Banking and Finance Law Daily Debt buying business that outsources collection activities is a debt collector under FDCPA
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Tuesday, March 10, 2020

Debt buying business that outsources collection activities is a debt collector under FDCPA

By Nicole D. Prysby, J.D.

A debt buyer that otherwise meets the "principal purpose" definition of debt collector in the FDCPA cannot avoid liability under the FDCPA merely by hiring a third party to perform its debt collection activities.

A business that buys and profits from consumer debts, but outsources direct collection activities, qualifies as a "debt collector" for purposes of the Fair Debt Collection Practices Act (FDCPA), held the Ninth Circuit Court of Appeals. A consumer sued the debt buyer, arguing that it is vicariously and jointly liable for alleged FDCPA violations by the firm it contracted with to perform the direct debt collection. The Ninth Circuit found that the debt buyer, which otherwise meets the "principal purpose" definition of debt collector ("any business the principal purpose of which is the collection of any debts") cannot avoid liability under the FDCPA merely by hiring a third party to perform its debt collection activities. The consumer adequately alleged that the debt buyer met the definition, because she alleged that its principal purpose is the collection of debts and it lacks any other business purpose besides debt collection. The dissenting judge would have held that the complaint failed to allege that the debt buyer acted directly in any way to violate the consumer’s rights under the FDCPA and that it is not a "debt collector" under the FDCPA because the consumer did not adequately allege that its "principal purpose" was the "collection of any debts" (McAdory v. M.N.S & Assoc., LLC, March 9, 2020, Christen, M.).

The consumer owed a debt to Kay Jewelers, which DNF Associates, LLC purchased after the consumer stopped making timely payments. DNF outsourced the debt collection to M.N.S. & Associates. MNS contacted the consumer by phone and arranged for repayment of the debt, and then withdrew funds from the consumer’s account before the authorized payment date. The consumer alleged that DNF was vicariously and jointly liable for MNS’s FDCPA violations and that DNF is a debt collector under the FDCPA because its principal purpose is the collection of defaulted consumer debts. DNF argued that because it is a debt buyer that outsources collection activities to third-party contractors, it does not meet the FDCPA’s definition of a "debt collector." The district court agreed, reasoning that the fact that a business benefits from the collection of debt by an entirely separate third party does not necessarily make the principal purpose of that business the collection of those debts. The consumer appealed.

The Ninth Circuit concluded that DNF is a debt collector under the FDCPA. DNF argued that the use of the word "collection" in the first prong of the definition ("any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts") require that a business’s principal purpose must be the act of collecting debts in order to qualify as a "debt collector." The court rejected that argument, finding that the phrase "collection of any debts" in prong one describes the type of business Congress sought to regulate—i.e., one with a principal purpose of debt collection (as opposed to the act of collecting debts). DNF also argued that the FDCPA’s other provisions support the conclusion that Congress intended the principal purpose prong to apply only to those who have direct contact with consumers. For example, the FDCPA’s specific restrictions pertaining to direct interactions with consumers. But, the court found, the fact that the FDCPA includes limits on direct collection activities does not require the conclusion that Congress intended to regulate only those entities that directly interact with consumers. The text of the principal purpose prong contains no such limitation and other parts of the statute make plain that Congress recognized that some debt collectors do not directly interact with consumers. Debt buyers profiting from debt collection lack market incentives that deter the sort of abusive debt collection practices Congress was motivated to regulate. A primary purpose of the FDCPA was to protect consumers from abusive debt collection practices by debt collectors and given the emergence of entities that purchase debt and subcontract regular collection activities, this purpose would be entirely circumvented if the FDCPA’s restrictions did not apply to entities like DNF. DNF argued that it cannot be a debt collector if it also meets the definition for "creditor." The court rejected this argument; there is no per se rule that those who meet the FDCPA’s definition of creditor cannot be debt collectors.

The consumer sufficiently alleged that DNF’s principal purpose is the collection of debts as defined by the principal purpose prong of the definition. The complaint alleged that DNF lacks any other business purpose besides debt collection. These allegations are sufficient to allege that DNF is a debt collector under the FDCPA, regardless of whether DNF outsources debt collection activities to a third party.

Judge Bea dissented, citing three reasons: the complaint failed to allege that DNF acted directly in any way to violate the consumer’s rights under the FDCPA; DNF is not a "debt collector" under the FDCPA because the consumer did not adequately allege that DNF’s "principal purpose" was the "collection of any debts;" and the word "collection" must, in context, describe the action of collecting.

The case is No. 18-35923.

Attorneys: Kelly D. Jones (Law Office of Kelly D. Jones) for Jillian McAdory. Brendan H. Little (Lippes Mathias Wexler Friedman LLP) for DNF Associates, LLC.

Companies: DNF Associates, LLC; M.N.S. & Associates LLC

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