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9th Cir. Holds Student Loan Guaranty Agency Not Subject to FDCPA

student loan debt collectionThe U.S. Court of Appeals for the Ninth Circuit recently affirmed summary judgment in favor of a guaranty agency that caused a set-off against a plaintiff’s Social Security benefits to recover a judgment assigned to it based on a defaulted student loan.

In so ruling, the Court held that, even though the guaranty agency regularly attempted to collect debts owed to another (the U.S. Government) the agency was not a debt collector as defined by the federal Fair Debt Collection Practices Act (FDCPA) because it qualified for the fiduciary exception given that its role was broader than merely collecting a debt.

In addition, the Court held that the guaranty agency did not violate the plaintiff’s procedural due process rights because it gave proper notice of its intent to seek the Treasury set-off.

A copy of the opinion in Lima v. Educ. Credit Management Corp. is available at:  Link to Opinion.

A borrower defaulted on his student loan. The lender obtained a judgment and assigned it to a guaranty agency, which sent the borrower a notice advising that it would seek a set-off against the borrower’s Social Security benefits.

The borrower filed suit in the U.S. District Court in Hawaii alleging violations of the FDCPA and the Due Process Clause of the Fifth Amendment.

The trial court granted summary judgment in the defendant’s favor, holding that “Defendant is not subject to the FDCPA because Defendant is not a ‘debt collector[,]’ and “that Defendant is not subject to the Due Process Clause because Defendant is not a state actor. In addition, the trial court declined to exercise supplemental jurisdiction over the state-law claims. The borrower appealed.

On appeal, the Ninth Circuit began by discussing the statutory framework, explaining that under the Higher Education Act of 1965’s Federal Family Education Loan Program, “lenders provide loans to students or their parents to help finance their education. Typically, those loans are guaranteed by guaranty agencies, which are ‘[s]tate or private nonprofit organization(s)’ that have agreements with the Secretary of Education to administer the Loan Program. … Those agencies, in turn, receive guarantees from the United States. Guaranty agencies, therefore, operate as intermediaries between the student-loan lender and the United States.”

When a borrower defaults, the lender must try to collect from the borrower. If it cannot, it files a claim with the guaranty agency and is “repaid the outstanding balance of the loan.” The lender then assigns the loan to the guaranty agency. “The guaranty agency, in turn, is repaid by the [Dept. of Education] in exchange for undertaking ‘due diligence’ activities to attempt to collect the debt from the borrower … [which] include ‘locating the defaulting borrower, offsetting federal and state tax refunds … initiating administrative garnishment proceedings …, and filing suit against the borrower.’”

The Court then turned to the FDCPA claim, explaining that “to obtain damages, Plaintiff first must establish that Defendant is a ‘debt collector[,]’” which the FDCPA defines “as ‘any person … who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.’”

The defendant guaranty agency argued that it was not a debt collector as defined by the FDCPA and even if it met the statutory definition, it was exempt “because it fulfills the criteria of the fiduciary exception, [15 U.S.C.] §1692a(6)(F).”

The Court disagreed with the first argument, but agreed with the second, holding that although the defendant was a “debt collector,” it would affirm summary judgment because “Defendant’s collection activities were ‘incidental to a bona fide fiduciary obligation[,]’ [as defined by] 15 U.S.C. § 1692a(6)(F)(i).

The Court explained that the Supreme Court of the United States in Henson v. Santander Consumer USA Inc. recently “held that a defendant who purchased a defaulted loan and sought to collect the debt was not a ‘debt collector’ [and that] [w]hether a lender in Defendant’s position is seeking to collect a debt for its ‘own account’ is a question of first impression in our circuit. To answer that question, Henson requires us to focus on who ultimately would receive payments on the debt being collected.”

The Court concluded that in the case at bar, the debt was owed to the United States and that “[t]he monies obtained from Plaintiff’s Social Security benefits through Treasury offset belong to the Treasury, not to Defendant.” Even “[t]hough Defendant possesses all right, title and interest in the judgment against Plaintiff, Defendant was not collecting a debt for its own ‘account.’” The Court also found “that Defendant ‘regularly’ attempts to collect debts owed, or asserted to be owed, to the United States” because “[u]nder the applicable agreement, Defendant was obligated to receive accounts like Plaintiff’s for one-year period, and Defendant received a long list of such accounts.”

The Ninth Circuit then turned to analyze subsection 1692a(6)(F) of the FDCPA, which “exempts from the definition of debt collector ‘any person collecting or attempting to collect any debt … owed or due another to the extent such activity … is incidental to a bona fide fiduciary obligation.” The plaintiff conceded, the Court agreed, that “Defendant owes a fiduciary obligation to the DOE.”

The Court reasoned that “to qualify for the fiduciary exception, Defendant’s collection activity ‘must not be central to’ [its] fiduciary relationship.”

Distinguishing its decision in Rowe, which “reversed the dismissal of a complaint for failure to a state a claim under the FDCPA [and where] [t]he plaintiff claimed that the defendant guaranty agency’s ‘sole function was to take assignment of the loan from [another agency] and to act as a collection agent[,]’” the Court explained that “[t]his case differs from Rowe because Defendant has a broader role than merely collecting a debt. … For example, Defendant is obligated to release its judgment against Plaintiff if Plaintiff’s debt is consolidated, rehabilitated, or repaid. Defendant is also obligated to maintain records, report to the National Student Loan Database System, and properly administer its operating fund.”

Thus, the Court concluded “that Defendant had a broader fiduciary role with respect to Plaintiff’s debt than merely collecting the debt. Therefore, Defendant’s collection activity was ‘incidental to’ its fiduciary obligation to the DOE.”

The Ninth Circuit then turned to the plaintiff’s claim for declaratory judgment and injunctive relief based on his allegation that “Defendant violated his procedural due process rights by ‘arbitrarily and maliciously’ garnishing his benefits.”

“To obtain declarative and injunctive relief, Plaintiff must establish: (1) that he suffered a ‘constitutional deprivation’ that was ‘caused by the exercise of some right or privilege created by the State or by a rule of conduct imposed by the [S]tate or by a person for whom the State is responsible,’ and (2) that ‘the party charged with the deprivation [is] a person who may fairly be said to be a state actor.’ … Here, Plaintiff challenges only the district court’s conclusion that Defendant is not a state actor.”

The Court assumed, without deciding, that the defendant was a state actor, but nonetheless affirmed “the summary judgment in Defendant’s favor because Defendant did not violate Plaintiff’s due process rights … [because] Defendant provided Plaintiff with notice of the debt, of Defendant’s intention to seek a Treasury offset against Plaintiff’s Social Security benefits, and the means by which Plaintiff could respond.” The notice was sent to the plaintiff’s correct address and was thus “’reasonably calculated’ to ensure that Plaintiff received it. … And Defendant’s misstatement, that Plaintiff’s debt arose from a single loan worth $8,500 rather than three loans totaling $8,500, does not violate due process.”

Finally, the Ninth Circuit reasoned that because no federal claims remain, the trial court “did not abuse its discretion by declining to exercise supplemental jurisdiction over Plaintiff’s state-law claim.”

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Hector Lora has substantial experience in all phases of complex commercial litigation, including motion practice, written discovery, depositions, mediations, bench and jury trials, and appellate practice. For more than a decade, his practice has focused extensively on the defense of civil enforcement actions filed by the FTC, as well as real estate litigation, and contested mortgage and condominium lien foreclosures and foreclosure of security interests under UCC Article 9. Hector also has substantial experience in advising a variety of types of businesses regarding their compliance with applicable federal and state laws, including the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, the Controlling the Assault of Nonsolicited Pornography and Marketing Act of 2003, and Florida laws governing telephone solicitation and communication. Hector received his Juris Doctor from the Georgetown University Law Center, and his undergraduate degree with honors from the University of Florida.

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