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.

Consumer Financial Protection Bureau Puts Creditors on Notice of Rulemaking Under the Fair Debt Collection Practices Act

By Edward J. Sholinsky

Last week, the Consumer Financial Protection Bureau issued a news release and Advance Notice of Proposed Rulemaking that signals the Bureau’s intention to broadly exercise its claimed power under the Fair Debt Collection Practices Act to regulate creditors and debt collectors.  Most notably, the Bureau is claiming the power to regulate creditors.  Although creditors generally are exempted from liability under the Act, the 113-page Notice touches on nearly every aspect of debt collection under the Act, seeking comments on a wide variety of topics from traditional written notices to how contemporary communication technology – like social media, text messaging, and cell phones – affect debt collection practices.

Even while acknowledging that Congress specifically excluded creditors from the Act’s reach, the Bureau stated that it “believes it is important to examine whether rules covering the conduct of creditors . . . are warranted,” citing the Dodd-Frank Act as its authority for doing so.  The Bureau’s potential reach here is staggering and could impact creditors, like retailers, medical providers, and small business, which would not likely have considered themselves subject to the Bureau’s jurisdiction or the Act itself. The Bureau signaled earlier this fall that it wished to expand its reach when it claimed supervisory authority over any furnisher of information to credit agencies under the Fair Credit Reporting Act.  We discussed that bulletin in an earlier blog post.  This Notice seems to be the next step in the Bureau’s broad claim to jurisdiction over consumer creditors.

While far ranging, the Notice focuses specific attention on the adequacy of information that creditors provide to collectors and buyers of debts, and how creditors transmit that information.  The questions posed by the Bureau suggest that it is contemplating rules governing how creditors provide information to debt collectors and buyers when assigning or selling a debt and the oversight creditors have over the collection of the sold or assigned debt.  Additionally, the Bureau dedicated a section of the Notice to technology that both creditors and debt collectors and buyers can use to share information, and privacy concerns relating to that technology.

This Notice is the second signal since September that the Bureau is looking to expand its purview in the area of debt collection to creditors, who generally are considered to be outside of the reach of federal debt collection laws.

The Third Circuit holds that communications with debtors during bankruptcy proceedings can expose debt collectors to liability under the FDCPA

By Stephen J. Shapiro

The Third Circuit, addressing an issue of first impression in the circuit, recently held that debtors who receive communications from debt collectors in the course of bankruptcy proceedings are not barred from pursuing claims alleging that those communications violate the Fair Debt Collections Practices Act (FDCPA).  In Simon v. FIA Card Services, N.A., the plaintiffs filed for bankruptcy and FIA, one of their unsecured creditors, hired a law firm to represent its interests in the bankruptcy proceeding.  The law firm sent a letter to the Simons’ bankruptcy counsel in which it offered to refrain from initiating a proceeding to declare the debt nondischargeable if the Simons either stipulated that the debt was nondischargeable or agreed to settle the debt by paying a discounted amount.  The letter also enclosed a notice of the law firm’s intent to question the plaintiffs pursuant to Bankruptcy Rule 2004.

The Simons sued FIA and the law firm, arguing that the letter and notice violated the FDCPA.  The district court dismissed the suit because, it held, the Bankruptcy Code precluded the Simons’ FDCPA claims and because the Simons’ allegations were not sufficient to state a claim under the FDCPA.

The Third Circuit reversed.  First, the Court rejected the law firm’s argument that the FDCPA did not apply because the firm’s communication did not demand payment of a debt.  The Court held that the “FDCPA applies to litigation-related activities that do not include an explicit demand for payment when the general purpose is to collect payment,” and that “[t]he letter and notice were an attempt to collect the Simons’ debt through the alternatives of settlement . . . or gathering information to challenge dischargeability” through a Rule 2004 examination.

Next, the Court held that some of the Simons’ allegations stated viable claims for violations of the FDCPA.  Specifically, the FDCPA prohibits debt collectors from “threat[ening] to take any action that cannot legally be taken or that is not intended to be taken” and “false[ly] represent[ing] or impl[ying] that documents are legal process.”  The Court held that the Simons adequately pled that the law firm violated these prohibitions in the FDCPA by failing to comply with provisions of the Bankruptcy Rules and Federal Rules that required the firm to: (a) personally serve the Rule 2004 notice on the Simons, and (b) include in the Rule 2004 notice text explaining the duties of and remedies available to the recipient of such a notice.  The Simons also alleged that the law firm failed to include in its letter the “mini-Miranda” warning required by the FDCPA (that “the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose”).

The Court then addressed an issue of first impression in the Third Circuit: “[W]hether, or to what extent, an FDCPA claim can arise from a debt collector’s communications to a debtor in a pending bankruptcy proceeding.”  The Court first noted that the circuits are split on this issue.  The Ninth Circuit, Ninth Circuit Bankruptcy Appellate Panel and the Second Circuit have held that communications with a debtor in the context of a bankruptcy proceeding cannot violate the FDCPA, while the Seventh Circuit has concluded that they can.  The Court agreed with the Seventh Circuit’s analysis, and held that “[w]hen FDCPA claims arise from communications a debt collector sends a bankruptcy debtor in a pending bankruptcy proceeding . . . there is no categorical preclusion of the FDCPA claims.”  Rather, the courts must consider “whether the FDCPA claim raises a direct conflict between the [Bankruptcy] Code or [Federal] Rules and the FDCPA, or whether both can be enforced.”

Applying that inquiry to the claims before it, the Court held that the Simons’ FDCPA claims based on the law firm’s failure to personally serve the Rule 2004 notice and failure to include in the notice text describing the rights and responsibilities of the recipient did not conflict with the Bankruptcy Code or the Federal Rules and, therefore, reversed the dismissal of those claims.  However, the Court affirmed the dismissal of the FDCPA claim based on the law firm’s failure to include in its letter a warning that it was attempting to collect a debt because such a warning would have violated the Bankruptcy Code’s automatic stay provision, which forbids “any act to collect, assess, or recover a claim against the debtor . . . .”

The lesson for debt collectors in the Simon case is clear.  When communicating with a debtor in a bankruptcy proceeding, debt collectors must take the same care to comply with the FDCPA as they would when communicating with debtors outside of bankruptcy proceedings.

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