U.S. Supreme Court Offers Some Clarity in Assessing Debt Purchaser FDCPA Liability

With its unanimous ruling yesterday that a debt buyer is not a “debt collector” under at least one reading of the federal Fair Debt Collection Practices Act, the U.S. Supreme Court offered some clarity to the financial services industry seeking to assess debt purchaser FDCPA liability.

It did, however, refuse to address an alternative interpretation that will likely be used in an attempt to end-run the ruling. The decision in Henson v. Santander Consumer USA Inc. is available at: Link to Opinion.

Debt Collector Must Be Collecting for ‘Another’

Santander Consumer USA Inc. acquired defaulted loans from CitiFinancial Auto and then began to collect on those loans. Henson sued Santander in U.S. District Court in Maryland alleging Santander’s efforts to collect the purchased debt violated the FDCPA. The trial court dismissed the complaint finding Santander was not a debt collector subject to the statute. On appeal the Fourth Circuit Court of Appeals affirmed the trial court decision finding that Santander, although a debt purchaser, did not meet the Act’s definition of a debt collector because it was not seeking to collect a debt “owed . . . another.” The Supreme Court affirmed in a unanimous decision and the first opinion to be authored by Justice Neil Gorsuch.

The issue before the Court was whether a purchaser of defaulted debt meets the FDCPA’s definition of a “debt collector” as one who “regularly collects or attempts to collect . . . debts owed or due . . . another.” 15 U. S. C. §1692a(6). The “plain terms” of the definition “seems to focus our attention on third party collection agents working for a debt owner— not on a debt owner seeking to collect debts for itself,” Gorsuch wrote. “All that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.’”

Henson argued that the phrase “owed or due . . .another” should be construed to include debts presently owed to Santander but that were once owed another creditor. The Court disagreed finding that the phrase “owed or due . . .  another” should not be read to encompass any debt that was once payable to an entity other than the current owner of the debt. Rather, the plain meaning of the phrase is that the debt collector must be engaged in collecting a debt that is owed to a third party at the time it is being collected.

The Performing Debt Exception Fails

Henson’s other argument concerned the status of the debt at the time it was acquired by Santander.  According to Henson, the FDCPA can be read so that persons purchasing defaulted debt are never creditors, but are always debt collectors. The Court disagreed because Henson’s interpretation conflicted with the very definition at issue, which expressly requires that the debt at issue be collected “for another.” Regardless of whether Santander acquired Henson’s debt pre- or post-default, its activities concerning the debt were always undertaken to collect the debt for itself, taking it outside of the definition at issue before the Court.

Policy Argument Not Persuasive

Henson’s final argument was based on a supposition that Congress intended to cover debt purchasers, but did not foresee the industry when it enacted the FDCPA in 1978. The Court labeled the argument as “a lot of speculation.” It would not “rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done had it faced a question that, on everyone’s account, it never faced.”

As an aside, Henson’s argument does not consider that Congress has amended the FDCPA several times and was quite aware of the practice of purchasing defaulted debt when it made the amendments. After all, it was Congress who in 1989 passed the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) establishing the Resolution Trust Corporation, a federal “bad bank” tasked with acquiring defaulted loans and then selling them, thus creating today’s debt buying industry. Congress has since amended the FDCPA in 1991, 1992, 1995, 1996, 2006 and most recently in 2010 as part of the Dodd-Frank Act.

The ‘Principal Purpose’ Definition Unresolved

The FDCPA also defines a debt collector as a person whose business has as its principal purpose the “collection of any debts.” The Court expressly declined to decide whether Santander would otherwise meet this alternative definition.  Several decisions have found that companies engaging in the purchase and collection of defaulted debts are “debt collectors” under the FDCPA.

Because the decision never reached the alternate, principal purpose definition, Henson should not be read as eliminating FDCPA liability for debt purchasers. Whether the business of purchasing and then collecting the purchased debts qualifies as engaging in a business that has as its principal purpose the “collection of any debts” remains an open question. So too is whether an entity can act both as a creditor and a debt collector for FDCPA purposes. These unanswered questions will serve as potent fuel for FDCPA litigation.

Circuit Court Opinions in Doubt

At least four Circuit Courts of Appeals have concluded that a debt buyer is a “debt collector” when it purchases and then collects defaulted debt. Three of the decisions (from the Third, Fifth and Seventh Circuits) are premised on the argument that the FDCPA’s definition of creditor excludes those who purchase and collect defaulted debts. The Sixth Circuit’s decision pointing to an exception to the FDCPA’s definition of “debt collector” found that “an entity that did not originate the debt in question but acquired it and attempts to collect on it . . .is either a creditor or a debt collector depending on the default status of the debt at the time it was acquired.” Because Henson found that the debt’s default status is not solely determinative of a person’s status as either a debt collector or creditor, it casts some doubt on the viability of these earlier circuit court decisions.

The Eleventh Circuit Court of Appeals departed from its sister circuits a few years ago in Davidson v. Capital One Bank (USA) N.A., and reached a similar conclusion with respect to a debt purchaser for many of the same reasons expressed in Henson. 

An Odd Unanimous Decision

Less than a month ago, Justice Sonia Sotomayor issued a dissent that not only concluded that a purchaser of defaulted debts violated the FDCPA, but vilified the entire industry’s bankruptcy practices. Justices Ruth Bader Ginsburg and Elena Kagan joined the dissent. That case, Midland Funding, LLC v. Johnson, was more about interpretation of bankruptcy law than the FDCPA. Given the vigor of last month’s dissent, it was odd to see a unanimous decision in Henson particularly when several briefs filed in support of Henson, including one from nearly 30 attorneys general, warned that allowing the Fourth Circuit’s decision to stand would permit debt purchasers to escape FDCPA liability.

Debt Purchasing Industry Urges Caution

Yesterday, Receivables Management Association International, a trade association representing the debt purchasing industry, issued a press release urging its members to proceed with caution. While welcoming the decision, RMA noted that the Court left open whether a debt buyer’s business falls within the FDCPA’s “principal purpose” definition of a debt collector. RMA also reminded its members that the requirements imposed by the association’s certification program meet or exceed the consumer protections of the FDCPA. “In the end, RMA does not see the Santander decision as lessening the consumer protections required of its membership,” said the association.

Two Webinars Will Examine Henson

Join me on June 14 at 12 p.m. ET for a webinar presented by the American Bar Association’s Consumer Financial Services Committee and RMA International. Our panel will include defense, compliance and plaintiff attorneys. To call in to the webinar, click here.

On June 14 at 1 p.m. ET AccountsRecovery.net will present a webinar where I will join a panel of defense attorneys to discuss the ruling, what it means for the accounts receivable management industry and what its participants should consider as part of their operations. Register for the webinar here.

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Donald Maurice provides counsel to the financial services industry, successfully litigating matters in the state and federal courts in individual and class actions. He has successfully argued before the Third, Fourth and Eighth Circuit U.S. Courts of Appeals, and has represented the financial services industry before several courts including as counsel for amicus curiae before the United States Supreme Court. He counsels clients in regulatory actions before the CFPB, and other federal and state regulators and in the development and testing of debt collection compliance systems. Don is peer-rated AV by Martindale-Hubbell, the worldwide guide to lawyers. In addition to being a frequent speaker and author on consumer financial services law, he serves as legal counsel to DBA International and as chair of the ABA's Bankruptcy and Debt Collection Subcommittee. He serves on the governing Board of Regents of the American College of Consumer Financial Services Lawyers and on the Governing Committee of the Conference on Consumer Finance Law .