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Solberg v. Victim Services, Inc.

United States District Court, N.D. California

November 20, 2019

KAREN SOLBERG, et al., Plaintiffs,


          Vince Chhabria United States District Judge.

         Many district attorneys throughout California have established diversion programs for people accused of passing bad checks with fraudulent intent. These programs allow suspects to avoid the possibility of criminal prosecution if they pay restitution and take a financial responsibility class. The district attorneys typically contract with private entities to administer the diversion programs.

         In this class action, the plaintiffs contend that a private entity-a company called Victim Services-administers diversion programs around the state in a way that violates the federal Fair Debt Collection Practices Act (FDCPA), as well as state law. The parties have filed cross-motions for summary judgment. The motions raise several complicated questions, only some of which can be answered at this stage:

         First, is Victim Services exempt from the FDCPA's coverage? The answer is no, at least for the period covered by this class action, because Victim Services failed to satisfy at least one of the statute's prerequisites for exclusion from coverage.

         Second, did the letter that Victim Services sent to suspects on behalf of district attorneys mislead debtors in violation of the FDCPA? The answer to this question is no as well-the letters sent during the class period were not misleading in any material respect.

         Third, did Victim Services violate the FDCPA by charging participants fees that are not authorized by California law for these diversion programs? This question cannot be answered based on the materials the parties have submitted in connection with their cross-motions for summary judgment.

         Fourth, did Victim Services violate the provisions of California law invoked by the plaintiffs? The answer to this question is no, with one caveat. If Victim Services charged unauthorized fees, this of course would be a state-law violation as well as a violation of the FDCPA.

         Accordingly, summary judgment is granted to Victim Services on all claims except those based on the allegation that it charged fees not authorized by state law. The parties will be permitted to file renewed cross-motions for summary judgment if they determine that this question can be answered without regard to any disputed material facts.


         In California, it is illegal to pass a bad check with fraudulent intent. See Cal. Penal Code § 476a. Because bad checkwriting is prevalent but frequently involves small dollar amounts, district attorneys often lack the resources to effectively deter this crime by prosecution. Many counties have therefore turned to pre-charge diversion programs that lower the stakes for the suspect but raise the probability that the suspect will face some consequence for writing a bad check. The bargain of the diversion program is straightforward: If the suspect makes the alleged victim whole, pays the diversion program's administrative fees, and attends a class about financial responsibility, the district attorney will agree not to prosecute the suspect.

         The California Legislature laid the groundwork for these diversion programs by passing the Bad Check Diversion Act. See Cal. Penal Code § 1001.60 et seq. This statute, in addition to setting parameters for the programs generally, allows district attorneys to contract with private entities to handle referrals from victims, collect fees, and teach the classes. Many (if not all) district attorneys in California use private entities to administer their bad-check diversion programs.

         Karen Solberg, Nancy Morin, and Narisha Bonakdar each wrote a bad check and were subsequently contacted for participation in one of these diversion programs. The contact was made by Victim Services, Inc., a private entity that administered the bad-check diversion programs for the district attorneys in the checkwriters' respective counties. Only Bonakdar took up the offer to participate in a diversion program and pay restitution; the other two disputed that they had committed a bad-check offense. But all three checkwriters eventually concluded that Victim Services' administration of the diversion program violates a federal statute that regulates debt collection, the Fair Debt Collection Practices Act (FDCPA).

         Thus, in December 2014, the three checkwriters (and two other people who have since dismissed their claims) filed this class action against Victim Services, three related corporate entities, and two corporate officers that jointly administered bad-check diversion programs on behalf of district attorneys in 32 California counties. For short, this ruling refers to the defendants collectively as Victim Services. The plaintiffs bring claims under the FDCPA based on Victim Services' allegedly false and misleading demand letters, and based on Victim Services' collection of fees allegedly not authorized by state law. On top of the FDCPA claims, the plaintiffs pursue claims for unfair business practices under California's Unfair Competition Law (UCL) and for fraudulent and negligent misrepresentation under California's general tort law. They seek damages of more than $6 million on behalf of a statewide class of checkwriters contacted by Victim Services.

         For the past five years, the plaintiffs and Victim Services have engaged in protracted litigation over pretrial motions. Victim Services first made unsuccessful attempts to dismiss the complaint and to strike the state-law claims under California's anti-SLAPP statute, which protects defendants' exercise of their First Amendment rights. As Ninth Circuit law permits, Victim Services immediately appealed the denial of its anti-SLAPP motion.

         There was also a skirmish over arbitration. As mentioned earlier, Bonakdar was the only plaintiff to enter into a non-prosecution agreement with the district attorney. Her contract to participate in the diversion program contained an arbitration provision, and Victim Services moved to compel arbitration with Bonakdar on this basis. This Court concluded that the Federal Arbitration Act does not apply to contracts between a district attorney and a suspect to resolve a question of criminal liability, and that California law does not permit arbitration of a dispute regarding the performance of a core government function by the government's agent. Breazeale v. Victim Services, Inc., 198 F.Supp.3d 1070 (N.D. Cal. 2016). As with an anti-SLAPP motion, the denial of motion to compel arbitration is immediately appealable. The Ninth Circuit affirmed the anti-SLAPP and arbitration rulings in a consolidated appeal. Breazeale v. Victim Services, Inc., 878 F.3d 759 (9th Cir. 2017).

         Next, the parties fought over class certification. After narrowing the plaintiffs' requested class definition, this Court certified two overlapping statewide classes. See Dkt. No. 297. The first class, which is for the FDCPA claims, consists of people who received a letter from Victim Services from December 1, 2013, to May 7, 2015. The second class, for the UCL claims, contains all people who paid fees to Victim Services in response to the letter between September 1, 2011, and May 7, 2015. Victim Services then filed a motion with the Ninth Circuit seeking permission to immediately appeal the class certification order under Federal Rule of Civil Procedure 23(f), but this motion was denied.

         That winding procedural history brings this case to its present stage, in which the plaintiffs and Victim Services each move for summary judgment on the FDCPA, UCL, and state-law misrepresentation claims.


         The plaintiffs' primary argument is that Victim Services, acting as an agent of district attorneys, engaged in unlawful debt collection practices. At the outset, one might question whether this case even involves “debt collection.” These diversion programs recover restitution for alleged violations of California Penal Code section 476a, the offense of passing a bad check with intent to defraud. An effort by a prosecutor, as an actor in the criminal justice system, to seek restitution on behalf of a victim is quite different from an effort by a private party to collect from a debtor. Cf. Lagos v. United States, 138 S.Ct. 1684, 1688 (2018) (distinguishing “government investigations and criminal proceedings” from “private investigations and civil or bankruptcy litigation” for purposes of statute authorizing restitution). Even though the restitution will equal the face value of the bad check plus any bank charges, it is counterintuitive (at best) to put restitution sought by a prosecutor in the same conceptual bucket as debt collection.

         Nor does the recovery of restitution in this context seem like recovery of a “debt” as that term is used in the federal debt collection statute that the plaintiffs invoke. Consider how the FDCPA defines “debt”: “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.” 15 U.S.C. § 1692a(5). The concept undergirding the term “debt” is that the obligation to pay arises out of a qualifying transaction. A merchant that pursues its civil remedies for a bad check can fairly be described as collecting a debt-that is, enforcing a payment obligation that arises out of a transaction. See Charles v. Lundgren & Associates, P.C., 119 F.3d 739, 742 (9th Cir. 1997). In contrast, it's a crime to fraudulently pass a bad check regardless of whether the check writer is transacting for goods or services. See Cal. Penal Code § 476a. The offender's obligation to pay restitution to the victim thus arises not from the transaction but from the agreement with the district attorney to resolve a dispute regarding criminal liability.

         Given this mismatch, one might have expected Victim Services to argue that it does not engage in “debt collection” when it acts as an agent of a district attorney's office to assist in the administration of a criminal justice program that includes the recovery of restitution. But that train has left the station. At the turn of the century, a spate of federal district courts interpreted the FDCPA to cover the efforts by private entities to obtain criminal restitution in their capacity as agents of diversion programs. See, e.g., Liles v. American Corrective Counseling Services, Inc., 131 F.Supp.2d 1114, 1119-20 (S.D. Iowa 2001). The distinction between civil and criminal enforcement, those courts reasoned, “makes no difference” if the restitution compensates the merchant harmed by the bad check. Gradisher v. Check Enforcement Unit, Inc., 133 F.Supp.2d 988, 990 (W.D. Mich. 2001). These rulings are arguably wrong as a matter of statutory interpretation, for the reasons discussed above. Moreover, assuming the statutory term “debt collection” is susceptible to either interpretation, there would have been good reason to avoid adopting the interpretation that includes district attorneys' bad-check diversion programs. Absent a plain statement of intent, Congress is presumed not to regulate in areas traditionally left to the states. Breazeale, 198 F.Supp.3d at 1077-79. The enforcement of state criminal law is obviously one such area. See Bond v. United States, 572 U.S. 844, 858 (2014). And at root, these diversion programs are criminal justice programs, so state and local government officials, not Congress, are supposed to be in charge.[1]

         But Congress did not respond to these rulings by clarifying that seeking restitution as part of a local law enforcement program is different from debt collection. Instead, it responded by amending the FDCPA to specify that private administrators of diversion programs can potentially avoid coverage under the statute, but only if they meet a series of detailed, confusing requirements. Financial Services Regulatory Relief Act of 2006, Pub. L. No. 109-351, § 801(a)(2), 120 Stat. 1966, 2004-06 (codified at 15 U.S.C. § 1692p). These requirements are discussed at length in Section III.A, but for now suffice it to say that although the prior version of the FDCPA arguably should not have been construed to cover entities involved in the administration of local law enforcement programs, the amended version reflects a clear expression of intent by Congress for the FDCPA to cover some of those entities-specifically, the entities that don't meet the series of requirements that would allow them to enjoy an exemption. Husted v. A. Philip Randolph Institute, 138 S.Ct. 1833, 1844 (2018) (“There is no reason to create an exception to a prohibition unless the prohibition would otherwise forbid what the exception allows.”); see also Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 219-20 (1979).

         Thus, Victim Services has understandably refrained from arguing that the FDCPA does not cover bad-check diversion programs. But the result is vexing-the Court must attempt to apply a series of complicated statutory requirements regarding debt collection to bad-check diversion programs, even though many of those requirements were not designed for, and often cannot be sensibly applied to, diversion programs. As the discussion below makes clear, this problem pervades the plaintiffs' claims.


         Although Victim Services does not make the argument discussed above, it does argue that it falls within two exceptions to the FDCPA's coverage. First, Victim Services contends that it meets the specific requirements of the exception for diversion programs discussed in the preceding section. See 15 U.S.C. § 1692p. Second, Victim Services contends that it satisfies the exception for people or entities who act as fiduciaries to creditors. See § 1692a(6)(F)(i).[2]

         As a preliminary matter, the plaintiffs argue that these statutory exceptions must be narrowly construed to further the FDCPA's guiding purpose of protecting debtors from deceptive and unfair practices. Yet the Supreme Court has recently shied away from invoking this longstanding narrow-construction canon, instead applying the principle that statutory exceptions must be given a “fair reading.” Food Marketing Institute v. Argus Leader Media, 139 S.Ct. 2356, 2366 (2019); see Encino Motorcars, LLC v. Navarro, 138 S.Ct. 1134, 1142 (2018). Given this vague language, it's unclear whether courts should narrowly construe the FDCPA's exceptions in cases of ambiguity or instead strive for the statute's best reading, no matter where it leads. But in this case, the narrow-construction canon-to the extent it survives-need not be deployed. Either way, the plaintiffs and the FDCPA class are entitled to summary judgment as to both exceptions.


         First, Victim Services contends that its collection activity falls within the exception for diversion programs, which includes programs “for alleged bad check offenders who agree to participate voluntarily in such program to avoid criminal prosecution.” 15 U.S.C. § 1692p(2)(A). This exception extends to private entities that administer such diversion programs under contract with a district attorney. § 1692p(2)(B). But to qualify for this exception, the private entity must comply with six requirements. See § 1692p(2)(C). During the class period, Victim Services failed to comply with at least one of these requirements, and possibly more.

         To be exempt from FDCPA liability, diversion programs must notify suspects of their right to request that the district attorney's office determine the existence of probable cause that the suspect committed a bad-check offense. See § 1692p(2)(C)(v). This disclosure ensures that suspects have a means to confirm, before deciding whether to participate in the program, that they were appropriately contacted for diversion. In addition, the diversion program must inform the suspect that restitution efforts will be paused until the requested determination of probable cause is made. Specifically, the statute provides that private entities must “include[ ] as part of an initial written communication with an alleged offender a clear and conspicuous statement that, ” among other things, “if the alleged offender notifies the private entity or the district attorney in writing, not later than 30 days after being contacted for the first time pursuant to clause (iv), that there is a dispute . . ., before further restitution efforts are pursued, the district attorney or an employee of the district attorney authorized to make such a determination makes a determination that there is probable cause to believe that a crime has been committed.” § 1692p(2)(C)(v)(III).

         Victim Services did not comply with this notice requirement. Attached as Appendix A to this ruling is the letter for the Santa Cruz diversion program, which is representative of the letters in use across California during the class period. That letter informed the suspect: “You may dispute the validity of this allegation in writing to this Office within 30 days of receiving this Official Notice.” Santa Cruz County Form Letter 2 (“Form Letter”), Dkt. No. 315-1. But the letter does not state that an employee of the district attorney will determine the existence of probable cause; it states only that “the authorized administrator of the Check Restitution Recovery Program will review the written dispute based on criteria established by [that county's] District Attorney.” Id. And the letter makes clear that the authorized administrator is a private entity under contract with the district attorney. Id. at 1. Nor does the letter assure the recipient that restitution efforts will be put on hold until that determination is made. As a matter of law, this letter is inconsistent with the notice provision in section 1692p(2)(C)(v). See Cavnar v. BounceBack, Inc., 2015 WL 4429095, at *3 (E.D. Wash. July 17, 2015).

         Victim Services appears to object that this application of the statute is nitpicky. Yet Congress chose to impose highly specific notice requirements for diversion programs that wish to avoid coverage under the FDCPA. If the requirements were more general (for example, “to qualify for the exemption, the program must notify the suspect of the opportunity to dispute the existence of probable cause”), perhaps Victim Services could be found in substantial compliance. But in the face of such a specific notice requirement, and in the face of mandate that the notification be ...

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