A TCPA Violation Confers Standing Under Spokeo in the 3rd Circuit

By Stephen A. Fogdall

The United States Court of Appeals for the Third Circuit has concluded that an alleged violation of the Telephone Consumer Protection Act creates a sufficiently concrete injury to give a plaintiff standing to sue under Spokeo, Inc. v. Robbins.

The U.S. Supreme Court held last year in Spokeo that while a violation of a statutory right does not by itself constitute a concrete injury for purposes of Article III standing, Congress nevertheless can by statute elevate an intangible harm “to the status of a legally cognizable injury” where the “intangible harm has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.”

The Third Circuit applied this principle to the TCPA in Susinno v. Work Out World Inc.  The plaintiff alleged that she received an unsolicited call on her cell phone from a fitness company, and the company left a one minute prerecorded voicemail message when she did not answer.  She was not charged for the call.

The Third Circuit held, first, that that these allegations were sufficient to state a claim for a violation of the TCPA, and second, that the plaintiff had standing to bring the claim under Spokeo.  The court explained that “when one sues under a statute alleging the very injury the statute is intended to prevent, and the injury has a close relationship to a harm traditionally providing a basis for a lawsuit in English and American courts, a concrete injury has been pleaded.”

The court found that both of these requirements were met on the plaintiff’s allegations.  The alleged “nuisance and invasion of privacy” resulting from a single unsolicited cell phone call and prerecorded voicemail message were “the very harm Congress sought to prevent” under the TCPA, and bore a close relationship to claims for invasion of privacy and “intrusion upon seclusion” that traditionally have been protected under the common law.

SCOTUS Clarifies Who is a Debt Collector Under FDCPA

By Stephen A. Fogdall

The Fair Debt Collection Practices Act (FDCPA) prohibits a “debt collector” from using any “false, deceptive, or misleading representation or means in connection with the collection of any debt,” as well as any “unfair or unconscionable means to collect or attempt to collect any debt.”  15 U.S.C. §§ 1692e, 1692f.  The critical predicate for liability under these provisions is that the party allegedly engaged in the improper conduct is, in fact, a “debt collector.”  It is well-settled that a party seeking to collect for its own account a debt it itself originated is not a “debt collector,” while an independent party in the business of collecting debts owned by others is a “debt collector.”   However, over the past ten years a circuit split arose regarding whether a party that buys debts originated by someone else, after those debts have gone into default, and then seeks to collect those debts for its own account is a “debt collector.”  The Third and Seventh Circuits concluded that such parties are debt collectors under the FDCPA, while the Fourth and Eleventh Circuits concluded that they are not.  The U.S. Supreme Court recently weighed in in Henson v. Santander Consumer USA Inc..  In a unanimous decision authored by Associate Justice Gorsuch (his first), the Court concluded that at least one part of the FDCPA’s definition of a “debt collector” excludes such parties.

The FDCPA broadly defines a “debt collector” as “any person” who (1) “uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts” (sometimes referred to as the FDCPA’s “first definition” of a “debt collector”)  or (2) “who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another” (sometimes referred to as the “second definition” of a “debt collector”).  15 U.S.C. § 1692(a)(6).  The statute then lists six exclusions, one of which is relevant to the Henson decision.  Specifically, this exclusion provides that the term “debt collector” “does not include” “any person collecting or attempting to collect any debt owed or due . . . another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.”  15 U.S.C. § 1692a(6)(F)(iii).  This exclusion is discussed further below.

The Court in Henson addressed the second definition, the portion that applies to those who “regularly collect . . . debts owed or due . . . another.”  The Court specifically declined to address the first definition, the portion that applies to persons “in any business the principal purpose of which is to the collection of any debts,” stating that “the parties haven’t much litigated” this portion and it was outside the scope of the grant of certiorari.

Addressing the second definition, the Court fairly easily concluded that it excludes those who, like the respondent in Henson, purchase debts (even, importantly, after the debts have already gone into default) and seek to collect those debts for their own account.  Because the second definition by its terms refers to the collection of debts owed to “another,” it follows, the Court held, that the definition does not include those who collect debts for themselves.

The petitioners’ primary argument against this conclusion was that the second definition uses the word “owed” in the past tense.  Thus, according to the petitioners, a subsequent purchaser of a debt that was at one time “owed” to “another,” namely, the originating lender, would qualify as a “debt collector.”  The Court rejected this argument, noting that the word “owed” could easily be understood in the present tense, and, in any event, construing it in the past tense would be difficult to square with the nearby word “due” (“owed or due . . . another”), which indisputably is used in the present tense.

The Court then addressed the exclusion, alluded to above, removing from the definition “any person collecting or attempting to collect any debt owed or due . . . another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.”  15 U.S.C. § 1692a(6)(F)(iii).  The Court rejected the petitioners’ suggestion that by excluding a person collecting a debt that “was not in default at the time it was obtained by such person,” the definition of “debt collector” impliedly included a person collecting a debt that was in default “at the time it was obtained by such person” (which allegedly was the case with the debts at issue here).

The Court concluded, first, that the term “obtained” in this exclusion does not mean “purchased,” but rather having taken “possession” of a debt “for servicing and collection.”  Second, the Court concluded that since the exclusion removes persons from the scope of the term “debt collector” who would otherwise fall within it, the exclusion does even not apply unless the person at issue does indeed satisfy the initial definition.  In other words, a person must, as a threshold, “attempt to collect debts owed another” in order for the logically secondary question to arise as to whether that person is within the terms of the exclusion.  The Court observed that the “petitioners’ argument simply does not fully confront this plain and implacable textual prerequisite.”

Although it is now clear that a party seeking to collect a debt for its own account (even when it acquired the debt after it had already gone into default) cannot be a “debt collector” under the second of the two definitions in the FDCPA, by declining to address the first definition, the Court in Henson left open the possibility that a party collecting  for its own account might still qualify as a debt collector if it is “in any business the principal purpose of which is the collection of any debts.”  15 U.S.C. § 1692a(6).  Indeed, the Eleventh Circuit, after concluding, like the Supreme Court in Henson, that the second definition excludes parties collecting debts for their own accounts, expressly acknowledged that such a party might nevertheless be a debt collector under the first definition if its “‘principal purpose’ is the collection of ‘any debts.’”  Davidson v. Capital One Bank (USA), N.A., 797 F.3d 1309, 1316 n.8 (11th Cir. 2015).

There are comparatively few decisions analyzing the first definition, but that presumably will change in the wake of Henson, as plaintiffs, and their lawyers, seek to make use of this still potentially open path to attempt to establish that a debt owner is a “debt collector.”  Parties that purchase and collect debts for their own accounts should pay close attention as this issue evolves.  This blog will track and report on significant developments.

Eighth Circuit Opens Circuit Split on the Scope of the Equal Credit Opportunity Act

By Aaron J. Fickes

The Equal Credit Opportunity Act (ECOA) makes it unlawful for any creditor “to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.” The statute was designed to prevent, in part, creditors from refusing to grant a wife’s credit application without a guaranty from her husband. However, one must be an “applicant” for the statute’s protections to apply. While Congress defined “applicant,” the Federal Reserve Bank expanded the definition by regulation to include guarantors. Is that regulation entitled to deference under the familiar Chevron two-step framework? The question is important because it determines the scope of the ECOA.

The two courts of appeals that have squarely addressed this issue have reached opposite conclusions. Earlier this year, the Sixth Circuit in RL BB Acquisition, LLC v. Bridgemill Commons Development Group enforced the regulation, effectively expanding the scope of the ECOA. According to the Sixth Circuit, because the ECOA does not specify whether a guarantor qualifies as an applicant, and because the Federal Reserve’s interpretation — that a guarantor is a credit applicant — is reasonable in light of the statute, the Federal Reserve’s definition is entitled to deference and therefore enforceable.

Recently, the Eighth Circuit in Hawkins v. Community Bank of Raymore expressly disagreed with the Sixth Circuit. In that case, the plaintiffs, two wives, alleged that Community Bank required them to execute guaranties securing loans to a company that their husbands owned solely because they are married to their respective husbands. The plaintiffs claimed that this requirement constituted discrimination against them on the basis of their marital status, in violation of the ECOA, so their guaranties were void and unenforceable. Community Bank moved for summary judgment. The trial court granted the motion, holding that the plaintiffs, as guarantors, were not “applicants” within the meaning of the ECOA. As such, Community Bank could not violate the ECOA by requiring the plaintiffs to execute guaranties.

The Eighth Circuit affirmed. At Chevron step one the court held that the plain language of the ECOA provides that a person is an applicant only if she requests credit. A guarantor does not request credit, but rather assumes a secondary, contingent liability on behalf of the person requesting credit. So, a guarantor cannot be an applicant under the ECOA. As a result, a guarantor is not protected from marital-status discrimination by the ECOA.

The Supreme Court may intervene to resolve this circuit split. Until then, it may be prudent for creditors outside of the Eighth Circuit to assume that the Sixth Circuit rule applies to avoid potential liability under the ECOA.

UPDATE: 

The Supreme Court agreed to review Hawkins and on March 22, 2016, issued a 4-4 per curiam order.  Because the Court was evenly divided, the order has the effect of affirming the Eighth Circuit’s ruling, but it has no precedential value for future cases.  As a result, the circuit split remains.

The CFPB Takes Aim at Arbitration Clauses in Contracts for Consumer Financial Products

Schnader Alert by Monica Clarke Platt:

The Consumer Financial Protection Bureau (CFPB) last week issued two proposals aimed at weakening and discouraging arbitration clauses in contracts for consumer financial products. First, the CFPB proposes prohibiting the application of arbitration clauses to class actions proceeding in court. Specifically, the Bureau is considering a requirement that arbitration clauses in covered consumer financial contracts provide that the arbitration agreement is inapplicable to putative class actions filed in court unless and until class certification is denied or the class claims are dismissed. This proposal could significantly increase putative class claims in the consumer finance sector (indeed, increasing access to class litigation appears to be the Bureau’s goal). Second, the Bureau seeks to require entities that use arbitration agreements in their contracts to submit to the Bureau notice of claims filed in arbitration proceedings and arbitration awards, potentially for publication.

Please click here to read the full Alert.

Third Circuit holds that only “material” representations by a debt collector are actionable under the FDCPA

By Stephen J. Shapiro

Joining a national trend, the United States Court of Appeals for the Third Circuit recently held that a plaintiff must allege more than just a misleading representation to prevail on a claim under the Fair Debt Collections Practices Act (FDCPA). Rather, a plaintiff must allege that the representation at issue was “material” in the sense that it would impact the decision-making process of the least sophisticated debtor.

In Jensen v. Pressler & Pressler, the attorneys for a debt collector, after obtaining a default judgment in a New Jersey state court against a debtor who failed to pay her credit card debt, served the debtor with a subpoena in aid of collection.  Under the New Jersey rules, an attorney may issue a subpoena in the name of the clerk of the New Jersey Superior Court. When the attorneys prepared the subpoena, though, they mistakenly used the name of a person who was not – and never had been – a clerk of the Superior Court.

The debtor brought a putative class action in the United States District Court for the District of New Jersey alleging that the debt collector and its attorneys violated provisions of the FDCPA that prohibit those collecting debts from (a) using false, deceptive, or misleading representations to collect debts from a consumer, and (b) falsely representing that a document used to collect a debt is “authorized, issued or approved by any court …” The district court granted summary judgment in favor of the debt collector and its attorneys on the ground that the misidentification of the clerk was not a material false statement.

On appeal, the Third Circuit affirmed, joining the Fourth, Sixth, Seventh, and Ninth Circuits in holding that only material representations are actionable under the FDCPA.  The Court began by noting that the “least sophisticated debtor” standard governs claims under the FDCPA.  Under that standard, Courts “focus on whether a debt collector’s statement in a communication to a debtor would deceive or mislead the least sophisticated debtor.”  Whether the statement at issue is literally true or false is not determinative.  Rather, “debt collection communications must be assessed from the perspective of the least sophisticated consumer regardless of whether a communication is alleged to be false, misleading, or deceptive.”  Therefore, the Court held, “a false statement is only actionable under the FDCPA if it has the potential to affect the decision-making process of the least sophisticated debtor; in other words, it must be material when viewed through the least sophisticated debtor’s eyes.”

Applying the materiality standard to the facts before it, the Court held that the misidentification of the clerk in the subpoena “could not possibly have affected the least sophisticated debtor’s ‘ability to make intelligent decisions.’”  As for the debtor’s alternate argument – that, by misidentifying the clerk, the defendants violated the FDCPA by falsely representing that the subpoena was authorized by a court – the Third Circuit held that, because attorneys in New Jersey are authorized to act as agents of the clerk when issuing subpoenas, the subpoena was validly issued regardless of the misidentification of the clerk.

* Joshua Won, Temple University School of Law Class of 2017, assisted with the preparation of this post.

The U.S. Supreme Court Unanimously Rules Against the Creditor in Jesinoski

By Stephen A. Fogdall

We predicted here that at least five U.S. Supreme Court Justices would reject the creditor’s argument in Jesinoski v. Countrywide Home Loans, Inc. that a borrower must file a lawsuit within three years of the consummation of the loan in order to preserve the statutory right to rescind under the Truth in Lending Act. As it turned out, the Court rejected that argument unanimously, holding instead that mere written notice to the creditor within the three-year period is sufficient. “[The statute] explains in unequivocal terms how the right to rescind is to be exercised,” the Court stated. “It provides that a borrower ‘shall have the right to rescind . . . by notifying the creditor . . . of his intention to do so’ (emphasis added). The language leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely. The statute does not also require him to sue within three years.”

Pennsylvania Supreme Court Formally Adopts “Gist of the Action” Doctrine

By Stephen J. Shapiro

Pennsylvania’s “gist of the action” doctrine prohibits plaintiffs from pursuing tort claims for what are, in actuality, breach of contract claims.  A variety of defendants, including those in the financial services industry, regularly have invoked the doctrine to seek dismissal of contract-based claims that are “dressed up” as tort claims in an effort to pursue damages – such as consequential and punitive damages – that might not be available under a breach of contract claim.

Although the Pennsylvania Supreme Court had never formally recognized the doctrine, the intermediate appellate courts in Pennsylvania, as well as the Third Circuit, had applied the doctrine for years, predicting that the Supreme Court would adopt the doctrine if given the opportunity.  In the recent case Bruno v. Erie Insurance Company, the Pennsylvania Supreme Court confirmed the accuracy of those predictions.

In Bruno, the plaintiff homeowners purchased an insurance policy from the defendant insurer that, among other things, insured the homeowners against physical loss to the property caused by mold.  While renovating their home, the homeowners discovered mold growing on their basement walls.  Agents of the insurer told the homeowners that the mold was harmless and that they should continue with the renovations, which they did.  When the homeowners began to suffer from severe respiratory ailments, they had the mold tested and learned that it was toxic.  One of the homeowners later developed cancer, which her physician believed was caused by the toxic mold.  Unable to remove the mold, the homeowners eventually were forced to demolish the house.

The homeowners sued the insurance company for, among other causes of action, negligence, alleging that the insurer negligently misled them about the health risks posed by the mold.  The insurer filed preliminary objections to the negligence claim, arguing that it was barred by the gist of the action doctrine.  The trial court sustained the preliminary objections and, on an interlocutory appeal, the Superior Court affirmed the dismissal of the negligence claim, holding that “the gravamen of [the homeowners’] action . . . sounds in contract – not in tort.”

On appeal, the Pennsylvania Supreme Court formally adopted the gist of the action doctrine.  The Court explained that a claim can be categorized as a contract claim or a tort claim as follows:

“If the facts of a particular claim establish that the duty breached is one created by the parties by the terms of their contract – i.e., a specific promise to do something that a party would not ordinarily have been obligated to do but for the existence of the contract – then the claim is to be viewed as one for breach of contract.  If however, the facts establish that the claim involved the defendants’ violation of a broader social duty owed to all individuals, which is imposed by the law of torts and, hence, exists regardless of the contract, then it must be regarded as a tort.”

The Court went on to specify that:

“[A] negligence claim based on the actions of a contracting party in performing contractual obligations is not viewed as an action on the underlying contract itself, since it is not founded on the breach of any of the specific executory promises which comprise the contract.  Instead, the contract is regarded merely as the vehicle, or mechanism, which established the relationship between the parties, during which the tort of negligence was committed.”

The Court cautioned that, when applying the gist of the action doctrine, the substance of the plaintiff’s allegations, not the label placed on the claim, governs:  “[T]he substance of the allegations comprising a claim in a plaintiff’s complaint are of paramount importance, and, thus, the mere labeling by the plaintiff of a claim as being in tort, e.g., for negligence, is not controlling.”

Applying the gist of the action doctrine to the facts before it, the Court held that the homeowners’ negligence claim was “not based on [the insurer’s] violation of any . . . contractual commitments.”  Rather, the homeowners alleged that the insurer’s agents acted negligently “while they were performing [the insurer’s] contractual obligation to investigate the claim made by the [homeowners] under their policy.”  Because, the Court explained, “[t]he policy in this instance merely served as the vehicle which established the relationship between the [parties], during the existence of which [the insurer] allegedly committed a tort,” the gist of the action doctrine did not bar the homeowners’ negligence claim.  Therefore, the Court reversed and remanded for further proceedings.

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