On October 13, 2017 a federal judge in Arizona refused to dismiss a lawsuit, finding that a judgment debt may not always be a per se permissible purpose for obtaining a credit report under the Fair Credit Reporting Act (FCRA), 15 U.S.C. §1681 et seq. The case is Baron v. Mark A. Kirkorsky, P.C. (Case No. 17-cv-01118, U.S.D.C., District of Arizona).  

A copy of the court’s Order can be found here

Background 

A medical training institute assigned its interest of a judgment against plaintiff, Baron, to defendant Mark A. Kirkorsky, PC. The judgment consisted of court costs awarded in a state court action that was dismissed with prejudice in favor of the institute. In defendant's attempts to collect the judgment, it requested and obtained copies of plaintiff's consumer report on four separate occasions over an 18-month period. Plaintiff filed a federal action against defendant alleging the firm violated the FCRA because it did not have a permissible purpose to obtain his consumer credit report. 

Defendant brought a motion to dismiss pursuant to Federal Rules of Civil Procedure 12(b). 

The Court's Order 

The Court highlighted that, pursuant to 15 U.S.C. § 1681b, the FCRA requires a person to have “permissible purpose” for obtaining or using a consumer report. While the statute identifies various activity that would constitute a permissible purpose, the one at issue here involves a recipient's intention “to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer” (§ 1681b(a)(3)(A)). 

In its Order, the court relied on definitions adopted by the Fair and Accurate Credit Transactions Act of 2003 (“FACTA”) to interpret the above provision. In particular, FACTA redefined the term "credit" to mean "the right granted by a creditor to a debtor to defer payment of a debt or to incur debt and defer its payment or to purchase property or services and defer payment therefor" (§ 1681a(r)(5)).

The court concluded that FACTA’s definition of “credit” limits the scope of when there is a permissible purpose to pull a consumer report. The court states: 

“Debt collection is a permissible reason for obtaining a credit report only insofar as the debt arose from a transaction in which the debtor voluntarily and directly sought credit.” 

Because a judgment was not a voluntary credit transaction, the defendant’s status as a judgment creditor did not give it an automatic permissible purpose to obtain the plaintiff’s credit report. The defendant argued that the matter underling the judgment, an enrollment agreement for the plaintiff to attend the medical institute, was a credit transaction. Regardless of whether that was true (the court found the existence of an enrollment agreement does not per se grant a permissible purpose), the court said there must be a “direct link” between the consumer’s voluntary search for credit and the creditor’s request for credit reports. 

The court denied the defendant’s motion to dismiss. 

insideARM Perspective

A few months ago insideARM published an article on the same topic. In that case the underlying debt was a lease agreement for an apartment; nevertheless, the issue is whether the debt was a “consumer credit transaction.” The judge in that case also denied the defendant’s motion to dismiss. 

There is no question that credit reporting, including furnishing as well as pulling consumer reports, continues to be a high-risk issue. As the above decision points out, the takeaway is to review the permissible reasons for obtaining a consumer’s credit bureau report and maintain policies and procedures to ensure compliance. For those in collections, a conservative approach would be to NOT obtain a credit bureau report unless the underling debt arose from a transaction where the consumer voluntarily and directly” sought credit. This would apply regardless of whether an entity pulls a consumer report via “hard” or “soft” pull – the FCRA makes no distinction between the two. 


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