DEFENDING CREDIT DAMAGE CLAIMS AND DEMANDS

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Your client has just been sued. One of the claims is for loss of credit reputation – a damage where plaintiffs assert their credit reputation has been harmed by an alleged wrongful act of a third party. Damage to one’s credit reputation can mean a higher mortgage interest rate or a denial of a business line of credit. With economic conditions leaving the credit of many individuals and businesses in ruins, more and more plaintiffs’ counsel are including credit reputation damage also known as “economic damage” in their pleadings.

The first judicial recognition of economic damage as a compensable damage was in 1912, Simonoff v. Jas H. Goodman & Co. Bank, (1912) 18 Cal.App.5, –12 years after the establishment of the first consumer credit reporting bureau, now known as Credit Bureau, Inc (CBI), the provider of Equifax reports. For decades, however, plaintiffs’ lawyers found little success in trying to measure the about of economic damage experienced by clients in personal injury, wrongful dismissal, fraud and breach of contract cases. Not until the mid-1990s did successful measuring for economic damage find its way into the courtroom.

Areas most often cited in court as impacted by loss of credit reputation include:

–employment/hiring and job promotion,
–insurance coverage (business, personal, property, health)
–credit cards (secured or unsecured, credit capacity, credit limits)
–vehicles purchase/leased on credit
–real estate purchase/lease
–banking services (denial of savings or checking account privileges, increased fees)

One of the problematic issues for plaintiffs when determining economic damage measurement (and a key defense argument) is that the most compensable and measurable damage may happen in the future. This is frequently the basis of the “speculation” objection raised by defense: “Why is the defendant being asked to pay for damages that have not happened?”

Economic Damage, is often the direct result of lost income and so is measurable. Compensation can be determined for continuance of a lifestyle prior to damage. Credit damage or economic damage measurement involves examining how poor credit will result in future higher interest rates, denied credit, denial of insurance, higher bank fees or possibly a pass over for a new job or promotion. Plaintiff’s counsel have devised ways to use standard credit industry forms, notices and credit reports to successfully reveal damages and obtain restitution to pre-injury status. The awards can be significant.

For example, in Squirty’s Body Shop v. FinishMaster Corp., (2007, Los Angeles Superior Court,) the two companies had a falling out. As a result, Squirty’s claimed it suffered reputation damage, loss of credit capacity and increased out of pocket costs of more than $50,000. A jury found in favor of the plaintiff in the amount of $297,000.

The Realities of Credit Damage/Economic Damage Defense

There are two basic realities to remember when defending an economic damage claim. The first reality is that neither the defense nor its client is permitted by the Fair Credit Reporting Act (15USC 1681b) to obtain a copy of the plaintiff’s credit report directly from a credit bureau or other authorized credit reporting source. The exception is if the defendant is a collection agency or a direct creditor. This can bind the defense’s hands.

Section 604(f) of the FCRA, as amended by the Consumer Credit Reporting Reform Act of 1996, prohibits any person from using or obtaining a consumer report unless the report is obtained for a purpose for which the consumer report is authorized under Section 604 and the purpose is certified by the user under the requirements of Section 607. The user of a consumer report must certify that the consumer report will be used for a permissible purpose, and for no other purpose. This certification will usually take the form of a contract between the user and the consumer reporting agency.

In Sporn v Home Depot (2004, Orange County, Calif. Superior Court), the plaintiff discovered that the defendant was accessing his credit report repeatedly without permissible purpose in violation of the FCRA. The defendant continued to do so even after agreeing to stop. The court found in favor of the plaintiff for $930,000 damages with $1.4 million in total damages paid.

The second reality is that without the cooperation of the plaintiff’s counsel to provide key documents, including credit reports, the defense will be at a disadvantage in building a case against economic damage. It is up to the defense to convince the plaintiff’s counsel to supply the needed documents. Take the position that the defendant is fully ready to compensate for any claim with a sufficient foundation and appropriate basis for valuation of the economic damage demand(s). Then ask for all documents that provide the foundation for the demand and an explanation of the process used to opine on its value.

An effective defense tactic is to use a “Jujitsu Defense” technique–let the plaintiff expend the time and energy to provide the defense with the information needed to build its defense. Ask for documents that will establish the pre-injury reputation of the plaintiff. It is acceptable to ask for a credit report prior to the alleged injury, as well as a post-alleged injury credit report. This is the defense’s opportunity to obtain the documents necessary to truly evaluate the legitimacy of the claim and to prepare a defense.

Confirm that the credit report is the type reviewed by lenders–a commercial or subscriber credit report–not the “free” credit report available to consumers. Free credit reports or consumer disclosure credit reports are not accepted by lenders and are never used in loan processing or by underwriting departments in credit application processing or evaluation. A current subscriber credit report should reveal credit status back seven years prior to the date of issuance/publication and will reveal creditor or public record remarks regarding the injury. Each report should be tri-merged, including a report from each of the three national credit agencies, Experian, TransUnion and Equifax.

Evaluating Documentation

A standard practice is to ask the plaintiff to provide a basis for the dollar amount for compensation, typically an amount suggested by its expert witness in a report included with the damage demand. These expert reports can be vague on how the compensation valuation opinion was arrived. A poorly prepared report will often refer generally to statutory violations, plaintiff inconvenience or emotional distress, leaving out the monetary specifics.

If the rationale or basis for arriving at the compensation amount is insufficient, the defense should be cautious about showing the plaintiff’s its hand. It is not in the defense’s best interest to tell the plaintiff what is necessary to provide an acceptable foundation for its damage demand.

Telling the plaintiff’s counsel that the documentation is insufficient may lead the plaintiff to find more detailed accounts of the damage. If defense counsel goes so far as to request specific correspondence regarding credit denial, rate increases and cancellation or reduction of credit since the alleged damage occurred, the defense will be assisting the plaintiff in the improvement of the validity of the economic damage claim.

Acceptable documentation that may provide a foundation for a damage demand would typically include a current subscriber credit report, monthly credit card statements from department stores, gasoline companies, MasterCard, American Express, Discover and Visa that have an option for a rate change due to delinquent payments. Know what to look for but don’t be specific in the request.

In one case involving an economic damage claim, the defendant was a local office of a national real estate brokerage. The plaintiff was a homeowner seeking to sell his property prior to foreclosure. The plaintiff sued the local real estate agent/broker for $200,000, alleging breach of contract since the property was not sold prior to the foreclosure’s completion. The plaintiff alleged that due to failure by the real estate agent to prevent the foreclosure, economic damage was inflicted and would cause denial of credit for up to 10 years. The plaintiff cited the necessity of a co-signer to lease a residence, as proof of the damage.

The plaintiff failed to disclose that he had filed and was discharged from Chapter 7 Bankruptcy approximately 16 months prior to filing the credit damage claim. The defense was able to establish that due to the recency of the bankruptcy discharge, the borrower was still in the “recovery/lesson learned” post-bankruptcy period that would typically prevent commercial lenders from considering his application with favorable results even if it accepted the application for underwriting review. Collection accounts and record of recent late payments were also revealed in the current credit report. A time line graphic was presented at trial showing the plaintiff’s credit activities. The credit documentation and time line helped the jurors deny the economic damage award.

Refuting Plaintiff’s Expert Witnesses

As another means of credit reputation damage defense, counsel can question the economic damage credentials and knowledge of the plaintiff’s credit damage expert. Is the expert’s report objective and neutral in language regarding the plaintiff and the effect of the alleged damage? Does the demand for damages have actual basis? In one case, the plaintiff’s expert claimed the plaintiff should be compensated because the stress of the economic damage was keeping her up at night. The jury denied damages for her tossing and turning.

A requisite for a capable economic damage measurement expert is an ability to provide a thorough review and understanding of standard credit report information in context of current marketplace requirements. The expert must have the ability to compare pre-injury charges to post injury charges of the borrower. Plaintiff’s counsel may bring in experts to convince jurors of damages, yet with a little digging on the part of the defense, often times it can be revealed that these experts do not possess the ability to formulate a monetization damage because it is beyond the scope of their expertise.

An economist, for example, can readily provide lifetime earnings projections, but can rarely recognize how extended lost income directly causes loss of credit reputation and measuring it so it may be a compensable damage. Simple recovery of income may replenish a bank account but the damage to reputation caused by late payments, charged off accounts, collection accounts, foreclosure, or bankruptcy is more nuanced. Loan officers, real estate brokers, accountants and banking experts all may have some qualifications in determining whether monetary damage occurred in their particular specialty but cannot typically provide an overall picture of the total damages that allegedly occurred. This gives the defense an opportunity to bring out this ambiguity during cross examination and cast doubt on their assertions.

As economic damage claims become more prevalent, defense attorneys must have a strategy in place to neutralize these claims. Obtaining adequate documentation and undermining the plaintiff’s expert witnesses and reports can go a long way in achieving this goal.

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