Opinion
Case No. 96-17127-SSM
July 17, 1998
Klinette Kindred, Falls Church, VA, of Counsel for the debtors
George F. Ball, Ball Ball, P.C., Alexandria, VA, of Counsel for Beneficial Discount Co. of Virginia
MEMORANDUM OPINION
This matter is before the court on the debtors' motion for an award of damages against Beneficial Credit Services ("Beneficial") for violation of the discharge injunction. A hearing was held on June 16, 1998, at which the debtors and Beneficial were both represented by counsel. The court made certain rulings from the bench but took under advisement the central issue of whether a creditor violates the discharge injunction by continuing to report a discharged debt as delinquent to a credit bureau.
Beneficial's attorney represents that "Beneficial Credit Services" is a trade name for Beneficial Discount Co. of Virginia.
Factual Background
Paul T. and Saburnia Fran Thistle ("the debtors") filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on December 20, 1996, and received a discharge on April 3, 1997. Beneficial Credit Services was listed as a creditor and was sent notice of the commencement of the case and of the discharge. Beneficial's claim was scheduled in the amount of $1,462, secured by "Bikes and Bike Accessories" with a value of $1. On their statement of intention, the debtors stated that they intended to retain the collateral but did not indicate that they would reaffirm the debt, redeem the collateral or avoid the lien. Their attorney, two days prior to their discharge, sent Beneficial an offer to reaffirm the debt in the compromise amount of $400 in order to retain the collateral. Beneficial rejected the offer.
Beneficial continued to bill the Thistles for the full unpaid amount of their account even after they received their discharge, and on July 30, 1997, the debtors filed a motion seeking an order requiring Beneficial to "provide proof that they have notified all credit reporting agencies that this debt has been discharged in bankruptcy" and an award of damages in the amount of $800. Attached to the motion was a bill from Beneficial to the debtors with a "closing date" of July 16, 1997 (some three months after their discharge), a "previous balance" of $1,438.97, a finance charge of $19.81, a "new balance" of $1,458.78, and a "minimum amount due" of $287.00. The bill contains the notation, "Payment Due On or Before 08/10/97" and a further notation, "YOUR ACCOUNT IS NOW SERIOUSLY IN ARREARS AND YOUR CREDIT PRIVILEGES HAVE BEEN SUSPENDED. MOST IMPORTANT YOU CALL THE TELEPHONE NUMBER ABOVE."
The hearing on the motion was set for September 9, 1997. The debtors in the interim had communicated to Beneficial an offer to settle the underlying account by entering into a reaffirmation agreement in the compromise amount of $600, payable in monthly installments of $45. The day prior to the hearing, Beneficial's attorney telephoned the debtors' attorney and left a message on her voice mail accepting the $600 offer. The debtors' attorney did not check her voice mail prior to going to court and was unaware that the offer had been accepted. Beneficial's attorney, believing that the matter had been resolved, did not appear. Debtors' counsel requested entry of an order granting the relief sought in the motion. This court, by memorandum opinion and order dated September 10, 1997, found Beneficial in civil contempt for violation of the discharge injunction and imposed a fine payable to the debtors in the amount of $800.00. When Beneficial's attorney received a copy of the order, he immediately telephoned the debtors' attorney, who acknowledged that she would not have gone forward with the motion had she been aware that the compromise offer had been accepted, and she agreed to consent to an order vacating the contempt order. No such order was prepared, however, either by Beneficial's attorney or by the debtors' attorney, and the issue was not brought to the court's attention until the hearing on June 16th on the present motion.
The agreement for the debtors to pay, and Beneficial to accept, $600 in full satisfaction of Beneficial's security interest in the bicycles and accessories was never reduced to a signed writing. Although not entirely clear from the evidence, it appears that the Thistles made, apparently in September 1997, the first $45 payment. They did not make any subsequent payment until December 1997. In that month, Mr. Thistle, who is employed as an account manager with a mortgage broker and, as a result, is familiar with consumer credit reports, obtained a copy of his credit report from a credit reporting agency called Credit Bureau of Delmarva, Inc. ("Delmarva"). Delmarva is not a direct recipient of credit information from reporting creditors, but rather repackages and reports information it receives from the "big three" credit bureaus, Equifax, Trans Union, and TRW. The Delmarva report showed a delinquent debt owed to Beneficial. The Thistles contacted their attorney, who advised them to pay the full $600 settlement amount to Beneficial. The Thistles did so, but never received any written confirmation from Beneficial that the payment in question had been accepted in full satisfaction of the agreed compromise amount.
Beneficial vigorously objected to the admission of the Delmarva credit reports on the ground of hearsay. That issue will be discussed in more detail below.
In February 1998, the debtors' attorney sent Beneficial's attorney a letter complaining that the debtors were continuing to receive monthly bills from Beneficial and also sent a copy of the December 1997 credit report. On March 12, 1998, she telephoned Beneficial's attorney to complain that a January 1998 credit report continued to mischaracterize the status of the debtors' account. Beneficial's attorney told her that the debtors should dispute the report with the credit bureau, but he also requested that the Thistles provide authorization for Beneficial to obtain a copy of the credit report. The Thistles faxed a signed authorization to Beneficial's branch office on March 24, 1998, but the manager of the office testified she never received it. In any event, it is undisputed that Beneficial never took any affirmative step to review the way the debtors' account was being reported or to request the credit bureau to which it reported — Equifax — to report the debt as paid, settled, or discharged in bankruptcy.
The manager of Beneficial's branch office testified that bills were prepared and mailed by a central billing center. To prevent any further bills from being mailed to the debtors, she had the mailing address for the debtors changed to the Beneficial branch office. She testified that bills continued to be received at the branch office for two or three months after that but have now stopped.
On May 22, 1998, the Thistles obtained a new credit report from Delmarva, which continued to show them as owing a delinquent $998 debt to Beneficial, with late payments through April 1998. The status of the Beneficial account is shown as "unknown." Mr. Thistle testified that at this time he and his wife were attempting to purchase a lot for the construction of a house, but that after he saw the credit report, he knew, from his experience as a mortgage broker, that the loan was certain to be turned down, both because the "credit score" was too low to support a 5% down payment loan (which was all he and his wife could support) and because the report listed delinquent payments owed to Beneficial. Accordingly, he did not make an offer to purchase the lot and did not submit a loan application.
At the hearing, Beneficial's witnesses testified that Beneficial's east coast branch offices report credit information only to Equifax, and that Beneficial does not report to Delmarva. The reporting is entirely automated, with customer account data from the branch office's computers being transmitted once a month electronically to Equifax's computers, and it does not appear that there is any established procedure for human intervention with respect to the way the account is reported. Beneficial's computer apparently still shows the Thistles as owing some sum of money, but, at least in Beneficial's branch office, the account is tagged as being in bankruptcy. There was no testimony as to whether a bankruptcy notation on an account is included with the information automatically transmitted to Equifax, or whether that notation is only for Beneficial's internal use. One of Beneficial's witnesses — the manager of a different branch office — testified that it is essentially impossible, even for a reporting creditor such as Beneficial, to talk with a real human being at Equifax in order to change information that is not being correctly reported. According to this witness, the only effective method of deleting incorrect information is for the customer to make a direct request to Equifax demanding the correction. Equifax then sends its own "yellow update" form to the reporting creditor, and the creditor then marks that form up to show the current status of the account. Upon return of that form, Equifax then changes its records to reflect the updated information. Beneficial's attorney recommended to the debtors, through their attorney, that they follow that procedure. Mr. Thistle testified, however, that he did not do so because he had nothing in writing from Beneficial confirming that the $600 payment settled the account, and thus he had no written evidence to support any complaint to Equifax. He testified that in his experience a credit bureau would not correct erroneous credit information without some written documentation of the error from the customer. Beneficial's witness testified that, regardless of whether a customer had written evidence to support his or her position, Equifax would send the reporting creditor an update form if a customer disputed an item on the credit report.
At the conclusion of the hearing, the court ruled from the bench that the prior order adjudging Beneficial in contempt would be vacated; that the debtors' personal liability to Beneficial had been discharged in bankruptcy; that no valid reaffirmation agreement had been executed; that the parties had agreed, in effect, to a redemption of the collateral securing Beneficial's claim for $600; that the debtors had paid to Beneficial in December 1997 the full agreed sum of $600 to redeem the collateral; and that Beneficial had no further enforceable claim against the debtors or the collateral. The court took under advisement, however, all issues of fact and law as to whether Beneficial was responsible for the reporting of the debt as though it were a seriously delinquent, but current, obligation and whether such misreporting, if either caused by or not corrected by Beneficial, would constitute a violation of the discharge injunction.
Under § 524(c), Bankruptcy Code, a reaffirmation agreement is enforceable only if it has been entered into prior to the debtor's discharge and has been filed with the court. Specific court approval of the agreement is not required if the debtor was represented by counsel in the negotiation of the agreement, and counsel certifies that the agreement was fully voluntary, is in the best interest of the debtor, and does not impose a hardship on the debtor or the debtor's dependents.
There is no requirement in the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure that an agreement — acceptable to both the debtor and the secured creditor — to redeem collateral be filed with, or approved by, the court. § 722, Bankruptcy Code; F.R.Bankr.P. 6008.
A written order to this effect was entered on June 17, 1998.
Discussion I.
Before reaching the question of whether a creditor violates the discharge injunction by continuing to report a discharged debt as delinquent, it is necessary to address a threshold evidentiary issue. As discussed above, the credit report obtained by the Thistles did not come from the credit bureau, Equifax, to which Beneficial reports, but rather from the Credit Bureau of Delmarva, Inc. Delmarva does not receive credit information directly from creditors, but rather repackages credit information it receives from the three major credit bureaus in the United States: Equifax, TransUnion, and TRW. The debtors did not offer any direct evidence of what Beneficial reported to Equifax. Rather, they offered — over strenuous hearsay objections by Beneficial — the Delmarva credit report as evidence of what Equifax was reporting, which it turn was offered to prove what Beneficial was reporting to Equifax.
Under Fed.R.Evid. 802, hearsay is not admissible in evidence except as provided in the Federal Rules of Evidence or by other rules promulgated by the Supreme Court or by Act of Congress. Hearsay is defined in Fed.R.Evid. 801(c) as "a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." Since the credit report is clearly a statement, the first question is whether it is offered to prove the truth of the matter asserted, since an out-of-court declaration does not constitute hearsay when offered purely to show that the statement was made. Here, however, it seems pretty clear that, even though the Delmarva report was not offered for the ultimate truth of the matter asserted — that is, that the Thistles were in fact delinquent on their loan — it was offered to prove that Beneficial was reporting to Equifax that the Thistles' loan was delinquent. The next question, therefore, is whether the report falls within one of the numerous recognized exclusions from, and exceptions to, the hearsay rule. See Fed.R.Evid. 801(d), 803, 804, and 807. The only exception urged is that of Fed.R.Evid 803(6) for records of a regularly conducted activity, commonly known as the "business record exception":
Rule 803. The following are not excluded by the hearsay rule, even though the declarant is available as a witness:
* * *
(6) Records of Regularly Conducted Activity. A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness. The term "business" as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.
Certainly, a credit report would qualify as a "report, record, or data compilation." A foundation to show that the information appearing on the report was made "from information transmitted by . . . a person with knowledge" and that it was compiled in the "regular practice" of a credit bureau does not necessarily require testimony from the "custodian" of the information but may be supplied by any "other qualified witness." United States Dept. of Housing Urban Development v. Cost Control Marketing Sales Mgt. of Va., Inc., 64 F.3d 920, 926 n. 10 (4th Cir. 1995) (Multiple Listing Service printout showing properties sold and prices paid during specified time frame admissible under Fed.R.Evid. 803(6) even though testifying realtor was not the custodian of the records but was familiar with how MLS system worked). In this case, Mr. Thistle, who is employed as an account manager with a mortgage company, has been in the mortgage industry for two and a half years, and receives and reviews credit reports "every day," testified that Delmarva, as part of its regular business practice, compiles information it receives from the three major credit bureaus. He also testified that the three major credit bureaus receive account information directly from the reporting creditors and maintain records of that information as a regular business practice.
Notwithstanding his general familiarity with the credit reporting industry, Mr. Thistle had no personal knowledge of Delmarva's internal procedures for compiling, reconciling and updating the information it reported. See NLRB v. First Termite Control Co., 646 F.2d 424, 428-30 (9th Cir. 1981) (freight bill offered to prove that lumber had been shipped from Washington to California could not be admitted based solely on the testimony of the bookkeeper of the company that had received the bill, because she had no specific familiarity with how the billing company's records were kept or maintained). The problem here, of course, is that there is a double layer of hearsay: the Delmarva report was offered to prove what Equifax was reporting, which in turn was offered to prove what Beneficial was reporting. Under the Federal Rules of Evidence, hearsay which comes within a recognized exception to the hearsay rule is not inadmissable simply because it contains other hearsay. Fed.R.Evid. 805. However, the included hearsay must itself fall within an exception to the hearsay rule. Id.
"Hearsay included within hearsay is not excluded under the hearsay rule if each part of the combined statements conforms with an exception to the hearsay rule provided in these rules."
In the present case, Beneficial's own witnesses testified that Beneficial provided credit information to Equifax — updated on a monthly basis — as part of Beneficial's regular business practice and that such information was obtained directly from Beneficial's own accounting records kept in the ordinary course of it business. Had the debtors offered in evidence a credit report obtained directly from Equifax, the combination of Mr. Thistle's testimony and that of Beneficial's witnesses would have provided a sufficient foundation for the admission of the report. But without a witness from Delmarva to testify as to the way Delmarva prepares its own reports, there is simply not a sufficient foundation to admit the Delmarva report as proof of what Beneficial is reporting to the Equifax. Accordingly, the court will sustain the objection to the two Delmarva credit reports offered by the debtors (Pltf. Exh. 3 and 4).
II.
Absent the credit reports, there is no direct evidence as to how Beneficial reported the Thistles' account. Of course, since it is undisputed that Beneficial reports to Equifax the information maintained in the branch office's computers, and since — although the testimony of the branch manager was notably vague on this point — it appears the branch office's computer, notwithstanding the bankruptcy "flag," continues to show a balance owed on the account, it can be inferred that Beneficial continues to report to Equifax — via the computer to computer monthly updates — that the debtors still owe Beneficial money. Such inference, however, simply does not carry sufficient weight to allow the court to make a factual finding that Beneficial is currently reporting the account to Equifax as delinquent.
Def. Exh. A, a printout offered by Beneficial to show what appears on the screen of the branch office's computer when the Thistles' account is called up, reflects a balance of $951.64 as of February 16, 1998. The "bankruptcy indicator" shown on the screen is dated July 30, 1997, nearly four months after the debtors received their discharge.
Without such a finding, any analysis of whether such reporting violates the discharge injunction would be mere dicta. Nevertheless, if Beneficial continues to report the account as delinquent, and if the debtors obtain admissible evidence of that fact, the parties could well be back before the court. Accordingly, some limited discussion of the issue is appropriate to assist the parties in resolving the controversy.
III.
Under § 524(a)(2), Bankruptcy Code, a chapter 7 discharge "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any [discharged] debt as a personal liability of the debtor." Such prohibited conduct includes the sending of "past due" notices with respect to a discharged debt. In re Conti, 50 B.R. 142, 146 (Bankr. E.D. Va. 1985). In the event the injunction is violated, this court has civil contempt powers to enforce it. Burd v. Walters, 868 F.2d 665, 669-70 (4th Cir. 1989) (bankruptcy court has civil contempt power under 11 U.S.C. § 105 to enforce the provisions of the Bankruptcy Code).
Surprisingly — given the pervasive role credit reports play in our society today — there appears to be only one reported decision directly addressing the issue of whether reporting a debt as delinquent can constitute an "act . . . to collect . . . [such] debt as a personal liability of the debtor." That decision is In re Sommersdorf, 139 B.R. 700 (Bankr. S.D. Ohio 1991), which held that a bank violated the co-debtor stay under § 1301, Bankruptcy Code, in a chapter 13 case when, although the automobile loan in question was proposed to be paid in full through the plan, the bank reported the debt as written off on the co-signor's credit report. The court explained that the phrase "act to collect . . . a claim," as used in § 362, Bankruptcy Code, was "intended to prevent creditor harassment of the debtor," including "conduct . . . of an informal nature, such as telephone contact or dunning letters." 139 B.R. at 701. In Sommersdorf, the bank had argued that federal banking audit requirements required a bank to charge off any amount that was more than four months in arrears. The court held, however, "[T]here is a distinction between an internal bank accounting procedure and the placing of a notation on an obligor's credit report. We find that the latter most certainly must be done in an effort to effect collection of the account." Id. (emphasis added).
Sommersdorf was cited and discussed in a subsequent unreported district court opinion, Batchelorv. First Nat'l Bank of Blue Island, 1993 WL 22859 (N.D. Ill. 1993). The debtor alleged, among other things, that shortly after confirmation of a chapter 13 plan that proposed to pay off an automobile loan, the defendant bank had reported the loan as written off, and, additionally, made repeated phone calls to the debtor while the chapter 13 case was pending in an attempt to collect the loan. The bank moved to dismiss the plaintiff's § 362(h), Bankruptcy Code, cause of action for failure to state a claim. Since the dunning telephone calls would unquestionably have constituted a violation of the automatic stay, the district court, after noting the holding in Massendorf, denied the motion to dismiss, finding that it was "unnecessary to presently resolve the question of whether the report to the credit agency also constituted a violation of the § 362 stay." Id. at *2.
In the present case, there is no evidence before the court tending to show that the account information shown on the Delmarva credit report, even if it accurately reflects information supplied by Beneficial to Equifax after the discharge was entered, was part of an effort by Beneficial to pressure or harass the Thistles into paying the balance of the debt. Of course, a creditor is under an affirmative duty to ensure that the discharge injunction is not violated, and the creditor need not necessarily have set out to violate the injunction in order to be found in contempt. See In re Soils, 137 B.R. 121, 131 (Bankr.S.D. N.Y. 1992) (holding the IRS in willful violation of the automatic stay even though the violation was due to a computer error). Additionally, as Massendorf sensibly observes, a black mark on a credit report will generally, by the very nature of things, have a coercive or harassing effect. But Massendorf was an unusual situation. The co-debtor had not filed for bankruptcy, and the debt in question was proposed to be paid in full through the chapter 13 plan. The Massendorf court apparently concluded that, in the absence of evidence to the contrary, the bank's action in reporting the debt as having been written off "must [have been] done" in an effort to collect the debt. In Massendorf, the offending entry had been placed on the credit report after the plan was confirmed. Here, by contrast, even if the court were to consider the Delmarva reports, the evidence would not show that Beneficial took affirmative steps after the discharge to report the debt as delinquent, but, at worst, that it was grossly negligent in not updating its computer to reflect the current status of the account, and that it allowed stale information to remain uncorrected.
IV.
It is important to note that the only issue before the court at this time is whether Beneficial violated the discharge injunction. The present motion does not raise, and the court does not reach, the issue of whether a creditor's failure, after a customer has brought an error to its attention, to promptly furnish a credit bureau with correct information would be a violation of any other statute, in particular the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. Nor is it necessary for the court to determine how the debtors' account should correctly be reported. Suffice it to note that in all probability this court would not have jurisdiction over an action seeking damages under the Fair Credit Reporting Act, and that any such action would therefore have to be brought in the United States District Court or another court of appropriate jurisdiction. 15 U.S.C. § 1681p. See Poplar Run Five L.P. v. Virginia Electric Power Co. (In re Poplar Run Five L.P.), 192 B.R. 848 (Bankr. E.D. Va. 1995) (bankruptcy court lacked jurisdiction over adversary proceeding by reorganized debtor to recover security deposit where outcome would not affect distribution to creditors or partners); Lux v. Spotswood Construction Loans, 176 B.R. 416 (E.D. Va. 1994), aff'd, 43 F.3d 1467 (table), 1994 WL 621820 (4th Cir. 1994) (after chapter 7 case was closed, bankruptcy court lacked even "related to" jurisdiction over adversary proceeding brought by debtor challenging a foreclosure sale). The court simply observes that, contrary to the suggestion of Beneficial's counsel that Beneficial has no responsibility for initiating correction of errors brought to its attention, the Fair Credit Reporting Act appears to place as much responsibility on the reporting creditor as it does on the consumer credit reporting agency. 15 U.S.C. § 1681s-2.
Mr. Thistle testified that he believed the account should be shown as "paid." Beneficial's witness testified that the account would more appropriately be shown as "settled" or "discharged in bankruptcy."
(2) Duty to correct and update information
A person who —
(A) regularly and in the ordinary course of business furnishes information to one or more consumer reporting agencies about the person's transactions or experiences with any consumer; and
(B) has furnished to a consumer reporting agency information that the person determines is not complete or accurate, shall promptly notify the consumer reporting agency of that determination and provide to the agency any corrections to that information, or any additional information, that is necessary to make the information provided by the person to the agency complete and accurate, and shall not thereafter furnish to the agency any of the information that remains not complete or accurate.
(3) Duty to provide notice of dispute
If the completeness or accuracy of any information furnished by any person to any consumer reporting agency is disputed to such person by a consumer, the person may not furnish the information to any consumer reporting agency without notice that such information is disputed by the consumer.
V.
In summary, the two Delmarva credit reports are not admissible to prove that Beneficial is currently reporting the account as delinquent. In the absence of such evidence, the court is unable to conclude that Beneficial has violated the discharge injunction, and for that reason the motion for an award of damages will be denied. Such denial, however, is without prejudice to the debtors' right to assert a violation of the discharge injunction if, after June 16, 1998 (the date of the hearing on the present motion), Beneficial reports the debt as delinquent. The denial is also without prejudice to the debtors' right to bring an action against Beneficial under the Fair Credit Reporting Act in an appropriate forum.
A separate order will be entered consistent with this opinion.