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United States District Court, S.D. California

October 13, 2005.

DANTI GALLI, for himself and on behalf of the general public, Plaintiff,
CRENSHAW & ASSOCIATES, a business entity of unknown form, and DOES 1 through 10, inclusive, Defendants.

The opinion of the court was delivered by: JEFFREY MILLER, District Judge

Factual Background
In November 2000, Plaintiff Dante Galli contracted with Protect America, Inc. for home security services. Plaintiff allegedly defaulted on the account and the account was assigned to Defendant Anderson Crenshaw & Associates for collection in November 2002. Defendant made a written demand on Plaintiff on April 28, 2003 for $1,482.75. Plaintiff disputed the debt and provided Defendant with supporting documents on May 5, 2003. Defendant claims to have verified the debt and to have sent Plaintiff a second demand letter on May 14, 2003, demanding $498.25 as a full settlement. Plaintiff alleges that prior to his receipt of the May 14 letter, an employee of Defendant called Plaintiff, offered to settle the debt for $539, and informed him that Defendant would have a mechanics lien placed on his home if he did not pay. The parties agree that Defendant made no further collection attempts after sending the May 14 letter. Procedural History

On September 15, 2003, Plaintiff filed a lawsuit against Protect America which settled in December 2003 for $3,000. On December 1, 2003, Plaintiff filed suit in San Diego Superior Court against Defendant, alleging violations of 15 U.S.C. §§ 1692 et seq (the federal "Fair Debt Collection Practices Act" or "FDCPA"), California Civil Code §§ 1788 et seq. (the "California Fair Debt Collection Practices Act" or the "Rosenthal Act"), and California's Unfair Competition Law, California Business and Professions Code § 17200 ("California UCL"). The case was removed to the Southern District of California on February 18, 2004. All three claims are based on the same factual allegations.*fn1

  On June 18, 2004, Defendant filed a motion to dismiss under Rule 12(b)(6) on the grounds of res judicata. This Court denied the motion, finding that the claims against Defendant were not based on the same set of primary rights as those against Protect America and that the claims against Defendant were premised on a different set of facts. Plaintiff attempted to file a Second Amended Complaint on November 19, 2004, which the Court rejected for failure to seek leave of the Court. The Court refused to grant leave to amend the complaint.

  On August 10, 2005, Defendant moved for summary judgment or summary adjudication on all claims. On August 25, 2005, Plaintiff filed a motion for partial summary judgment on the issue of whether Defendant's practice of calculating collection fees violates the FDCPA and the Rosenthal Act.

  Federal Fair Debt Collection Practices Act

  A. Standing

  Defendant argues that Plaintiff has not suffered any actual damages or mental anguish and, thus, lacks standing to bring a claim. Defendant further argues that Plaintiff is not entitled to the $1000 in statutory damages, as provided under Section 1692k(2)(A), because Plaintiff has already received a settlement from Protect America for $3,000 that should be set-off against any damages owed by Defendant. Plaintiff argues that he is not barred from receiving statutory damages and argues that the collateral source rule prevents Defendants from introducing evidence of the settlement with Protect America. Additionally, Plaintiff argues that the settlement with Protect America was for a different set of claims based on different facts and, therefore, is irrelevant.

  As an initial matter, a party may recover statutory damages under the FDCPA without alleging actual damages. See Baker v. G.C. Services Corp., 677 F.2d 775, 780 (9th Cir. 1982) ("The statute clearly specifies the total damage award as the sum of the separate amounts of actual damages, statutory damages and attorney fees. There is no indication in the statute that award of statutory damages must be based on proof of actual damages."). The fact that Plaintiff has settled claims with Protect America is irrelevant. Plaintiff's claims against Protect America arose out of a different set of facts and involved different rights. In Defendant's Reply to Plaintiff's Opposition to Defendant's Motion for Summary Judgment, Defendant lists various ways in which Plaintiff's claims against Protect America are linked, in Plaintiff's mind, to the claims against Defendant. However, Congress has given debtors certain rights and remedies against debt collectors that are specifically separate from rights vis-a-vis creditors. Defendant does not cite any authority that states that a plaintiff cannot pursue separate actions against creditors and debt collectors for separate claims even where it stems from the same string of events. Accordingly, the Court finds that Plaintiff has standing to seek statutory damages under the FDCPA.

  B. Definition of Debt Collector

  Defendant argues in its opposition to Plaintiff's motion for partial summary judgment that, based on Plaintiff's admissions, Defendant is not a "debt collector" within the meaning of 15 U.S.C. § 1692a(6). Plaintiff filed a Declaration of Dante Galli in Support of Plaintiff's Motion for Partial Summary Judgment in which Galli declares that his account with Protect America was not in default. Defendant argues this Court must construe this fact in its favor and find that it is not liable under the FDCPA. See 15 U.S.C. § 1692a(6)(F)(iii) (excluding persons attempting to collect debts not in default at the time obtained from the coverage of the statute).

  The Seventh Circuit addressed and rejected this same argument in Schlosser v. Fairbanks Capital Corp. 323 F.3d 534 (7th Cir. 2003). The court acknowledged that the plain language of Section 1692a(6)(F)(iii) excluded from the Act persons attempting to collect debts not in default. However, the court refused to accept the argument that the exclusion applied where the debt was "acquired as a debt in default, and its collection activities were based on that understanding." Id. at 537. The critical distinction in the statute is whether the activity aimed at the consumer is "servicing or collecting." Id. at 538. The statute is more concerned with the activities of debt collectors because there is no on-going relationship to temper behavior. Accordingly, "if the parties to the assignment are mistaken about the true status, that status will not determine the nature of the activities directed at the consumer." Id. The Ninth Circuit has not yet addressed this question as directly as in Schlosser. However, in Baker v. G.C. Services Corp., the court described the FDCPA as "designed to protect consumers who have been victimized by unscrupulous debt collectors, regardless of whether a valid debt actually exists." 677 F.2d 775, 777 (9th Cir. 1982) (emphasis added).

  C. Collection Fees

  Plaintiff is moving for summary judgment on his claim that Defendant violated the FDCPA by increasing the amount of the debt by charges, fees, costs or penalties not permitted by law or contract. See 15 U.S.C. § 1692f(1). Plaintiff argues that the present case is similar to Ballard v. Equifax Check Services, Inc., 158 F.Supp.2d 1163 (C.D.Cal. 2001). In Ballard, the court held that a collection agency could not "apportion[] all of its collection expenses among the accounts it successfully collected." Id. at 1174; see Bondanza v. Peninsula Hospital and Medical Center, 23 Cal.3d 260 (1979). Plaintiff argues that Defendant employs this practice and notes that the size of the fee varies with the size of the debt rather than the actual cost of collecting the debt.

  Defendant argues in its own motion for summary judgment that it is entitled to the collection fees because they were calculated based on actual costs and agreed to by Plaintiff in the subscription agreement with Protect America. Defendant does not cite any case law that specifically approves their fee calculation method, but seeks to distinguish Ballard and Bondanza on the grounds that Defendant is not assessing a flat collection fee or percentage and is not using collection fees to secure a profit.

  Both parties point to the testimony of Thomas Backal, CEO of Crenshaw, as supportive of their arguments that the collection fees added to the amount of the debt were lawful or unlawful. Backal testified at his deposition that the collection fee is an estimated number based on "a forecast of the number of collection accounts that should be collected" plus an "interpolative factor" that includes telephone bills, rent, employee costs, money paid to the collector, external costs, and postage. It does not include a profit margin. The collection fee is different for every account and varies based on the amount in controversy. The fee reflects actual costs incurred by Defendant, but, according to Backal, there is no way to tell if it reflects actual costs incurred with respect to Plaintiff's account specifically.

  A genuine issue of material fact remains as to precisely how collection fees are calculated. On the surface, it appears that, due to the "forecast" element, the fees include some apportionment for costs or fees associated with non-recoverable accounts. This practice would in all probability violate California state law as articulated in Bondanza and applied in Ballard. See Ballard, 158 F.Supp.2d at 1174 (holding a service charge unlawful because they failed to establish that the $20 estimate was reasonable and because the defendant "apportioned all of its collection expenses among the accounts it successfully collected."); Bondanza, 23 Cal.3d at 269 (holding that debtors could not be required "to guarantee the economic well-being of the agency.") If a charge is prohibited under state law, the collection agency cannot attempt to collect it, even if it is part of an express agreement. See Ballard, 158 F. Supp. 2d at 1173.

  D. Verification of Debt and Cessation of Collection Activity

  Defendant also moves for summary judgment on Plaintiff's claim that Defendant violated the FDCPA by failing to verify Plaintiff's debt and cease collection activity. Defendant initially argues in its opening moving papers that it complied with the statutory requirements on May 14, 2003, when it sent Plaintiff a verification of the debt with an offer to settle the debt for a lower amount. However, by its Reply to Plaintiff's Opposition to Defendant's Motion for Summary Judgment and in the declaration of Crenshaw's CEO, Defendant only asserts that it verified the debt with Protect America before sending the May 14 letter. Plaintiff admits that Defendant ceased collection activity after sending the May 14 letter, but disputes Defendant's contention that it provided Plaintiff with a verification of the debt. Interestingly, both parties attached the May 14 letter as an exhibit, but draw opposite conclusions as to whether it constitutes a debt verification. Neither party cites any case law that supports their respective contentions as to what is, or is not, a legally sufficient verification.

  The relevant provision of the FDCPA states:

If the consumer notifies the debt collector in writing within the thirty-day period described in subsection (a) of this section that the debt, or any portion thereof, is disputed, or that the consumer requests the name and address of the original creditor, the debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or a copy of the judgment, or the name and address of the original creditor, and a copy of such verification or judgment, or the name and address of the original creditor, is mailed to the consumer by the debt collector.
15 U.S.C. § 1692g(b) (emphasis added). Under the statute, the debt collector must do more than verify the amount with the original creditor. The amount must be verified and a copy of the verification mailed to the debtor.

  Both parties agree that Plaintiff sent a timely written dispute of the debt. Defendant responded with a letter, on Anderson Crenshaw & Associates letterhead, with the date, file number, debtor name, debtor social security number, and client account number at the top. The text reads, in its entirety:

Please be advised that our client Protect America has placed your account(s) with the offices of Crenshaw & Associates for immediate action. The total balance on your account is $498.25. This notice is to confirm our offer to accept $498.25 on behalf of our client as settlement in full for the above referenced account.
As discussed, we must receive the necessary payment information for this arrangement no later than close of business on the date of this letter. If we do not, this offer is void and you will be responsible for the full amount of your account plus all applicable penalties and fees.
The letter does not give the address or any other contact information for Protect America, nor does it indicate that Crenshaw contacted Protect America after receiving Plaintiff's fax. Neither party has argued that this letter was sent along with any other paper or documentation.

  This letter does not satisfy the statutory requirements. The term "verification" implies something other than the debt collector repeating the demand with a lower amount. The statute provides that the debt collector must send a "verification of debt" or "copy of judgment," suggesting that an official record or independent document of some sort must be sent to the debtor. This is in line with the purpose of the statute, which is to give debtors protection from unscrupulous collectors. Here, Defendant has simply reiterated a demand without giving any additional comfort to Plaintiff that the debt is true. The May 14 letter does not satisfy the language or the purpose of the statute.*fn2

  Even if Defendant did not send an adequate verification, it may have still complied with the FDCPA if Defendant ceased collection activity following Plaintiff's notice of dispute. Courts disagree as to whether a verification is still necessary if the agency has ceased collection. Compare Sambor v. Omnia Credit Services, Inc., 183 F.Supp.2d 1234, 1242 (D. Haw. 2002) ("The provisions do not require both cessation of collection efforts and verification of a debt.") with Powell v. J.J. MacIntyre, 2004 U.S. Dist. LEXIS 2811, *12 n. 6 (D. Haw. Jan. 23, 2004) ("cessation of collection does not release Defendant from its duty to verify the debt.").

  This Court agrees with Powell that a debt collector must provide a verification regardless of whether it ceases collection. A debt collector is required to inform the debtor that if the debtor disputes the debt in writing, the debt collector will obtain verification of the debt and send a copy of the verification to the debtor. 15 U.S.C. § 1692g(a)(4). The debtor, then, expects to receive a verification of a disputed debt. A debt collector cannot assert an obligation then back away once challenged and leave the debtor to wonder what he actually owes. See also Guerrero v. RJM Acquisitions, LLC, 2004 U.S. Dist. LEXIS 15416 (D. Haw. July 9, 2004). Moreover, here, there are no allegations that Defendant no longer has the records from which it could verify Plaintiff's debt. See Powell, 2004 U.S. Dist. LEXIS 2811 at *11 (distinguishing Sambor on the grounds that in Sambor the defendants no longer had the records in their possession).

  Although Defendant did not make any collection attempts after May 14, it has not acknowledged or refuted the allegation that an employee called Plaintiff before May 14 to offer to settle the debt for approximately $530, nor has it sent Plaintiff a verification of the debt. Accordingly, Defendant is not entitled to summary judgment on this point. E. Misrepresentation of Debt Amount

  Plaintiff's complaint alleges that Defendant violated the FDCPA by, among other things, falsely representing the amount of the debt. Defendant has moved for summary judgment, arguing that it is not liable because any misrepresentation was the result of a bona fide error. "A debt collector may not be held liable . . . if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error, notwithstanding the maintenance of procedures reasonably adapted to avoid any such error." 15 U.S.C. § 1692k(c); see Hyman v. Tate, 362 F.3d 965 (7th Cir. 2004). Defendant has offered the declaration of Thomas Backal in support of its argument that the misstatement of the debt was unintentional and that procedures are in place to avoid this type of error. Defendant further argues that it reasonably relied on information provided by Protect America. Plaintiff objects to Backal's declaration on the grounds that it does not establish that those procedures were in place at the time Plaintiff's account was active and, therefore, is irrelevant.

  Backal's declaration is not phrased such that his statements regarding procedures necessarily encompass the time Plaintiff's account was active and, therefore, there is still a genuine dispute as to whether Defendant had procedures in place to avoid error in April to May 2003.

  F. Threatened Mechanics Lien

  Plaintiff's complaint includes allegations that Defendant threatened to have a mechanics lien placed on Plaintiff's home, an act which would be unlawful, in violation of 15 U.S.C. section 1692e(4) and section 1692e(5). Presumably in moving for summary judgment Defendant intends to include this claim as well. Plaintiff testified to this event at his deposition and Defendant has yet to dispute it or argue that Plaintiff has not offered proof of some essential element of this claim. Defendant argues that the evidence shows that the caller did not use any threatening or offensive language, but these are not requirements for the claim. Accordingly, genuine issues of material fact remain.

  California Fair Debt Collection Practices Act/Rosenthal Act

  Defendant seeks summary judgment on the claim that it violated the Rosenthal Act on the grounds that Plaintiff lacks standing to bring the claim because he has not suffered actual damages. In his complaint, Plaintiff alleges damages based on mental anguish. Defendant argues that the evidence shows that Plaintiff has not suffered mental anguish that is outrageous or beyond all reasonable bounds of decency. See Moore v. Greene, 431 F.2d 584 (9th Cir. 1970). Plaintiff does not respond to Defendant's argument on mental anguish. Instead, he argues that under California Civil Code Section 1788.30, he is entitled to statutory damages.

  Under Section 1788.30(a), a debt collector is liable to the debtor for the actual damages sustained by the violation. Subsection (b) provides for punitive damages within the range of $100 to $1000 if the violation is willful and knowing. This penalty is to be awarded "in addition to actual damages sustained." Cal. Civ. Code § 1788.30(b). There are no statutory damages that are recoverable without proof of actual damages under this section. However, Section 1788.17 states that "[n]otwithstanding any other provision of this title, every debt collector collecting or attempting to collect a consumer debt shall comply with the provisions of Sections 1692b to 1692j, inclusive, of, and shall be subject to the remedies in Section 1692k of, Title 15 of the United States Code." Cal. Civ. Code § 1788.17; see Abels v. JBC Legal Group, P.C., 227 F.R.D. 541 (N.D. Cal. 2005) (finding the legislative intent behind Section 1788.17 to be to broaden the remedies available under 1788.30). The Ninth Circuit has interpreted Section 1692k to allow a plaintiff to recover statutory damages in the absence of proof of actual damages. See Baker v. G.C. Services Corp., 677 F.2d 775, 780 (9th Cir. 1982). Therefore, under Section 1788.17, Plaintiff has standing to seek statutory damages.

  Plaintiff has alleged the same wrongful acts under the FDCPA and the Rosenthal Act. Accordingly, the determinations above on the merits of the claims apply with respect to the Rosenthal Act as well.

  California UCL

  Defendant argues that Plaintiff does not have standing to bring a claim under the California UCL, as amended by Proposition 64 effective November 3, 2004, because he has not lost money or property. See Cal. Bus. & Prof. Code § 17204 (2005). Plaintiff responds that his complaint was filed on December 1, 2003, before the passage of Proposition 64. Under Proposition 64, plaintiffs in an action brought pursuant to the California UCL must have suffered "injury in fact" and "lost money or property as a result of unfair competition." Id. The question of whether Proposition 64 has retroactive effect is currently pending before the California Supreme Court and Plaintiff urges the Court to stay any decision on this matter until the question is resolved. See, e.g., Californians for Disability Rights v. Mervyn's LLC, 126 Cal.App.4th 386 (Cal.Ct.App. 2005) (holding that Proposition 64 is not retroactive); Branick v. Downey Sav. & Loan Ass'n, 126 Cal.App.4th 828 (Cal.Ct.App. 2005) (holding that Proposition 64 is retroactive).

  One federal court has anticipated a ruling by the California Supreme Court and already held that Proposition 64 is retroactive based on California Government Code Section 9606. See Chamberlain v. Ford Motor Co., 369 F.Supp.2d 1138 (N.D.Cal. 2005). But see Abels v. JBC Legal Group, P.C., 227 F.R.D. 541 (N.D. Cal. 2005) (staying its decision on retroactivity pending resolution by the California Supreme Court). Under California law, repeals of statutory enactments must apply retroactively to pending cases unless the statute is a codification of a common law right. See Cal. Gov. Code § 9606; Callet v. Alioto, 210 Cal. 65, 67-68 (1930). California courts have held that the California UCL is not equivalent to the common law tort of unfair competition. See, e.g., Bank of the West v. Superior Court, 2 Cal.4th 1254, 1264 (1992). Accordingly, the Court believes that the California Supreme Court will find that Proposition 64 is retroactive and, therefore, Plaintiff does not have standing to bring claims under the California UCL.

  Attorney's Fees

  Defendant has asked the Plaintiff be ordered to pay its attorney's fees in this matter. There is no basis for such an award and, accordingly, the request is denied. Conclusion

  Defendant's motion for summary judgment is DENIED in part and GRANTED in part. Plaintiff's cross-motion for partial summary judgment is DENIED.



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