9th Cir. Rejects FDCPA Claim That Collector Did Not ‘Meaningfully Participate’ in Collection

The U.S. Court of Appeals for the Ninth Circuit recently rejected a so-called “flat-rating” claim, holding that a company that sent letters demanding that hospital patients pay their overdue medical bills did not create a false or misleading impression that the company was actually participating in collecting the debts in violation of the federal Fair Debt Collection Practices Act (FDCPA), because the company meaningfully participated in the hospital’s efforts to collect debts.

A copy of the opinion in Echlin v. PeaceHealth is available at:  Link to Opinion.

The plaintiff received treatment at a hospital but failed to pay the medical bills.  After the plaintiff ignored multiple requests for payment, the hospital referred her delinquent accounts to a collection agency.

The hospital and the collection agency operated together under a subscriber agreement where the hospital would refer delinquent patient accounts to the collection agency.  For a fixed fee, the collection agency would send letters requesting payment by check, credit card, or online at the hospital’s website.

The collection agency sent three demand letters to the plaintiff.  In response to the third letter, the plaintiff disputed the debt and the collection agency marked the account as disputed and returned the account to the hospital.

In March 2014, the plaintiff filed a putative class action against the collection agency and hospital alleging violations of the FDCPA, including but not limited to 15 U.S.C. §§ 1692e and 1692j.

The plaintiff alleged that the letters she received “created a false or misleading belief that [the collection agency] was meaningfully involved in the collection of a debt prior to the debt actually being sent to collection” — a practice commonly known as flat-rating.

The hospital and collection agency moved for summary judgment.  In response to the motions, the plaintiff argued that even if her flat-rating claim failed, the defendants’ practices violated 15 U.S.C. § 1692e(5) by falsely threatening to take further action against her if she refused to pay her debt.  The plaintiff argued that the collection agency had no actual authority to take any action against her outside of sending the demand letter.

The trial court granted the defendants’ motion for summary judgment.  It ruled that the evidence established that the collection agency meaningfully participated in the collection of the plaintiff’s debt, thereby precluding any flat-rating claim.  The trial court also struck the section 1692e(5) claim because it was raised too far into the litigation, the plaintiff did not formally amend her complaint, and the claim was barred by the FDCPA’s one year statute of limitations.

The plaintiff appealed and challenged the trial court’s rejection of both her flat-rating and § 1692e(5) claims.  The plaintiff also argued that she had a viable claim under § 1692e(10) for the collection agency’s allegedly deceptive acquisition of her information.

The Ninth Circuit began its analysis by reviewing the flat-rating claim.

As you may recall, § 1692j prohibits “flat-rating — the practice where a third party (usually for a flat rate) sells form letters to a creditor — which creates the false impression that someone (usually a collection agency) besides the actual creditor is ‘participating’ in collecting the debt.”  See White v. Goodman, 200 F.3d 1016, 1018 (7th Cir. 2000).  Flat-rating essentially involves a creditor using a third party’s name for intimidation value.

Because it was undisputed that the collection agency furnished form letters to create the belief that it was participating in the collection of debts owed the hospital, the question presented to the Ninth Circuit was whether there was sufficient evidence in the record to support the plaintiff’s contention that this impression was false.

Section 1692j does not define what it means for a person to participate in the collection of or in an attempt to collect a debt.  The statute makes it unlawful to:

design, compile, and furnish any form knowing that such form would be used to create the false belief in a consumer that a person other than the creditor of such consumer is participating in the collection of or in an attempt to collect a debt such consumer allegedly owes such creditor, when in fact such person is not so participating. 15 U.S.C. § 1692j(a).

The plaintiff argued that the collection agency must do more than merely mail form letters to “participate” sufficiently in debt-collection efforts.  For example, the plaintiff argued that the collection agency did not have authority to negotiate or to process payments from debtors, it received no proceeds from payments that were made, and it was not involved in any further action that was pursued against debtors whose accounts remained delinquent.

The Ninth Circuit noted that meaningful participation in the debt collection process may take a variety of forms.  It considered the amount of control the entity exercised over the collection letters it sends, the amount of contact the entity had with the debtors, whether the entity invited and responded to debtor inquiries, whether the entity received or negotiated payments, whether the entity received or retained full debtor files, and whether the entity was involved in further collection activities if the debt remained unpaid.

Above all, the Ninth Circuit stated that the key is whether the entity genuinely contributed to an effort to collect another’s debt.

The Ninth Circuit found that while the collection agency did not process payments, it participated in the attempts to collect debts owed to the hospital because: (1) it independently screened accounts for barriers to collection, (2) it drafted and mailed the collection letters without input from the hospital, (3) its letters invited the debtor to contact the collection agency and its personnel handled such inquiries, (4) it in fact received approximately 500 calls a week from debtors and received hundreds of pieces of mail from debtors, (5) it provided debtors with information about the debts and how to repay them, (6) it maintained a website where debtors could access information about their debts and submit documents, and (7) it sometimes received and forwarded to the hospital payments it received from debtors.

Therefore, the Ninth Circuit determined that the collection agency’s efforts were enough to have participated meaningfully in the attempts to collect debts like the plaintiff’s.

The plaintiff argued that the trial court’s conclusion was inconsistent with two out-of-circuit cases in which attorneys who mailed collection notices on a creditor’s behalf were deemed not to have participated meaningfully.

In Nielsen v. Dickerson, the Seventh Circuit considered whether certain form collection letters falsely represented that the letters came “from an attorney” in violation of 15 U.S.C. §1692e(3).  Nielsen v. Dickerson, 307 F.3d 623, 634-35 (7th Cir. 2002).  The question in Nielsen turned on whether the attorney who composed and mailed the letters in an “assembly-line fashion” was actually involved in the debt collection process.  Id., at 635.

The Ninth Circuit noted that Nielsen only briefly addressed the attorney’s potential liability as a flat-rater under 1692j, stating that the attorney might “seem to be a natural candidate for flat-rating liability pursuant to section 1692j.”  Id., at 639.  However, the Seventh Circuit in Nielsen ultimately did not decide whether the attorney violated section 1692j because any such liability would have been redundant to the attorney’s liability under section 1692e(3).  Id., at 640.

Thus, the Ninth Circuit found that Nielsen did not support the plaintiff’s argument.

In Vincent v. Money Store, the Second Circuit considered whether a creditor that hired a law firm to mail debt collection notices could be held liable for violation of section 1692e as its own debt collector under the FDCPA’s false name exception, because the law firm was not meaningfully involved in collection efforts.  Vincent v. Money Store, 736 F.3d 88, 91 (2nd Cir. 2013).

The Second Circuit applied the analysis in Nielsen and concluded that “a jury could find” that collection letters mailed by the law firm “falsely implied that [the firm] was attempting to collect [the creditor’s] debts and would institute legal action against debts,” when the firm “acted as a mere conduit for a collection process [the creditor] controlled.” Id., at 104.

The Ninth Circuit was not persuaded by Vincent either because the collection agency in this case participated to a greater degree in collection efforts than the law firm in Vincent did. The plaintiffs in Vincent presented evidence that the law firm drafted the letters jointly with the creditor, directed debtors to send nearly all communications to the creditor itself, and after mailing the demand letters “performed virtually no role in the actual debt collection process” besides verifying the existence of the debt or the identity of the creditor.  Id., at 93-95, 104.

Given the greater degree of participation by the collection agency in this case, the Ninth Circuit determined that Vincent was distinguishable and did not support the plaintiff’s position.

Therefore, the Ninth Circuit held that the collection agency in this case meaningfully participated in the attempts to collect the plaintiff’s debts.

Next, the Ninth Circuit turned to the plaintiff’s arguments regarding the FDCPA’s prohibition against “threat[ening] to take any action that cannot legally be taken or that is not intended to be taken.” 15 U.S.C. § 1692e(5).

The plaintiff argued that her complaint gave the collection agency adequate notice of its need to defend against the claim, and even if it did not, she should have been given leave to amend the complaint.

However, the Ninth Circuit found that the plaintiff’s complaint focused narrowly on her flat-rating allegations.  It never cited § 1692e(5) and did not mention the FDCPA’s prohibition against threatening to take an action that is not intended or legally authorized.  And, the Ninth Circuit found that the complaint expressly disavowed such a claim by alleging that the collection agency “was not acting as a debt collector when it sent the Letters.”

Because the plaintiff’s theory of liability was that the collection agency was a flat-rater, not a true debt collector, the Ninth Circuit held that the trial court did not err in striking the claim.

The plaintiff further argued that she should have been granted leave to amend the complaint, and the amended claim should “relate back” to the date of her original complaint.

The Ninth Circuit rejected this argument because an amended complaint relates back to the date of the original complaint only where the claim arose out of the same conduct in the original pleading.

The plaintiff’s § 1692e(5) claim, in the Ninth Circuit’s view, would not rely on the same facts and evidence because the plaintiff’s complaint did not allege (1) that the collection agency was a debt collector, and (2) that the collection agency threatened to take any action against her that it had no authority or intention to take.  These issues, according to the Ninth Circuit, would involve different witnesses and the trier of fact would need to determine what, if anything, the collection letters threatened to do.

Additionally, the Ninth Circuit determined that the plaintiff waived her claim under § 1692e(10) because the claim is nowhere to be found in the complaint, and she did not argue the claim in opposing the defendants’ motions for summary judgment.

Accordingly, the Ninth Circuit affirmed the trial court’s grant of summary judgment in favor of the defendants.

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Eric Tsai practices in Maurice Wutscher’s Commercial Litigation and Consumer Credit Litigation groups, and in its Regulatory Compliance group. He concentrates his practice primarily on the defense of consumer and commercial financial services companies, including mortgage lenders and servicers, mortgage loan investors, third party debt collectors, and other financial services providers. He also counsels clients on regulatory compliance, licensing, and other consumer protection matters. Eric earned his undergraduate degree from the University of California, Irvine. Prior to attending law school, he worked as a loan officer for national direct lenders. He earned his Juris Doctor from California Western School of Law and thereafter obtained a Master of Laws (LLM) in Taxation from the University of San Diego School of Law. Eric publishes extensively on various issues affecting consumer lending and litigation, including both federal and California-specific developments. He is licensed to practice law in California, Nevada, and Oregon, and is admitted in all United States District Courts in the State of California, the United States District Court for the District of Oregon, the United States District Court for the District of Nevada, the U.S. Tax Court, and the Ninth Circuit Court of Appeals. He is also a licensed real estate broker in the State of California.