2000); McNab v. Statewide Recovery Service, Inc., 2000 WL 135839 (E.D. La.); Garner v. Kansas, 1999 WL 262100 (E.D. La.). For example, sending a collection letter with language demanding immediate payment or payment within 10 days overshadows other language in the letter giving notice of the § 1691g validation rights. Attorneys are not infrequently sued for overshadowing or contradicting the validation notice required by § 1691g. See, e.g., Graziano and Garner.

At least one court has found that a validation notice which required any dispute of the purported debt to be in writing was a violation of § 1692g(a)(3). Spearman v. Tom Wood Pontiac-GMC, Inc., 2002 U.S. Dist. 24389, * 21-31 (S.D. Ind. 2002). A number of courts agree with this ruling. Ong v. Am. Collections Enterp., Inc., 1999 U.S. Dist. LEXIS 409 (E.D.N.Y. 1999); Harvey v. United Adjusters, 509 F.Supp. 1218, 1221 (D. Ore. 1981). At least one court of appeals, however, has ruled that such disputes must be in writing. Graziano v. Harrison, 950 F.2d 107, 111-112 (3rd Cir. 1991). There is no explicit ruling on this issue in the Fifth Circuit.

If the initial communication between the debt collector attorney and a debtor is the petition filed in court, compliance with § 1691g can be even more complicated. What if the first contact between the debt collector attorney and a debtor is the petition filed in court? A number of courts addressing this issue have found legalpleadings such as petitions can be “initial communications,” thereby triggering a duty to provide a validation notice. Thomas v. Law Firm of Simpson & Cybak, 392 F.3d 914, 916-920 (7th Cir. 2004)(en banc); Kafele v. Lerner, Sampson & Rothfuss, 2005 U.S. Dist. LEXIS 11127 (S.D. Ohio 2005); Spears v. Brennan, 745 N.E.2d 862, 875-878 (Ind. App. 2001); Mendus v. Morgan & Associates, P.C., 994 P.2d 83, 88-92 (Okla. App. 1999); Goldman v. Cohen, 2004 U.S. Dist. LEXIS 25517, *7-24 (S.D.N.Y. 2004).

Two other courts, reading Heintz narrowly, have found that a pleading was not a “communication” for purposes of the FDCPA and, consequently, refused to find any violation of the Act. Vega v. McKay, 351 F.3d 1334, 1337 (11th Cir. 2003); McKnight v. Benitez, 176 F.Supp.2d 1301, 1304-1308 (M.D. Fla. 2001). These decisions, however, have been criticized for ignoring the spirit of Heintz. Thomas v. Law Firm of Simpson & Cybak, 392 F.3d at 918; Goldman v. Cohen, 2004 U.S. Dist. LEXIS 25517, at *10-11; Frye v. Bowman, Heintz, Boscia & Vician, 193 F.Supp.2d 1070, 1080 n. 7 (S.D. Ind. 2002); Spearman v. Tom Wood Pontiac-GMC, Inc., 2002 U.S. Dist. LEXIS 24389, *5-17 (S.D. Ind. 2002); Sprouse v. City Credits Company, 126 F.Supp.2d 1083, 1089 n. 8 (S.D. Ohio 2000). Thus, there is some conflict among the courts on this issue, but the safe procedure is to assume that a pleading can be an “initial communication.”

Likewise, what happens if an attorney debt collector gives the validation notice in the body of the petition, because it is the attorney’s first communication with the debtor regarding a debt? When the citation or summons provides for a different period of time in which to file an answer than the 30 days for in the validation notice, there can be a different violation of the FDCPA. Several courts have ruled that the FDCPA has been violated when the initial petition/complaint contained notice of the 30-day validation period and the attached citation/summons provided for a lesser period to file an answer to avoid a default, finding that the validation notice had been contradicted or overshadowed by the notice of when to file an answer in a different time period. Spears v. Brennan, 745 N.E.2d at 875-878; Mendus v. Morgan & Associates, P.C., 994 P.2d at 88-92.

In Spears, the Indiana Court of Appeals even ruled that the notice was overshadowed if a default judgment was obtained during the 30-day verification period. 745 N.E.2d at 875-876. See also In re Martinez, 266 B.R. 523, 533-537 (Bktrcy. S.D. Fla. 2001), aff’d, 271 B.R. 696, 700-702 (S.D. Fla. 2001), aff’d, 311 F.3d 1272 (11th Cir. 2002), where a conflict was found between a summons and a validation notice, even though both stated 30-day deadlines. One other court has simply refused to find any “overshadowing” when a summons provided 28 days in which to respond while the validation notice provided a 30-day deadline. Sprouse v. City Credits Company, 126 F.Supp.2d at 1088-1089. Nevertheless, to avoid this issue, collection attorneys can send a demand letter with a clean validation notice before filing suit.

In some of these cases, debt collectors have argued that it is irrelevant whether the validation notice was given where it is clear that the amount of the debt is 1 Moreover, including an amount of attorney’s fees in the disclosure of the amount of the debt can be deceptive and thereby found to be a violation of 15 U.S.C. §§ 1692e and 1692f. For example, the Seventh Circuit found the failure to itemize the amount of the debt, which would have explained the addition of attorney’s fees, was deceptive and violative of the FDCPA. Fields v. Wilber Law Firm, 383 F.3d 562, 565-566 (7th Cir. 2004). That ordinarily does not mean that attorney’s fees can only be determined in a court of law. Id. at 564-565; Singer v. Pierce & Associates, P.C., 383 F.3d 596, 598-599 (7th Cir. 2004). valid. While this may have some basis in logic, no court has accepted this argument. In each case, the courts have ruled that the statutory validation notice must be given and the validation procedure followed. Rhoades, 96 F.Supp.2d at 532-533. See McCartney v. First City Bank, 970 F.2d 45, 47 (5th Cir. 1992); Baker v. G.C. Serv. Corp., 677 F.2d 775, 777 (9th Cir. 1982).

Also, in stating the amount of the debt in the § 1691g notice, it is not appropriate to give notice of the unpaid principal balance only and direct a debtor to an 800 telephone number to obtain the amount of the accrued interest, late charges and other charges that may be due. Miller, 214 F.3d 872, 875-876. The Seventh Circuit indicated that the notice must state the full amount of the debt as of the date the notice was issued. Id. While this is a new issue, it may well apply to the activities of attorney debt collectors in many situations, such as when an attorney sends notices preliminary to a non-judicial foreclosure with a statement of the amount owed.

Finally, if an attorney sends a notice letter with a § 1691g notice and the consumer responds by contesting the debt and requesting the verification, the collecting attorney must cease collection efforts upon receipt of the consumer’s request until such verification. Thus, filing suit after getting a request for verification and without providing any verification of the debt beforehand violates the FDCPA. Anderson v. Frederick J. Hanna & Associates, 361 F.Supp.2d 1379 (N.D. Ga. 2005).

c. Flat-rating: This is another name for the process by which an attorney provides signed or unsigned letterhead for use by another debt collector or even a creditor without any direct involvement on his part. It violates § 1692j, because it leaves the impression that a debt collector or creditor is represented by counsel, and in effect is serious about suing, when, in fact, there is no such connection. Taylor v. Perrin, Landry, deLaunay & Durand, 103 F.3d 1232, 1237-1238 (5th Cir. 1997); Miller v. Wolpoff & Abramson, 321 F.3d 292, 306-312 (2nd Cir. 2003); Nielsen v. Dickerson, 307 F.3d 623, 634-640 (7th Cir. 2002); Boyd v. Wexler, 275 F.3d 642, 644-648 (7th Cir. 2001); Clomon v. Jackson, 988 F.2d 1314, 1317-1321 (2d Cir. 1993); Nance v. Lawrence Friedman P.C., 2000 WL 1230462 (N.D. Ill. 2000). Moreover, liability for such flat-rating is not limited to debt collectors; liability may be imposed upon any person participating in the conduct, including an attorney who does not fit the definition of a “debt collector” or even a creditor.

3. FDCPA Remedies

If a “debt collector” violates the FDCPA or a “person” violates the flat-ratingprohibition in § 1692j, they are subject to claims for actual damages, statutory damagesof up to $1,000 in an individual action or not more than$500,000 or 1% of the net worth of the defendant in a class action, and attorney’s fees and costs. 15 U.S.C. § 1692k(a). Such claims may be filed in federal or state court within one year from the date on which the violation occurs. 15 U.S.C. § 1692k(d). A bona fide error defense is afforded to defendants, 15 U.S.C. § 1692k(c), and a defendant may recover attorney’s fees from the plaintiff upon a showing that any FDCPA action was brought in bad faith and for the purpose of harassment, 15 U.S.C. § 1692k(a)(3). Class actions against law firms for violation of the FDCPA are becoming more common. See, e.g., Keele v. Wexler, 149 F.3d 589 (7th Cir. 1998); Fuller v. Becker & Poliakoff, P.A., 198 F.R.D. 697 (M.D. Fla. 2000); Fry v. Hayt, Hayt & Landau, 2000 U.S. Dist. 18895 (E.D. Pa. 2000).

Practice Note: Attorneys covered by the FDCPA should consider the development of procedures “reasonably adapted to avoid” violations of the FDCPA, so that the bona fide error defense can be raised. See 15 U.S.C. § 1692k(c); Frye v. Bowman, Heintz, Boscia & Vician, 193 F.Supp.2d 1070, 1084-1089 (S.D. Ind. 2002).

III. Texas Debt Collection Act

This Act has a very broad scope but provides fewer remedies for consumer debtors than the FDCPA.

A. Scope

The Texas Debt Collection Act (“TDCA”), Tex. Fin. Code § 392.001 et seq., is far broader than that of the FDCPA. Like the FDCPA, the TDCA only applies to “debt collectors” seeking to collect consumer-related debt, Tex. Fin. Code § 392.001(2), (5) and (6), but the definition of debt collectors is intended to encompass creditors collecting their own debts. Smith v. Heard, 980 S.W.2d 693, 697 (Tex. App. - San Antonio 1998, pet. denied); Monroe v. Franks, 936 S.W.2d 654, 659-660 (Tex. App. - Dallas 1996, writ dism’d w.o.j.). It further defines a “third-party debt collector” as encompassing the FDCPA definition of “debt collector” with the caveat that attorneys are not included in this definition only if he employs non-attorney staff who regularly engage in debt collection. Tex. Fin. Code § 392.001(7). The TDCA only places two demands upon third-party debt collectors: (1) they are required to file proof of a $10,000 bond with the Texas Secretary of State, Tex. Fin. Code § 392.101, and (2) they must provide verification of debts upon request, Tex. Fin. Code § 392.201.

B. What does the TDCA prohibit and require?

Most of the TDCA is directed at “debt collectors” which includes creditors seeking to collect their own debts, parties that would clearly be exempted from coverage under the FDCPA.

1. Threats or Coercion: § 392.301 prohibits a number of specific threats including threats of violence; falsely accusing a debtor of fraud or any other crime; representing to any person that a consumer is willfully refusing to pay a debt when the debt is in dispute; threatening to have a debtor arrested for nonpayment of a debt without proper court proceedings; threatening to file criminal charges when the debtor has not committed a crime; threatening that nonpayment of a debt will result in seizure, repossession or sale of property without proper court proceedings or threatening to take an action prohibited by law. This statute goes on, however, to provide that it is acceptable for a debt collector to inform a debtor that he may be arrested after proper court proceedings if the debtor has violated a criminal statute, threaten to institute a civil lawsuit, or to threaten to exercise a right to non-judicial repossession and sale.

In a very broad construction of the predecessor statute, the Texas Supreme Court held that any threat of criminal prosecution violated this law, specifically ruling that such a threat was inappropriate before a debtor had been convicted of a crime. Brown v. Oaklawn Bank, 718 S.W.2d 678, 680 (Tex. 1986).

In construing what is now § 392.301(a)(8) prohibiting the making of threats to take action prohibited by law, one court concluded that letters threatening to terminate a contract for deed without providing the notice required by a statute regulating such contracts violated the TDCA. Dixon v. Brooks, 604 S.W.2d 330, 334 (Tex. Civ. App. - Houston [14th Dist.] 1980, writ ref’d n.r.e.). Similarly, another court has held that wrongful acceleration of a real estate note states a violation of this provision as well. Rey v. Acosta, 860 S.W.2d 654, 659 (Tex. App. - El Paso 1993, no writ).

2. Harassment and Abuse: § 392.302 prohibits harassment and abuse by debt collectors through the use of obscene language, repeatedly calling a debtor without disclosing one’s identity with the intent to annoy or harass, causing a person to incur collect telephone and telegram fees without first disclosing the identity of the caller, and causing a telephone to ring repeatedly with the intent to harass.

3. Unfair and Unconscionable Means: § 392.303 prohibits debt collectors from employing the following practices: (a) seeking a written statement that specifies a debtor’s obligation is one incurred for necessaries of life if the obligation was not incurred for such necessaries, and (b) attempting to collect any fee incidental to an obligation unless it is expressly authorized by the agreement creating the obligation with one exception for a particular form of reinstatement fee.

4. Fraudulent, Deceptive or Misleading Representations: § 392.304 prohibits debt collectors from using specified misrepresentations that basically correspond to the misrepresentations prohibited in § 1692e of the FDCPA.

5. Use of Independent Debt Collector: § 392.306 imposes liability upon a creditor for using a third-party debt collector if the creditor knows that the debt collector repeatedly engages in practices that are prohibited by the Act.

Note: While there is no caselaw interpreting this provision, it has had some effect in the marketplace. When enforcing the TDCA publicly as an assistant attorney general with the Consumer Protection Division of the Texas Attorney General’s Office, I discovered that debt collectors being investigated for TDCA violations frequently agreed to no-fault injunctions to avoid a finding of repeated TDCA violations that would preclude them from taking on work from creditors as a result of this provision.

C. TDCA Remedies:

The TDCA affords a number of remedies. Like the FDCPA, you can recover actual damages and attorney’s fees. Tex. Fin. Code § 392.403(a)(2) and (b). Unlike the FDCPA, it does provide for injunctive relief. Tex. Fin. Code § 392.403(a)(1). While § 392.403(e) appears to provide minimum statutory damages of $100 for violations of the two provisions applied solely to third-party debt collectors (the bond requirement in § 392.101 and the debt verification requirement in § 392.201) and the prohibition on representing or threatening to represent that a debtor is willfully not paying a debt when it is in dispute (§ 392.301(a)(3)), this provision has been construed in such a way as to make it meaningless. In Elston v. Resolution Services, Inc., 950 S.W.2d 180, 183-184 (Tex. App. - Austin 1997, no pet.), the Austin Court of Appeals ruled that the minimum damages accorded by § 392.403(e) were not available unless actual damages are demonstrated.

Note: Given the absence of any meaningful statutory damages provision and the apparent unwillingness of Texas courts to issue injunctions to enforce the TDCA in private lawsuits, this Act is largely a toothless tiger. Debt collectors are put at much more risk by the FDCPA. On the other hand, the TDCA is usually the only mechanism for imposing liability on a creditor using abusive tactics in collecting its own debts. See, e.g., Charlie Thomas Leasing, Inc. v. Taylor, 44 S.W.3d 684 (Tex. App. - Houston [14th Dist.] 2001, no pet.) which involved the certification of a class of debtors subjected to the filing of false criminal complaints asserting theft.

IV. Conclusion

Attorneys who fit the definition of “debt collector” need to be careful about complying with the FDCPA to avoid potential liability for statutory damages and costs of litigation. While easier to comply with, the TDCA does raise potential liability issues in particular for creditors attempting to collect their own debts.

12-Jan-06 1:00 PM

Can The Contractor Really Put a Lien On My House?

Richard Tomlinson — Thu, 12 Jan 2006 18:00:00 GMT

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Everyone who owns a home should understand when a worker can put a lien on their home and what they can do about it. While the term “homestead” has been touted to protect homeowners in Texas, there is much confusion about what the term means and when creditors can actually place a lien on your home.

Texas, in the homestead provision of its Constitution, provides homeowners protection from creditors. For urban areas, homestead protection applies to 10 acres of land with improvements, such as a garage and house primarily used as a home. Homesteads generally are not subject to attachment, execution or forced sale by creditors. There are exceptions, however, to this protection. Mechanic’s and materialman’s liens for improvements are one such exception, and can create liens valid against your homestead if the worker follows the Texas Property Code’s strict requirements.

To place a valid lien against homestead, the Texas Property Code lists a host of provisions that must be included in a contract for residential construction, including remodeling jobs. A lien may be created if a written contract was executed before commencement of improvements or delivery of supplies; the contract is signed by both spouses; and the contract is properly recorded. If the construction contract does not meet strict statutory requirements, the contractor may not be able to enforce a lien on the property. If a creditor wrongfully levies against the homestead, both the creditor and the creditor’s law firm may be liable.

Contractors may threaten to place a lien on a home in cases of disputed remodeling work. A consumer who feels progress on a home improvement is moving too slowly or completed work does not meet required specifications must understand the leverage contractors have once a written contract is properly signed. While a homeowner may have good cause to withhold future payments until construction issues are resolved, the contractor has the ability to file a claim on title or an affidavit of lien with the county’s real-estate records. Homeowners may wish to raise a number of defenses to a lien, including a contractor’s failure to pay subcontractors, incomplete work, poor workmanship and failure to follow required lien procedures. Removal of any and all liens should be part of any dispute resolution with a contractor.

An affidavit of lien recorded by a remodeling contractor against one’s homestead places a “cloud” over title and can make selling your home or refinancing difficult. Consumers should have an experienced attorney review and respond to any claim or lien affidavit to clear any potential cloud on the property’s title.

Once a dispute is resolved, the homeowner should make certain to obtain a release. The Property Code requires contractors to provide an affidavit stating that all bills are paid once construction is complete and before final payment for work performed. Such documentation is important for a homeowner to protect his or her home, especially if a claim is later made on the homestead.

Contractors have strict filing deadlines for filing lien affidavits. Even if the contract contains all the provisions required by statute, the affidavit may not be valid if it was not timely filed. Homeowners should keep records of the date that work was completed or abandoned by the contractor. This date starts the clock on how long a contractor has to file a lien affidavit. In case of disputes, an attorney will want to evaluate the construction timeline to determine whether the lien is barred because of late filing.

Delinquent property taxes, home refinancing, and home equity loans may also create liens on a homestead. A home is often a family’s most valuable possession. Consider consulting an attorney before entering into any contract that affects your home.

12-Jan-06 12:00 PM

New Protections and Hurdles for Homeowners

Richard Tomlinson — Wed, 11 Jan 2006 20:00:00 GMT

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For individuals considering remodeling their home or buying a newly constructed home, new requirements under Texas law provide consumers valuable information and some protection, but also create a maze of hurdles for homeowners with construction problems.

Under the Texas Residential Construction Commission Act (TRCC Act), as of November 1, 2005, new homes must be registered with the Texas Residential Construction Commission (TRCC) by the 15^th day of the month after title is transferred. For remodeling jobs, the contractor must register the project no later than 15 days after the project agreement or construction begins, whichever is earlier. Homeowners and prospective homebuyers can go to the Texas Residential Construction Commissions’ web site at www.trcc.state.tx.us to research a worker’s history before contracting on a remodeling job or new home purchase.

Since June 1, 2005, home builders and re-modelers have been required to provide limited warranties including one year for workmanship and materials, two years for plumbing, electrical, heating and air conditioning systems and ten years for structural components and habitability. New building and performance requirements provide homeowners with minimum standards to expect from contractors.

Smaller builders who do not provide their own warranties often work with third parties to warranty their work and materials. These third party warranty providers now must register with the TRCC. To register, they must either have been in business for five years or meet insurance requirements.

While the TRRC Act created new standards and registration requirements to protect homeowners, the Act also requires them to jump through new hoops when they encounter problems.

A strong lobby of homebuilders and contractors helped formulate and implement new procedural rules that homeowners must follow before seeking relief in court. The TRCC Act requires a homeowner to give written notice 30 days before filing a claim with the Commission. At each step of the dispute, the homeowner must give the builder or re-modeler an opportunity to inspect the defects. Only after the contractor fails to respond to the homeowner’s satisfaction, can the homeowner file an action with the Commission. The homeowner must then go through a state sponsored inspection and dispute resolution process.

This process, called the State-sponsored Inspection and Dispute Resolution Process, or SIRP, requires the homeowner to pay a $250.00 inspection fee for an independent inspection of the defect. If homeowners disagree with the inspector’s findings, they may appeal within the Commission to a panel of inspectors. If the contractor makes an offer to settle the dispute at any time in the process, specific statutory rules provide consequences and some penalties for rejecting the contractor’s offer.

Only after a homeowner pursues all remedies through the TRCC, may he or she pursue their rights through litigation. An independent inspector’s findings create a legal presumption in favor of the inspector and are admissible in arbitration proceedings or court.

On its face, the ability to cure defects as required by the TRCC Act seems to be a good way to resolve construction problems. But those who find defects want a fast resolution. In practice under the TRRC Act, however, homeowners must successfully navigate a complex, time-consuming complaint process.

Some home construction problems are not covered under the TRCC Act and can be resolved outside the Commission’s rigid rules. Independent inspectors review defects to see if they fail to meet only minimum standards and compliance guidelines under the TRCC Act. Defective custom features may not be covered under the Act. The TRCC also does not resolve contract issues and recommends consulting an attorney for disputes that arise because a contractor fails to meet the terms of a contract.

While the TRCC Act provides good resources and some protection for consumers, once consumers encounter problems, the Act’s rigid procedural requirements mean homeowners must move carefully to protect their rights.

11-Jan-06 2:00 PM

When Your Contract Includes an Arbitration Clause

Richard Tomlinson — Wed, 11 Jan 2006 20:00:00 GMT

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Consumers need to be aware that the arbitration agreement in the contract they sign for a car, home, remodeling project, credit card application or loan, can have a major impact on their rights.

Agreeing to a binding arbitration clause as part of a contract prevents all parties from going to court. These clauses typically require parties to present any complaints for resolution to the arbitrator named in the contract.

A typical contract for a car includes the arbitration clause in small font on the back side of the contract. Most consumers overlook arbitration agreements and consent to arbitration of disputes just by signing the contract.

Costs for arbitration can be substantial and include filing fees. Arbitrators also usually charge an hourly or daily fee. Parties in a court case are not required to pay for the services of a jury or judge. Paying the decision-maker applies only in arbitration. Both parties may be required to split these costs or the losing party may be forced to pay all costs. Some businesses ignore arbitration demands and refuse to pay arbitration costs. This effectively slows the process and adds expense for the consumer.

Most arbitration clauses designate a limited number of organizations such as the National Arbitration Forum or the American Arbitration Association, to resolve disagreements. The inexperienced consumer must use the arbitrator named in the contract. Each organization has its own unique set of arbitration rules. Businesses have an incentive to name arbitrator services in their contracts that are inclined to rule in their favor. Arbitrators who want to be named in businesses’ future contracts have incentive to rule for businesses who are likely to be repeat customers.

It is worthwhile to try to cross out the arbitration clause from a contract before signing. Many sellers, however, will refuse to go forward with the deal without the clause. If so, then the consumer can decide whether to proceed.

Individuals must also pay attention to arbitration demands filed against them. Arbitration complaints usually come through the mail by certified mail. If a business or creditor files a complaint for arbitration, the consumer must respond to the complaint immediately. Failure to respond can result in the complaining party being awarded the full amount in dispute, arbitration costs, attorney’s fees and interest.

Consumers should understand what they lose when signing contracts with arbitration clauses and what they risk in ignoring arbitration complaints. They should seek advice from an attorney when they are confronted by either.

11-Jan-06 2:00 PM

Representing Consumer in Failed Yo-Yo Transactions

Richard Tomlinson — Sun, 18 Dec 2005 21:00:00 GMT

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A. Background of Yo-Yo Sales, aka Spot Deliveries

A yo-yo or spot delivery is a very common sales practice with both new and used car dealers, and it is probably the most insidious practice affecting consumers with poor credit histories. This is how it works. In response to advertising offering “second chance financing,” a consumer with a less than sterling credit history appears at a dealership seeking to buy an automobile. After choosing a particular car to purchase and permitting his trade-in vehicle to be appraised, the consumer will be asked to provide a substantial cash downpayment, and sometimes a trade-in, and sign all of the usual paperwork, including a buyer’s order, a retail installment contract, a title application, a promise to obtain insurance sheet and odometer disclosure documents, and, in addition, the consumer will be asked to sign a document usually referred to as a “bailment agreement” or “courtesy delivery agreement.”

Some wags refer to these documents as “MacArthur agreements.” This is based on General Douglas MacArthur’s famous promise that “I shall return” after he was forced to depart the Philippines in World War II. The relevance of this moniker will soon become apparent.

After driving off in a new vehicle, the dealer attempts to sell the retail installment contract, and the right to receive the monthly payments, to a sub-prime finance company. If the dealer is unable for any reason to sell the contract or at least not on the terms set forth in the contract, the dealer will usually call the consumer and ask for either the car to be returned or the consumer to sign a new retail installment contract, frequently back-dated to the date of delivery, with terms less favorable to the consumer, such as a higher downpayment, a higher interest rate and consequently higher monthly payments, or the addition of a co-signor. In fact, sometimes dealers ask consumers to return and sign several different retail installment contracts.

When the retail installment contract is not sold or renegotiated and sold, the dealer takes the position that no sale was ever consummated, as it has not transferred title (which only occurs when the dealer is paid in full by a finance company). Instead, because no financing has occurred, the argument goes that the transaction was merely a form of rental and an objecting consumer will have daily and mileage rental charges assessed against their downpayment. When such a deal goes south and a consumer demands the return of the trade-in and cash downpayment, the dealer frequently says the trade-in has already been sold and that the consumer is not entitled to any refund due to significant use, relying on the “bailment agreement.” (Marvin Zindler calls this process “dehorsing” when consumers are denied the return of their tradein.) To avoid arguments over the existence of a sale on specific terms, dealers have alternated between providing no copies of the retail installment contract until after funding at the time of assignment or by providing a copy of the retail installment contract with no dealer signature (based on the feeble argument that it was not a final agreement without such a signature).

B. Are such transactions even subject to challenge?

The legal effect of the “bailment agreement” and the eventual failure to sell the retail installment contract turns largely on whether there is a “condition precedent” or “condition subsequent” contractual transaction. If this is a “condition precedent” deal, the dealer must retain title, the plates must be dealer use license plates and the dealer must provide the insurance coverage. In a “condition precedent” deal, the transaction is not consummated until the dealer sells the retail installment contract. In short, with a condition precedent contract, no agreement exists until the condition is met. If this is a “condition subsequent” deal, the dealer would be entitled to rescind the contract if the subsequent condition of contract sale is not met. With a “condition subsequent” deal, title should pass immediately, temporary dealer sale plates are permissible and the consumer-buyer is responsible for insuring the vehicle. Thus, if a condition is not met, one or both of the parties are entitled to cancel an agreement that has already been consummated.

It is hard to determine whether the “spot delivery” transactions are either “condition precedent” or “condition subsequent,” because dealers set up the deals using elements of both types of transactions. For example, dealers typically retain title and do not apply for a new certificate of title showing ownership in the name of the consumer-buyer until the deal is funded following the sale of a retail installment contract to a finance company, and this suggests the transaction is a “condition precedent” transaction.

Under Tex. Bus. & Com. Code § 2.401, however, it can be argued that title passes immediately upon delivery of the vehicle and that retention of the certificate of title only means the dealer has retained a security interest. See, e.g., In re Johnson, 230 B.R. 466, 468-469 (Bkrtcy.D.D.C. 1999).

On the other hand, dealers typically provide temporary license plates that can only be used when a vehicle has been sold according to Tex. Transp. Code § 503.603, and they require the consumer-buyer to maintain insurance on the vehicle. Moreover, under Tex. Fin. Code § 348.101(b)(4), a retail installment contract for the purchase of a vehicle can only be tendered for signature when it is “complete as to all particulars,” which suggests that the contract must be binding when tendered for signature. Also, if these are “condition precedent” transactions, the trade-in should not be sold until the condition of contract sale has occurred, but dealers frequently sell the trade-ins very quickly, or at least represent that to the consumers caught in the web of these transactions. In addition, if these are “condition precedent” transactions, no interest can be earned until the condition of contract sale occurs, and yet dealers always allege that interest can be earned from the date the first contract was signed and delivery of the vehicle was made. Finally, the execution of a retail installment contract with an entirety clause and no language on the sale being conditional could render invalid all other documents with contrary language.

For example, many retail installment contracts used in Houston have language indicating that the contract “contains the entire agreement between you and us relating to this contract.”

1. Attacks on “condition subsequent yo-yo’s

I believe that these transactions should ordinarily be considered “condition subsequent” transactions, which means that there has been a consummated transaction. For TILA purposes, the transaction is consummated when the consumer is obligated and, according to the only two courts of appeals to rule on the issue, that is when the consumer signs the retail installment contract. Nigh v. Koons Buick Pontiac GMC, Inc., 319 F.3d 119, 123-124 (4th Cir. 2003), cert. granted on other grounds, 2004 U.S. LEXIS 677 (2004); Bragg v. Bill Heard Chevrolet, Inc., 374 F.3d 1060, 1066-1068 (11th Cir. 2004).

From that conclusion, a number of consequences follow. First of all, the failure to provide copies of the retail installment contract to the sub-prime consumers in these transactions constitutes a violation of the Truth-in-Lending Act. The finance company which is the assignee on the retail installment contract probably has no liability for this TILA violation, because it is not apparent from the face of the contract paperwork which followed the assignment. See 15 U.S.C. § 1641(a).

Polk v. Crown Auto, Inc., 221 F.3d 691, 692 (4th Cir. 2000); Lozada v. Dale Baker Oldsmobile, Inc., 197 F.R.D. 321 (W.D. Mich. 2000); In re Williams, 232 B.R. 629 (Bkrtcy.E.D. Pa.), aff’d as corrected, 237 B.R. 590 (E.D. Pa. 1999). See Revisions to Official Staff Commentary to Regulation Z, 67 F.R. 16980, 16982-16983 (April 9, 2002). Unfortunately, consumers can only recover for this type of violation if there are “actual damages.” Baker v. Sunny Chevrolet, 349 F.3d 862 (6th Cir. 2003). Second, antedating the contract can render the APR disclosure inaccurate, entitling the consumer buyer to recover statutory damages under TILA. See Rucker v. Sheehy Alexandria, Inc., 228 F.Supp.2d 711 (E.D. Va. 2002). Third, representing a right to repossess the automobile subject to spot delivery and/or a right to retain the downpayment and the trade-in or the proceeds from its sale may violate the DTPA, and in particular § 17.46(b)(12), if the contract had been consummated and the consumer had not defaulted. Fourth, if the transaction was of the “condition subsequent” variety, the dealer was required to comply with Article 9 of the UCC when it repossessed and disposed of the vehicle following repossession. If the repossession was not performed in a peaceable manner or no notice of sale was given after repossession, the dealer will be subject to minimum statutory damages under Tex. Bus. & Com. Code § 9.625(c)(2).

Failure to give notice or to sell the vehicle in a commercially reasonable manner will further preclude the dealer from seeking a deficiency judgment. See Comment 4 following Tex. Bus. & Com. Code § 9.626, the State Bar Comment following § 9.626, and Tanenbaum v. Economic Laboratory, Inc., 628 S.W.2d 769 (Tex. 1982).

2. Attacks on “condition precedent” yo-yo’s

Even if a court finds a “spot delivery” to be a “condition precedent” transaction, consumers may still challenge the dealer’s conduct. First, a consumer can sue under the DTPA for a misrepresentation if he was told that financing had been approved when it turned out otherwise. See Taylor v. Butler, 2003 Tenn. App. LEXIS 308 (Tenn. App. 2003). This is a fraud in the inducement claim. Second, if the consumer complied with his obligations under the bailment agreement after being informed that the retail installment contract could not be sold, the consumer may have a breach of contract claim if the downpayment is not returned. See Violette v. P.A. Days, Inc., 2002 U.S. Dist. LEXIS 23246, * 13-14 (S.D. Ohio 2002). Third, the failure to return the trade-in when a spot delivery fails may well be an unconscionable act, entitling the consumer to relief under the DTPA. Fourth, if the dealer relies on the absence of its signature on the retail installment contract to argue the absence of consummation and to support its right to keep all or a portion of the downpayment, the dealer may have violated Tex. Fin. Code § 348.101(b) by tendering a retail installment contract for signature by the consumer when it was not “completed as to all essential provisions.” See, e.g., Cannon v. Metro Ford, Inc., 242 F.Supp.2d 1322, 1332-1333 (S.D. Fla. 2002). As such, the consumer would be entitled to statutory damages and attorney’s fees under Tex. Fin. Code § 349.003(a) equal to three times the actual loss caused by the violation (conceivably three times the amount of the downpayment being withheld).

3. Possible changes in the regulatory environment

In the “spot delivery” context, the risk of loss associated with a failed transaction could fall on either the consumer or the dealer. There are indications, however, that the regulatory landscape in this area may possibly change, because, on October 22, 2004, the Finance Commission authorized the Office of the Consumer Credit Commissioner to publish a proposed rule on this issue. Specifically, the Commissioner sought leave to publish a proposed rule on the issue in the Texas Register to solicit comments from the public and the affected industry. See the text of this proposed rule at www.fc.state.tx.us by scrolling down to "meeting packets" and look in section "D" under the title of the Office of the Consumer Credit Commissioner. The proposed rule would legitimize yo-yo sales under state law, but it would explicitly prohibit some of the biggest abuses. For example, no trade-in could be sold by a dealer until the underlying retail installment contract was actually sold to a third-party lender. Likewise, the dealer is stuck with the retail installment contract unless the contract is rescinded or sold to a third-party lender within 10 days. On the other hand, the dealer is entitled to recover for loss of use from the consumer’s down payment if the bailment agreement so provides and the transaction is rescinded within 10 days. That could mean that many consumers in yo-yo deals will have lost their entire cash downpayment.

C. What yo-yo cases are worth taking?

In my practice, I have agreed to represent consumers in these matters only where the consumer has suffered a concrete loss. This happens when a dealer has retained the consumer’s cash downpayment, sold a trade-in owned outright by the consumer and/or repossessed the new car. When the consumer has lost no cash and the trade-in was worth less than the amount still owed (this is referred to in dealer parlance as being “overunder”), I am usually reluctant to take the case.

I am more likely to accept this kind of case if the consumer has returned a number of times to sign new contracts, especially when the subsequent contracts impose progressively worse terms upon the consumer. Moreover, I am more likely to accept such a case when the dealer has repossessed the spot delivered vehicle and violated some UCC provision during the repossession or later sale of the vehicle. Given the prevalence of the practice and the frequent unfairness in the dealer’s conduct, attorneys willing to represent consumers should consider handling these types of cases. Acceptance of such cases in the future, however, must depend upon the effect of any OCCC rule that may be promulgated to legitimize and regulate the practice.

18-Dec-05 3:00 PM

Consumer Laws: One Perspective on Private Enforcement

Richard Tomlinson — Sat, 17 Dec 2005 01:00:00 GMT

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Between approximately 1965 and 1975, a number of federal statutes were passed to provide additional protections for consumers, including the Truth-in-Lending Act, the Magnuson-Moss Warranty Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act and the Motor Vehicle Information and Cost Savings Act (aka the Odometer Act). Recognizing the need for private enforcement mechanisms to supplement public enforcement, all of these statutes provided that prevailing consumers could recover their attorney’s fees. Many of these statutes provided new statutory causes of action not recognized under the common law or statutory causes of action with reduced burdens of proof. This legislation, in effect, recognized that the common law with its high burdens of proof, extensive defenses and preclusion of attorney’s fee awards was not protecting consumers from fraud and deception in the marketplace.

The spirit of reform also extended to the states, resulting in the passage of statutes prohibiting deceptive and unfair acts against consumers. In Texas, the Deceptive Trade Practices - Consumer Protection Act, commonly known as the DTPA, was passed in 1973 to lower the burdens for consumer plaintiffs with complaints of deceptive trade practices against merchants. Specifically, the new DTPA was intended as a replacement for the common law fraud cause of action, which was difficult to prove and only practical to raise in cases involving substantial damages. Like the new federal statutes, the DTPA provided the means for private enforcement through the award of attorney’s fees to prevailing consumer plaintiffs.

Fast forward to 2005. Where are we now in terms of private enforcement of consumer protection laws? Frankly, tort reform has taken a bite out of private enforcement. To evaluate how attorneys can represent consumer plaintiffs in the future, we must first review the history of tort reform’s impact. Once that is done, we can then consider how to cope with laws and courts that are far less sympathetic to consumer claims than 30 years ago.

A. Short legislative history of the DTPA

The DTPA, as originally enacted, was a plaintiff lawyer’s dream. The act required the courts to construe the statute liberally to promote consumer protection, provided a laundry list of specified deceptive practices which was not exclusive, awarded consumers their actual damages for violations of the act and automatically trebled those damages, provided a means of suing to enforce the act by class action and required the giving of presuit notice at least 30 days’ prior to suit. In addition, the act provided a panoply of public enforcement mechanisms (best left to John Owens’ paper). In terms of private enforcement, this new act was revolutionary.

Unlike common law fraud, there was no mens rea requirement of intent or recklessness, as the law effectively imposed strict liability on merchants found to have made affirmative misrepresentations, even if made unknowingly. See Robinson v. Preston Chrysler Pymouth, Inc., 633 S.W.2d 500 (Tex. 1982)(“when a seller makes representations to the buyer, he is under a duty to know if the statements are true”). Unlike common law fraud, it did not openly recognize many of the existing common law defenses, leading the courts to hold repeatedly that most common law defenses were unavailable. Smith v. Baldwin, 611 S.W.2d 611 (Tex. 1980)(defense of substantial performance unavailable); Weitzel v. Barnes, 691 S.W.2d 598 (Tex. 1985)(parole evidence defense unavailable to prevent proof of an oral misrepresentation); Kennemore v. Bennett, 755 S.W.2d 89 (Tex. 1988)(waiver and estoppel defenses unavailable).

To provide incentives for enforcement generally not recognized by common law, the new act automatically trebled all actual damages awards and provided for awards of attorney’s fees to prevailing consumers. In the interest of encouraging settlement prior to litigation, however, the act provided for pre-suit notice.

Early attempts at modifying the DTPA had only modest effect. In 1975, a bona fide error defense was made available in DTPA class actions, but it also required the giving of restitution to all members of the class. See Appendix B-1, Alderman, The Lawyer’s Guide to the Texas Deceptive Trade Practices Act (1996). In 1977, the act was amended to expand its scope by adding real estate to the definition of “goods,” to add causes of action for unconscionability and distant forum abuse, to permit reference to Federal Trade Commission Act precendent in determining whether an act was deceptive, to provide the bona fide error defense to all actions under the act, to afford two new defenses and a basis for seeking indemnification or contribution, to ease the elements for the appointment of a receiver when attempting to collect a DTPA judgment and to repeal the act’s class action provisions. Alderman, Appendix B-3.

The repeal of the DTPA’s class action provisions was not a significant change. Prior to the repeal, Tex.R.Civ.P. 42 had been amended to make it close to Fed.R.Civ.P. 23, so there was no longer a need for special class action provisions in the DTPA.

Not until 1979 did the Legislature roll back the DTPA in any appreciable way, but none of the changes prior to 1995 could be considered catastrophic.

In 1979, the DTPA was amended to limit private claims for deception to the laundry list, to permit the recovery of additional damages upon a showing of knowing conduct but retaining an automatic trebling of the first $1,000 in actual damages, and to provide a new defense based upon the defendant’s reliance on information from third parties. Alderman, Appendix B-4. Then in 1981, the act was amended to permit waivers of the act’s protections for entities with assets of more than $25 million. Alderman, Appendix B-5. In 1983, entities with assets of $25 million or more were excluded from the definition of consumer. Alderman, Appendix B-6. In 1987, a cause of action for misrepresenting corporate status was added to the laundry list. Alderman, Appendix B-8. In 1989, more substantial changes were made, including a significant expansion of the waiver exception, the imposition of proportionate responsibility in personal injury cases and the requirement that pre-suit notice be given 60 days before suit instead of 30. Alderman, Appendix B-9. In 1989, the Legislature also enacted the Residential Construction Liability Act (RCLA) which, in residential construction cases involving claims for damages, superimposed a different and more detailed pre-suit notice procedure that permitted builders to demand the right to inspect, that provided builders could make an offer of repairs instead of a monetary offer as provided by the DTPA, that provided builders new defenses related to contributory negligence and the failure to mitigate damages by the homeowner, limited damages to certain specific elements and eliminated the right to recover post-offer attorney’s fees if an offer was unreasonably rejected by the homeowner.

McQuality, in a paper entitled “R.C.L.A. - Home Warranties,” presented at the Advanced DTPA - Consumer Law Course in May of 1991. RCLA, as written, overrode the DTPA to the extent that there was any conflict. Id. In 1993, RCLA was amended to impose a damages cap tied to the purchase price of the home and to limit the recoverable damages when a builder complied in good faith with the settlement provisions of the act. McQuality, paper entitled “An Update on the Texas Residential Construction Commission Act: Is It Really the End of the World As We Know It? . . . What You Need to Know,” presented at the Consumer Law: Doing Well By Doing Good course in November of 2004.

In 1995, tort reform finally came into its own and huge changes were made to the
DTPA. Specifically, the act was amended to permit more waivers of rights under the DTPA, to delete the substantive alternative prong of the unconscionability definition, to add a cause of action for taking advantage of a disaster to charge excessive prices, to afford a partial exemption for professional services, to eliminate the automatic trebling of the first $1000 in damages, to permit the recovery of mental anguish only upon a showing of knowing conduct and to permit additional damages based on mental anguish injuries only upon a showing of intent, to liberalize the award of attorney’s fees to defendants, to limit awards of prejudgment interest, to require a showing of detrimental reliance to recover any form of relief for misrepresentation, to add a right to inspect in response to the pre-suit notice requirement and to limit awards of attorney’s fees to the amount earned through the date of an offer if a reasonable offer was made prior to suit and rejected by the consumer. Alderman, Appendix B-12.

In 2003, tort reform made further inroads at the Legislature. First of all, the Residential Construction Commission Act (“RCCA”) was passed. The RCCA provided for the filing of all residential construction complaints with the commission as an administrative exhaustion requirement, required complaining consumers to marshal all of their evidence and expert opinions at the time of filing the administrative complaint, provided for state sponsored inspections and administrative adjudications, stated that a state inspector’s recommendation provided a rebuttable presumption that a construction defect does or does not exist and the reasonable manner of repair, and replaced the existing implied warranties of habitability and good and workmanlike construction with a new statutory warranty to be devised by the commission. In addition in response to cases limiting the reach of the RCLA,2 the Legislature also amended RCLA to provide that the failure to follow the settlement procedures would lead to dismissal and not merely abatement and the cap on damages and that the limit on the types of damages would apply even when the builder fails to make a reasonable offer.

O’Donnell v. Roger Bullivant of Texas, Inc., 940 S.W.2d 411 (Tex. App. – Fort Worth 1997, writ denied)(failure to make reasonable offer precludes builder from relying on RCLA cap on damages); Bruce v. Jim Walters, Homes, Inc., 943 S.W.2d 121 (Tex. App. - San Antonio 1997, writ denied)(fraud claim not covered by RCLA); Perry Homes v. Alwattari, 33 S.W.3d 376 (Tex. App. - Fort Worth 2000, pet. denied)(failure to make reasonable offer precludes builder from asserting RCLA limits on the type of damages recoverable); Sanders v. Construction Equity, Inc., 42 S.W.3d 364 (Tex. App. - Beaumont 2001, pet. denied)(RCLA no limit on exemplary damages).

Alderman, in a paper entitled “How 2003 Legislation Actions Impact the DTPA,” presented at the Comprehensive Consumer Law Seminar in August of 2003; McQuality, 2004 paper. Second, a major tort reform bill passed that had other significant effects upon consumers, including an opportunity for defendants to make an offer after suit is filed and to recover attorney’s fees and other litigation costs as a form of defensive recoupment if the trial recovery was at least 20% less than the amount of the offer. Alderman, 2003 paper.

B. Recent Judicial History of the DTPA

In the past ten years, consumers have lost virtually every case that made its way all of the way to the Texas Supreme Court. Slowly but surely, the Court on its own has construed the DTPA in such a way that it is a mere shadow of its former self with few advantages over common law fraud. What follows is a short description of the cases dating back to 1995.

1. Prudential Insurance Co. of America v. Jefferson Associates, Ltd., 896 S.W.2d 156 (Tex. 1995)

In this case, a limited partnership purchased a commercial building “as is” after an inspection and then discovered, after the purchase, that the building contained asbestos fireproofing which would be expensive to remediate. The buyer sued the seller for misrepresenting the quality of the building and for knowingly failing to disclose the material fact of asbestos contamination. Concentrating on the sophistication of the buyer, the Supreme Court held that the existence of the “as is” agreement precluded a finding of “producing cause,” because the buyer had disavowed any reliance upon the seller’s representations. While recognizing that this effect on causation could be avoided when there has been fraud in the inducement or concealment of information by the seller and when it would be unfair under the totality of circumstances, the Court has unleashed a genie with many unforeseen consequences.

Comment: To avoid the effect of an “as is” clause in an ordinary consumer case, the consumer is now required to show that any “as is” clause is part of a “boiler-plate” provision and entered into by parties with unequal bargaining positions. In short, you want to show that your client is an unsophisticated consumer with far less knowledge and resources than the seller. By so doing, the “as is” clause will not preclude a finding of causation.

2. Parkway Company v. Woodruff, 901 S.W.2d 434 (Tex. 1995)

In this case, some residents in a subdivision sued a developer that changed its master plan after they purchased their home and this change resulted in their home repeatedly flooding. The Supreme Court ruled that the law did not recognize any implied warranty relating to future development services and that events after sale cannot be considered in determining whether a seller has acted unconscionably in violation of the DTPA.

3. Abbott Laboratories v. Segura, 907 S.W.2d 503 (Tex. 1995)

The plaintiffs in this case argued that the defendant manufacturers were seeking to fix the wholesale price of infant formula and to monopolize those markets. To avoid the bar on such actions against indirect sellers under state antitrust law, the plaintiffs alleged that this conduct was unconscionable under the DTPA. The Supreme Court held that claims barred by state antitrust law are also barred if pled as DTPA claims.

In short, a purchaser of a product could only sue the immediate seller for antitrust violations and is prohibited from pursuing other parties up the chain of distribution such as manufacturers.

4. Crawford v. Ace Sign, Inc., 917 S.W.2d 12 (Tex. 1996)

In this case, a business sued SWB when its SWYP advertisement did not run and after a sales representative had promised a substantial increase in business if the advertisement ran. Finding that SWB had only breached its contract to run the advertisement, the Supreme Court affirmed the dismissal of all DTPA claims. The Court further found that the only representation made to induce the contract was a promise to perform under the contract, and the breach of that duty only sounds in contract. It reiterated that to permit this to be treated as a DTPA claim would turn all breach of contract claims into DTPA claims.

5. Amstadt v. U.S. Brass, 919 S.W.2d 644 (Tex. 1996)

In this case, homebuyers sued a number of defendants over the practice of installing deficient plastic pipes in new homes. Specifically, the plaintiffs sued the manufacturers of the pipe and the plastic used to fashion the pipe for making misrepresentations to builders about the quality of the pipe. Finding that any such misrepresentations were not made in connection with the homeowners’ purchase of their homes, the Supreme Court found no DTPA liability on the part of the upstream suppliers.

Comment: This case, however, would not prevent a builder from bringing a third party claim for indemnification or contribution against a manufacturer that made misrepresentations about products incorporated by the builder into a new house.

6. Arthur Anderson & Co. v. Perry Equipment Corp., 945 S.W.2d 812 (Tex. 1997)

In this case, an accounting firm was sued for doing a faulty audit of a firm in the process of being purchased. Specifically, the accounting firm represented that a pipeline firm was profitable when it was not, and the plaintiff would not have purchased the pipeline firm had it known the firm was not profitable. While upholding the plaintiff’s consumer status and permitting the DTPA to apply, the court overturned the trial court’s award of damages and remanded the matter for trial. As a part of the remand, the Supreme Court also held that plaintiffs cannot recover attorney’s fee awards that were merely a percentage of the total recovery as authorized by the consumer’s retainer agreement, finding that the factors in Tex. Disciplinary R. Prof. Conduct 1.04 must be considered in any determination of fees. Thus, a contingent fee of 1/3 or 40% would not govern the issue.

7. American Tobacco Co. v. Grinnell, 951 S.W.2d 420 (Tex. 1997)

In this case, the survivors of a smoker sued a tobacco company under various theories, including strict liability, breach of express and implied warranty, and fraud associated with the failure to disclose the health and addiction risks of smoking before the deceased smoker began to smoke. While the Court remanded the implied warranty claim due to the failure of the defendant to establish common knowledge of the addictive nature of nicotine, the Court also dismissed the fraud and express warranty claims on the basis that both claims require some proof as to reliance.

Query: Since reliance is often used for denying class certification on the basis that individual issues will predominate over class issues, see Wall v. Parkway Chevrolet, 2004 Tex. App. LEXIS 9586 (Tex. App. – Houston [1st Dist.] 2004) and Peltier Enterprises, Inc. v. Hilton, 51 S.W.3d 616 (Tex. App. - Tyler 2001, pet. denied), does this ruling preclude DTPA class actions based on express warranty?

8. Rocky Mountain Helicopters v. Lubbock County Hospital District, 987 S.W.2d 50 (Tex. 1998)

Here, the hospital owned several helicopters to serve as ambulances and hired an outside firm to handle maintenance and refueling. When a fuel spill occurred which cost $300,000 to clean up, the hospital sued the outside firm for breach of an implied warranty to perform services in a good and workmanlike manner. The Court found that refueling was not the type of activity covered by the implied service warranty, thereby limiting the hospital to its negligence remedy and suggesting that a breach of contract claim might have been available.

7. In re Alford Chevrolet-Geo, 997 S.W.2d 173 (Tex. 1999)

In this case, after defendants filed a motion to abate based on the failure to provide pre-suit notice, the plaintiffs’ counsel sent notice on behalf of an entire class of car buyers. Defendants moved for abatement on the theory that the notice was inadequate unless it was done on behalf of only the named plaintiffs, presumably on the chance that they could moot out the entire class action by paying the demands made on behalf of individual consumers. Defendants cited to the repeal of the DTPA’s own class action provisions to suggest that either DTPA class actions were not permitted or that payment of individual claims to moot out potential class claims was permissible. The Court, however, noted that the DTPA class action provisions were repealed when they were no longer necessary, given an amendment to Tex.R.Civ.P. 42. In short, the Court stated that pre-suit notice could be given on behalf of a class.

Comment: The plaintiffs filed the suit without prior notice to avoid the risk that the individual claims of the named plaintiffs would be paid and possibly mooting out any opportunity to file a class action. While the Alford decision permits putative classes to give pre-suit notice and thereby avoid this risk of mooting the class claims through cherry picking of the named representative plaintiffs, other changes in the law render this decision largely pointless. Specifically, the requirement of reliance in all laundry list claims imposed by the 1995 amendments means that DTPA class actions based on misrepresentations are unlikely to be certified. Likewise, the imposition of a reliance element to express warranty claims makes it unlikely that such claims can be certified as classes.

8. Gunn Infiniti, Inc. v. O’Byrne, 996 S.W.2d 854 (Tex. 1999)

In this case, a buyer purchased an automobile on the representation that it was undamaged and later learned that it had been previously damaged. In response to a demand letter, the seller offered to replace the car. At trial, the seller submitted a mitigation of damages question based on the buyer’s failure to settle. The Supreme Court ruled the common law defense of mitigation applied to DTPA claims, finding the pre-suit settlement provisions of the act did not supplant this common law defense. On the other hand, the Court held that an offer that required the release of all claims did not impose any duty to mitigate by the plaintiff-buyer. Thus, if the seller had merely offered to replace the original car without seeking any release, the seller would have been entitled to raise the mitigation defense.

Comment: Smart defense counsel can effectively moot DTPA claims by offering substantial relief without seeking any release of claims, thereby potentially precluding any recovery of attorney’s fees.

9. Miller v. Keyser, 90 S.W.3d 712 (Tex. 2002)

In this case, the buyer of two lots in a subdivision sued a homebuilder and its agent over misrepresentations made by the sales agent. The homebuilder was dismissed as a defendant on limitations grounds, but a judgment was entered after a trial against the agent. The court of appeals reversed the trial court on the basis that an agent acting within the course and scope of his authority could not be held personally liable, relying upon Karl & Kelly Co. v. McLerran, 646 S.W.2d 174 (Tex. 1983). The Supreme Court, however, found that the agent was personally liable under the plain language of the DTPA, refusing to find that he had to have acted intentionally to be liable as an agent. Specifically, the Court found that the McLerran decision had been implicitly overruled years ago and concluded that a corporate agent is responsible for his own acts under the DTPA.

Comment: This is the most pro-consumer decision made by the Texas Supreme Court in the past 10 years. Unfortunately, it is a rare example of the Court’s recognition of the rights of consumers.

10. Centex Homes v. Buecher, 95 S.W.3d 266 (Tex. 2002).

In this case, a class of consumers filed a suit to declare void a new home builder’s disclaimer of the implied warranties of habitability and good and workmanlike construction. The San Antonio Court of Appeals ruled that the disclaimers were invalid, finding implied warranties would be superfluous if they could be easily disclaimed. The Supreme Court also ruled that the implied warranty of habitability could not be disclaimed generally, permitting such disclaimer only when the known defects are clearly disclosed. The Court also held that the more important implied warranty of good and workmanlike construction could be disclaimed if the construction contract “provides for the manner, performance or quality of the desired construction.” In other words, if the construction contract defines the level of performance, there is no need for a gap-filler such as the implied warranty of good and workmanlike performance to supply such a standard of performance.

Comment: My preference would have been for the Court to hold that implied warranties cannot be disclaimed, as otherwise they are superfluous. Nevertheless, it will be difficult under this ruling for a builder of a new home to disclaim the implied warranty of habitability, as it will be dicey to give full disclosure of defects. Likewise, if the construction contract provides guidance as to the standard of construction by stating, for example, that the plumbing and electrical systems will be built to the local code standard, there may be no need for an implied warranty of good and workmanlike performance, as a breach of contract claim exists in its stead.

The future effect of this ruling may be limited, however, with the passage of the RCCA, which provides that the Residential Construction Commission can issue new regulations defining implied warranties to supplant those provided by the common law.

11. PPG Industries, Inc. v. JMB/Houston Centers Partners LP, 146 S.W.3d 79 (Tex. 2004)

In this case, a company purchased an office building and the seller’s warranty claims. These subsequent owners of the office building then sued over the failure of windows, asserting breach of warranty. The Court found that, as a matter of law, DTPA claims could not be assigned, finding the law was only intended to protect the immediate purchasers.

Comment: The unfortunate effect of this ruling is that the survivability of DTPA claims will now be in doubt, because assignability and survivability tend to be connected.

C. Arbitration and its practical effect on private enforcement

Another recent change is the proliferation of arbitration clauses in credit card agreements, automobile and new home sales contracts and even attorney retainer agreements. The primary practical problem with arbitration is that the added cost is frequently so high that it discourages the making of any claims, and frankly that is my impression as to why such clauses are being used. While such clauses have been effectively challenged in a number of state and federal courts, Texas courts appear to be more pro-arbitration and less willing to consider challenges to arbitration than the courts of any other state.

See, e.g., In re American Homestar of Lancaster, Inc., 50 S.W.3d 480 (Tex. 2001)(arbitration compelled in mobile home contract, despite assertion that binding arbitration was barred by the Magnuson-Moss Act). Nevertheless, some Texas courts have been willing to refuse enforcement of arbitration clauses with particularly odious provisions. Pine Ridge Homes, Inc. v. Stone, 2004 Tex. App. LEXIS 6979 (Tex. App. - Dallas 2004)(court refuses to enforce arbitration agreement that imposes full cost of the arbitration on injured homebuyer with claim when AAA also refused to administer); In re Palm Harbor Homes, Inc., 129 S.W.3d 636 (Tex. App. - Houston [1st Dist.] 2003, orig. proc.)(provision in arbitration agreement unilaterally allowing the manufacturer to opt out of the agreement rendered it unenforceable).

D. Status of Private Enforcement

What does this history mean for private enforcement of consumer laws?

First, DTPA claims are much more difficult to prove than 15-20 years ago, because the Legislature and the courts have imposed a vast number of limitations, rendering the DTPA cause of action a shadow of its former self. With imposition of new defenses, the DTPA is not much better than common law fraud as a cause of action now. (Nevertheless, the DTPA still affords two advantages over common law fraud: (1) strict liability for affirmative misrepresentations without any required showing of mens rea, and (2) the provision of attorney’s fees to prevailing consumers.)

Second, DTPA claims relating to residential construction have become much more difficult with the RCLA notice obligations, the RCCA administrative exhaustion requirements (including the obligation to provide all expert opinions with the original administrative complaint) and the common existence of arbitration agreements in new home contracts. Given the procedural obstacles, only the wealthy will be in a position to pursue residential construction complaints in the future.

Third, the cost of arbitration may make it impossible to pursue many smaller claims, and it clearly will reduce the number of new precedential decisions.

Fourth, the chances of certifying any type of consumer class action in state court is effectively nil. See, e.g., Compaq Computer Corporation v. Lapray, 135 S.W.3d 657 (Tex. 2004); Henry Schein, Inc. v. Stromboe, 102 S.W.3d 675 (Tex. 2002); General Motors Corporation v. Garza, 2005 Tex. App. - San Antonio 2005); Ford Motor Company v. Ocanas, 138 S.W.3d 447 (Tex. App. - Corpus Christi 2004). Given that virtually class certification to be appealed has been reversed in the past few years, Texas state courts are now generally hostile to the concept.

E. How to Cope?

While I limit my practice is limited to representing consumer-plaintiffs and debtorconsumer- defendants, I am not entirely clear on how to deal with the current environment. Nevertheless, I do have a few suggestions:

First, be careful. Only take consumer deception cases when the facts indicative of fraud are compelling. Now is not the time to take a case that requires a court or a jury to take a leap of faith. For example, consider pursuing car title claims, as the consumers frequently are entirely innocent and very sympathetic to judges and juries.

Second, think small and simple. Avoid large cases involving multiple plaintiffs, a class or multiple defendants. Classes will not be certified in state court; suing multiple defendants only leads to multiple defense counsel; and mass actions will probably be treated as second cousins of class actions.

Third, be flexible. Be willing to pursue the right kind of cases in arbitration, assuming that you can persuade your client to bear the full cost or you can limit the cost by utilizing consumer rules (unfortunately with no oral hearing under the AAA consumer rules) or by use of an expedited, less expensive arbitration procedure (such as the expedited arbitration procedure in the AAA commercial arbitration rules). Do not expect to persuade a state court to refuse enforcement of an arbitration agreement, even one that is, in your view, extremely one-sided.

Fourth, be subtle. Consider bringing warranty actions under the Magnuson-Moss Act to avoid DTPA complications, odometer claims under the Motor Vehicle Information and Cost Savings Act to obtain treble damages more easily, and disclosure claims under the Truth-in-Lending Act claim to obtain federal jurisdiction. Access to federal courts can provide an alternative to state courts that are reluctant to recognize the viability of consumer claims. Similarly, bring consumer claims as adversary proceeding complaints in bankruptcy courts, as there is often a higher likelihood of avoiding referral to arbitration inthose courts.

Until the pendulum returns, I can think of no more to add.

16-Dec-05 7:00 PM

Deceptive Auto Sales: Odometer Rollbacks and Undisclosed Wreck Damage

Richard Tomlinson — Fri, 16 Dec 2005 23:00:00 GMT

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A. Background

In my experience, two of the most common deceptive trade practices in the sale of automobiles involve misrepresentations regarding the mileage of an automobile and failures to disclose prior wreck damage. These commonly are issues in the sale of used automobiles, but the failure to disclose damage to automobiles can occur with new cars as well.

For example, new cars sometimes fall off their transporters when being unloaded and sometimes new cars get into wrecks before they have ever been titled.

These are significant issues as well, because increased mileage and prior wreck damage, particularly when not fully remedied, have major impacts upon the fair market value of vehicles and may also render warranties void.

On an initial review, many attorneys may believe that the only responsible party in an odometer case is the party in the chain of title that rolled back the odometer. Upon further review, however, the law often holds parties up the chain of title to be liable in such cases, sometimes including the retail finance company.

With cases involving prior wreck damage, many defense attorneys representing dealerships will assert that their clients had no actual knowledge of the prior wreck damage and should therefore not be held liable. Dealers, and even retail finance entities, can be held liable in such cases.

B. Who is responsible when an odometer has been rolled back?

Imagine the following hypothetical facts based on one of my cases: Ms. Smith, a consumer, notices an advertisement for a vehicle in the Chronicle which claims a particular vehicle has “Low K,” obviously an indication of low mileage. She calls the advertising dealer and is informed orally that the exact mileage is around 40,000, and she decides to go visit the dealership as a result. At the dealership, she is shown the advertised vehicle which has a sticker affixed to one of the side windows which affirmatively states the mileage to be around 40,000.

After purchasing the vehicle and an extended warranty by way of a retail installment contract that is later assigned to a bank, she begins to notice that the vehicle seems to need constant repairs. Relying on a television story about odometer fraud, she runs a Carfax search and discovers that the odometer of her vehicle may have been rolled back, because the Carfax report notes an emissions test with a recorded mileage that is much more than what has apparently been recorded in the various title transfers visible in the title history of the vehicle.

After sending a demand letter to the dealer, she is contacted by an adjustor for the dealer’s insurance carrier who denied her claim, asserting that the emissions station had merely made a mistake on the inputting of the mileage. Upon contacting the first consumer owner of the vehicle and the dealer which accepted the vehicle as a trade-in, however, she discovered that the vehicle had over 100,000 miles on the odometer at the time of its trade-in after about 2 ½ years of use. The title history did not reflect the true mileage, because the initial entry at the time of trade-in and later sale by the trade-in dealer had been forged, as apparently the first digit of a 6-digit odometer reading entry had been turned into a upper-case “A” and this forgery hid the true mileage in subsequent sales. The issue is who is liable for this obvious fraud.

1. The party directly responsible for the roll-back

The party which rolled back the odometer and forged the mileage reading on the title was apparently a wholesaler which had purchased the vehicle at auction after the trade-in dealer had submitted the vehicle for sale at an auction. This wholesaler was able to forge the odometer reading in the first transfer of title paragraph on the back of the original certificate of title, because the trade-in dealer and the culpable wholesaler were not obligated, as licensed dealers, to apply for a new certificate of title, and thereby record for posterity the information regarding the odometer reading during each transfer, until a retail sale was made.

In short, the wholesaler had the original certificate of title in hand and was able to forge the odometer reading in an effort to hide the roll-back of the odometer performed by the wholesaler. The cheating wholesaler engaged in this course of conduct to make a better profit on the vehicle, having purchased it at the low value reflected by its high mileage and then sold it for a much higher price which was based on a purported mileage reading which was far below the actual experience of the vehicle.

The cheating wholesaler that engaged in the roll-back and the forgery of the title is clearly liable under both the Texas Deceptive Trade Practices Act and the federal Odometer Act. The DTPA explicitly prohibits “disconnecting, turning back, or resetting the odometer of any motor vehicle so as to reduce the number of miles indicated on the odometer gauge. Tex. Bus. & Com. Code § 17.46(b)(16). See, e.g., Houston v. Mike Black Auto Sales, 788 S.W.2d 696, 697-699 (Tex. App. - Corpus Christi 1990, no writ) where a dealer was required to go to trial on this issue based on evidence that the dealer had replaced the odometer and failed to disclose that fact in a later sale. Likewise, the Odometer Act prohibits such tampering. 19 U.S.C. § 32703(2). See, e.g., U.S. v. Whitlow, 979 F.2d 1008 (5th Cir. 1992), an appeal regarding the sentence given to a Houston used car wholesaler who pleaded guilty to odometer tampering and was believed to have rolled back odometers in no less than 1500 automobiles. While both the DTPA and the Odometer Act would permit a private recovery of damages and attorney’s fees against such a party, this may be a waste of time, because the parties engaged in rollbacks are often judgment-proof. That does not mean, however, that consumers injured by such roll-backs are entitled to no relief.

2. The dealer that misrepresented the mileage or failed to disclose the true mileage of the vehicle

In the example set forth above, the dealer made a number of representations about the mileage that turned out to be false.

First, the advertisement stated that the mileage on the vehicle was low when it was over 100,000 miles.

Second, the dealer representative stated orally on the telephone that the mileage was around 40,000 which is clearly false.

Third, the sticker on the car disclosed an exact mileage of around 40,000 when the true mileage was over 100,000.

Obviously, this vehicle was represented to be a low mileage vehicle when, in fact, it had an excessive number of miles which clearly affected the value of the vehicle. As a result, the dealer clearly violated the DTPA, Tex. Bus. & Com. Code § 17.46(b)(5) and (7), by misrepresenting the characteristics and quality of the vehicle. There are numerous Texas cases where dealers have misrepresented the mileage of a vehicle with a rolled-back odometer and have been held liable under the DTPA for the misrepresentation. Green Tree Acceptance, Inc. v. Holmes, 803 S.W.2d 458, 460, 462 (Tex. App. - Fort Worth 1991, writ denied); Houston v. Mike Black Auto Sales, 788 S.W.2d at 699; Jones v. Star Houston, Inc., 1988 Tex. App. LEXIS 827 (Tex. App. - Houston [14th Dist.] 1988, no writ); Gallery Datsun, Inc. v. Metcalf, 630 S.W.2d 853, 854 (Tex. App. - Houston [1st Dist. 1982, no writ); Jack Criswell Lincoln-Mercury, Inc. v. Haith, 590 S.W.2d 616, 617-619 (Tex. Civ. App. - Houston [1st Dist.] 1979, writ ref’d n.r.e).

One defense frequently raised in such cases is that the dealer did not know that the odometer reading that it was disclosing was false, and this fact can be relevant due to the fact that the odometer disclosures on the certificate of title are made based on the seller’s “best knowledge.” In Preston II Chrysler-Dodge v. Donwerth, 744 S.W.2d 142, 144-145 (Tex. App. - Dallas 1987), rev’d on other grounds, 775 S.W.2d 634 (Tex. 1989), the dealer represented that the mileage on the odometer of a vehicle was the accurate mileage “to the best of its knowledge,” and the failure to prove actual knowledge that the mileage on the odometer was inaccurate doomed the DTPA misrepresentation claim.

On the other hand, in Green Tree Acceptance, 803 S.W.2d at 459-460, a similar “to the best of its knowledge” representation was made, but there was enough evidence of actual knowledge that the odometer reading was false to uphold a DTPA verdict. In our example, however, the dealer made an affirmative statement about the mileage unconditioned by any limitation based on its knowledge, which imposes a duty on the seller to know whether its statements were true. First Title Co. of Waco v. Garrett, 860 S.W.2d 74, 76 (Tex. 1993)(“when a seller makes an affirmative representation, the law imposes a duty to know whether that statement is true”); Robinson v. Preston Chrysler-Plymouth, Inc., 633 S.W.2d 500, 502 (Tex. 1982)(“When a seller makes representations to the buyer, he is under a duty to know if his statements are true.”). Thus, the dealer in our example should be held liable for any misrepresentation, whether made with knowledge or not.

Like the DTPA, the Odometer Act also prohibits not only mileage misrepresentations on the prescribed odometer disclosure clauses on certificates of title, but also elsewhere in oral statements, advertising and other written statements. See 49 U.S.C. § 32705(a)(2); Ryan v. Edwards, 592 F.2d 756, 761 (4th Cir. 1979)(false representation of “low mileage” in newspaper advertising actionable, as our oral misstatements of mileage); Hughes v. Box, 814 F.2d 498, 501-502 (8th Cir. 1987). Under the Odometer Act, however, there is no private liability in a civil action unless the defendant is shown to have acted with “intent to defraud.” 49 U.S.C. § 32710(a).

Unlike the duty to establish a failure to disclose under the DTPA with actual knowledge, the “intent to defraud” element in an Odometer Act case can be established by constructive knowledge. In other words, a dealer making a false representation of mileage is liable under the Odometer Act if it reasonably should have known its statement was false or reasonably should have taken investigative steps which would have revealed the falsity of its statement. Nieto v. Pence, 578 F.2d 640, 642 (5th Cir. 1978). In further contrast with the DTPA, the Odometer Act provides that a prevailing consumer is entitled to an automatic award of three times the consumer’s actual damages with minimum damages of $1,500. 49 U.S.C. § 32710(a).

3. The finance company that purchased the retail installment contract

Due to a clause in most retail installment contracts which provides that the holder of the contract is subject to all claims and defenses that the buyer has against the seller, assignee finance companies have vicarious liability for the odometer violations of dealers. See Riggs v. Anthony Auto Sales, Inc., 32 F.Supp.2d 411, 415-417 (W.D. La. 1998). This vicarious liability is limited by the terms of the “holder clause,” such that a consumer would be entitled to cancel the debt and recover affirmatively a sum not to exceed what has been paid under the contract.

Finance companies deal with the potential liability flowing from the “holder” clause by requiring dealers to agree to indemnify them should they be sued over a wrongful act performed by the dealer. This indemnification is usually a prominent part of the formal dealer agreement between the dealer and the finance company, which sets forth the terms of the relationship between them and the terms under which the finance company will purchase retail installment contracts. In lawsuits in which the lender has been added under a “holder clause” theory of vicarious liability, the finance companies often file cross-claims against the dealer seeking indemnification. In other cases, the dealer may agree to purchase the retail installment contract and assume all liability in an effort to save the finance company the expense and inconvenience of litigation.

Based on this inherent indemnification arrangement, the dealer is usually, but not always, the party which is ultimately responsible for covering the monetary cost of defensive attorney’s fees, settlement, and judgment. The most common exception to this general rule is when the dealer is out of business or otherwise insolvent.

C. Who is responsible when prior wreck damage has not been disclosed?

Imagine the following hypothetical facts based on one of my cases: Mr. and Mrs. Smith appear at a dealership and take their time looking over the available vehicles. Finding one late model vehicle with relatively low mileage, Mrs. Smith asked if there was anything wrong with the vehicle and whether it had been in a wreck, particularly in light of its low milage, and was told that there was nothing wrong with the vehicle and that it had only one owner before being traded-in to that dealer. As a result of these assurances, the Smiths purchased the vehicle. A few months after the purchase concluded, Mrs. Smith was informed by the service department that the vehicle had been in a serious wreck previously and that she might want to return it. After contacting the first and only owner, it was discovered that the first owner had been in a serious wreck, that the repairs had been performed by the same dealer which had later sold the car to the Smiths, and that he informed the salesman at the time of trade-in that the vehicle had been in a wreck previously, which fact reduced the trade-in allowance provided by this same dealer.

There is some specific Texas law which is intended to provide some protection against this sort of deception in automobile sales, but, in many cases, it does not appear to work. Under Tex. Transp. Code § 501.0911 through 501.0931, the Texas Legislature has set up a regulatory framework which requires vehicles which have suffered damages equal to 75% or more of their fair market value prior to an accident to have branded titles and those which have suffered damages equal to 95% or more of their prior fair market value to be used only as salvage. To avoid the loss in value associated with a branded title, however, insurance companies need merely estimate that the cost of repair following a serious wreck to be less than 75% of the prior fair market value. By manipulating either the estimate of repairs or the appraisal of the prior value, insurance companies can avoid the intended sweep of this statutory scheme. Despite the fact that the salvage title laws can be easily avoided, consumers can still receive some measure of protection through the DTPA.

1. Dealer liability

Under the foregoing facts, the dealer might well be liable both for an affirmative misrepresentation, in violation of DTPA § 17.46(b)(5) and (7), and a failure to disclose a material fact, in violation of DTPA § 17.46(b)(24). Many dealers have been liable for 7 affirmatively misrepresenting the collision history of vehicles. River Oaks L-M, Inc. v. Whalen, 1998 Tex. App. LEXIS 5687 (Tex. App. [1st Dist.] 1998, no writ); Grabinski v. Blue Springs Ford Sales, Inc., 136 F.3d 565 (8th Cir. 1998); Torrance v. AS & L Motors, Ltd., 459 S.E.2d 67 (N.C. App. 1995). Likewise, many dealers have also been held liable for failing disclose the prior wreck history of vehicles. Tandy v. Marti, 213 F.Supp.2d 935 (S.D. Ill. 2002); Bird v. John Chezik Homerun, Inc., 152 F.3d 1014 (8th Cir. 1998); Parrott v. Carr Chevrolet, Inc., 965 P.2d 440 (Ore. 1998), aff’d in part, rev’d in part, 17 P.3d 473 (Ore. 2001). As mentioned previously, a failure to disclose violation requires proof of the dealer’s knowledge of the prior wreck history as well as proof that this fact was not disclosed. Based on these violations, dealers in Texas would be liable for damages or rescission/revocation of acceptance/restoration of money or property under DTPA § 17.50(b)(3).

2. Finance company liability

As stated before, finance companies that purchase retail installment contracts are typically held liable for the wrongs of the dealers based on the “holder” clause. Even in those cases in which the “holder” clause is missing but should have been placed in the contract, recent amendments to the UCC have implied the existence of such a clause when it should have been present. See Tex. Bus. & Com. Code § 9.403.

E. Conclusion

Despite the weakening of the DTPA and the obvious impact of tort reform on Harris County juries, there remain many deceptive automobile sales cases worth taking to court. In particular, odometer rollbacks and undisclosed wreck damage provide strong bases for suit. Prior to suit, however, plaintiff’s counsel must evaluate the facts and consider all of the risks associated with trial before taking on such cases. Given the conservative litigation climate, plaintiffs’ counsel are advised to take those cases that even a conservative juror would consider to be fraud. In the automobile context, odometer rollbacks and failures to disclose wreck damage are the types of cases that all jurors would view as fraudulent and worthy of their time in the jury box.

16-Dec-05 5:00 PM

Consumer Issues that Affect Bankruptcy Law Practitioners

Richard Tomlinson — Fri, 16 Dec 2005 21:00:00 GMT

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Attorneys representing debtors in bankruptcy court are probably more exposed to a wider gamut of consumer law issues than any other sub-set of attorneys. Bankruptcy debtors are often a desperate and yet unsophisticated lot that are subject to many abuses not visited upon sophisticated, middle class consumers with prime credit ratings.

Being short of money and convinced that conventional lending sources are unavailable, debtors who file for bankruptcy protection are more likely, in my experience, to seek payday loans with interest rates that commonly exceed 500%, auto title loans with interest rates in excess of 100% and to be subject to yo-yo spot deliveries of automobiles. Likewise, such debtors are often treated, both before and after bankruptcy, as “second chance finance” customers are more likely to be sold automobiles with odometer rollbacks and undisclosed wreck damage and to be sold products on the “back end” such as credit life insurance, credit disability insurance and third-party extended warranties which are usually over-priced and rarely provide the promised benefits without litigation. In addition, this class of consumers is more vulnerable to wrongful repossessions, improper attempts at foreclosure, deceptive attempts at credit repair and outrageous debt collection tactics.

What follows are my ruminations on a number of practical consumer and debtor issues that can be addressed by consumer protection laws.

A. Abusive or Predatory Lending

1. Payday Loans

Payday loans are the modern version of salary-buying. Typically, a company advertises that it offers personal loans of $100 to $500 “without a credit check.” Assuming the loan applicant has worked for the same employer, lived at the same residence and maintained a checking account for a minimum period of time without any pending hot check charges, these lenders will make loans without actually pulling any credit report. Usually, the consumer is required to provide one or two checks for the amount of the loan plus a fee of 15-20%, and the lender promises not to deposit the check or checks for 14 days, or after the next payday, and only if the consumer fails to pay off the full amount or fails at least to pay the fee and to roll over the loan. In effect, these are one-payment term loans that are secured by postdated or undated checks (or by an authorization to seek electronic payments from the consumer’s bank account). Many consumers are unable to pay off the full amount of the loan in 14 days, so they “renew” the loan and pay the fee repeatedly until they are able to come up with the full amount or they tire of paying and simply cease their payments. A number of surveys have shown that consumers renew these loans, due to an inability to pay off the loan in full, 10 to 12 times. At 15% every two weeks, the annualized cost of this credit is 26 X 15 or about 390%. At 20% every two weeks, the annualized cost of this credit is 26 X 20 or about 520%.

Given the high rate of interest, the absence of any reduction of the principal amount owed unless the full sum is repaid and the financial tight wire walked by many consumers who take out these loans, many of these loans eventually fall into default. To induce payment, payday lenders explicitly state, or at least implicitly suggest, that if a check or checks are deposited, the practice when no other payment is received, and then bounces, the consumer has committed a criminal offense and could be arrested on the job. In fact, however, the consumer has not passed a hot check, because the lender knows when it receives the check that it will not be good. Otherwise, why would a consumer be seeking the loan? Likewise, there can be no presumption of criminal intent if the check is postdated and probably not if it is undated. In practical terms, I have not heard of a criminal hot check prosecution brought against a consumer in the Houston area, even in J.P. Court, in over 10 years. In effect, the explicit or implicit threat of criminal prosecution which induces many consumers to renew loans and to pay fees has no teeth.

What can be done about such loans? In the best of all worlds, all of these transactions would be considered usurious, any failure to give credit disclosures would be treated as a Truth-in-Lending Act (TILA) violation and much of the efforts at collection would be viewed as violations of the Fair Debt Collection Practices Act (FDCPA) and/or the Texas Debt Collection Act (TDCA). Every loan transaction has to be reviewed differently. The validity of potential claims varies a great deal, depending upon the business model utilized by the lender. See § 7.5.5 of the 2004 Supplement to The Cost of Credit (NCLC 2004).

a. Rent-a-charter transactions

At this time, the most difficult payday loan transactions to attack are those involving a purported principal-agent relationship between the actual lender, usually a state bank in Delaware, South Dakota, Illinois or Kentucky, and companies with local offices that purport to be acting as loan brokers. Many of the larger payday loan operations purport to act as brokers of payday loans and arrange for loans from banks, such as the County Bank of Rehoboth Beach, that are located in states in states with no usury limits. Since federal banking law allows the exporting of rates permitted in the jurisdiction where banks are located, these loans facially appear to be immune to attack for usury, even though the disclosed APR exceeds 500%. Nevertheless, a number of public and private suits have been filed, arguing that the payday lender chains are carrying all of the risk, being required to buy back all notes in default, and that, in substance, the true lender is the purported local broker. In effect, these suits argue that the banks whose names are on the notes are only renting their charters to permit the purported brokers to evade local usury laws. See The Cost of Credit § 3.4.6.5 (NCLC, 2004 Supplement). The one case in which the plaintiffs prevailed involved a settlement. Purdie v. Ace Cash Express, 2002 U.S. Dist. LEXIS 20910, 2002 WL 31730967 (N.D. Tex. 2002)(case dismissed), 2003 WL 21447854 (N.D. Tex. 2003)(dismissal vacated), 2003 U.S. Dist. LEXIS 22547, 2003 WL 22976611 (N.D. Tex. 2003)(class certifies and settlement approved). While Congress has not acted on this issue, the Office of the Comptroller of the Currency and the Office of Thrift Supervision have issued policies to discourage such arrangements, leaving only institutions regulated solely by the FDIC to engage in such arrangements. See The Cost of Credit § 3.4.6.5. These are difficult usury cases, involving undecided law and significant resources.

Practice Pointer: If there is a claim in these cases, it is usually usury and possibly RICO (based on a claim that the interest being charged exceeds the allowable limit by more than two times). These payday lenders are much more likely to comply with the Truth-in-Lending Act in their written disclosures and the Texas Debt Collection Act in their direct collection activity.

b. Lenders pretending not to be lenders

Another sub-set of payday lenders pretend to be selling a product or a service when, in fact, they are only making a loan. For example, some payday lenders have unsuccessfully claimed to be selling catalog gift certificates, Cashback Catalog Sales, Inc. v. Price, 102 F.Supp.2d 1375 (S.D. Ga. 2000) and Upshaw v. Ga. Catalog Sales, 206 F.R.D. 694 (M.D. Ga. 2002)(class certification granted), advertisements, Henry v. Cash Today, Inc., 199 F.R.D. 566 (S.D. Tex. 2000)(class certification granted), and internet service, Short on Cash.Net of New Castle, Inc. v. Department of Financial Institutions, 811 N.E.2d 819, 2004 Ind. App. LEXIS 1210 (Ind. App. 2004). The issue in all of these cases is whether, in substance, the transactions are loans or sales or, in other words, whether the form of the transaction as a sale is merely a guise or sham to evade the usury laws. See Tex. Fin. Code §§ 342.008 and 342.051. Since § 342.008 explicitly states that “[c]haraterization of a required fee as a purchase of a good or service in connection with a deferred presentment transaction is a device, subterfuge or pretense” to evade the law, there may be no factual issue when such transactions are completed in Texas.

Besides usury, payday lenders that pretend to be sellers often violate the Truth-in-Lending Act as well. Since the Federal Reserve Board’s issuance of an official interpretation on March 24, 2000, 65 Fed. Reg. 17129 (2000), there has no been issue that TILA applied to deferred presentment transactions as extensions of credit. Arrington v. Colleen, 2000 U.S. Dist. LEXIS 20651 (D. Md. 2000). Even if this official interpretation need not be followed until October 1, 2000, Clement v. Amscot Corp., 176 F.Supp.2d 1292 (M.D. Fla. 2001), there is no doubt that all payday loan transactions consummated on or after that date must comply with TILA. Nevertheless, it has been my experience that those businesses pretending to be sellers instead of being lenders fail to give any TILA disclosures, exposing themselves to federal jurisdiction and statutory damages equal to twice the finance charge not to exceed $1000 and not less than $100. Koons Buick Pontiac GMC, Inc. v. Nigh, 2004 U.S. LEXIS 7979 (2004).

2. Car Title Loans

These transactions work much like payday loans, but the security is a lien on a paidoff vehicle (instead of a check), the amount being lent is usually at least $1000 (instead of $100 to $300), the interest rate is usually around 100% (instead of 400% or more) and the term is usually at least 6 months with multiple payments (instead of a 2-week term with one payment). Like the case of many payday lenders, title lenders often try to evade the usury laws through the use of form, but these efforts at evasion usually are unsuccessful. See Sal Leasing, Inc. v. State ex rel. Napolitano, 10 P.3d 1221 (Ariz. App. 2000)(saleleaseback of automobiles actually car title loans); Aple Auto Cash Express Inc. of Okla. v. State ex rel. Oklahoma Dep’t of Consumer Credit, 78 P.3d 1231 (Okla. 2003)(transactions in form rent-to-own deals but, in reality, were car title loans).

One local group of businesses have attempted to avoid usury liability for such transactions by having one business act as a broker, register under the Credit Services Organizations Act, do all the work, place the loan with a lender. Specifically, they have disclosed in their paperwork that the finance charge for TILA purposes was over 100%, but they argued that the 75% fee paid to the broker could not be treated as interest even in the face of allegations that there was a principal-agent relationship between the lender and the broker. So far, a panel of the Fifth Circuit Court of Appeals has accepted the lenders and brokers’ argument in affirming a Rule 12(b)(6) dismissal, although petitions for rehearing are pending. See Lovick v. Ritemoney Ltd., 378 F.3d 433 (5th Cir. 2004). Should the Lovick opinion remain in place, form will be more important than substance and successful usury cases will be few and far between.

3. High-interest, high-fee loans

One other form of predatory loan is the home equity, home improvement or re-fi loan secured by a homestead with very high fees or interest that is subject to the Home Ownership Equity Protection Act (HOEPA), a part of TILA. Money Mortgage used to broker a number of HOEPA loans every year, but I have not seen many of these type of loans since Money Mortgage failed and filed for bankruptcy protection back in September of 2001. If you find one of these loans with fees in excess of 8% or an interest rate 8% in excess of the T-bill rate for notes with similar terms, see 15 U.S.C. § 1602(aa), then the lender is required to comply with a number of mandates set forth in 15 U.S.C. § 1639, such as a required written notice before closing, limitations on prepayment penalties, a partial ban of balloon payments, a complete ban on negative amortization and a prohibition on the making of loans without regard to the borrower’s ability to repay (in other words, the loan was made solely on the basis of the borrower’s equity in his home). When HOEPA applies, it is often violated, and it provides a special penalty equal to all payments to date for interest and fees. 15 U.S.C. § 1640(a)(4). Moreover, HOEPA provides unlimited assignee liability. 15 U.S.C. § 1641(d). In short, HOEPA provides the plaintiff’s counsel with a substantial weapon, even where federal law has preempted all state usury regulation in the context of residential construction mortgages.

While such loans are much more common in other states, I have been referred a number of consumers in the past 18 months who have HOEPA-covered loans.

B. Yo-Yo/Spot Delivery Transactions

After driving off in a new vehicle, the dealer attempts to sell the retail installment contract, and the right to receive the monthly payments, to a sub-prime finance company. If the dealer is unable for any reason to sell the contract or at least not on the terms set forth in the contract, the dealer will usually call the consumer and ask for either the car to be returned or the consumer to sign a new retail installment contract, frequently back-dated to the date of delivery, with terms less favorable to the consumer, such as a higher downpayment, a higher interest rate and consequently higher monthly payments, or the addition of a co-signor. In fact, sometimes dealers ask consumers to return and sign several different retail installment contracts. When the retail installment contract is not sold or renegotiated and sold, the dealer takes the position that no sale was ever consummated, as it has not transferred title (which only occurs when the dealer is paid in full by a finance company). Instead, because no financing has occurred, the argument goes that the transaction was merely a form of rental and an objecting consumer will have daily and mileage rental charges assessed against their downpayment. When such a deal goes south and a consumer demands the return of the trade-in and cash downpayment, the dealer frequently says the trade-in has already been sold and that the consumer is not entitled to any refund due to significant use, relying on the “bailment agreement.” (Marvin Zindler calls this process “dehorsing” when consumers are denied the return of their tradein.) To avoid arguments over the existence of a sale on specific terms, dealers have alternated between providing no copies of the retail installment contract until after funding at the time of assignment and providing a copy of the retail installment contract with no dealer signature (based on the feeble argument that it was not a final agreement without such a signature).

For ways to obtain for injured consumers in these transactions, see the attached paper presented to a State Bar CLE in November of 2004. Please note as well that the Office of the Consumer Credit Commissioner has proposed a rule to regulate these transactions, based on the Commissioner’s licensing authority over dealers that enter into retail installment transactions.

C. Car Title Disputes Arising out of Sales out of Trust

What happens when a vehicle is sold by a dealer without payment of the inventory lender’s PMSI? This is commonly known as a “sale out of trust.” Such sales out of trust are very common, especially with failing used car dealers who must steal from Peter to pay Paul. The law must determine who must suffer or share the risk of loss when such a sale out of trust occurs. Attorneys representing consumers can make at least modestly decent money in such cases, as long as careful case selection analysis is conducted before offering to be retained. On the one hand, consumers in these cases are sympathetic even to very conservative judges and jurors, because they are often truly innocent and yet have suffered a loss of title or even possession of a vehicle that they had purchased. On the other hand, there can be substantial risk in these cases as well, however, because there may be no deep pocket defendant that can afford to pay damages or afford other relief. Before agreeing to represent a consumer in a sale out of trust case, consumer attorneys must be sure that their prospective consumer is innocent and that there is a target defendant with the resources to pay damages. With the right facts, the right client and the right defendant, an attorney representing an innocent consumer can do well for his client and himself. An attached paper endeavors to survey how the law has addressed the burden of risk in sales out of trust and, thereby, to give attorneys the tools to identify those cases which are worth handling.

D. Outrageous collection tactics

E. Deceptive Auto Sales: Odometer Rollbacks and Undisclosed Wrecks

In my experience, odometer rollbacks and undisclosed wrecks are the most common consumer complaints about automobiles after failed yo-yo transactions. For a discussion of the law in this area, see the attached paper on deceptive auto sales.

F. Conclusion

I urge bankruptcy practitioners who represent debtors to become familiar with the consumer laws applicable to their clients, partly because I want to encourage more lawyers to handle consumer claims and partly to encourage lawyers to recognize consumer issues and to refer their clients when necessary to attorneys with consumer law experience.

16-Dec-05 3:00 PM