Accounts receivable entities which are inundated by seemingly auto-generated dispute letters have been paying close attention to the case filed by CBE Group, Inc. (CBE) and RGS Financial, Inc. (RGS) against Lexington Law (Lexington) and Progrexion, Inc. What at first seemed like a significant win for entities being flooded with these letters has seemingly ended with the opposite result.
Here's a recap of the saga: in 2017, after years of receiving massive amounts of letters with consumer signatures that appeared to be auto-generated and not sent from the actual consumers themselves, CBE and RGS filed a lawsuit against Lexington and Progrexion. The suit alleged Lexington and Progrexion (as Lexington's agent) committed fraud by making the letters appear to be from consumers when the letters were actually sent by Lexington on templates created by Progrexion. In July 2019, a jury returned a verdict awarding a total of 2.5 million dollars in actual and punitive damages to CBE and RGS, finding that the practice amounted to fraud, including by failing to disclose material facts.
What happened after the verdict?
After the jury came back with its award, Lexington and Progrexion filed post-judgment motions asking the District Court to set aside the jury’s verdict. In February 2020, the District Court granted the motions and overturned the jury verdict primarily on the basis that Lexington’s engagement agreement with its clients (1) allowed Lexington to send letters on its client’s behalf in their names, and (2) advised each client that the letters “will not be identified as being sent by Lexington.” The District Court reasoned that since Lexington had the legal right to sign its client's names, it did not make any false representations, material or otherwise when it sent the letters (a false representation is a requirement for a fraud claim).
CBE and RGS appealed, and on April 1, 2021, the Fifth Circuit Court of Appeals affirmed the District Court’s ruling, confirming that as a matter of law, Lexington’s conduct did not amount to fraud. The Fifth Circuit also focused on the language of Lexington’s engagement agreements and rejected CBE and RGS's contention that there was no true attorney-client relationship between Lexington and its clients. Instead, the Court noted that the engagement agreements had not been shown to be invalid, and even if Lexington’s clients misunderstood the terms of the engagement agreement, they were still bound by it. Like the District Court, the Fifth Circuit concluded that since Lexington was operating with its clients’ consent, it did not make any false representations when it sent the letters, nor did Lexington create any false impressions requiring disclosure.
Further, the court held that the fraud claims must fail because CBE and RGS did not “justifiably rely” on the alleged misrepresentations since their internal policies and procedures require them to investigate and respond to dispute letters sent by consumers third parties alike. Regarding Progrexion, the Court held “there is no evidence that Progrexion sent dispute letters; rather the evidence is that Progrexion provided template letters to Lexington  for its use, hence Progrexion cannot be liable for fraud since it like Lexington law did not make any material misrepresentations.”
As we stated when the District Court vacated the judgment in 2020, this is an unfortunate ruling in the fight against a practice that ultimately harms consumers. Legitimate debt collectors understand the importance of accurately reporting account information to the credit bureaus, and they build robust compliance processes and procedures to ensure they are reporting correctly and are able to investigate quickly—and, if necessary, correct—disputed information. It is believed that many credit report disputes, such as the ones from credit repair organizations, are not legitimate; instead, they are an attempt to remove correct, but unwanted, derogatory items from credit reports. If debt collectors are flooded with these illegitimate disputes, it makes it more difficult to separate the wheat from the chaff and help consumers who have legitimate disputes. Maybe there is a different legal theory to pursue in this battle, but the Fifth Circuit has made clear that if the credit repair organization is acting in accordance with its engagement agreement, a fraud suit may not be successful.