Hrebal v. Seterus, Inc.

Citation: 598 B.R. 252Docket: Case No. 17-cv-1815 (SRN/SER)

Court: District Court, D. Maine; January 24, 2019; Federal District Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Litigation under the Fair Credit Reporting Act (FCRA) involves a dispute between Plaintiff Charles Hrebal and Defendant Seterus, Inc. regarding whether Seterus inaccurately reported Hrebal as delinquent on his mortgage to major credit reporting agencies in 2016, shortly after he completed a Chapter 13 bankruptcy plan. The issues at stake include the accuracy of Seterus's reporting, potential willfulness of any FCRA violations, and whether such violations caused Hrebal actual damages. 

Both parties have completed discovery and are now seeking summary judgment. The court partially grants Seterus's motion and denies Hrebal's motion. 

Hrebal, residing in Annandale, Minnesota, filed for Chapter 13 bankruptcy in September 2010 after financial difficulties at his car dealership. At the time of the bankruptcy filing, he owed four months of mortgage payments to CitiMortgage. CitiMortgage later filed a Proof of Claim that stated Hrebal owed a reduced amount in arrears, which led to an amended Chapter 13 plan that was approved by the Bankruptcy Court. Hrebal's final confirmed plan required him to repay the actual amounts of default and to make regular payments on his mortgage, which he did timely from October 2010 onward.

In January 2012, CitiMortgage identified inaccuracies in its Proof of Claim but failed to amend it despite multiple internal notes from 2012 to 2014 recommending an amendment. Although it was noted that an amended claim had been sent for filing, no such amendment was made. By February 2014, when CitiMortgage sold Hrebal's loan to Fannie Mae/Seterus, the Trustee had already paid off the arrears listed in the claim, leading Seterus to not investigate the issue further during the bankruptcy proceedings. Seterus accepted Hrebal's regular mortgage payments without filing an amended claim or notifying the Bankruptcy Court about the outstanding arrears. During this time, Hrebal was informed by Seterus that his account was current. 

On October 27, 2015, Hrebal completed his modified Chapter 13 plan and received a discharge under 11 U.S.C. § 727. However, on November 3, 2015, the Bankruptcy Trustee issued a Notice of Final Cure Payment, asserting that Hrebal had cured the default under the claim and requested confirmation from Fannie Mae/Seterus regarding his post-petition payments. In response, Fannie Mae/Seterus claimed, for the first time, that Hrebal was not current on his post-petition payments for October and November 2015. Hrebal, confident he had made all required payments, did not pursue this claim further, believing it to be an error. He was unaware of his right to request a hearing to contest the response regarding the alleged missed payments.

Seterus maintained that Hrebal was still considered delinquent on his mortgage despite making all post-bankruptcy payments, due to two outstanding payments prior to the bankruptcy that were not properly included in the bankruptcy proceedings. Michael McNeil, a corporate witness for Seterus, testified that Hrebal should have been current after bankruptcy if the process had been executed correctly. However, the erroneous Proof of Claim left Hrebal two payments behind. Seterus treated these pre-petition payments as part of Hrebal's ongoing mortgage balance, indicating that payments would be applied to prior months when delinquent, leading to Hrebal being classified as "two months behind" since Seterus began servicing the loan in 2014.

In early 2016, Hrebal discovered that Seterus was reporting him as delinquent to major credit reporting agencies (CRAs), despite his belief that he had made all payments on time after emerging from bankruptcy. On March 1, 2016, Hrebal disputed the delinquency with Seterus, who advised him to send his dispute to the CRAs. Hrebal complied, asserting he had always paid on time and that his account should have been included in his bankruptcy. Seterus responded to Experian on March 23, 2016, indicating Hrebal was "60 days past due," with a first date of delinquency recorded as March 3, 2016. Notably, a September 2015 entry indicating Hrebal was one month late was later admitted as a mistake by Seterus's representative, who did not inform the CRAs about Hrebal’s dispute or confirm its legitimacy, despite having the means to do so.

Watts, in her deposition, detailed the process of correcting an error in Hrebal's account, specifically regarding his delinquency status. Initially, Watts issued an AUD on March 25, 2016, removing a mistaken September 2015 entry, and updated Hrebal's status from "60 days past due" to "30 days past due" after acknowledging a double payment, reducing his outstanding balance to $2,916. Notably, she changed Hrebal's "first date of delinquency" to December 1, 2013, despite the AUD indicating a current delinquency status of 30 days, and she could not explain this discrepancy. 

Following this, Seterus received an ACDV from Experian on March 14, 2016, which included documents from Hrebal disputing the account status. Seterus, through Watts, reaffirmed Hrebal's 30 days past due status in a March 29, 2016 response, but again altered the "first date of delinquency" to March 3, 2016, without marking the delinquency as disputed. 

On March 25, 2016, another ACDV from Equifax indicated Hrebal claimed his account was never late. Jermaine Daniels, handling this ACDV, reported Hrebal as 30 days past due and established March 2016 as the new first date of delinquency, but failed to suppress the erroneous payment history from the period after Hrebal's bankruptcy discharge in October 2015, making it appear he had multiple late payments. 

Throughout this process, it became evident that Seterus representatives, including Watts, did not recognize that an erroneous CitiMortgage Proof of Claim was central to the confusion regarding Hrebal's payments. McNeil acknowledged that the link between the Proof of Claim and Hrebal's payment issues was not discovered until months later in litigation. Seterus staff did not review prior servicer notes, which could have provided clarity on the situation.

Watts had the opportunity to contact Seterus's bankruptcy department regarding previous servicing notes but failed to do so. Subsequently, after multiple calls from Hrebal, Seterus and Hrebal agreed to a loan modification that allowed him to incorporate missed payments into his loan balance and repay the arrears over time. Seterus ceased reporting Hrebal as delinquent between February and April 2017.

Hrebal claims that Seterus's allegedly inaccurate credit reporting caused him significant damages. He argues it prevented him from obtaining a favorable loan modification in April 2016, specifically a government-backed HARP loan that would have reduced his interest rate to 4.375% and saved him approximately $800 monthly. Instead, due to a late payment reported on his credit, he could not refinance until March 2017, securing a loan at a higher interest rate of 4.625%, resulting in only $300 in monthly savings.

Additionally, Hrebal experienced embarrassment and stress during a job application process in December 2016, fearing that his credit issues would affect his chances. Despite ultimately securing the job, he felt ashamed and stressed about explaining his credit history. His wife corroborated his feelings, noting the stress led to sleepless nights. Although the stress did not lead to serious physical illness or work absence, it affected Hrebal's temperament, making him irritable and impacting his interactions with family. His wife remarked on the lasting effects of the stress he endured over the past eight years.

Hrebal expressed significant frustration regarding alleged misreporting by Seterus shortly after completing a lengthy bankruptcy plan, stating it was unexpected to finalize the bankruptcy only to face issues with his credit report. On May 31, 2017, Hrebal filed a Fair Credit Reporting Act (FCRA) lawsuit against Seterus, seeking actual, statutory, and punitive damages for non-compliance, along with attorney's fees. Seterus responded on July 21, 2017, leading to discovery. Both parties filed motions for summary judgment on July 11, 2018, with the Court hearing oral arguments on August 22, 2018. 

The Court noted that summary judgment is appropriate when there are no material fact disputes and the moving party is entitled to judgment as a matter of law, emphasizing the requirement to view evidence favorably towards the nonmoving party. A critical issue arose concerning bankruptcy law—whether Seterus was entitled to enforce two missing pre-petition mortgage payments after Hrebal's discharge, given that these payments were not included in their Proof of Claim or challenged in Hrebal's confirmed bankruptcy plan. The parties contested whether Hrebal's discharge absolved him of these arrears, which affected the accuracy of Seterus's credit reporting. The Court indicated it could address the FCRA claim without resolving the complex bankruptcy law question, which could potentially support either party's position.

A lender is barred from collecting on its lien after a homeowner's bankruptcy discharge if the lender had notice of inaccuracies in the Chapter 13 Plan and did not object, as established in In re Smith, 575 B.R. 869 (Bankr. W.D. Ark. 2017). Conversely, in In re Bateman, 331 F.3d 832-33, a lender could still collect on its lien despite inaccuracies in the plan because the secured claim remained unaffected by it, preventing a potential windfall for the homeowner. Courts emphasize that bankruptcy judges should handle complex bankruptcy issues, as highlighted in Peoples Nat. Bank of Mora v. Stucky.

Under the Fair Credit Reporting Act (FCRA), enacted over forty years ago, the law aims to ensure fair credit reporting and protect consumer privacy. It regulates Credit Reporting Agencies (CRAs) and those who provide consumer data to CRAs, such as Seterus. The FCRA mandates that furnishers supply accurate information and investigate disputes raised by consumers. If a furnisher fails to address inaccuracies, the consumer may pursue legal action for damages, as noted in Johnson v. Collecto, Inc.

Courts assessing potential violations of 1681s-2(b) focus on whether a furnisher conducted a reasonable investigation into disputed information. The standard for a "reasonable investigation" is not rigid and varies based on case specifics and available documentation, but it must exceed a mere cursory review. Furnishers are expected to examine dispute-related information beyond what the Credit Reporting Agency (CRA) provides. Courts in the District have generally agreed that the reasonableness of an investigation is often a jury question. However, a furnisher may secure summary judgment if the consumer fails to demonstrate actual inaccuracies that a reasonable investigation would have revealed. Furthermore, even technically correct credit information can be deemed inaccurate if it creates a materially misleading impression through omission. Circuit courts have ruled that a furnisher may create such an impression by failing to report a consumer’s bona fide dispute, which can significantly affect the understanding of the reported debt. For instance, a consumer's failure to pay a disputed debt may not indicate irresponsibility if the dispute is valid. Conversely, it is typically not misleading for a furnisher not to report a meritless dispute.

Whether "technically accurate information" is "materially misleading" is typically a jury question. Under the Fair Credit Reporting Act (FCRA), if a consumer proves a furnisher breached its duties under 15 U.S.C. § 1681s-2(b), they can recover damages in two ways. A consumer can establish that a breach was "willful," eliminating the need to demonstrate actual damages, and may be entitled to statutory or punitive damages. "Willfulness" encompasses reckless actions that pose a significant risk of harm. Evidence such as inconsistent responses to consumer inquiries or a blanket policy against reporting disputed debts may indicate willfulness. Conversely, if the breach is deemed "negligent," actual damages must be proven.

Actual damages can include denial of credit or higher interest rates due to inaccurate credit reports, as well as emotional distress, provided there is competent evidence of genuine injury. The consumer must show damages resulted from the inaccurate information. 

In the case at hand, there are disputes over liability, willfulness, and the existence of actual damages. The parties contest whether there is sufficient evidence for a jury to find that Seterus failed to reasonably investigate Hrebal's credit dispute and correct misleading information. Assuming a breach is established, they also dispute if the breach was willful or reckless and whether Hrebal suffered actual damages, including emotional distress, as a result. Hrebal claims Seterus breached its duties by failing to identify that he was not behind on his mortgage in response to three Automated Consumer Dispute Verifications (ACDVs) and did not remove the delinquency from his credit report, linking this to a bankruptcy issue that should have precluded enforcement of pre-petition arrears.

Hrebal asserts that Seterus violated its obligations under 15 U.S.C. § 1682s-2(b) by failing to identify his bona fide dispute concerning mortgage delinquency in response to three ACDVs. Key undisputed facts include: Hrebal's only missing payments during bankruptcy were two pre-petition payments not included in CitiMortgage's Proof of Claim; neither Seterus nor CitiMortgage amended this claim; after Hrebal completed his bankruptcy plan in October 2015, debts were discharged; and employees Watts and Daniels did not utilize available servicing notes or consult a specialized bankruptcy department during their investigation, resulting in inconsistent responses to credit reporting agencies that suggested Hrebal was delinquent post-bankruptcy. A reasonable juror could conclude that Seterus's investigations were cursory and that they should have marked Hrebal's delinquency as disputed. This failure could render Seterus's reporting inaccurate, misleadingly portraying Hrebal as financially irresponsible despite his successful bankruptcy discharge. Seterus does not contest the investigation's reasonableness but argues that it is not liable under the FCRA because the reported information was accurate, and any inaccuracies stem from bankruptcy law prohibiting enforcement of the uncured arrears.

Seterus is not required to report a dispute to Credit Reporting Agencies (CRAs) if the dispute is legal rather than factual. However, the court finds Seterus's arguments unpersuasive. Seterus's reliance on bankruptcy law, which allegedly allowed them to enforce pre-petition arrears against Hrebal, is not supported by definitive case law. Unlike cases where courts validated accurate reporting, Seterus's situation lacks such clear precedent. Even if Seterus's reporting was "technically correct," failing to mark Hrebal's delinquency as "disputed" could mislead and constitute a materially misleading "inaccuracy by omission." 

Furthermore, Seterus cites the First Circuit’s Chiang case, claiming that the existence of a legal dispute does not equate to inaccurate credit reporting. However, the court questions the correctness of this interpretation, noting that it conflicts with the broader understanding that technically correct reporting can still mislead if it omits vital information about a consumer's dispute. The court highlights that other circuit courts have adopted a standard recognizing this inconsistency, suggesting that even if a debt is reported accurately, it could be misleading if not marked as disputed, particularly if the consumer has a valid challenge regarding the debt's enforceability.

In legal disputes over debts, furnishers are better positioned than credit reporting agencies (CRAs) to conduct thorough investigations since CRAs lack a direct relationship with consumers. Claims against CRAs concerning underlying debt disputes raise concerns of "collateral attacks," whereas claims against furnishers do not, because furnishers are the creditors involved. Consequently, no other circuit court has adopted the approach established in Chiang regarding furnishers.

Even if the court were to adopt Chiang, it would not obligate Seterus (the furnisher) to resolve legal questions solely determinable by a court. Seterus was required to determine if Hrebal's dispute was "bona fide" or "potentially meritorious" before confirming the dispute under the Fair Credit Reporting Act (FCRA). This determination did not necessitate in-depth legal analysis; rather, it involved a straightforward review of available records, which indicated that Hrebal's missed payments were from five years prior and prior to his bankruptcy. Hrebal's situation was significantly different from a precedent case where the consumer's dispute was deemed meritless.

The court also found a genuine dispute of material fact regarding Seterus's compliance with FCRA duties. Seterus claimed its actions were unintentional due to established compliance policies. However, inconsistencies in Seterus's responses to Hrebal from 2014 to 2016 suggested that any FCRA violations could reasonably be viewed as more than unintentional. For instance, Seterus misinformed Hrebal about his payment status during separate inquiries, raising questions about the company's adherence to FCRA standards.

Inconsistent responses to multiple requests from the consumer and inquiries from Credit Reporting Agencies (CRAs) indicate a potential "willfulness" by Seterus in failing to comply with the Fair Credit Reporting Act (FCRA). The court highlights Seterus's policy of not reporting debts as disputed, raising questions about its culpability. Seterus's representative, Ms. Watts, confirmed that the company does not inform CRAs of a debt being disputed, claiming CRAs already know of the dispute. However, several courts have found similar blanket policies indicative of willful or reckless disregard for FCRA compliance. 

The court emphasizes that reporting a debt as disputed serves two essential functions: validating the dispute and notifying all relevant CRAs of the dispute, not just the one that raised it. The court finds the reasoning from prior decisions persuasive, noting that despite federal circuit rulings against such practices predating 2016, Seterus did not alter its policies. This raises a genuine dispute of material fact regarding whether Seterus willfully or recklessly violated the FCRA, potentially allowing Hrebal to seek statutory or punitive damages.

Additionally, Seterus contends that Hrebal's claims for actual damages are not legally cognizable, asserting that Embrace Home Loans did not deny credit based on Seterus's credit reporting. They argue that the loan for which Hrebal applied had no credit score requirement and that the relevant credit report showed Hrebal's mortgage as current. Hrebal counters that the denial was based on a later review of his credit, but fails to provide supporting evidence. The court agrees with Seterus, concluding that there is insufficient evidence to suggest EHL denied Hrebal a HARP loan due to Seterus's credit reporting.

Roger Fisette, the EHL loan officer who denied Hrebal's loan, stated that a pay-off statement dated April 18, 2016, which indicated Hrebal's loan was "48 days late," was the reason for the denial, rather than delinquent credit reporting. Fisette's declaration highlighted that HARP loans do not require a credit score, and although EHL considered Hrebal's credit score, the relevant report did not show him as delinquent. It was noted that Seterus may have wrongly declared Hrebal "behind" on his mortgage due to missing pre-petition arrears; however, for a violation under the Fair Credit Reporting Act (FCRA) to be actionable, Hrebal must link his damages to the credit report, which he failed to do, leading to Seterus being entitled to summary judgment on that issue. 

Regarding Hrebal's claim for emotional distress damages, Seterus argued that these damages arose from foreclosure notices and the stress of potentially losing his home, rather than Seterus's credit reporting. They also contended that Hrebal and his wife did not provide sufficient evidence of a genuine injury. Hrebal countered by asserting that they offered detailed testimony indicating that Seterus's actions caused him emotional distress, including sleep issues and anxiety. The court decided not to grant summary judgment to Seterus on this issue, noting that Hrebal's fear of foreclosure was not the sole cause of his anxiety but rather one of several contributing factors. Additionally, Hrebal presented competent evidence of genuine injury, contrasting with a prior case where the plaintiff failed to demonstrate sufficient detail regarding her emotional distress.

The Housing Authority approved the consumer's application for assistance swiftly, within five to ten minutes. In contrast, Hrebal experienced significant emotional distress over several months, marked by stress, anxiety, and a short temper, affecting both his personal and professional life. His wife supported his claims in a detailed declaration, highlighting changes in Hrebal's behavior and questioning the long-term impact of their experiences. This combined testimony is deemed sufficient to justify a jury trial on emotional damages.

The court noted that although Hrebal and his wife did not explicitly connect Seterus's failure to mark his delinquency as disputed to his emotional injuries, a reasonable juror could infer that this oversight contributed to Hrebal's distress. If his employer had recognized the dispute, it might have alleviated some of his job application stress. While the court found no material fact dispute regarding the denial of a loan modification due to Seterus's credit reporting, it acknowledged genuine disputes concerning the emotional distress caused by the reporting.

The court scheduled the trial for May 6, 2019, and ordered a pretrial settlement conference. Seterus's motion for summary judgment was partially granted and partially denied, while Hrebal's motion for partial summary judgment was denied. The court clarified that discrepancies in payment records and internal notes from Seterus indicated confusion regarding Hrebal's mortgage status, with evidence showing Seterus reported him as delinquent starting December 10, 2015, for events prior to that date.

An AUD (Automated User Data) is a method for financial entities to report consumer information to a Credit Reporting Agency (CRA). An ACDV (Automated Consumer Dispute Verification) allows a CRA to report consumer disputes to data furnishers like Seterus. Under 15 U.S.C. § 1681i(a)(2), CRAs must promptly inform furnishers of any consumer disputes. Credit bureau specialists, such as Watts, manage around 35 disputes daily, but Seterus does not use specific codes in response to ACDVs, as CRAs are already aware of the disputes.

There is ambiguity regarding Hrebal's payment history; Seterus indicated he was one payment behind, while a November 3, 2015 Notice stated he was two payments behind, despite his "double payment" occurring in December 2014 before the bankruptcy discharge. Daniels, a relevant figure, has left the company. Fisette's loan decision did not cite any late payments to Seterus, and his deposition did not link Seterus's reporting to the loan denial. Hrebal’s summary judgment motion included a declaration from Richard Scoles, asserting that Seterus's reporting negatively impacted Hrebal, but the declaration was withdrawn due to improper disclosure.

The conflict between the Bankruptcy Code and Supreme Court interpretations presents challenges in handling arrears owed to mortgage lenders that were not accounted for in a debtor’s Chapter 13 plan. The Code protects home mortgage lenders while emphasizing the finality of confirmed plans, creating uncertainty for courts regarding unaccounted arrears. Furthermore, enforcement of violations under 15 U.S.C. § 1681s-2(a) is limited to federal or state agencies, requiring consumers to notify CRAs of disputes before pursuing claims against furnishers under § 1681s-2(b), as illustrated in Thulin v. EMC Mortgage Corp., where a claim was rejected due to the consumer's failure to notify the CRAs of the dispute.

Hrebal adhered to the correct procedures regarding disputed credit information. Furnishers are required under 15 U.S.C. § 1681s-2(a)(3) to notify Credit Reporting Agencies (CRAs) when credit information is disputed, although consumers cannot directly enforce this subsection. A furnisher's obligation to mark an account as disputed under § 1681s-2(a) does not negate the possibility that failing to do so can be considered a material inaccuracy under § 1681s-2(b). Consumers may claim actual damages for willful violations of the Fair Credit Reporting Act (FCRA) as per 15 U.S.C. § 1681n(a)(1)(A). However, for negligence claims, consumers must demonstrate a "dispute of material fact" regarding damages to move past the summary judgment stage, as established in Johnson. Completing a Chapter 13 bankruptcy plan and receiving a discharge is challenging, with only 41% of debtors achieving discharge between 2008 and 2010. All cited circuit court decisions regarding the distinction between factual and legal disputes relate to CRAs, not furnishers. Hrebal's motion for summary judgment on the reasonableness of the furnisher's investigation lacked supporting case law, and the court noted that Hrebal's counsel did not emphasize this point during oral arguments. Consequently, the court decided to refer this matter to a jury. Despite Ms. Watts being a factual witness, Hrebal's counsel indicated she was knowledgeable about ACDVs and reporting, a characterization not contested by Seterus’s counsel. The court also declined to grant summary judgment to Hrebal regarding the question of "willfulness."