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Ninth Circuit: County Contractor that Counsels Bad-Check Writers Not Entitled to State Sovereign Immunity from Suit

by John E. Dannenberg

The Ninth Circuit U.S. Court of Appeals has ruled that a private firm hired by a California county to run a diversion program for bad-check writers was not immune from suit under a claim of state sovereign immunity.

California law authorizes District Attorneys to offer a diversion program for bad-check writers in lieu of formal criminal prosecution (CA Penal Code §§ 1001.60-67), a service that can be contracted to private companies. To this end, the Santa Clara County District Attorney (DA) hired American Corrective Counseling Services (ACCS) to operate the county’s § 1001.60 bad check diversion program. To qualify for the program, an offender must cover the bad check, complete a course and pay applicable collection and administrative fees. For its efforts, ACCS collects a $100 class fee, other costs and late charges, plus 60% of all administrative fees.

ACCS’s contract with the county denominates ACCS as an “INDEPENDENT CONTRACTOR” (emphasis in original), and notes that “nothing within this agreement shall be construed as creating a relationship of employer or employee, or principal and agent, between the County of Santa Clara and ACCS.” The contract further requires ACCS to indemnify the county and carry its own insurance.

When Elena M. del Campo bounced a check for $95.02, ACCS sprung into action by sending her a demand letter, written on the DA’s letterhead, telling her that she could avoid a court proceeding if she voluntarily enrolled in their program at a cost of $265.02. Del Campo sent payment for just her original bad check, whereupon ACCS mailed a follow-up letter warning her that failure to pay the balance could result in criminal prosecution.

Rather than pay, del Campo filed a 42 U.S.C. § 1983 complaint in U.S. District Court against the DA’s office, ACCS and related companies and officials, alleging violations of the California Unfair Business Practices Act, CA Bus. & Prof. Code §§ 17200 et seq., and the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 et seq.

Both ACCS and the DA claimed state sovereign immunity from suit, which the district court declined to extend. While the DA was ultimately dismissed from the lawsuit, the question remained as to whether ACCS, as a private contractor, was entitled to immunity.
The court determined that the bad check diversion program, although authorized by state law, was in fact a county and not a state program. Hence, ACCS’s involvement could not be construed as a “central function of state government” as required for state sovereign immunity.

On appeal, the Ninth Circuit first ruled that it had jurisdiction to hear the matter, prior to a final judgment in the district court, because “whether the immunity reaches beyond ‘states and state entities’ is the substantive issue we face, which we may not prejudge by denying jurisdiction to decide it.”

Turning to the merits, the appellate court relied on United States ex rel. Ali v. Daniel, Mann, Johnson & Mendenhall, 355 F.3d 1140 (9th Cir. 2004) at 1146-48, to demonstrate why private entities’ claims of state sovereign immunity must fail. The court reviewed U.S. Supreme Court precedent, Ninth Circuit precedent and case law from all the other circuits, and found them unanimous in holding that state sovereign immunity is not shared by private entities contracted by governmental agencies to do “official” work. In fact, using the five-part test for such immunity set forth in Ali, it is plain that a private entity could never meet four of those tests. Thus, ACCS, as a private contractor, was not entitled to “state sovereign immunity.”

Accordingly, the Ninth Circuit affirmed the district court, permitting del Campo’s lawsuit to proceed. See: Del Campo v. American Corrective Counseling Services, Inc., 517 F.3d 1070 (9th Cir. 2008). Following remand, the district court granted class action status in this case on December 3, 2008. See: Del Campo v. American Corrective Counseling Services, Inc., 254 F.R.D. 585 (ND Cal. 2008); 2008 U.S. Dist. LEXIS 106004.
ACCS filed for Chapter 11 Bankruptcy on January 19, 2009, resulting in a stay; the lawsuit is ongoing against other defendants, with class notification pending.

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Del Campo v. American Corrective Counseling Services, Inc.

Del Campo v. American Corrective Counseling Services, Inc.