Court Opinion

ID: 16146
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:51:36+00
Date Added: 2024-06-11T15:04:44.297625
License: Public Domain

Revised November 10, 1998

                  UNITED STATES COURT OF APPEALS
                       For the Fifth Circuit

                           No. 97-50423

            EDWARD C. SEPULVADO; SHEREE D. SEPULVADO,

                         Plaintiffs - Appellees-Cross-Appellants,

                              VERSUS

               CSC CREDIT SERVICES, INC.; ET AL.,

                                                        Defendants,

                    CSC CREDIT SERVICES, INC.,

                            Defendant - Appellant-Cross-Appellee.

          Appeals from the United States District Court
                for the Western District of Texas

                         October 23, 1998
Before KING, EMILIO M. GARZA, and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:

     CSC Credit Services, Inc. (CSC) appeals from judgment entered

in favor of plaintiffs Sheree and Edward Sepulvado, after a bench

trial, in this matter brought pursuant to the Fair Credit Reporting

Act, 15 U.S.C. §§ 1681 - 1681(t).   We reverse, and render judgment

in favor of the defendant, CSC.
                                 BACKGROUND

      The Sepulvados' claim that an erroneous credit item on a

report prepared by CSC caused Texas Homestead Mortgage Company

(Texas Homestead) to deny them a mortgage for the purchase of a new

home. The material facts relating to the parties’ conduct are

essentially undisputed.

I.    The Prior Foreclosure and the New Purchase

      In 1984, Edward and Sheree Sepulvado purchased a home. In the

summer of 1988, the Sepulvados were unable to make timely payments.

In July 1988, the mortgage lender, the now-defunct University

Savings, foreclosed on the home.           University Savings sold the home

for   less   than   was   owed   by   the    Sepulvados,   which    created   a

deficiency on their account of $12,333. Sometime around June 1989,

University Savings reported the foreclosure to certain credit

reporting    agencies,    including    the    defendant    CSC.     University

Savings did not report any deficiency at that time.1              In July 1989,

University    Savings     notified    the     Sepulvados    that    they   were

responsible for the $12,333 deficiency and attempted collection by

a form letter dated July 21, 1989.           The Sepulvados never paid the

deficiency, and University Savings did not reduce the obligation to

      1
          The record contains the form filed by University Savings
to report the foreclosure to CSC. That form does not mention any
deficiency. The record also contains credit reports from two other
credit reporting agencies that were issued in June 1989. Although
those reports reflect the foreclosure, neither report indicates
that there was any deficiency associated with the foreclosure.

                                       2
judgment by commencing legal action.

      Under the provisions of the Fair Credit Reporting Act, the

Sepulvados foreclosure and the resulting deficiency could have been

reported on their credit for a period of seven years.          See 15

U.S.C. § 1681c(a).   The Sepulvados knew this, and for more than six

years lived in rental property while waiting for the foreclosure to

drop off of their credit report. Then in March 1995, approximately

six years and eight months after the foreclosure, the Sepulvados

signed an earnest money contract to purchase a new home.            The

Sepulvados were referred by the builder to Texas Homestead to

finance that purchase.

II.   The Mortgage Application

      The Sepulvados informed the Texas Homestead loan officer,

Wendy Jamison, about the earlier University Savings foreclosure.

The Sepulvados did not inform Ms. Jamison about the deficiency

resulting from the foreclosure.       Ms. Jamison told the Sepulvados

not to include any information about the foreclosure on their

application.2    That    advice   was   apparently   based   upon   the

      2
          This fact was disputed at trial. Ms. Jamison conceded
that the Sepulvados told her about the foreclosure during the
application process, but denied that she told them to omit the
information from their application. Her testimony at trial was
contrary to Mrs. Sepulvado’s testimony.       The district court
resolved the factual dispute in favor of the Sepulvados. On the
basis of the entire record, that finding is not clearly erroneous.
See Stevenson v. TRW Inc., 987 F.2d 288, 292 (5th Cir. 1993).

                                  3
possibility that the foreclosure had already been removed from

their credit report, or would be removed before the purchase of the

new home was closed.     Ms. Jamison also told the Sepulvados that

Texas Homestead might approve the mortgage even if the aging

foreclosure appeared on the credit report, provided that their

credit report was otherwise as they had represented it in the

application.     Once again, there was no conversation concerning

either the existence of the deficiency or the effect that a

deficiency would have on their application. The Sepulvados did not

include   any   information   about       the   foreclosure   in   the   Texas

Homestead application, although that information was clearly called

for by the language of the application.

III. The Negative Credit Report

     On or about March 13, 1995, Texas Homestead obtained a credit

report on the Sepulvados from Advanced Credit Technology (ACT).

The report contained an entry that was ultimately determined to be

related to the deficiency created by the 1988 University Savings

foreclosure.    On its face, however, the ACT entry indicated that

Mr. Sepulvado owed $12,333 on an account with an “open date” of

March 1994, and that no payments had ever been made.

     ACT retrieved the information made the basis of that entry

from a database maintained and provided by Equifax.           Equifax is an

                                      4
affiliate of the defendant, CSC.3      ACT made certain material

changes to the CSC entry before sending its own report to Texas

Homestead.   For example, whereas the ACT entry reported an “open

date” of March 1994, the CSC entry reported that an obligation in

the amount of $12,333 had been “assigned” to “CSC/TCCP” in March

1994.4.5   At trial, ACT President James Fuchs confirmed that the

     3
          CSC stipulated at trial that ACT had access to the
Equifax database. The record is otherwise silent with regard to
the precise relationship between Equifax and CSC. Neither ACT, who
provided the report relied upon by Texas Homestead, nor Equifax,
who provided the database accessed by ACT, were sued in this
litigation.
     4
          Neither the ACT report submitted to Texas Homestead nor
the CSC report from which ACT derived its own entry are in the
record. The district court’s order drew its description of the ACT
entry from Plaintiff’s trial exhibit 1.      Plaintiff’s exhibit 1
contains two documents, one of which is an updated and amended ACT
report that was issued about one month after the original report to
Texas Homestead, and one of which is a notice in letter form that
ACT sent directly to the Sepulvados. The two documents contain
slightly different versions of the entry, and neither of those
versions correspond exactly with the rendition given in the
district court’s order. Nonetheless, the district court found, and
the parties do not dispute that the ACT entry contained the
following information:

     Account Designation A; Creditor TCCP; Account Number
     1150; Open Date 03/94; Report Date 03/95; High Credit
     $12333; Last Activity 03/94; Balance $12333; Months past
     due $12333; Late Payments COLLECT; Comment: For Telacu
     Carpenter Coll Partners, Date of last activity 03/94;
     Collection For; TCCP Texas; Unpaid, 07/94; 713-918-5756
     Sharon Rice.

     The district court’s order drew its description of the CSC
entry from Plaintiff’s exhibit 2. That document is a credit report
issued by CSC in July 1995, several months after ACT retrieved the
CSC entry from the Equifax database. Nonetheless, the district
court found, and the parties do not dispute, that the CSC entry
contained the following information:

                                5
information   ACT   retrieved   from   credit   repositories   was   often

reformatted before the issuance of an ACT report.

     When Texas Homestead received the ACT report, Ms. Jamison read

the described entry to reflect that the Sepulvados had taken out a

$12,333 loan in March 1994, and then immediately defaulted without

making any payments.    Ms. Jamison informed Mrs. Sepulvado that the

mortgage would not be approved as long as the outstanding account

remained on the credit report. Testimony from both Ms. Jamison and

a mortgage banker produced by the defense established that mortgage

lenders will not approve a mortgage when there is a collection item

reported on the credit report.     In making that decision, industry

practice requires that the mortgage lender be guided primarily by

information on the face of the credit report, rather than by any

explanatory statements that might be provided by the applicant.

Accordingly, Ms. Jamison further informed Mrs. Sepulvado that

neither Texas Homestead nor Ms. Jamison herself could assist the

     COLLECTION REPORTED 07/94; ASSIGNED 03/94 TO CSC/TCCP
     (713) 918-5799 CLIENT-TCCP TEXAS; AMOUNT-$12,333; UNPAID
     07/94; BALANCE-$12,333 07/94 DATE OF LAST ACTIVITY 03/94;
     INDIVIDUAL; ACCOUNT NUMBER 1150.

Although there is no sound basis in the record for verifying the
precise format or content of either entry, there is no active
dispute about the material content of either entry, and therefore,
no basis for finding the district court’s rendition of those
entries clearly erroneous.     Stevenson, 987 F.2d at 292 (“Our
standard of review is deferential to the district court. We uphold
findings of fact unless we are left with the firm and definite
conviction that they were ‘clearly erroneous.’").

                                   6
Sepulvados with regard to removing the negative entry. Rather, Ms.

Jamison encouraged the Sepulvados to contact the creditor and the

credit reporting agency to determine whether the entry was being

erroneously reported.

      Near the same time, ACT also sent the Sepulvados a letter

informing them that adverse credit history had been reported to

Texas Homestead.     The letter contained a version of the ACT entry

which showed an outstanding collection item in the amount of

$12,333.     Although the letter reported that Texas Homestead had

requested additional information about the item, the undisputed

testimony at trial, from both the President of ACT and Ms. Jamison,

was   that   Texas   Homestead     never   instigated   any   request   for

information from ACT.

IV.   The Sepulvados’ Attempts to Clear their Credit Report

      The Sepulvados began their investigation by calling the number

listed for “CSC/TCCP” in the credit report.          As suggested by the

entry, TCCP is also affiliated with CSC.            TCCP was formed in

January 1994 as a partnership between CSC and the Resolution Trust

Corporation    (RTC)   for   the     purpose   of   collecting   mortgage

foreclosure debts.      The CSC entry at issue in this case was

submitted by the RTC when the debt was assigned by the RTC to

“CSC/TCCP” in March 1994.6    Thus, defendant CSC was in the peculiar

      6
          There is no evidence that the deficiency was ever
reported against the Sepulvados’ credit prior to that time.

                                      7
position of acting as both the creditor and the credit reporting

agency with respect to the objectionable entry.

     That duplicity was compounded by the fact that CSC apparently

maintained little, if any, functional separation between the credit

reporting   division     and   the   collection    division.      When   Mrs.

Sepulvado called the number provided in the entry for CSC/TCCP on

March 14, she was transferred to CSC employee Mark Lewis.                 Mr.

Lewis represented to the Sepulvados that he was in a position to

change their credit reports.          Mr. Lewis was also attempting to

collect the debt.7     After some investigation, Mr. Lewis told Mrs.

Sepulvado   that   the   entry   related   to     the   $12,333   deficiency

resulting from the 1988 University Savings foreclosure.            Mr. Lewis

did not explain to Mrs. Sepulvado why CSC was entitled to collect

on that debt.

     The following day, March 15, 1995, Mrs. Sepulvado called Mr.

Lewis and offered to settle the account for ten percent of the

deficiency owed.     Mr. Lewis rejected the offer, but countered that

CSC would accept fifty percent of the deficiency.           Mrs. Sepulvado

rejected the counteroffer and the conversation was ended.

     On March 16, 1995, Mr. Sepulvado contacted Mr. Lewis and

explained that the entry on the credit report was inaccurate

because it did not reflect that the obligation arose from a 1988

     7
          Mr. Lewis was an employee of CSC’s collection division.
Whatever internal separation may have existed between CSC’s
collection division and its reporting division, CSC has not argued
that it is not bound by the actions of its agent, Mark Lewis.

                                      8
mortgage foreclosure.     Mr. Lewis responded that CSC could report

the item “in any manner [CSC] saw fit,” that the entry could “be

reactivated any time,” and that CSC could report the item for the

rest of the Sepulvados’ lives if it saw fit.                Mr. Lewis also

informed Mr. Sepulvado that the entry would continue to impede

their attempts to get a new mortgage.         In spite of Mr. Sepulvado’s

request that the entry be amended to reflect that the obligation

related to a 1988 mortgage foreclosure and resulting deficiency,

Mr. Lewis did not supplement the entry to reflect those facts, did

not inform Mr. Sepulvado that he had a right to supplement the

report with his own statement about the debt, and did not make any

notation in the credit report that the obligation was disputed.

     On April 10, shortly before the final mortgage decision by

Texas Homestead, Mrs. Sepulvado called CSC directly for the last

time to complain again that the CSC entry was inaccurate because it

led the mortgage company to believe that the $12,333 entry related

to a 1994 personal loan rather than a 1988 mortgage foreclosure.

Once again, CSC refused to correct or supplement the entry to

indicate   that   the   obligation       actually   arose   from   the   1988

foreclosure.

                                     9
V.   Rejection of the Mortgage Application and
     Subsequent Efforts to Obtain Documentation

     The Sepulvados informed Texas Homestead, through Ms. Jamison,

that the negative item related to the 1988 University Savings

foreclosure.     That information from the Sepulvados was of minimal

effect.      Following industry practice, Texas Homestead made its

decision on the basis of the credit report, rather than anecdotal

or explanatory information from the Sepulvados.            The Sepulvados’

application was formally denied on or about April 11, 1995.           Texas

Homestead issued a letter stating that the decision was made on the

basis   of   negative   credit   entries,   but   Ms.    Jamison   told   the

Sepulvados that the rejection of their application was primarily

due to the $12,333 collection item.

     After the mortgage was declined, the Sepulvados continued in

their efforts to obtain information about the objectionable entry,

this time with the aid of their attorney.                On April 12, the

Sepulvados’ attorney called Mr. Lewis and requested documentation

confirming the Sepulvados’ debt.         On April 26, having received no

response, the attorney renewed that request.            Mr. Lewis responded

by fax the same day, sending (1) a copy of the form letter sent to

the Sepulvados by University Savings in July 1989, and (2) a copy

of a form that may have been executed when the mortgage was opened,

which shows the applicable interest rate and the schedule of

payments due under the contract.      Mr. Lewis did not send, although

CSC had a complete file on the foreclosure in its possession,

                                    10
documentation explaining how the deficiency was calculated or

documentation demonstrating that CSC was authorized to collect the

debt.

      On May 12, the attorney contacted Mr. Lewis again, explaining

that thirty days had elapsed without an adequate response to the

Sepulvados’ request for documentation of the loan and CSC’s right

to collect.      Around that time, CSC sent one additional document.

The source of this document is not immediately clear.                  However, it

reflects that the Sepulvados’ outstanding balance at the time of

foreclosure was $48,333.65, and that University Savings received a

bid on the property of $45,000.            Whatever else it may have proved,

that documentation did nothing to establish the validity of a

$12,333 deficiency on the Sepulvados’ property.

VI.   The Lawsuit

      The Sepulvados brought this suit pursuant to the Fair Credit

Reporting Act, 15 U.S.C. § 1681 - 1681(t), alleging that the CSC

entry   made     the    basis   of   the    ACT    entry   was    inaccurate      and

misleading.      Specifically, the Sepulvados claimed that CSC failed

to maintain reasonable procedures to assure “maximum possible

accuracy” in its report, in violation of 15 U.S.C. § 1681e(b),

failed to comply with the statutory procedure for reinvestigating

the   accuracy    and    completeness       of    an   entry,    in   violation   of

15 U.S.C. § 1681i, and failed to provide adequate documentation

concerning the entry when requested, in violation of 15 U.S.C.

                                           11
§ 1681g.    The Sepulvados further claimed that CSC’s negligent

violation of the Fair Credit Reporting Act caused them to lose the

opportunity to buy their dream home, which resulted in mental

anguish and will cause them to pay a higher interest rate if they

ever choose to buy another home.

     After the matter was tried to the bench, the district court

entered judgment in favor of the Sepulvados.          CSC appealed.         On

appeal, CSC argues that the district court unfairly held it liable

on the basis of language that appeared in the ACT report, but not

the CSC report.    CSC also claims that its own report was neither

inaccurate nor misleading, and that the district court’s award of

damages was not supported by sufficient evidence.

     The   Sepulvados   respond   that   CSC’s    report   was    inaccurate

because it failed to disclose that the $12,333 obligation assigned

in 1994 actually arose in 1988.     The Sepulvados also filed a cross-

appeal, in which they argue that the district court erred by

failing to award additional compensatory damages and punitive

damages.

     To    the   limited   extent    that   our     review       requires    a

reconsideration of the district court’s fact findings, our review

is for clear error only.     Stevenson, 987 F.2d at 292.           We review

the district court’s conclusions of law de novo. Hammack v. Baroid

Corp., 142 F.3d 266, 270 (5th Cir. 1998).

                                    12
                                CSC’S LIABILITY

      The Fair Credit Reporting Act requires “consumer reporting

agencies [to] adopt reasonable procedures for meeting the needs of

commerce for consumer credit . . . in a manner which is fair and

equitable to the consumer.”        15 U.S.C. § 1681.         The Act defines a

complex set of rights and obligations that attend the relationships

among and between the provider of a credit report, the user of that

information and the consumer who is made the subject of such a

report.     The Act also provides remedies for negligent or willful

failure to comply with the requirements of the Act.                      See id.

§§ 1681n, 1681o.

      The   district    court    based    its    finding   of   liability      upon

§ 1681e(b).     Section 1681e(b) provides that a consumer reporting

agency must use “reasonable procedures to assure maximum possible

accuracy” when preparing a consumer report.                Id. § 1681e(b); see

also Pinner v. Schmidt, 805 F.2d 1258, 1262 (5th Cir. 1986)

(Section 1681e(b)       “imposes    a    duty   of   reasonable   care    in    the

preparation of a consumer report.”).                 A credit entry may be

“inaccurate” within the meaning of the statute either because it is

patently incorrect, or because it is misleading in such a way and

to such an extent that it can be expected to adversely affect

credit decisions.       See Pinner, 805 F.2d 1258 (finding violation of

§   1681e(b)   where,    notwithstanding        consumer   reporting     agency’s

actual knowledge of the true facts, it marked a credit entry

                                         13
“litigation   pending”    without    specifying   that   it   was   the

plaintiff/obligor who had initiated suit against the creditor).

But the Fair Credit Reporting Act does not impose strict liability

for inaccurate entries.    Rather, the plaintiff must show that the

inaccuracy resulted from a negligent or willful failure to use

reasonable procedures when the report was prepared.       Thompson v.

San Antonio Retail Merchants Assoc., 682 F.2d 509, 513 (5th Cir.

1982).

     The district court concluded that CSC failed to use reasonable

procedures when preparing the entry that reflected the $12,333

deficiency.   The district court first found that CSC’s consumer

report was, in all material respects, correct.     The district court

concluded, however, that CSC’s report was incomplete because it did

not reveal (1) that University Savings was the original debtor on

the assigned obligation, and (2) that the “assigned” debt dated

back to a 1988 mortgage foreclosure.      The district court further

concluded that CSC’s failure to include these details about the

assigned debt rendered the CSC report so misleading that it was

“inaccurate” within the meaning of the statute.          Finally, the

district court concluded that the inaccuracy was caused by CSC’s

failure to adopt reasonable procedures because CSC could have

easily eliminated any ambiguity by simply supplying additional

information about the nature of the $12,333 entry.

                                    14
     We disagree.     CSC’s report may have been incomplete, but it

was not, as the district court found, facially misleading or

inaccurate when prepared.       CSC’s use of the term “assigned” (as

compared to the phrase “open date” in ACT’s report) would have

placed a creditor on notice that the obligation existed before the

March 1994 assignment date.

     The Sepulvados attempt to support the judgment by arguing that

completeness, as a principle separate and apart from whether a

particular    entry   or   report   is    misleading,   may   also   lead   to

liability under § 1681e(b).         In support of that proposition, the

Sepulvados cite Koropoulos v. Credit Bureau, Inc., 734 F.2d 37

(D.C. Cir. 1984).      While it is true that Koropoulos recognizes

completeness as an aspect of accuracy under § 1681e(b), that case

also suggests that only a truly extraordinary case would justify

liability on the basis of an incomplete, but not misleading, credit

report.     See id. at 45.     Indeed, Koropoulos states that it may

often be a reasonable procedure within the meaning of the Act to

rely upon the potential creditor or the credit applicant to supply

information that is alleged to have been omitted from a credit

entry that was incomplete, but otherwise accurate, when it was

prepared.    Koropoulos, 734 F.2d at 45.

     We decline, at least in this case, to construe § 1681e(b) in

a way that would require completeness without regard to whether the

disputed entry was misleading.        To frame the issue this way would

                                     15
require the Court to choose in this case between a rule that

consumer   reporting   agencies    may   not   report      an   assignment   or

secondary collection effort without independently investigating and

then reporting on the details of the underlying obligation, and a

rule that they are always excused from doing so.            Such an approach

ignores both the statutory balance adopted in the “reasonable

procedures”   language   of   §   1681e(b)     and   the   effect    of   other

statutory procedures, which are intended to govern the resolution

of a consumer dispute about the content or completeness of an

entry.   See generally 15 U.S.C. § 1681i.        We hold that CSC did not

negligently fail to follow reasonable procedures when preparing the

credit entry that reported the $12,333 deficiency.8             Therefore, CSC

    8
          At trial, the Sepulvados claimed both that the CSC entry
was inaccurate, in violation of § 1681e(b), and that CSC failed to
respond appropriately once they registered their disagreement with
the content of the entry, in violation of certain provisions of
§ 1681i and § 1681g of the Fair Credit Reporting Act. See id.
§ 1681i(a)(5) (requiring the agency to promptly delete or modify
information that is unverifiable or incomplete); id. § 1681i(a)(3)
(requiring the agency to provide written notice concerning the
disposition of the dispute within five days); id. § 1681i(a)(6)
(requiring written notice of results of reinvestigation); id.
§ 1681i(a)(6)(B)(iv) (requiring the agency to provide notice that
the consumer has the statutory right to supplement the disputed
information with the consumer’s own statement disputing the
accuracy or completeness of the report); id. § 1681i(b) & (c)
(permitting the consumer to supplement the entry with a statement
setting forth the nature of the dispute); id. § 1681i(c) (requiring
that the consumer’s own statement be carried forward with the
entry). The district court found that the Sepulvados failed to
prove a violation of § 1681i or § 1681g, and that CSC was entitled
to judgment as to those claims. On appeal, the Sepulvados have
failed to brief, and therefore abandoned, any claim that the
district court’s disposition of their claims under § 1681i or §
1681g is error. See, e.g., MacArthur v. University of Texas Health

                                    16
did not violate § 1681e(b) of the Fair Credit Reporting Act.

Without liability there can be no damage award, and we need not

review those damage issues raised by CSC on appeal and by the

Sepulvados in their cross-appeal.

       For the foregoing reasons, the district court’s judgment in

favor of plaintiffs Edward C. and Sheree D. Sepulvado is REVERSED,

and judgment is RENDERED in favor of defendant CSC Credit Services,

Inc.

       REVERSED AND RENDERED.

Ctr., 45 F.3d 890, 895 (5th Cir. 1995). We therefore express no
opinion concerning whether CSC’s conduct once the Sepulvados
registered their disagreement with the content of the entry
violated the Fair Credit Reporting Act.

                                 17