2nd Cir: Debtor’s Failure to Contest Debt Does Not Insulate Debt Collector from Liability under FDCPA

By Stephen J Shapiro

The Fair Debt Collection Practices Act (“FDCPA”) requires that a debt collector attempting to collect a debt notify a consumer that (1) “unless the consumer . . . disputes the validity of the debt . . . the debt will be assumed to be valid by the debt collector,” and (2) if the consumer disputes the debt, “the debt collector will obtain [and send to the consumer] verification of the debt . . . .”  15 U.S.C. § 1692g(a)(3) and (4).  The Second Circuit recently held that compliance with these provisions does not insulate debt collectors from claims alleging that they violated the FDCPA by making false representations about debts.

In Vangorden v. Second Round, Limited Partnership, a creditor agreed to settle a debtor’s credit card debt for less than the amount the debtor owed.  Five years later, a debt collector purchased the debtor’s settled debt and sent the debtor a letter requesting that she pay the “current outstanding balance” on her credit card of about $1,300.  In compliance with § 1692g(a), the letter notified the debtor that she had the right to dispute the validity of the debt and that the debt collector would verify the debt if she did so.  The debtor did not dispute the debt.  Instead, she sued the debt collector alleging that it violated several provisions of the FDCPA by falsely representing the existence, amount and legal status of the debt.  The debt collector moved to dismiss the suit on the grounds that the debtor did not exercise her right to dispute the debt, and the trial court granted the motion.

On appeal, the Second Circuit reversed.  Joining the Third Circuit and Fourth Circuit, the Second Circuit held that “nothing in the text of the FDCPA suggests that a debtor’s ability to state a [claim under the Act] ‘is dependent upon the debtor first disputing the validity of the debt in accordance with § 1692g.’”

In reaching its decision, the Second Circuit relied in part on the FDCPA’s “bona fide error” defense.  Section 1692k(c) of the FDCPA provides that a debt collector “may not be held liable . . . if the debt collector shows by a preponderance of the evidence that [a] violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.”  The Court held that, where debt collectors make honest mistakes, “the protection the FDCPA affords debt collectors . . . is the affirmative defense stated in § 1692k(c), not an immunity from suit inferred from the dispute notice provision of § 1692g.”

Practitioners can draw a number of lessons from Vangorden:  1) At least in the Second, Third and Fourth Circuits, debt collectors are unlikely to prevail on requests to dismiss FDCPA claims on the ground that the debtor did not contest the debt at issue.  2) Where the facts so warrant, debt collectors should plead § 1692k(c) as an affirmative defense to avoid potential waiver arguments.  3) Where a debt collector intends to invoke the “bona fide error” defense, it should make efforts to develop record facts to support the defense, since the burden of proof will fall on the debt collector at both the summary judgment stage and at trial.

 

Creditors can be found liable for violating the FDCPA when they use third party debt collectors that do not make bona fide attempts to collect debts

By Stephen J. Shapiro

Last week the Second Circuit held that: (1) a creditor can face liability under the Fair Debt Collection Practices Act (FDCPA) when a third party it hires to contact debtors does not make bona fide attempts to collect the debt but rather acts as a mere conduit between the creditor and debtor; and (2) the assignee of a debt is not a “creditor” for purposes of the Truth in Lending Act (TILA).

The plaintiffs in Vincent v. The Money Store were several homeowners who took out mortgage loans, each from a different lender. Each mortgage was assigned to The Money Store, and each plaintiff thereafter defaulted on his or her mortgage.

The Money Store had an arrangement with a law firm, Moss Codilis, pursuant to which the firm would mail breach notices to borrowers who had defaulted. The Money Store provided Moss Codilis with spreadsheets containing contact information for the borrowers in default, and Moss Codilis would send each borrower a virtually identical letter stating that The Money Store had retained Moss Codilis to collect a debt. However, after sending the letters, Moss Codilis rarely played any further role in collecting the debts, and if The Money Store brought collection actions against the borrowers, other firms would handle those actions. The Money Store initially paid Moss Codilis $50 for each letter, but later reduced the payment to $35 per letter. During a five-year period, Moss Codilis sent almost 89,000 of these letters. Testimony suggested that the The Money Store used Moss Codilis to send default letters on the theory that a letter on law firm letterhead was more likely to catch the attention of the defaulted borrowers.

After receiving letters from Moss Codilis, plaintiffs brought a putative class action against The Money Store, arguing that, by having Moss Codilis send the letters, The Money Store violated the FDCPA. Plaintiffs also argued that The Money Store violated TILA by charging them unauthorized fees, which created credit balances on their accounts, and then refusing to refund those credit balances. The district court granted summary judgment to The Money Store on both claims.

On appeal, the Second Circuit first addressed the FDCPA claim. The Court noted that the FDCPA applies only to “debt collectors,” and that creditors such as The Money Store, as a general rule, do not qualify as debt collectors. However, the FDCPA includes within its definition of debt collector “any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts.” The Court held that:

[W]hen determining whether a representation to a debtor indicates that a third party is collecting or attempting to collect a creditor’s debts, the appropriate inquiry is whether the third party is making bona fide attempts to collect the debts of the creditor or whether it is merely operating as a “conduit” for a collection process that the creditor controls.

Because the record contained evidence from which a jury could find that Moss Codilis made no attempts to collect the debts and was merely acting as a “conduit” for The Money Store, the Court reversed the district court’s grant of summary judgment in favor of The Money Store on the FDCPA count, and remanded that claim for further proceedings.

On the TILA claim, the Court acknowledged that TILA requires “creditors” to refund credit balances on their borrowers’ accounts, but pointed out that an entity only qualifies as a “creditor” for purposes of TILA if the debt at issue was “initially payable” to that entity. The Money Store was not such an entity. Rather, other lenders originated the loans to the plaintiffs and The Money Store only later acquired the loans. Therefore, the Court held, The Money Store was not a “creditor” as that term is defined in TILA, and, as such, TILA did not require it to refund credit balances. In so ruling, the Court rejected the plaintiffs’ argument that the entity that receives the first payment on a loan is a “creditor” for purposes of TILA, regardless of whether that entity originated the loan.

Although it affirmed the dismissal of plaintiffs’ TILA claim, the Court questioned whether Congress intended the result that the statutory language mandated. The Court pointed out that TILA requires loan originators to refund credit balances on borrowers’ accounts, but exempts any entity other than the originating lender from that requirement. In light of the fact that many originators assign their mortgage loans to others, the narrow definition of “creditor” exempts a significant number of loans from the protections afforded by TILA. The Court surmised that this result may have been the unintended consequence of amendments Congress made to TILA, and “note[d] th[e] discrepancy . . . for the benefit of Congress and the Federal Reserve.”

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