Banking and Finance Law Daily FDCPA claims against passive debt buyer go forward
Wednesday, February 27, 2019

FDCPA claims against passive debt buyer go forward

By Nicole D. Prysby, J.D.

A debt buyer may be a "debt collector" under the FDCPA even though it outsourced the collection. Because the debt buyer’s entire reason for existence was to collect debts, it fell within the FDCPA definition.

An entity that otherwise meets the "principal purpose" definition of a debt collector under the Fair Debt Collection Practices Act cannot avoid coverage by the FDCPA by hiring a third party to do its collecting, held the U.S. Court of Appeals for the Third Circuit. The debt buyer argued that under recent Supreme Court precedent, it could not be a "debt collector" under the "regularly collects" prong of the definition because it owned the debts in question and was therefore a "creditor." However, the Third Circuit noted that the Supreme Court’s decision did not consider the question under the "principal purpose" prong of the definition. Under that prong, an entity is not excluded from being a debt collector merely by virtue of the fact that another entity did the actual collecting. Nothing in the statute limits the definition to entities that overtly collect debts, and there is no evidence that Congress intended to so limit the definition. Relevant to the question to be determined on remand, the court also noted that vicarious liability need not be based on a showing of actual control and that a debt buyer could be held vicariously liable under the FDCPA even if the agent does not qualify as a debt collector in its own right (Barbato v. Greystone Alliance, LLC, Feb. 22, 2019, Krause, C.).

Background. The defendant is a purchaser of charged-off receivables. When it purchases an account, it determines whether the debtor has filed for bankruptcy or is deceased. If neither is the case, it does not collect on the account itself but refers the charged-off receivable to a third-party servicer for collection or hires a debt collection law firm to file a collection lawsuit on its behalf.

Relevant to this case, the debt buyer referred the case to a third-party debt servicer. The debt servicer contacted the consumer by letter and phone. The debt buyer had no direct communication with the consumer and did not review the letter sent to her. When the consumer filed for bankruptcy, the debt buyer recalled her account from the servicer and took no further action. The consumer brought FDCPA claims against the debt buyer and debt servicer. The debt buyer asserted that it is not a debt collector under the FDCPA. The consumer argued that the debt buyer met the FDCPA’s definition of debt collector in that it purchased debts while they were in default and that it satisfied the statute’s "principal purpose" definition because the principal purpose of its business was the collection of those defaulted debts, even if it hired third-party debt collectors to do the collecting. The district court agreed with both of the consumer’s arguments.

Subsequent to the district court’s decision, the U.S. Supreme Court issued a decision in Henson v. Santander Consumer USA Inc., interpreting the "regularly collects" definition (see Banking and Finance Law Daily, June 12, 2017). The Court held that it was irrelevant whether the debt acquired and sought to be collected was in default; instead, it held that the only relevant consideration is whether the defendant regularly seeks to collect debts for its own account or does so for another. Based on the Henson decision, the debt buyer argued that it is not a debt collector because it collects debts on its own behalf. The district court disagreed, but certified its decision for interlocutory appeal and presented the following question to the Third Circuit: whether Henson requires a finding that the defendant is not a debt collector in this case when it was a third-party buyer of the debt, and the debt was in default at the time it purchased it.

Debt buyer qualifies as debt collector under FDCPA. The debt buyer presented three arguments. First, the Supreme Court’s decision in Henson undermined prior Third Circuit precedent that would render it a debt collector. Second, its principal purpose is the acquisition—not the collection—of debt. And third, the legislative history demonstrates that Congress intended to regulate the proverbial "repo man," not a "passive debt owner." The court rejected all three arguments.

The Supreme Court’s Henson decision explicitly declined to address whether debt buyers could qualify as debt collectors under the "principal purpose" definition in the FDCPA. Until Henson, the Third Circuit relied on a test classifying an entity as either a creditor or a debt collector. After Henson, which rejected that test, the categories of debt collector and creditor are no longer mutually exclusive. Therefore, the debt buyer is not excluded from coverage under the FDCPA merely because it meets the definition of a creditor because it owns the debt in question.

In addition, Henson did not address the other prong of § 1692a(6)—the wholly separate "principal purpose" definition. Prior Third Circuit precedent holds that an entity is not excluded from being a debt collector merely by virtue of the fact that another entity did the actual collecting. The debt buyer argued that the principal purpose definition applies only to those that engage in overt acts of collection, not entities that purchase and outsource the debt. But, the court found, nothing in the statute so limits the definition and the debt buyer’s principal purpose of existence is to collect debts. (It could, for example, have bought debts for the purpose of reselling them to unrelated parties at a profit, in which case its principal purpose would not be to collect debts).

In the principal purpose definition, Congress did not specify who must do the collecting or to whom the debt must be owed. It was unnecessary for Congress to specify that the collection may be direct or indirect, because collection, by its very definition, may be indirect. There is also no evidence in the legislative history that Congress only intended to regulate "repo men." And in fact, because the debt buyer’s only incentive is to get consumers to pay debts (as opposed to cultivating good will among customers), it is more like a repo man than a creditor.

Other issues. The court noted that its decision did not address the ultimate issue of liability in the case, which rested on principles of vicarious liability, as that issue was not present on appeal. But it did make two observations. First, that vicarious liability need not be based on a showing of actual control. Second, that a debt buyer could be held vicariously liable under the FDCPA even if the agent does not qualify as a debt collector in its own right.

The case number is No. 18-1042.

Attorneys: Cathleen M. Combs (Edelman Combs Latturner & Goodwin) for Mary Barbato. Anthony J. Gingo (Gingo Palumbo Law Group) for Crown Asset Management LLC.

Companies: Crown Asset Management LLC; Turning Point Capital Inc.; Greystone Alliance LLC

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