Kort v. Diversified Collection Services, Inc.
| Decision Date | 10 January 2005 |
| Docket Number | No. 04-1455.,No. 04-1074.,04-1074.,04-1455. |
| Parties | Elizabeth KORT, individually and on behalf of all others similarly situated, Plaintiff, v. DIVERSIFIED COLLECTION SERVICES, INC., a California corporation, Defendant-Appellee. Appeal of: Hattie Harris-Alleyne and Lindsay Miller, Intervenors-Appellants. |
| Court | U.S. Court of Appeals — Seventh Circuit |
James Shedden, Beeler, Schad & Diamond, Chicago, IL, for Plaintiff.
Christine Olson McTigue (argued), David M. Schultz, Hinshaw & Culbertson, Chicago, IL, for Defendant-Appellee.
Lance A. Raphael (argued), Stacy M. Bardo, Consumer Advocacy Center, Chicago, IL, for Intervenors-Appellants.
Before POSNER, MANION, and EVANS, Circuit Judges.
Elizabeth Kort, representing a class of individuals, sued Diversified Collection Services ("DCS"), claiming that DCS violated the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. §§ 1692, et seq., by mailing her and others misleading garnishment notices. The debts at issue were student loans governed by the Higher Education Act ("HEA"), 20 U.S.C. §§ 1070, et seq. The text of the garnishment notice was taken entirely from a form issued by the Department of Education ("DOE"), which is the federal agency charged with regulating under the HEA. Given DCS's reliance on the DOE form, the district court ruled that DCS was entitled to an affirmative defense under the FDCPA known as the "bona fide error" defense and thus granted DCS summary judgment on this issue. Kort is no longer prosecuting the case, but Hattie Harris-Alleyne and Lindsay Miller have intervened to appeal the grant of summary judgment to DCS on behalf of themselves and the corresponding class. We affirm.
Elizabeth Kort procured a student loan under the HEA's Federal Family Education Loan Program. The Illinois Student Assistance Commission ("ISAC")1 guaranteed the loan. ISAC hired DCS to collect delinquent debts. As of February 2000, Kort's debt to ISAC, totaling approximately $1,600.00, was delinquent. Consequently, DCS, as an agent of ISAC, took steps under the HEA to collect Kort's debt for ISAC, specifically, to garnish her wages.
The HEA permits guarantors, such as ISAC, to administratively garnish (i.e., without going to court) a debtor's wages. See 20 U.S.C. § 1095a. Before wages can be administratively garnished, however, the guarantor, or its agent, must give the debtor at least thirty days' notice. See 20 U.S.C. § 1095a(a)(2). Attempting to comply with this requirement, DCS mailed Kort a notice — dated February 5, 2000, and postmarked February 7, 2000 — to inform her of ISAC's intent to garnish her wages unless she took certain actions by March 6, 2000. Also, attached to the notice was a response form, which enabled Kort to claim exemptions and request a hearing in response to the garnishment notice.
One such exemption from wage garnishment is the HEA's so-called unemployment exemption. See 20 U.S.C. § 1095a(a)(7). The HEA mandates that, for a debtor who was "involuntarily separated" from the debtor's employment and then "reemployed," "no amount may be deducted from the disposable pay of [the debtor] until [the debtor] has been reemployed continuously for at least 12 months." Id. Thus, a debtor who successfully invokes this exemption can avert wage garnishment during the first twelve months on the job. Pursuant to its grant of regulatory authority, see 20 U.S.C. § 1082(a)(1), the DOE amplified this point in a regulation stating: "The guaranty agency may not garnish the wages of a [debtor] whom it knows has been involuntarily separated from employment until the [debtor] has been reemployed continuously for at least 12 months." 34 C.F.R. § 682.410(b)(9)(i)(G) (emphasis added).2 In order for a guarantor to have the needed knowledge that a debtor is entitled to this exemption, the debtor must ordinarily come forward, according to the DOE's interpretation of the exemption, with information to substantiate that the debtor qualifies for the exemption. See Federal Family Education Loan Program: Final Regulations, 59 Fed.Reg. 22462, 22474 (Apr. 29, 1994).
To ensure compliance with the HEA and the corresponding regulations, the DOE drafted a form notice for guarantors — and thus for their agents — to use in initiating garnishment proceedings. The form is entitled "Notice Prior to Wage Withholding." The DOE form handles the HEA unemployment exemption as follows:
If you document that you have been involuntarily separated from employment [fill in name of guaranty agency] will not garnish your wages until you have been re-employed continuously for twelve (12) months. If you wish to claim this exemption from wage garnishment, you need to complete Part II of the enclosed "Request for Hearing" form and send us written proof that you qualify for the exemption by MM/DD/YYYY.3 Satisfactory written proof is the following: documents from the Employment Commission (or similar state agency in another state) indicating your entitlement to unemployment compensation, and a statement from your present employer indicating the date you began work at your present job. If you are not covered under a state's unemployment program (even if involuntarily separated from employment), you must provide a statement to that effect from the state unemployment agency. Failure to provide written proof may result in your claim of exemption being rejected as unsubstantiated.
R. 51 at Ex. C (emphasis omitted). The DOE's accompanying "Request for Hearing" form, which debtors could use to respond to the garnishment notice, utilizes similar language in discussing the exemption.
These DOE forms were not simply optional suggestions; they were and are mandatory. See 34 C.F.R. § 682.401(d)(3).4 On March 17, 1998, the policy chief of the DOE's Federal Family Education Loan Program issued the DOE-approved "Notice Prior to Wage Withholding" and "Request for Hearing" forms to guarantors, including ISAC, with a cover letter stating: "These new notices must be used for any wage garnishment initiated on or after June 1, 1998." R. 51 at Ex. C (emphasis in original).5
Consequently, ISAC and DCS used the government forms as directed. The notice and the response form that DCS sent to Kort followed the DOE forms verbatim, adding only Kort's name, address, amount owed, and other specifics. With respect to the unemployment exemption, the DCS notice tracked the DOE form as follows:
If you document that you have been involuntarily separated from employment, Illinois Student Assistance Commission will not garnish your wages until you have been re-employed continuously for twelve (12) months. If you wish to claim this exemption from wage garnishment, you will need to complete Part II of the enclosed Request for Hearing form and send us written proof that you qualify for the exemption by March 6, 2000.6 Satisfactory "written proof" is the following: documents from the applicable Employment Commission (or a similar state agency in another state) indicating your entitlement to unemployment compensation, and a statement from your present employer indicating the date you began work at your present job. If you are not covered under a state's unemployment program (even if involuntarily separated from employment), you must provide a statement to that effect from the state unemployment agency. Failure to provide written proof may result in your claim of exemption being rejected as unsubstantiated.
R. 51. at Ex. A (emphasis omitted). The response form that DCS provided to Kort likewise followed the similar text about the exemption in the DOE's "Request for Hearing" form.
After receiving the DCS notice, Kort filed a two-count complaint in the Northern District of Illinois against DCS, claiming that the notice was false and misleading in violation of the FDCPA. Count one alleged that the DCS notice misstated the date by which Kort had to take action to avoid the garnishment. Count two alleged that the DCS notice contained misinformation about the HEA unemployment exemption. Specifically, Count two asserted: "The statute does not require the consumer to take any action, or act within any particular time frame, to qualify for the exemption." R. 1 at 5. Kort maintained that, because the text of the HEA contained no documentation or deadline requirement, DCS wrongfully required her to come forward with documentation of her eligibility for the exemption and to do so by a certain date.
Kort brought her action as a class action on behalf of herself and others who had received the DCS notice. After certifying a class of 460 individuals for count two and a subclass of 107 individuals for count one, the district court entertained cross-motions for summary judgment on each count.
The district court granted Kort and the corresponding subclass summary judgment on count one. The district court determined that, because the March 6 deadline in the notice was less than thirty days after DCS mailed the notice on February 7, the notice violated the FDCPA: the notice wrongfully stated that the garnishment could begin on a date that came before the HEA's thirty-day notice period had expired. See Kort v. Diversified Collection Servs., 270 F.Supp.2d 1017, 1022-25 (N.D.Ill.2003). Thereafter, Kort, on behalf of herself and the count-one subclass, accepted an offer of judgment from DCS. Kort received $1,000.00 and the other 106 subclass members each received $300.00. Kort also recovered her attorneys' fees and costs. Count one is not at issue on appeal.
Conversely, the district court granted DCS summary judgment on count two. The district court ruled that DCS was insulated from liability under the FDCPA's bona fide error defense. The district court concluded that, even if the notice violated the FDCPA by misleading Kort and the others about the HEA unemployment exemption, the violation was excusable given DCS's reliance on the DOE form. See ...
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