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IRWIN v. MASCOTT

August 31, 2000

KATHLEEN R. IRWIN, ET AL. PLAINTIFFS,
V.
OWEN T. MASCOTT, ET AL., DEFENDANTS.



The opinion of the court was delivered by: James Larson, United States Magistrate Judge.

            INTRODUCTION

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiffs Kathleen R. Irwin, Nancy Heth, and Lorraine L. Castaneda filed suit on December 31, 1997, for damages and injunctive relief in this action against defendants Owen T. Mascott, Commonwealth Equity Adjustments, Inc. ("CEA"), and Eric W. Browning, for alleged violations of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq.

["FDCPA"], and the California Unfair Business Practices Act, Cal. Business & Professions Code §§ 17200, et seq. ("CUBPA").

An order was filed on August 23, 2000, ruling on all the pending discovery motions.

Plaintiffs allege that CEA and its executive director Browning through its then attorney Owen Mascott violated the FDCPA and CUBPA by means of written communications to debtors which:

1) contained impermissible threats of future litigation;

2) sought add-on charges and damages which CEA (and its attorneys) were not entitled to collect under California law; and
3) often contained draft lawsuits which Mascott had no intention of filing, to extort extra charges from debtors.

(Complaint, ¶¶ 36-43, 51-61).

The class was certified on March 24, 1999. Irwin v. Mascott, 96 F. Supp.2d 968 (N.D.Cal. 1999).*fn1 The class is defined as follows:

Umbrella Class

1.(i) all persons with addresses in California; (ii) to whom any defendant has sent or will send or has caused or will cause to be sent a letter containing demands or representation which are identical or similar to the demands or representations contained in any of the letters attached as Exhibits 1-10 to the Complaint; (iii) in connection with attempts to collect debts arising from dishonored checks (iv) which checks were not returned as undeliverable by the Post Office.

B. Sub-Classes

Sub-class A: Those members of the umbrella class whose checks were written for personal, family or household purposes at any time on or after January 1, 1997 [the FDCPA class];

Sub-class B: Those members of the umbrella class whose checks were written for any purpose at any time on or after January 1, 1994 [the CUBPA class].

Id. at 982.

Defendants' Motion to Add Third-party Defendants was denied on February 11, 2000. Irwin v. Mascott, 94 F. Supp.2d 1052 (N.D.Cal. 2000) Since the motion for summary judgment was submitted, the parties have filed approximately ten discovery motions.*fn2

Plaintiffs move for summary judgment, including findings of fact and conclusions of law that Defendants' debt collection practices violate the FDCPA and the CUBPA, and that Defendants are liable to Plaintiffs for damages. Plaintiffs also move for entry of a preliminary injunction that Defendants cease all illegal debt collection practices.

STANDARD FOR SUMMARY JUDGMENT

An issue is "genuine" only if there is a sufficient evidentiary basis on which a reasonable fact finder could find for the nonmoving party, and a dispute is "material" only if it could affect the outcome of the suit under governing law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, (1986).

To withstand a motion for summary judgment, the opposing party must set forth specific facts showing that there is a genuine issue of material fact in dispute. See Fed.R.Civ.P. 56(e). A dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248. If the nonmoving party fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial, "the moving party is entitled to a judgment as a matter of law." Celotex v. Catrett, 477 U.S. 317, 323 (1986).

The Court does not make credibility determinations with respect to evidence offered, and is required to draw all inferences in the light most favorable to the nonmoving party. See T.W. Elec. Serv., Inc., 809 F.2d at 630-31 (citing Matsushita Elec. Ind. Co. v. Zenith Radio, 475 U.S. 574, 587 (1986). Summary judgment is therefore not appropriate "where contradictory inferences may reasonably be drawn from undisputed evidentiary facts . . . '' Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324, 1335 (9th Cir. 1980).

A party seeking summary judgment bears the initial burden of informing the court of the basis for its motion, and of identifying those portions of the pleadings and discovery responses which demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. Where the moving party will have the burden of proof on an issue at trial, it must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party.

If the moving party meets its initial burden, the opposing party must then "set forth specific facts showing that there is some genuine issue for trial" in order to defeat the motion. Anderson, 477 U.S. at 250, 106 S.Ct. at 2511; Fed.R.Civ.P. 56(e). "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no `genuine issue for trial.'" Matsushita, 475 U.S. at 587. A grant of summary judgment is reviewed de novo by the appellate court; a denial of summary judgment is reviewed for an abuse of discretion. U.S. v. $5,644,540.00 in U.S. Currency, 799 F.2d 1357, 1361 (9th Cir. 1986).

PLAINTIFFS' CONTENTIONS

Plaintiffs ask this Court to issue an order granting summary judgment as to the liability of Defendant CEA for violations of the FDCPA, and the CUBPA, as well as plaintiffs' right to damages, restitution, and declaratory and injunctive relief. Plaintiffs do not request an award of a specific amount of either damages, restitution or interest by this motion. The FDCPA provides for both actual and statutory damages, up to the statutory ceiling, according to the sound discretion of the trial court. 15 U.S.C. § 1692k. See also 15 U.S.C. § 1692k (a)(2)(B) (class action damages limited to lesser of $500,000 or 1 per cent of debt collectors' net worth). See also 15 U.S.C.A. § 1692k(b)(1) (District court must consider frequency and persistence of noncompliance by debt collector, nature of such noncompliance, extent to which such noncompliance was intentional, and other relevant factors in deciding the amount of any "additional damages" awarded as a consequence of violation of the FDCPA.)

The CUBPA provides for both disgorgement of profits and injunctive relief as follows:

Any person who engages, has engaged, or proposes to engage in unfair competition may be enjoined in any court of competent jurisdiction. The court may make such orders or judgments, including the appointment of a receiver, as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition, as defined in this chapter, or as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.

Business & Professions Code §§ 17200, et seq.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Plaintiffs ask this Court to make the following findings, as a matter of law:

Liability

1) CEA*fn3 violates 15 U.S.C. § 1692 et seq., the Fair Debt Collection Practices Act ("FDCPA"), in particular §§ 1692e(2)(A), (10), and 1692(f), by seeking charges from check writers in excess of those expressly permitted by Cal. Civ. Code § 1719. (See Plaintiff's Memorandum of Points and Authorities at pages 19 — 23. § 1719 authorizes recovery of the face amount of the check, and treble damages at a minimum of $100, and a maximum of $1,500.00, provided the debt collector sends the check writer a certified letter informing him of the right to pay the check and a service charge within thirty days to avoid treble damages. § 1719 was amended January 1, 1997 to authorize an additional $25.00 service charge for uncleared checks. This amendment is not retroactive.

CEA routinely sends demand letters that do not conform to the provisions of § 1719, for example:

The "ADC Letter" (Plaintiffs' Appendix III in Support of Motion for Summary Judgment, Ex. 50) demands the face amount of the check, and $25.00 and interest. CEA is not entitled to interest.
The "AFW Letter" (Id.,Ex. 181) adds a $35.00 "legal notice cost" to the check amount, service charge and interest. This "legal notice cost" is also an unauthorized charge to which CEA is not entitled under § 1719.
The "AFX Letter" (Id., Ex. 182) demands payment of the check amount, treble damages, a $25.00 bank charge, and interest. CEA is not entitled to treble damages, the $25.00 charge, or the interest.
CEA cannot establish that any of these letters were sent by certified mail, since, until the last few months,*fn4 CEA did not maintain any documentation that letters were sent certified.
CEA does not deny any of the factual allegations made by Plaintiffs regarding CEA's letters. (See "Defendant's Opposition" below)

The court has carefully reviewed the text of each letter and finds that all the letters violate the FDCPA, in particular §§ 1692e(2)(A), (10), and 1692(f), by seeking charges from check writers in excess of those expressly permitted by Cal. Civ. Code § 1719.

2) CEA violates the FDCPA, in particular § 1692 et seq., §§ 1692e(2)(A), (10), and 1692(f), by seeking charges from check writers pursuant to Cal. Penal Code § 490.5. § 490.5 provides for penalties for someone who takes merchandise from a merchant without intent to pay for it:

"When an adult or emancipated minor has unlawfully taken merchandise from a merchant's premises . . . the adult or emancipated minor shall be liable to the merchant . . . for damages of not less than fifty dollars nor more than five hundred dollars, in addition to the retail value of the merchandise, if not recovered in merchantable condition . . . Cal. Penal Code section 490.5.

Plaintiffs assert that CEA is invoking this section to try to extract penalties intended for shoplifters from consumers who write checks which do not clear. Plaintiffs contend that CEA has no idea what the intent of each check writer is, and that the merchants' right to invoke § 490.5 is unassignable. Newman v. CheckRite California, Inc., 912 F. Supp. 1354, 1378 (E.D.Cal., 1995). Plaintiffs are correct and CEA does not offer any argument which directly contradicts this contention.

This court finds that Penal Code § 490.5 does not apply to a buyer who writes a check to a merchant and takes merchandise from the store with the merchant's knowledge and permission. The buyer in such an instance has lawfully taken merchandise. The failure of the buyer's check to clear does not make the buyer a shoplifter. CEA has no basis for assuming that every person who writes a check which later fails to clear knows at the time of writing it that it will not clear and, therefore, has no intent of paying the merchant. The court finds that CEA violates the FDCPA by threatening to impose penalties under Penal Code § 490.5 against consumers whose checks fail to clear.

3) CEA violates § 1692e(7), by sending collection letters which reference Cal. Penal Code § 490.5, because these letters state or imply that by writing a check that did not clear, the check writer has committed larceny. Again, Plaintiffs are correct, and CEA does not contradict this contention. This court finds that these letters violate the FDCPA.

4) CEA violates § 1692e(2) and (10), by sending collection letters which misrepresent the amounts due from consumers, or which contain false, deceptive or misleading representations regarding the respective rights and obligations of the debt collector and the consumer. This is part and parcel of the earlier contentions that CEA demands penalties and interest it has no right to. CEA does not counter this contention.

This court finds that these letters violate the FDCPA.

5) CEA violates § 1692e(3), and is liable for damages, by falsely representing that its dunning letters are communications from attorneys. The FDCPA prohibits "the false representation or implication that any individual is an attorney or that any communication is from an attorney" 15 U.S.C. § 1692e(3). Section 1692e(3) prohibits a debt collector from using an attorney's status to add to the force of its collection letters, unless the attorney is actually involved in the collection effort to the extent implied by the letter. Abuses by attorney debt collectors are more egregious than those of lay collectors, because a consumer fears more an attorney's improper threat of legal action than that of a debt collection employee who is not an attorney. A debt collection letter on an attorney's letterhead conveys authority and credibility. Crossley v. Lieberman, 868 F.2d 566, 570 (3d Cir. 1989).

As noted by the Second Circuit:

"[M]ass mailings may sometimes be the only feasible means to contact large numbers of delinquent debtors, particularly when many of those debtors owe relatively small sums. But it is also true that the FDCPA set boundaries within which debt collectors must operate. No mass mailing technique is permissible — regardless of how effective it might be — if that technique constitutes a false, deceptive or misleading communication . . . [T]here will be few, if any, cases in which a mass-produced collection letter bearing the facsimile of an attorney's signature will comply with the restrictions imposed by section 1692e." Clomon v. Jackson, 988 F.2d 1314, 1321 (2d Cir. 1993). See also Avila v Rubin, 84 F.3d 222 (7th Cir. 1996) (mass-produced collection letters sent on attorney letterhead violated FDCPA where an attorney had no direct personal involvement in the creation, preparation or mailing of letters to a plaintiff.) Id. at 228-229. CEA sends collection letters on attorney letterhead signed by an attorney,*fn5 previously Owen Mascott, and more recently, Jacob Koper. Owen Mascott testified that he looked at spreadsheets of debtor data, including names, addresses, check amounts and merchant names. He reviewed the letters which were generated by using the spreadsheets in order to meet "compliance requirements," which he defined as "being aware of where letters with my name as part of it are being sent. You know, where and to whom and to what accounts." As he scanned the computer spreadsheets, he checked off each name.

Mascott reviewed the spreadsheets to see who was receiving letters, where the checks were being written and the amounts, and to sensitize himself to the volume and which checks were being written to which creditor-clients, for example 7-Eleven or J.C. Penney. When he started as general counsel for CEA, the printouts were well under an inch thick. Each quickly expanded to two and a half to three times as many printed names.

He couldn't estimate how many.*fn6 He never decided not to send a letter, based on this review.*fn7 Mascott did not review debtor information in any detail until "it was reaching the point of considering actual litigation." He would neither approve nor disapprove the sending of a letter.*fn8

CEA Manager Robert Hyde would bring Mascott information regarding debtors that Hyde thought should be sued. According to Hyde, Mascott made the decision to sue, but Hyde could not recall any time when Mascott told him to sue or not to sue someone.*fn9 The decision to settle a case was made by either Owen Mascott or CEA's director of operations.*fn10

After Jacob Koper became CEA's general counsel, he did not review the files of all 350,000 accounts handled by CEA in 1998.*fn11 CEA's Hyde testified that Jacob Koper "looked at" the 175,000 letters which went out in one month.*fn12 However, at the time of the deposition Hyde described Koper's duties as follows: to give his opinion whether CEA should file suit against a check writer, to make sure that letters are being sent to the right state, to obtain licenses for CEA in states which require it, to be sure letters weren't being sent out which referred to checks more than four years old and representing CEA in lawsuits filed against check writers.*fn13

Mascott testified that he reviewed checks for dates which might be so old as to be outside the statute of limitations.*fn14 A non-attorney staff person screened for check writers who were in bankruptcy proceedings and removed their names from the list of those to whom letters would be sent.*fn15

The court finds that Owen Mascott and Jacob Koper, as general counsel for CEA, neither conducted individual reviews of debtor files nor decided if a particular dunning letter should be sent, nor knew the identities of the check writers to whom individual letters were sent. The attorneys merely scanned the spreadsheets and the completed letters to satisfy some rote requirement that their eyes should fall on the documents before letters were sent out. The communications to check writers were not "from" an attorney in any meaningful sense of the word, as discussed in Clomon v. Jackson, 988 F.2d at 1320 and Newman v. CheckRite, 912 F. Supp at 1382. Consequently, the letters are false and misleading and as a matter of law violate the FDCPA.

6) CEA violates § 1692e(5), by threatening to file lawsuits when it does not intend to do so, or is not legally capable of doing so. There is a two-pronged test for violations of this part of the FDCPA:

(1) whether the debt collector threatened legal action, and, if so,
(2) whether such action could legally be taken or whether the debt collector intended to take such action. Newman v CheckRite, 912 F. Supp. at 1379.

Again, the court applies the "least sophisticated debtor" standard, in deciding whether there is a perceived threat of litigation. Plaintiffs contend that five of CEA's dunning letters satisfy the first prong of the test, even without an overt threat to sue, as long as the letter creates the impression that legal action is a real possibility. Baker v. G.C. Services Corp., 677 F.2d 775, 778-779 (9th Cir. 1982) (threat to refer account to attorney for collection held to be threat of unintended legal action).

In the case at bar, CEA wrote in its letters about "damages and court costs," stating that a check writer had ten days to pay to avoid a lawsuit, and included a sample lawsuit with its collection demand. Even a disclaimer such as "NO LEGAL ACTION HAS BEEN OR IS NOW BEING TAKEN AGAINST YOU" does not preclude liability, if in the context of the letter the debt collector is threatening to sue. Bentley v. Great Lakes Collection Bureau, 6 F.3d 60, 63 (2d Cir. 1993). If the least sophisticated debtor would take a communication as threatening legal action, it violates the FDCPA. Four of CEA's letters contain threats to sue under these standards. CEA does not deny the contents of its letters.

Plaintiff contends that the first letter in the 490.5 series threatens suit as a matter of law. The first letter in the series is designated "ADX."

A. "ADX" Letter: (Plaintiffs' Appendix II in Support of Motion for Summary Judgment, Exs. 1,3,7)

Because you converted the merchandise to your own use without having paid the purchase price thereof and without our client's consent, a law suit may be filed against you. Prior to filing a suit, our client has requested that we extend an out of court settlement offer. If you pay the Settlement Total below, which is a portion of the penalties our client would be entitled to under Penal Code 490.5, no suit will be filed against you. [Emphasis added.]

The letter sets forth "Potential Liability" if the Settlement Total is not paid. This includes "Court/Service" Fees of $220.00, plus a "Statutory Penalty" of $500.00, plus "Attorneys Fees" of $150. The alternative is presented in closing:

If you fail to pay the Settlement Total, our client may be left with no other choice than to file a law suit for the Potential Liability above.

B. "ADR" Letter (Id., Exs. 2,4,8,10,183,194)

CEA uses the ADR letter second in the 490.5 series and the fourth in the 1719 series. ...


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