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Hernandez v. Midland Credit Management

March 6, 2007


The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer


In November 2004, Plaintiff Frank N. Hernandez, Jr. received a letter from Defendant Midland Credit Management, Inc. ("MCM"), a debt collector, offering to settle Plaintiff's outstanding credit card debt at a 50% discount. A privacy notice enclosed with this letter stated that MCM and its parent corporation, Defendant Encore Capital Group, Inc. ("Encore"), reserved the right to share nonpublic personal information about Plaintiff, gathered in the course of debt collection, with certain nonaffiliated third parties, unless Plaintiff opted out in writing. This claimed right to disclose information was not conditioned upon Plaintiff's acceptance of the offer. Plaintiff, on behalf of a class of Illinois and Wisconsin residents who received such a privacy notice at various times between 2003 and 2005, alleges that this privacy notice violates the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq., which generally prohibits communications "in connection with the collection of any debt" between a debt collector and persons other than the debtor and certain parties such as attorneys of the debtor and the creditor. See 15 U.S.C. § 1692c(b). The Act also prohibits false and misleading representations, which include a "threat to take any action that cannot legally be taken." See 15 U.S.C. § 1692e(5). Plaintiff contends that MCM and Encore (collectively, "Defendants") actually engage in prohibited third-party communications, and that the privacy notice constitutes both an illegal threat to do so as part of a debt collection effort and a false representation of a debtor's legal rights.

Both parties have moved for summary judgment. For the reasons explained below, Plaintiff's motion is granted, and Defendants' motion is denied.


A. The Parties

Encore is a "'purchaser and manager of charged-off consumer receivables portfolios,'" (Pl.'s 56.1 ¶ 12 (quoting Encore Form 8-K, March 3, 2005, Ex. E to Pl.'s 56.1, at 2)), which it acquires "at deep discounts from their face values." (Id. ¶ 13 (quoting Encore Form 10-K for fiscal year ended December 31, 2004, Ex. F to Pl.'s 56.1, at 2).) MCM, Encore's wholly-owned subsidiary,*fn2 collects debts held by other subsidiaries of Encore, (Def.'s 56.1¶ 6), including MRC Receivables Corporation ("MRC"), which purchases debts.*fn3 (Pl.'s 56.1 ¶¶ 16-17.) James Brandon Black, the President and Chief Executive Officer ("CEO") of both Encore and MCM,*fn4 (Black Dep., Ex. B to Def.'s 56.1 Resp., at 9), was Encore's Chief Operating Officer ("COO") before becoming CEO in October 2005. (Pl.'s 56.1 ¶¶ 50-52.)

Plaintiff, an Illinois resident, is well-versed in debt-collection practices. Currently a credit analyst for an oil company, he worked for nearly thirty years as a senior collections manager for several Fortune 500 companies and banking institutions. (Def.'s 56.1 ¶ 3.) Plaintiff has conducted at least fifty training seminars, many of which involved the FDCPA, for the American Management Association ("AMA"),*fn5 and authored a training manual on the FDCPA for the AMA. (Id. ¶ 4.) He also has been a litigant in at least one other lawsuit alleging violations of the FDCPA.*fn6 (Id. ¶ 5.)

B. The Collection Letter and Privacy Notice

Shortly after November 14, 2004, Plaintiff received a mailing from MCM containing two items. The first was a letter (the "Collection Letter") from MCM concerning his credit card debt with Providian National Bank.*fn7 (Def.'s 56.1 ¶ 9.) The Collection Letter informed Plaintiff that MRC had "recently purchased" Plaintiff's Providian account, and that MCM, "a debt collection agency," would now be servicing the account. (Collection Letter, Ex. C to Def.'s 56.1.) The Collection Letter offered Plaintiff "50% off" of his current balance of $3,135.26, if MCM received his payment of $1,567.63 by December 22, 2004. (Id.) In exchange for this payment, MCM stated that it would "[n]otify the credit bureaus that the debt is 'Paid'" and "[i]mmediately stop all recovery activity on this account." (Id.) This was MCM's first communication to Plaintiff regarding the Providian debt. (Def.'s 56.1 ¶ 12.)

The Collection Letter also stated, in bold capital letters, "Please See Reverse Side for Important Information." (Collection Letter, Ex. C to Def.'s 56.1.) There, at the top of the page under a heading titled "Important Disclosure Information", in a box and also in boldface, appeared the following: "Please understand this is a communication from a debt collector. This is an attempt to collect a debt. Any information obtained will be used for that purpose." (Id.) Following this disclosure was information on how the recipient should proceed if the debt was disputed or had been discharged in bankruptcy. (Id.)

The second item, enclosed in the envelope with the Collection Letter, was a document titled "Privacy Notice of Financial Information" (the "Notice"). (Def.'s 56.1 ¶ 13.) The Notice, which stated that it was from "MCM Capital Group, Inc.*fn8 . . . and its affiliates," including MCM and MRC, explained that its purpose was "so that you understand what nonpublic personal information we gather about you, how we use or share that nonpublic personal information, and the safeguards we have in place in order to protect that nonpublic personal information." (Notice, Ex. D to Def.'s 56.1.) The Notice specifically states:

In connection with collecting on, or servicing, your account, we collect nonpublic personal information about you from the following sources:

* Directly from you, application or other forms (e.g., your name, address, social security number, telephone number and other information obtained from our communications with you);

* From your account transactions with us, our affiliates or others including, without limitation, the originating creditor (e.g., account balance, payment history, banking information and customer information);

* From consumer reporting agencies (e.g., creditworthiness or credit history); and

* From other nonaffiliated third parties (e.g., providers of location information and demographic information).

(Id.) The Notice states, further, that Encore and its affiliates "reserve the right to disclose all the nonpublic personal information" collected in the above manner, and that they "may disclose" such information to third parties including "[f]inancial service providers, such as mortgage bankers or other lenders" and "[n]on-financial companies, such as direct marketers or retailers." (Id.) The Notice continued:

We may disclose nonpublic personal information about you to other nonaffiliated third parties as permitted by law (such as credit reporting agencies, debt collectors, attorneys, companies that process financial products or services, in connection with the sale of all or part of our business, and, as necessary, to respond to legal subpoenas and other similar legal process).

We may disclose all of the information we collect, as described above, to companies that perform marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements. (Id.) Finally, the Notice included an opt-out provision that advised Plaintiff that if he wished to prevent the disclosure of nonpublic personal information to nonaffiliated third parties, he must make an affirmative request for non-disclosure in writing. (Id.)

Shortly after receiving this mailing, Plaintiff sent a letter to MCM, stating that he was providing "formal written notice" to MCM and all its affiliates that he wished to receive no further communications from those parties. (Def.'s 56.1 ¶ 44 (quoting Letter from Hernandez to MCM of November 30, 2004 ("Plaintiff's Letter"), Ex. H to Def.'s 56.1).) The letter further "instructed" MCM "to stop solicitation and/or disclosing information, pertaining to my credit history, to all third parties." (Id. ¶ 45 (quoting Plaintiff's Letter (emphasis in original)).) In his deposition, Plaintiff testified that he had read the Notice, was not confused or threatened by its language, and understood that MCM was authorized to disclose information to certain third parties "as permitted by law." (Id. ¶ 43 (citing Pl.'s Dep., Ex. A to Def.'s 56.1, at 67-68).) He also forwarded a copy of the Notice to his legal counsel, seeking an opinion on whether it violated the FDCPA.*fn9 (Id. ¶ 46.)

C. MCM's Arrangement With Its Credit Card Partner

As noted, the Notice states that Defendants "may disclose" information it collects to "other financial institutions with whom we have joint marketing agreements." (Notice, Ex. D to Def.'s 56.1.) This was not a mere possibility; in fact, Encore has a "joint marketing agreement" with a major credit card company (the "Credit Card Partner")*fn10 for a balance transfer program (the "Program"). (Pl.'s 56.1 ¶¶ 20-21, 32, 55.) Encore described the Program in its 2003 annual report:

Account Balance Transfer. We may transfer to our credit card partner accounts with a low expected value or those for which collection efforts have failed. The credit card partner may offer the debtor the opportunity to put the balance on a credit card.

If the account is transferred we receive an agreed upon payment. We retain the ownership of and the ability to collect on the charged-off accounts that the card issuer has solicited until a successful balance-transfer has occurred. (Id. ¶ 20 (quoting Encore Form 10-K for fiscal year ending December 31, 2003, Ex. G to Pl.'s 56.1, at 10).) More specifically, Encore first selects a group of accounts as likely eligible for the Program, (Def.'s 56.1 ¶ 36; Pl.'s 56.1 ¶ 40); MCM then sends debtors' name, address, and account balance information to its Credit Card Partner, (Pl.'s 56.1 ¶ 42); and the Credit Card Partner then decides which customer accounts will be solicited for the credit card offer. (Pl.'s 56.1 Resp. ¶ 36; Def.'s 56.1 Resp. ¶ 40; Meredith Dep., Ex. O to Pl.'s 56.1, at 49-51.) MCM sends a letter to the account debtors that the Credit Card Partner will accept, signed by MCM (and Encore) CEO Black, advising them of the offer. (Pl.'s 56.1 ¶¶ 44, 50.) If the debtor chooses to participate, and transfers the balance of the debt MCM is attempting to collect onto the new credit card, that debt is paid off and a new debt is incurred with the Credit Card Partner.*fn11 (Id. ¶ 38; Def.'s 56.1 ¶ 37.) After the customer makes an initial payment on the new debt, the Credit Card Partner pays MCM a percentage of the amount of the balance transfer.*fn12 (Pl.'s 56.1 ¶¶ 46-47.)

Although the mechanics of the Program are undisputed, the parties characterize its purpose differently. Defendants, citing to Black's testimony, maintain that the Program "allow[s] [MCM] customers the opportunity to transfer debt to a new credit card, thereby affording them an opportunity to establish good credit." (Def.'s 56.1 ¶ 34 (citing Black Dep., Ex. B to Def.'s 56.1, at 22-23).) Thus, according to Defendants, the purpose of disclosing customer information to MCM's Credit Card Partner is to "provide [MCM] customers with an opportunity to take advantage of a low interest credit card or some other line of credit."*fn13 (Id. ¶ 33 (citing Black Dep., at 23).) Plaintiff, rejecting this benign description, asserts that the Program is simply "an attempt to collect a debt." (Pl.'s 56.1 Resp. ¶¶ 32-34.) Plaintiff points to an SEC filing in which Encore described "the transfer of accounts to a credit card provider, generating a payment to [Encore]" as one of its "collection strategies." (Pl.'s 56.1¶ 21 (quoting Encore Form 10-K for fiscal year ended December 31, 2004, Ex. F to Pl.'s 56.1, at 2).) In its 2003 annual report, Encore itself listed, as one of its "collection strategies," a "relationship with a national credit card company to provide for account balance transfers." (Pl.'s 56.1 Addnl. ¶ 8 (quoting Encore Form 10-K for fiscal year ended December 31, 2003, Ex. G to Pl.'s 56.1 Addnl., at 6).) In addition, Plaintiff notes that Encore's then-CEO Carl Gregory, in a conference call with analysts in 2004, touted Encore's "innovative collection strategies" and identified the Program as one of "eight unique revenue channels." (Pl.'s 56.1¶ 31 (quoting Conference Call Transcript of August 3, 2004, Ex. L to Pl.'s 56.1).)

However characterized, the Program is "entirely optional": offerees "are not obligated to participate," and there are no "negative consequences" if a debtor declines the offer. (Def.'s 56.1 ¶¶ 39-40.) If a debtor opts out, as explained in the Notice, MCM will no longer submit that person's name to its Credit Card Partner, or to any other third party or for any other balance transfer program. (Id. ¶ 42.) The debtor will receive no further balance transfer offers.*fn14 (Id.)

Plaintiff asserts that Black, the current President and CEO of both Encore and MCM and COO of Encore from 2000 to May 2005, was responsible for the Program. (Pl.'s 56.1 ¶¶ 33, 50-52.) Although Defendants deny this, Black in fact testified that he "was responsible for all of the collection activities," and when asked, "[w]as one of the collection processes the [Program]?" Black answered, "I was responsible for the people who managed the [Credit Card Partner] relationship. So if that-so the answer is yes." (Black Dep., at 22-23.) It is also undisputed that in an October 2004 conference call, then-CEO Gregory described Black as "the architect of many of the analytical procedures and collection processes that distinguish Encore's approach to the business." (Pl.'s 56.1 ¶ 27 (quoting Conference Call Transcript of October 28, 2004, Ex. K to Pl.'s 56.1).)

D. The Parties' Dispute Over the Purpose of the Notice

Defendants assert that the Notice was "sent pursuant to an optional credit card opportunity," i.e. the Program, and "not in connection with the collection of a debt." (Def.'s 56.1 ¶ 32.) Although Plaintiff acknowledges that the Notice "indirectly refers to [the Program] by informing the debtor about a joint marketing agreement," (Pl.'s 56.1 ¶ 55), Plaintiff vehemently denies the lack of any connection between the Notice and debt collection. (Pl.'s 56.1 Resp. ¶ 32.) Plaintiff notes that the Notice itself states that Defendants collect nonpublic personal information "[i]n connection with collecting on . . . your account," (Notice, Ex. D to Def.'s 56.1), and that it was enclosed in the same envelope with the Collection Letter, which states that it is a "communication from a debt collector" and "an attempt to collect a debt," and that "[a]ny information obtained will be used for that purpose." (Collection Letter, Ex. C to Def.'s 56.1.) Moreover, Plaintiff, as noted above, asserts that the Program itself is an "attempt to collect a debt," citing Encore's descriptions of the Program as a "collection strategy" as well as the fact that MCM received a percentage of every successful balance transfer. (Pl.'s 56.1 Resp. ¶ 32.)

Defendants further assert that MCM was obligated to send the Notice under the GrammLeach-Bliley Act ("GLBA"), 15 U.S.C. § 6801 et seq. (Def.'s 56.1 ¶ 19.) The GLBA requires a financial institution, upon "establishing a customer relationship with a consumer," to "provide a clear and conspicuous disclosure" of its policies and practices with respect to disclosing consumers' nonpublic personal information to nonaffiliated third parties, 15 U.S.C. § 6803(a), and to provide an opportunity for the consumer to opt out. 15 U.S.C. § 6802(b)(1). Defendants assert that it sent the Notice "in compliance with" the GLBA as part of "its first contact with the Plaintiff," (Def.'s 56.1 ¶ 20), and that the Notice had been drafted to be sent to "each [MCM] customer upon [MCM's] initial contact pursuant to the GLB[A] and its regulation." (Id. ¶ 25.) Plaintiff admits that the GLBA required Defendants to send some form of privacy notice. (Pl.'s 56.1 Resp. ¶ 19.) Plaintiff contends, however, that because Defendants' Notice constituted "an attempt to collect a debt," Defendants were also required to comply with the FDCPA, which the Notice allegedly violated, and that nothing in the GLBA "permits disclosures that violate the FDCPA." (Id. ¶¶ 19-20.)

The Notice was drafted by Timothy Collins, who was MCM's corporate counsel from 2000 to the spring of 2002. (Def.'s 56.1 ¶ 25; Collins Decl. ¶¶ 1, 3, Ex. E to Def.'s 56.1.) Citing Collins' affidavit, Defendants assert that after the GLBA was enacted in 1999, MCM in-house counsel "began setting up procedures that would assure compliance" with the GLBA, (Def.'s 56.1 ¶ 23); that "[i]deas were shared among in-house counsel on how to comply with the new regulations," (id. ¶ 24); that Collins "relied on the language in the GLBA and its regulations in drafting the Notice", (id. ¶ 25); that MCM "monitored the regulation on a regular basis" to determine whether any revision to the Notice was necessary, (id. ¶ 22); and that the Notice "tracks the language of the GLB[A] and its regulations verbatim."*fn15 (Id. ¶ 25.) Although Collins' affidavit indeed supports these assertions, Plaintiff notes circumstances that cast some doubt on them: Collins left MCM in the spring of 2002 and therefore could not know whether MCM monitored any regulations beyond that time, (Pl.'s 56.1 Resp. ¶ 22); and although Collins states in his affidavit that he "relied solely" on the language in the GLBA and its regulations, (Collins Aff. ¶ 5), he testified in his deposition that he "looked at" examples of GLBA-mandated privacy notices from credit card and student loan institutions, and "incorporated some of their language" into his draft of the Notice.*fn16 (Collins Dep., Ex. R to Pl.'s 56.1 Resp., at 61.) Plaintiff also notes that neither the GLBA nor sample privacy notices found in FTC regulations promulgated in May 2000 contain the language "[i]n connection with collecting on, or servicing, your account" that appears at the beginning of the Notice. (Pl.'s 56.1 Resp. ¶ 25 (citing Privacy of Consumer Financial Information, 65 Fed. Reg. 33,662, 33,688-89 (May 24, 2000) (now codified at 16 C.F.R. pt. 313), Ex. U to Pl.'s 56.1 Resp.).)

Notably, in contrast to the efforts they assertedly made to comply with the GLBA, Defendants do not appear to have devoted a similar level of attention to the FDCPA when drafting the Notice. Defendants assert merely that MCM "consulted the FDCPA and the GLB[A] and regulations and their relationship to each other to ensure compliance." (Def.'s 56.1 ¶ 21.) Although Plaintiff disputes this assertion, (Pl.'s 56.1 Resp. ¶ 21), it is supported, albeit not extensively: Defendants cite to Collins' deposition, in which, when asked, "did you consider the relationship between the GLB[A] and the privacy notice, on one hand, and the [FDCPA], on the other hand?" Collins answered, without elaboration, "Yes."*fn17 (Collins Dep., at 17.) Plaintiff notes, however, that to his recollection, Collins did not receive any training regarding the FDCPA while at MCM, (Pl.'s 56.1 Addnl. ¶ 12); and Collins cannot recall whether he reviewed the FDCPA or its regulations in drafting the Notice. (Pl.'s 56.1 Resp. ¶ 21; Collins Dep., at 67.)

Defendants also note that MCM has received no complaints from "the regulatory agencies"*fn18 regarding the Notice, and assert that MCM has "set procedures in place to address" such complaints. (Def.'s 56.1 ¶¶ 49-50 (citing Melconian Dep., at 15).) Plaintiff, however, points to a lawsuit filed against MCM in July 2003 in federal court in Florida, (Pl.'s 56.1 Resp. ¶¶ 48, 50), in which the court considered a privacy notice similar to the one here, and concluded that summary judgment for either party on the plaintiff's FDCPA claim was inappropriate because the privacy notice, read together with the dunning letter, could be seen as a threat to collect and disclose personal information. See Fields v. Midland Credit Mgmt., No. 8:03-CV-1049-T-23EAJ, slip op. at 14-15 (M.D. Fl. Oct. 28, 2004).

Finally, Plaintiff points out that MCM is a member of the American Collectors Association (the "ACA"), an industry trade group that on September 20, 2000 presented a "teleseminar" entitled "Practical Implications of the Gramm-Leach-Bliley Act." (Pl.'s 56.1 Addnl. ¶¶ 3-4 (citing Ex. S to Pl.'s 56.1 Addnl.).) The ACA published an advisory manual in conjunction with the teleseminar, (id. ¶ 4), as well as a "Questions & Answers" booklet. (Id. ¶ 5 (citing Gramm-Leach-Bliley Act, Teleseminar, September 20, 2000, Questions & Answers (the "ACA Q & A"), Ex. T to Pl.'s 56.1 Addnl., at 4).) One of the ...

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