7th Circuit affirms, reverses on ‘bona fide error’ defense in consolidated debt suits

Two Indiana women who disputed debts they allegedly owed to debt-collection companies received conflicting results from the 7th Circuit Court of Appeals in a consolidated Wednesday decision.

Laura Ewing tried to dispute medical debts by faxing a letter to MED‐1 Solutions LLC, a debt‐collection company assigned to her case. But MED‐1’s receptionist misrouted the fax and sent it to the wrong department. As a result, Ewing’s dispute was never recorded and wasn’t resolved until more than two years later.

For September Webster, her attorney faxed a dispute notice to debt collector Receivables Performance Management LLC for a debt she believed she didn’t owe. However, the attorney was never made aware that Receivables had decided, without announcement, to stop monitoring its electronic fax inbox. As a result, Receivables was unaware that Webster had faxed any dispute.

Ewing and Webster sued their debt collectors separately, seeking actual and statutory damages. The companies prevailed at summary judgment because the U.S. District Court for the Southern District of Indiana in both cases determined the companies’ mistakes were bona fide errors.

Before the 7th Circuit, both Ewing and Webster argued the debt collectors’ actions were not bona fide error. Meanwhile, the debt collectors maintained that under TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021), the consumers lack standing because any risk of future harm they face is not sufficiently concrete to support a suit for damages.

In a consolidated decision, the 7th Circuit found that Ewing and Webster “suffered an intangible, reputational injury that is sufficiently concrete for purposes of Article III standing.”

“Specifically, they have shown that their injury is related closely to the harm caused by defamation. Reputational harm of this sort is a real-world injury; being portrayed as a deadbeat who does not pay her debts has real‐world consequences,” Circuit Judge Amy St. Eve wrote.

As to the merits and the application of the bona fide error defense, the appellate court concluded that while MED-1 had reasonable procedures in place to prevent its error, Receivables did not.

“Ewing argues that MED‐1 needed to have a policy requiring departments to identify and forward misdirected faxes. The absence of such a policy, however, does not mean that MED‐1 failed to maintain reasonably adapted procedures. If MED‐1’s step‐by‐step fax procedures had been followed, then the error that gave rise to this case would have been avoided,” St. Eve wrote.

But the 7th Circuit found it was not reasonable for Receivables to stop monitoring its fax inbox while allowing the system to continue sending confirmations that faxes had been received.

“Unlike MED‐1’s one‐time misstep in Ewing, Receivables’s lack of procedures invited the error that occurred in this case. Until debtors and their attorneys knew that Receivables no longer accepted disputes by fax, it was entirely foreseeable that Receivables would continue receiving faxed disputes. Receivables used no procedures to avoid the error that occurred, let alone reasonable ones, and so is not sheltered by the bona fide error defense,” it concluded.

Thus, the 7th Circuit affirmed in Laura Ewing v. MED1 Solutions, LLC, 21‐1276, but reversed and remanded in September Webster v. Receivables Performance Management, LLC, 21‐1299.

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