The U.S. Court of Appeals for the Fifth Circuit recently held that a consumer’s contractual obligation to repay an overpayment in government grant money received by the debtor qualified as a “debt” under the federal Fair Debt Collection Practices Act (FDCPA) because it involved a consensual promise to repay in exchange for receipt of an item of value, and the subject of the transaction was primarily for personal, family, or household purposes.
A copy of the opinion in Calogero v. Shows, Cali & Walsh, LLP is available at: Link to Opinion.
In response to Hurricanes Katrina and Rita destroying and damaging homeowners’ primary residences, Congress appropriated money through the Community Development Block Grant program of the Department of Housing and Urban Development to provide grants to homeowners to repair and rebuild their homes. The Louisiana Office of Community Development (OCD) administered this program and disbursed the grants to qualified applicants.
A Louisiana consumer whose home was damaged by the hurricanes applied for and received a grant as compensation for her damages. The consumer entered into an agreement with the OCD. In exchange for receiving $33,392.68 in one lump sum payment, the consumer agreed to several terms, including limitations on any transfer or sale of the property, occupying the property as her primary residence for three years after executing the agreement, and maintaining casualty and flood insurance on the property. The consumer also agreed to pay the OCD any insurance or assistance payments that would have reduced the grant amount distributed if the consumer had received such payments before the receipt of the grant.
A debt collector subsequently sent the consumer a letter demanding repayment under the agreement for an alleged $4,598.89 grant overpayment. The consumer disputed the overpayment and the debt collector provided a breakdown of the amount owed “including $5,300 owed in duplicated FEMA benefits, $1,269.85 owed in overpaid homeowner insurance proceeds, and a $1,970.96 credit due to a recalculated insurance penalty.”
In response, the consumer sued the debt collector alleging that the debt collector committed multiple violations of the FDCPA.
The debt collector moved to dismiss arguing that the consumer’s complaint did not state a claim because the money it sought to collect did not qualify as a “debt” under 15 U.S.C. § 1692a(5), as required. The trial court agreed and dismissed the consumer’s FDCPA claims with prejudice. This appeal followed.
The Fifth Circuit began its analysis by observing that to state an FDCPA claim, a plaintiff must allege that a debt collector sought to collect a “debt” from them. Under the FDCPA, a debt is “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.” 15 U.S.C. § 1692a(5).
The Fifth Circuit noted that when deciding whether something constitutes a debt under the FDCPA, it follows the Third Circuit’s three-part test enunciated in St. Pierre v. Retrieval-Masters Creditors Bureau, Inc., 898 F.3d 351, 360 (3d Cir. 2018).
First, the court must establish if the “underlying obligation arises out of a transaction” meaning the “consensual exchange involves an affirmative request and the rendition of a service or purchase of property or other item of value, such as a contract.”
Second, the court must next determine “what money, property, insurance, or services … are the subject of the transaction, i.e., what it is that is being rendered in exchange for the monetary payment.”
Finally, the court considers “the characteristics of that ‘money, property, insurance, or services’ to ascertain whether they are ‘primarily for personal, family, or household purposes.’”
As you may recall, the FDCPA does not define the term “transaction.” Thus, the Fifth Circuit interpreted the term “transaction” using its ordinary meaning when Congress enacted the FDCPA.
In 1978, when Congress passed the FDCPA, dictionaries commonly defined transaction “as an agreement, negotiation, or business dealing.” The Fifth Circuit also noted that transaction “is a broader term than ‘contract’” and “must therefore consist of an act or agreement, or several acts or agreements having some connection with each other, in which more than one person is concerned, and by which the legal relations of such persons between themselves are altered.” Also, “the ordinary meaning of the term ‘transaction’ is a broad reference to many different types of business dealings between parties, and does not connote any specific form of payment.” Finally, the Fifth Circuit also found support, in St. Pierre, 898 F.3d at 360, for its view that “transaction” broadly “refers to business dealings best characterized as “a consensual exchange involving an affirmative request” and “the rendition of a service or purchase of property or other item of value.”
Here, the Fifth Circuit found that the agreement involved “a mutual exchange of value that reciprocally affected and influenced” the consumer and the OCD. The program provided relief money to encourage the consumer “and many homeowners to return to and reside in Louisiana in the wake of Hurricanes.” The OCD gave the consumer money to repair her home, and in exchange the consumer agreed to comply with the terms of the agreement. The debt in question, the consumer’s agreement to repay any excess grant money, “specifically arises out of” her agreement to provide any “future funds she received from insurance or FEMA” to the OCD.
Put differently, in consideration for receiving repair funds up front, the consumer agreed to provide any future insurance funds received to the OCD. Thus, the consumer’s “obligation to repay excess funds amply meets the ‘transaction’ test and distinguishes it from the cases of overpayment in which there was no explicit consent to repay an erroneous deposit of money.”
The Court also declined to interpret the transaction in a vacuum, observing that nothing in the FDCPA explicitly excludes an obligation to repay excess funds received. Thus, the Fifth Circuit found that the consumer’s obligation to repay any excess grant money received arises from a “transaction, which encompasses consensual agreements and negotiations like this one.”
The Fifth Circuit next turned to the second prong of the test. To determine “what money, property, insurance, or services are the subject of the transaction,” the Fifth Circuit looked at “what is being rendered in exchange for payment.” Here the consumer received repair funds from the OCD in exchange for agreeing to certain obligations in a contract, including her promise to repay any excess grant money. The receipt of funds from the government in exchange for promises “comports with other cases in which we have assumed the FDCPA applies.”
The debt collector argued that the FDCPA only applies to transactions that occur within the “normal creditor/debtor relationship.” The Fifth Circuit rejected this narrow interpretation of the FDCPA because it overly restricts transaction’s plain meaning.
The Court reasoned that if Congress wanted to limit the FDCPA’s definition of debt to apply only to repayments to creditors or obligations arising out of the exchange of tangible goods, then it could and should have drafted the statute to reflect this limitation. Congress did not include this limitation so the Fifth Circuit found that it was prohibited from reading this limitation “into the FDCPA’s clear statutory language.” Therefore, the Fifth Circuit found that the second prong of the test was met here because the consumer voluntarily agreed to receive the repair money in exchange for consenting to the obligations in the agreement.
Finally, the Court turned to the third prong of the test to examine if the money the consumer received in exchange for complying with the agreement’s terms was primarily for “personal, family, or household purposes.” As the parties did not dispute this prong of the test and the program was designed to “provide grants for home repair and rebuilding, support affordable rental housing, and offer housing support services,” the Fifth Circuit had no trouble in concluding that the consumer met the last part of the test.
Thus, the Fifth Circuit held that the trial court erred when it determined that the FDCPA did not cover the consumer’s obligation to repay the OCD, and therefore reversed the trial court’s “determination that the obligation of repayment at issue in this case does not qualify as a ‘debt’ under the FDCPA” and remanded for additional proceedings consistent with its opinion.