2d Cir. Rules that Unsettled Legal Disputes Not Actionable Under the FCRA

January 27, 2023 | by Dafney Dubuisson Stokes, Partner of Wong Fleming

Can credit reporting agencies and furnishers of information be sued under the Fair Credit Reporting Act, 15 U.S.C. 1681, et. seq. (“FCRA”), over a reported debt when the “accuracy” of the debt turns on a legal dispute? The Second Circuit says no, in a fight over whether a student loan was dischargeable.

On January 4, 2023, the Second Circuit held that credit reporting agencies are not required to determine the legal validity of a debt under the FCRA in the matter of Michael Mader v. Experian Info. Sols., Inc., 2023 U.S. App. LEXIS 79 (2d Cir. Jan. 4, 2023). This decision has wide reaching implications in regards to FCRA matters for both credit reporting agencies and furnishers moving forward.

In March 2008, Plaintiff, Michael Mader, secured an $18,000 educational loan (“Excel Grad loan”) from Sallie Mae, Inc, which was later assigned to Navient Solutions, LLC. In 2012, Mader filed for bankruptcy, listing the Excel Grad loan in his petition. In April 2013, the bankruptcy court issued a final decree of discharge which stated that Mader was “released from all dischargeable debts.” An explanation of bankruptcy discharge attached to the final order stated that “most, but not all, types of debts are discharged” and that “debts for most student loans are not discharged.”

Mader later entered into a loan modification agreement with Navient regarding this Excel Grad loan and continued to make payments between 2013-2017. Nevertheless, in April 2019 Mader brought the action against Experian under the FCRA for continuing to report the loan as an outstanding debt on his credit report.

Experian’s motion to dismiss was granted primarily based on a declaration from a Navient employee stating the Excel Grad loan was made under a “program that also included Stafford loans guaranteed or funded by non-profits or the government” and thus, non-dischargeable under the bankruptcy code. While the Second Circuit ultimately agreed with the district court’s final ruling, it found error in the court’s reasoning. The Second Circuit stated that there was competing evidence in the record demonstrating a genuine and material dispute as to whether this grant was “made under a program that included governmental funding” and non-dischargeable, as opposed to a program funded only with private funds which are dischargeable. Rather, the Second Circuit ultimately held that this kind of legal inaccuracy, i.e. whether this was a continuing debt obligation as defined by the bankruptcy code, is not a cognizable claim under the FCRA and Experian was under no obligation to make a legal determination of that sort.

The Second Circuit noted that the FCRA requires reporting agencies to follow reasonable procedures to assure maximum possible accuracy of the information provided in a consumer credit report. In order to properly allege a violation of the FCRA, a Plaintiff must plead that there is an “inaccuracy” in his credit report. District courts have held that an inaccuracy is information that is “patently incorrect” or “misleading.” However, in Mader, determination of whether this particular entry in Mader’s credit report was “inaccurate” required a sort of legal gymnastics that credit reporting agencies and furnishers are simply not equipped to do. The Second Circuit explained that the accuracy of the reporting of Mader’s student loan debt depended on whether the debt was still owed, which in turn depended on whether it was dischargeable under section 523(a)(8)(A)(i) of the bankruptcy code, which was then reliant on the unsettled meaning of the word “program” within the section. Ascertaining the “accuracy” of this debt would therefore require resolving a factual dispute over the entire funding structure of the Grad Excel Program.

The Second Circuit ultimately decided that this sort of determination is outside the scope of the “reasonable procedures” required of credit reporting agencies by the FCRA and upheld the general maxim that these sorts of collateral attacks on the legal validity of debts is not cognizable under the FCRA.

The general takeaway for furnishers and credit reporting agencies is that while they are required by the FCRA to provide accurate information, they are not necessarily required to determine the legal validity of the debts they are reporting, even when they are disputed. While I’m sure this outcome will continue to be disputed in various jurisdictions, for now, it provides another avenue of defense for credit reporting agencies and furnishers against legal disputes cloaked as standard FCRA claims.

About Dafney Dubuisson Stokes

Dafney Dubuisson Stokes is a Partner of Wong Fleming. Ms. Dubuisson Stokes concentrates her practice in creditors’ rights, bankruptcy and automotive finance. She has led creditors’ rights teams on a national level for clients who have experienced their highest recovery rates. She has also successfully defended many automotive finance companies in connection with complex Fair Credit Reporting Act, Truth in Lending and bankruptcy litigation. Prior to a career in litigation, Ms. Dubuisson Stokes worked for almost a decade in the social service sector advocating for youth in specialized foster care placement and instructed classes on critical life skills geared towards inner city young adults that would empower them to gain independence and move forward in life. She has continued her passion for social issues as a lawyer by representing the underprivileged in the areas of civil liberties and criminal justice. With a desire to develop a strong relationship with every client and consistently steer them in the most productive direction, Ms. Dubuisson Stokes consistently goes above and beyond to help the client arrive at a beneficial and satisfactory solution.

In law school, Ms. Dubuisson Stokes served as a judicial intern for Magisterial District Court Justice David R. Strawbridge in the Eastern District of Pennsylvania. Her responsibilities included reviewing reports and recommendations and editing draft opinions in the area of Social Security. Ms. Dubuisson Stokes also became certified in domestic relations mediation and volunteered at the Philadelphia Court of Common Pleas Family Division where she used her conflict management and negotiation skills to assist estranged families.

Ms. Dubuisson Stokes is licensed to practice law in New Jersey (2013), New York (2018), Ohio (2022) and Pennsylvania (2012). She holds a B.A. with honors from Boston College and a J.D. from Temple University James E. Beasley School of Law.