11th Cir. Holds FCRA ‘Reasonable Investigation’ May Require Assignee to Examine Account-Level Documents

This article previously appeared on The Consumer Financial Services Blog and is republished here with permission. 

Christopher Hahn

The U.S. Court of Appeals for the Eleventh Circuit recently reversed in part a trial court’s ruling granting summary judgment in favor of a debt buyer, its affiliated debt collector and their parent company, holding that a reasonable jury could find that the defendants willfully violated section 1681s-2(b) of the federal Fair Credit Reporting Act (FCRA) when they reported two charged-off debt accounts as “verified” without obtaining sufficient documentation that the debts in fact belonged to the plaintiff consumer.

In so ruling, the Court held that a jury could find that because the buyer retained the right to seek account-level documentation through its agreements with the sellers, it behaved unreasonably when it reported the accounts as ‘verified’ without first exercising those rights.

A copy of the opinion in Teri Lynn Hinkle v. Midland Credit Management, Inc., et al is available at:  Link to Opinion.

In September 2008, the debt buyer acquired one of the subject debts in the amount of $357.56 from another debt buyer, and sent a collection letter to the debtor offering to settle the debt for $237.49.  The debt buyer received payment of the settlement amount in October 2008, but reported to the consumer reporting agencies (“CRAs”) that the debt “was assigned to internal or external collections.”

In December 2008, the debt buyer “zeroed out the account and marked it paid in full.” It also reported to the CRAs that the account was “paid in full” in January, February and March 2009, then stopped further reporting. “The CRAs marked the account as ‘paid’ but continued to show that it had been in ‘[c]ollection as of Dec 2008, Nov 2008.’”

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The plaintiff consumer allegedly “became aware of the [first account] in May 2011, when she obtained her credit report and discovered that [the debt buyer] had erroneously attributed the account to her.” She then disputed the account with the CRAs, who notified the debt buyer about the dispute.  The plaintiff consumer also sent a letter disputing the debt to the debt buyer. The debt buyer took no action because it had marked the account “paid” and had already stopped reporting it to the CRAs.

In December 2011, the debt buyer acquired the second debt attributable to the plaintiff — a cell phone account — in the amount of $300.80. It then sent a collection letter to the plaintiff offering a 10 percent discount to settle the debt. The plaintiff disputed the debt orally during a phone conversation, saying that the account did not belong to her.

In February 2012, the debt buyer sent the plaintiff a letter advising her that the dispute was being investigated, and requesting “any documentation you may have that supports your dispute.”  Nevertheless, it began reporting the account to the CRAs as “assigned to internal or external collections” and then “flagged the debt as ‘[d]isputed.’”

In July 2012, plaintiff obtained her credit report and disputed the second cell phone account with the CRAs, who then notified the debt buyer of the dispute the same month.

The evidence showed that the debt buyer “verified the debt by double-checking the information it had reported to the CRAs against its own internal records [which] consisted of the same electronically-stored information [it] received from the [seller] when it purchased the debt.”  It did not request “account-level documentation” from the seller or original creditor.

The debt buyer sent the plaintiff another letter requesting documentation supporting her position, to which she responded in writing, reiterating that neither of the accounts belonged to her and that she could not furnish any documentation for accounts that were not hers. The debt buyer continued to report the cell phone debt as “assigned to internal or external collections” through March 2013.

In April 2013, the plaintiff, proceeding pro se, sued in federal district court. At the close of discovery, the defendants moved for summary judgment, which the district court granted and entered judgment against the plaintiff on all counts. The plaintiff appealed.

On appeal, the Eleventh Circuit began by explaining its understanding of how the debt-buying industry works, citing to the Federal Trade Commission’s 2013 report, “The Structure and Practices of the Debt Buying Industry.”  According to the Eleventh Circuit, this case involved two “junk debt” accounts, which are “[d]ebts that have been repeatedly bought and sold … They are often sold ‘as-is,’ in the form of electronic data, and without ‘account-level documentation’ such as applications, agreements, billing statements, promissory notes, notices, correspondence, payment checks, payment histories, or other evidence of indebtedness.”

The plaintiff argued that the district court erred by granting summary judgment in defendants’ favor on her claim under section 1681s-2(b) of the FCRA, which requires entities that furnish information to the CRAs to “promptly … modify[,] … delete [or] permanently block the reporting” of disputed information to the CRAs if, after conducting  a “reasonable investigation to determine whether the disputed information is inaccurate” the investigation determines that the disputed information is “inaccurate or incomplete or cannot be verified.”

The plaintiff also argued that section 1681s-2(b) “requires down-the-line buyers to investigate mistaken-identity disputes by verifying the identity of the alleged debtor against account-level documentation (not just against electronic-data files),” and that because the debt buyer failed to get such documentation, a reasonable jury could find that the investigation was inadequate.

The Eleventh Circuit first addressed the “scope of the duty to investigate under § 1681s-2(b) … an issue of first impression in the Eleventh Circuit” concluding that “’reasonableness’ is an appropriate touchstone for evaluating investigations under § 1681s-2(b),” citing to decisions from the First, Ninth and Fourth Circuits.

The Court stressed that “what constitutes a ‘reasonable investigation’ will vary depending on the circumstances of the case and whether the investigation is being conducted by a CRA under § 1681i(a), or a furnisher of information under § 1681s-2(b).”

Here, the Eleventh Circuit agreed with the plaintiff that the debt buyer’s electronic records “were insufficient to verify the accounts and that, absent additional proof, [the debt buyer] should have reported the accounts as “cannot be verified.”

The Court then held that, on the facts before it, the defendants were not entitled to summary judgment under § 1681s-2(b).

The Court reasoned that § 1681s-2(b) presents a furnisher with a choice when handling disputed information. First, the Eleventh Circuit held, the furnisher can conduct an investigation, verify the disputed information, and report this to the CRAs. “When a furnisher reports that disputed information has been verified, the question of whether the furnisher behaved reasonably will turn on whether the furnisher acquired sufficient evidence to support the conclusion that the information was true. This is a factual question, and it will normally be reserved for trial.”

Second, the Court held, the furnisher can “conduct an investigation and conclude, based on that investigation, that the disputed information is unverifiable. Furnishers can avail themselves of this option if they determine that the evidence necessary to verify disputed information either does not exist or is too burdensome to acquire. Having made such a determination, furnishers are entitled to cease investigation and notify the CRAs that the information ‘cannot be verified.’”

Finally, the Eleventh Circuit held, the third option for a furnisher “to satisfy § 1681s-2(b) is to conduct an investigation and conclude that the disputed information is ‘inaccurate or incomplete.’” “When a furnisher determines that disputed information is false or ‘cannot be verified,’ the furnisher must notify the CRAs of this result pursuant to § 1681s-2(b)(1). The furnisher must also ‘as appropriate, based on the results of the reinvestigation promptly … modify[,] … delete [or] permanently block the reporting’ of that information to CRAs.”

The Court concluded that while what the “results of the reinvestigation” will require depends on the “nature of the disputed information,” when a furnisher is unable to verify the identity of an alleged debtor, “the appropriate response will be to delete the account or cease reporting it entirely.  Similarly, when a CRA receives notice that an account is unverifiable, it must ‘promptly delete that item of information from the file of the consumer.’”

The Eleventh Circuit noted that the debt buyer here was faced with a mistaken-identity dispute.  However, according to the Court, the debt buyer merely confirmed that “the identifying information possessed by the CRAs was the same as the identifying information contained in its internal data files,” that information was obtained from previous debt buyers instead of the original creditors “and was the same information [the debt buyer] had reported to the CRAs in the first place” and, finally, the buyer “did not attempt to consult account-level documentation.”

On these facts, the Court found that “[a] reasonable jury could find that the documentation … reviewed was insufficient to prove that the [two accounts] belonged to [plaintiff] and that [the buyer] therefore had a duty to report the account as ‘cannot be verified.’ … A jury could also find that because [the buyer] retained the right to seek account-level documentation through its agreements with [the sellers] [it] behaved unreasonably when it reported the accounts as ‘verified’ without first exercising those rights.”

The district court’s summary judgment was reversed as to the § 1681s-2(b) claim, affirmed as to the other claims, and the case was remanded.