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Uniform Debt-Management Services Act - Page 18

SECTION 35. PRIVATE ENFORCEMENT.

(a) If an individual voids an agreement pursuant to Section 25(b), the individual may recover in a civil action all money paid or deposited by or on behalf of the individual pursuant to the agreement, except amounts paid to creditors, in addition to the recovery under subsection (c)(3) and (4).

(b) If an individual voids an agreement pursuant to Section 25(a), the individual may recover in a civil action three times the total amount of the fees, charges, money, and payments made by the individual to the provider, in addition to the recovery under subsection (c)(4).

(c) Subject to subsection (d), an individual with respect to whom a provider violates this [act] may recover in a civil action from the provider and any person that caused the violation:

(1) compensatory damages for injury, including noneconomic injury, caused by the violation;

(2) except as otherwise provided in subsection (d) and subject to adjustment of the dollar amount pursuant to Section 32(f), with respect to a violation of Section 17, 19, 20, 21, 22, 23, 24, 27, or 28(a), (b), or (d), the greater of the amount recoverable under paragraph (1) or $5,000;

(3) punitive damages; and

(4) reasonable attorney’s fees and costs.

(d) In a class action, except for a violation of Section 28(a)(5), the minimum damages provided in subsection (c)(2) do not apply.

(e) In addition to the remedy available under subsection (c), if a provider violates an individual’s rights under Section 20, the individual may recover in a civil action all money paid or deposited by or on behalf of the individual pursuant to the agreement, except for amounts paid to creditors.

(f) A provider is not liable under this section for a violation of this [act] if the provider proves that the violation was not intentional and resulted from a good-faith error notwithstanding the maintenance of procedures reasonably adapted to avoid the error. An error of legal judgment with respect to a provider’s obligations under this [act] is not a good-faith error. If, in connection with a violation, the provider has received more money than authorized by an agreement or this [act], the defense provided by this subsection is not available unless the provider refunds the excess within two business days of learning of the violation. (g) The administrator shall assist an individual in enforcing a judgment against the surety bond or other security provided under Section 13 or 14.

Comment

1. This section specifies the private remedies for an individual with respect to whom a provider or other person has violated the Act. More than one subsection may apply to a particular violation, and the individual may recover under any of them. If there are multiple acts that each violate a different provision of the Act, the individual may recover for the loss caused by each of them.

2. Section 25(b) makes an agreement voidable if the provider is not properly registered under this Act. Under subsection (a) the individual may recover all money paid by the individual, except for amounts passed on to creditors. This sanction is to disgorge all money that the provider otherwise would have earned for its services. If the minimum damages under subsection (c)(2) are larger than the amount specified in subsection (a), the individual is entitled to the minimum damages of subsection (c)(2) rather than recovery under subsection (a).

3. Section 25(a) permits an individual to void an agreement if a provider exceeds the fee caps. Subsection (b) permits the individual to recover treble damages, as well as recovering under subsection (c)(3) and (4). The amount to be trebled includes all payments made to the provider (or its designee), including amounts that thereafter are forwarded to the individual’s creditors. If the individual opts for recovery under this subsection, he or she may not also recover under subsection (c)(1) or (2). On the other hand, if recovery is larger under subsection (c)(2) than under this subsection, the individual recovers the larger amount under subsection (c)(2). The individual may choose which subsection to assert.

The treble damages remedy is available only if the individual voids the agreement. If the individual does not void the agreement, recovery is under subsection (c) (actual damages but not less than $5,000).

4. Subsection (c) provides the basic private remedy for an individual. The language in paragraph (1), “damages for injury . . . caused by the violation” means that there must be some causal connection between the violation and the individual’s injury. Thus there is little likelihood of a private remedy for a provider’s violation of some provisions of the Act, e.g., section 29 (failure to notify the administrator that it has been sued).

On the other hand, for violation of the sections specified in paragraph (2), there is no requirement of causation. This means, for example, that an individual may recover the minimum damages under paragraph (2) for a provider’s failure to make the disclosures required by section 17 or to conform its agreement to the requirements of section 19. This remedy recognizes that the administrator is not likely to have the resources to redress every violation of the Act and enlists the customers of a provider as private attorneys general to enforce the Act. The individual is entitled to recovery under paragraph (2) even if the individual has not suffered any monetary loss. Alternatively, the individual may recover any loss that he or she can prove to have been caused by the violation.

5. “Compensatory damage” in paragraph (1), which includes recovery for noneconomic injury, encompasses emotional distress, humiliation, aggravation, etc.

6. The minimum damages provision in paragraph (2) applies only to the specified violations (prerequisites for a plan, form and contents of an agreement, cancellation of agreement, translation of documents, trust account, fee caps, voluntary contributions, periodic reports, and certain prohibited acts and practices). For violation of other sections of the Act, including failure to register and failure to provide customer service, the aggrieved individual may recover actual damages (if any are caused by the violation), punitive damages, or both. The administrator, of course, may enforce all sections of the Act.

7. Paragraph (3) authorizes punitive damages. The courts should use the usual standards for determining the appropriateness and amount of punitive damages. Factors commonly considered are the seriousness of the violation, previous violations of the violator, the deleterious effect of the violation on the public, the net worth of the violator, the violator’s intent to harm, etc.

Statutes in some states specify that a portion of an award of punitive damages is to be paid to someone other than the successful plaintiff. Paragraph (3) is intended to displace those statutes, so that the entire award is paid to the plaintiff.

8. “Costs” in paragraph (4) encompasses filing fees, jury fees, expert witness fees, and everything else that may be taxed as costs against the losing party. In determining the reasonable amount of attorney’s fees, the court should use the lodestar approach. It should pay particular attention to the purpose of this section, which is to ensure that counsel is available for individuals to enforce their rights under this Act. The award of fees must be sufficient to encourage attorneys to take on representation of individuals whose rights under this Act have been violated. Often this representation will be on the basis of a contingency fee. Consequently, the criteria in section 33(d) for determining a fee award to the administrator should serve as a floor for fee awards in private actions, and the amount of the recovery should play little or no role in determining the amount of the fees. See, e.g., Jordan v. Transnational Motors, Inc., 537 N.W.2d 471 (Mich. App. 1993); Bittner v. Tri-County Toyota, Inc., 569 N.E.2d 464 (Ohio 1991). The contingent nature of the attorney’s compensation or the risk of the litigation may justify enhancement of the award. See Bowers v. Transamerica Title Ins. Co., 675 P.2d 193, 203-06 (Wash. 1983).

9. The prerequisite to recovery under this section is a violation by a provider. But subsection (c) does not limit liability to just the provider. Under section 33(a)(2), the administrator may obtain relief not only against a provider but also against one who causes a provider to violate the Act. Similarly, subsection (c) of this section also authorizes relief against a person who is responsible for a provider’s violation.

10. An aggrieved individual may proceed by class action if the prerequisites for class actions under the rules of civil procedure are satisfied. The minimum damages provision does not apply in a class action unless the provider violates section 28(a)(5), which prohibits a provider from initiating a transfer of an individual’s money unless the transfer is authorized by the Act and the agreement.

11. Subsection (e) implements the remedy implicit in section 20 when an individual exercises the right to cancel: if the agreement complies with sections 19, 20, and 28, the individual has only three days to cancel. Upon cancellation, the provider must refund all money paid by the individual, as stated in section 20(b). The provider can protect itself against any outof- pocket loss by keeping any such money until the three-day period has expired, in which event this subsection imposes no loss on the provider. If, however, the provider fails to comply with section 19, 20, or 28, the cancellation period is 30 days, in which event cancellation may very well occur after the provider has provided services to the individual. This subsection requires refund of all money not already paid to creditors, which means that the provider must return any money it has booked for set-up or monthly service fees. It thus provides an additional modest incentive for the provider to conform to the requirements of sections 19, 20, and 28. In addition to refund of fees and money held in trust, the individual is entitled to recovery under subsection (c) for minimum (or other actual) damages, punitive damages (if otherwise appropriate), and costs.

12. A provider has a defense to civil liability under subsection (f) if its violation is a result of a bona fide error notwithstanding the maintenance of procedures reasonably adapted to prevent the error. This defense is adapted from section 130(c) of the federal Truth-in-Lending Act, 15 U.S.C. § 1640(c). It should be interpreted in a manner similar to the federal statute, as exemplified in Teel v. Thorp Credit Inc., 609 F.2d 1268 (7th Cir. 1979). The defense extends to clerical errors and mechanical malfunctions, but not to matters of legal judgment concerning the obligations imposed by this Act. E.g., Haynes v. Logan Furniture Mart, Inc., 503 F.2d 1161 (7th Cir. 1974).

For the defense under this subsection to be available to a provider with respect to a violation by a person to whom the provider has delegated its duties, the provider must prove that the person committed the violation unintentionally, as a result of good-faith error, and notwithstanding the maintenance of procedures reasonably designed to prevent the error. It is not enough that the provider’s violation was unintentional. The provider is liable under section 31 for the violations of its delegee, and the provider is exonerated by this subsection only if the delegee’s conduct meets the standard of this subsection.

13. If a violation relates to section 23 or 24, regulating permissible charges, the provider is not liable if both (a) the violation meets the good-faith error test of subsection (f), and (b) the provider refunds the excess portion of the charge within two business days of learning of its error. If either of these conditions is not met, the provider has no defense under this section; in addition, if the first condition is not met, the individual has a right to void the agreement under section 25 and recover treble damages under subsection (b) of this section.

If a provider’s violation of section 23 or 24 results from an act or a policy that affects more than one individual, the defense is available only if the provider makes refunds to all of them within two days of learning of the violation as to one individual. Once informed of the violation by a single individual, the provider has learned of the violation as to all individuals who were overcharged in the same way.