Loan Servicer’s “Obvious” Willful Violation of the Fair Credit Reporting Act Warrants Revival of Plaintiffs’ Claims for Emotional-Distress and Punitive Damages

Last week, in Marchisio v. Carrington Mortgage Services, LLC, 2019 WL 1320522 (11th Cir. Mar. 25, 2019), the Eleventh Circuit, taking a somewhat exasperated tone, addressed claims against a mortgage servicer whose repeated misreporting of a consumer account—even after a history of litigation and two settlement agreements—was an “obvious” violation of the Fair Credit Reporting Act. The 60-page opinion, authored by Judge Julie Carnes, discusses the FCRA, the Florida Consumer Collection Practices Act, availability of emotional-distress and punitive damages, agency law, and contract interpretation, among other topics. In the end, it was not a good day for the mortgage servicer.

Back in 2009, Carrington Mortgage Services and the plaintiffs, Johnnie and Adrian Marchisio, settled a foreclosure action based on the Marchisios’ default on two mortgage loans serviced by Carrington. The Marchisios turned over the property, and their debt was extinguished. Carrington, however, continued its debt collection efforts and reported the debt as delinquent to the credit reporting agencies.

The Marchisios then filed their first FCRA lawsuit, prompting Carrington to (correctly) inform the credit reporting agencies that the plaintiffs’ first loan had a zero balance. Carrington, however, continued to misreport that the Marchisios owed money under the second loan. Under another settlement agreement, entered in January 2013, Carrington agreed to pay the Marchisios $125,000 and report the second loan’s zero balance to the credit reporting agencies “as soon as reasonably possible, but in any case” by April 23, 2013.

Nevertheless, Carrington continued for the next three months to send automated monthly reports to the credit reporting agencies, erroneously reporting the second loan as delinquent. Carrington finally corrected the report two days after the April 23 deadline, only to begin reporting (incorrectly) that the Marchisios owed a balloon payment of nearly $35,000, due on March 1, 2021.

In response to disputes submitted by the Marchisios in November 2013, the credit reporting agencies contacted Carrington to verify the information reported. A Carrington employee investigated, but nothing in Carrington’s database reflected the January 2013 settlement agreement or the previous litigation history, so the employee verified the reported information as accurate.

The Marchisios then filed their second lawsuit in the Southern District of Florida, giving rise to the Eleventh Circuit’s opinion. On cross-motions for summary judgment, the district court granted summary judgment to the Marchisios as to Carrington’s willful violation of the FCRA  but granted summary judgment to Carrington on pretty much everything else, including emotional-distress damages and punitive damages (which it did sua sponte) as well as on the Marchisios’ state-law claims. This left the Marchisios with an award of statutory damages of $3,000 plus attorneys’ fees and costs, calculated based on only partial success.

On cross-appeals, the Eleventh Circuit affirmed the ruling for the Marchisios and reversed and remanded for trial on the rest of the claims.

As to the willful FCRA violation, the Court found it “obvious that Defendant failed to conduct a reasonable investigation” and concluded that, as a matter of law, Carrington’s investigative efforts were not reasonable. Carrington had failed to create a reliable system for inputting information regarding the settlement of litigation, Carrington was aware that its system was unreliable, and it was incumbent on Carrington to ensure that the terms of the settlement agreement were communicated to those who report to the agencies. Because Carrington had not taken these necessary steps, it was foreseeable that any investigation of the disputed information would yield an incorrect conclusion by its employees.

Moreover, even if Carrington had not acted willfully, it was at least reckless, which was sufficient to support a violation of the FCRA. The Marchisios had attempted to stop Carrington from reporting false information for “an exceedingly long period of time,” yet Carrington repeatedly failed to take appropriate measures to insure its records were accurate.

The Eleventh Circuit went on to reverse the district court’s denial of emotional-distress damages under the FCRA. Although there was evidence that these damages were caused by actions that occurred prior to the November 2013 FCRA violation, the district court had failed to evaluate whether that violation “exacerbated again” the existing emotional distress.

The Eleventh Circuit also reversed on the issue of punitive damages. First, it was improper for the district court to summarily dispose of the issue without hearing from either party. Second, the court rejected the district court’s rationale that punitive damages were inappropriate because the defendant’s willful violation was not based on any intentional or purposeful act. According to Supreme Court precedent, willfulness includes reckless conduct, not solely conduct that is intentional or purposeful.

The Eleventh Circuit also rejected the district court’s reasoning and Carrington’s arguments as to the state-law claims for violation of the Florida Consumer Collection Practices Act and breach of contract. Although the court agreed with Carrington that a breach-of-contract claim could not be based on emotional-distress damages, the Marchisios had put forth evidence of damages in the form of receiving adverse financial terms on subsequent vehicle purchases.

Finally, the court vacated the award of attorneys’ fees and costs. The Marchisios were entitled to fees, but the amount must be recalculated at the completion of the proceedings and should take into account the Marchisios’ success on their claims that had been dismissed by the district court. With that in mind, the court noted its assumption “that the present award of $94,000 will act as a floor when the district court determines the appropriate attorney’s fees for Plaintiffs.”

Posted by Kamryn Deegan.

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