2nd Cir. Holds FCRA Does Not Apply to Inaccuracies Involving Legal Disputes

The U.S. Court of Appeals for the Second Circuit recently affirmed a trial court’s order granting summary judgment in favor of a credit reporting agency and ruled that reporting a student loan debt that was discharged in bankruptcy as “due and owing” is not cognizable as an “inaccuracy” under the federal Fair Credit Reporting Act.

In so ruling, the Second Circuit held that inaccuracies that turn on legal disputes are not cognizable under the FCRA. Here, the question of whether the student loan debt was discharged in bankruptcy, or whether it was still due and owing, was a legal one to which the FCRA did not apply.

A copy of the opinion in Mader v. Experian is available at: Link to Opinion.

A consumer alleged that his private educational loan was discharged in bankruptcy. He then sued a credit reporting agency under the FCRA for reporting the loan as “due and owing.” Pursuant to that provision, credit reporting agencies “shall follow reasonable procedures to assure maximum possible accuracy of the information” in the reports they prepare. 15 U.S.C. § 1681e(b).

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The consumer claimed that his credit report was inaccurate because it continued to list his outstanding student loan debt following his chapter 7 bankruptcy. He argued that the educational loan was discharged in bankruptcy because, as a private loan, it was not exempted from discharge under section 523(a)(8) of the Bankruptcy Code. That provision defines as non-dischargeable, among other things, “an educational . . . loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.” 11 U.S.C. § 523(a)(8)(A)(i).

The trial court granted summary judgment in favor of the credit reporting agency. Relying primarily on a declaration from the lender’s employee, the trial court determined that the consumer’s loan was non-dischargeable, and that therefore its inclusion on his credit report was not an inaccuracy. The consumer timely appealed.

The Second Circuit began its analysis by concluding that the trial court’s reasoning was in error.

The Appellate Court noted that competing evidence in the record raised a genuine and material dispute as to whether the consumer’s loan was made under a program that included governmental funding. Although the lender’s employee declared that the loan was issued “under a program that was funded, in part, by non-profit organizations, including governmental units,” the Second Circuit observed that the prospectus that the consumer submitted — which the trial court did not address — cut the other way. That document indicated that the loan was made under a separate program funded only with private funds.

Even though it disagreed with the trial court’s assessment of the record and did not endorse its interpretive approach, the Second Circuit determined that it “may affirm . . . on any grounds for which there is a record sufficient to permit conclusions of law, including grounds not relied upon by the district court.” CBF Indústria de Gusa S/A v. AMCI Holdings, Inc., 850 F.3d 58, 78 (2d Cir. 2017).

The Second Circuit ultimately affirmed the trial court’s ruling, as the credit reporting agency argued in the alternative, that the FCRA does not require credit reporting agencies to adjudicate legal disputes such as the post-bankruptcy validity of the consumer’s educational loan debt.

The relevant provision of the FCRA states that when preparing credit reports, credit reporting agencies “shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.” 15 U.S.C. § 1681e(b). Thus, to prevail on a section 1681e claim against a consumer reporting agency, the Second Circuit decided that it is necessary for a plaintiff to establish, among other things, that a credit report contains an inaccuracy. See Shimon v. Equifax Info. Servs. LLC, 994 F.3d 88, 91 (2d Cir. 2021).

In Shimon, the Second Circuit held that a credit report is inaccurate “either when it is patently incorrect or when it is misleading in such a way and to such an extent that it can be expected to have an adverse effect.” Id.

Thus, the Second Circuit concluded that the “inaccuracy” the consumer alleged did not meet the above-referenced statutory test because it evaded objective verification. There was no bankruptcy order explicitly discharging this debt. The lender continued to treat the debt as outstanding following the consumer’s bankruptcy, and, for that matter, so did the consumer.

Instead, the Second Circuit reasoned that the accuracy of the credit reporting agency’s reporting that the debt was still owed depended on whether it was “dischargeable,” which itself depended on whether section 523(a)(8)(A)(i) applied to the consumer’s educational loan. And that question, finally, turned on the unsettled meaning of the word “program” within section 523(a)(8)(A)(i) of the Bankruptcy Code.

In the Second Circuit’s view, the specialized attention and legal reasoning required to determine the post-bankruptcy validity of the consumer’s debt meant that its status was not sufficiently objectively verifiable to render the credit report “inaccurate” under the FCRA.

Additionally, the Second Circuit pointed out that every other circuit to have considered an analogous question has agreed: inaccuracies that turn on legal disputes are not cognizable under the FCRA.

Some circuits reached this conclusion by holding, as the Second Circuit did, that claims under the FCRA require factual inaccuracies to be actionable. For example, the First Circuit concluded that a debtor’s claim that his credit report contained an inaccurate report of a legally invalid mortgage “crossed the line between alleging a factual deficiency that [the credit reporting agency] was obliged to investigate pursuant to the FCRA and launching an impermissible collateral attack against a lender by bringing an FCRA claim against a consumer reporting agency.” DeAndrade v. Trans Union LLC, 523 F.3d 61, 68 (1st Cir. 2008). Likewise, the Ninth Circuit held that “collateral attacks on the legal validity of…debts” cannot satisfy the “inaccuracy” element of an FCRA claim. Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 891–92 (9th Cir. 2010).

The Tenth Circuit reached the same conclusion but based its reasoning on the “reasonable procedures” element, which, the circuit concluded, requires only that credit reporting agencies “look beyond information furnished to them when it is inconsistent with the [credit reporting agency’s] own records, contains a facial inaccuracy, or comes from an unreliable source.” Wright v. Experian Info. Sols., Inc., 805 F.3d 1232, 1239 (10th Cir. 2015). In that case, the Tenth Circuit held that, as a matter of law, reasonable procedures do “not require [credit reporting agencies] to resolve legal disputes about the validity of the underlying debts they report.” Id. at 1242.

Finally, the Seventh Circuit reached a similar conclusion drawing on both a distinction between factual and legal inaccuracies and an analysis of what the “reasonable procedures” element requires. See Denan v. Trans Union LLC, 959 F.3d 290, 293–96 (7th Cir. 2020).

Consistent with these decisions, the Second Circuit held that the consumer failed to allege an inaccuracy within the plain meaning of section 1681e(b) of the FCRA. The unresolved legal question regarding the application of section 523(a)(8)(A)(i) to the consumer’s educational loan rendered his claim non-cognizable under the FCRA.

Accordingly, the Second Circuit affirmed, on an alternative ground, the trial court’s order granting summary judgment in favor of the consumer reporting agency.