The U.S. Court of Appeals for the Third Circuit recently affirmed a trial court’s dismissal of a putative class action complaint alleging that the defendant debt buyer violated the federal Fair Debt Collection Practices Act (FDCPA) by trying to collect interest supposedly in excess of limits imposed under Pennsylvania law.
In so ruling, the Third Circuit held that the defendant debt buyer is not subject to the limitations on collecting interest under the Pennsylvania Consumer Discount Company Act (PCDCA) asserted by the named plaintiff because the debt buyer is not in the business of negotiating loans or advances, as required.
Of note, a concurring Third Circuit justice opined that Section 2210 of Pennsylvania’s Commercial Code provides that contract rights — including rights to collect debts and interest — are freely assignable, and that “the assignee stands in the same shoes as the assignor,” U.S. Steel Homes Credit Corp. v. S. Shore Dev. Corp., 419 A.2d 785, 789 (Pa. Super. Ct. 1980). Here, because the interest rate on the loan at issue was valid when the loan was extended by the bank lender, the concurring justice opined that the interest rate remained valid when the loan was sold and assigned to the defendant debt buyer.
A copy of the opinion in Lutz v. Portfolio Recovery Associates, Inc. is available at: Link to Opinion.
The named plaintiff applied for and received a credit card from a depository institution (“bank”) that included an agreement for the plaintiff to pay interest on the unpaid balance of his account at an annual rate of 22.9%. After default, the bank sold plaintiff’s delinquent account to a debt buyer (“company”).
The company filed a collection complaint against the plaintiff and obtained a default judgment. The plaintiff appealed and the company did not pursue the litigation further. After the collection proceedings concluded, the plaintiff sued the company alleging the company violated two provisions of the FDCPA. The company moved to dismiss, but the plaintiff filed an amended complaint.
The plaintiff’s amended complaint asserted that the company violated Pennsylvania’s Consumer Discount Company Act (PCDCA) and as a result also violated the FDCPA by trying to collect interest in excess of limits imposed under Pennsylvania law.
The trial court granted the company’s motion to dismiss and denied the plaintiff’s request for another opportunity to amend their complaint. The plaintiff appealed.
On appeal, the plaintiff argued that the company violated the FDCPA by attempting to collect interest that had accrued at greater than 6% annually in supposed violation of Pennsylvania law. In Pennsylvania, the PCDCA permits certain licensed entities to charge interest at up to 24% for loans under $25,000. See 7 P.S. §§ 6203.A, 6213.E, 6217.1.A. However, unlicensed entities that are subject to the PCDCA may not “charge, collect, contract for, or receive interest” at an annual interest rate above 6% for loans under $25,000. Id.
Here, the loan was extended by the bank, and the bank is not subject to the restrictions under the PCDCA. However, the plaintiff argued that the company is subject to the PCDCA but not licensed, and therefore that it was illegal for the company to collect or attempt to collect interest at a rate that exceeded 6%, even though the interest rate was valid when the loan was made by the bank.
The company argued that it was not subject to the PCDCA for two main reasons. First, the company pointed out that it is not “in the business of negotiating or making loans or advances” as required under 7 P.S. § 6203.A. Second, even if it negotiated or made loans or advances, the company argued that it could still collect interest at an annual rate above 6% because it held a license from the Department of Banking and Securities.
The Third Circuit agreed with the company’s position that the PCDCA does not apply to it.
Because the PCDCA only applies to entities that are “in the business of negotiating or making loans or advances,” the Third Circuit focused on the definition and meaning of the term “negotiate.” After review of the legislative history of the PCDCA, Black’s law dictionary, statutory rules of construction, and the consistent usage canon, the Court held that the term “negotiate” as used in the PCDCA is best understood to mean “to bargain” and not “to transfer.”
In examining the allegations in the amended complaint, the Third Circuit held that although there were general references to the company’s debt collection practices, including the practice of purchasing defaulted consumer debts, this was not enough to reasonably infer that an entity that purchases charged-off debt would also negotiate or bargain for the initial terms of loans or advances. Therefore, the Third Circuit affirmed the dismissal.
In addition, the Third Circuit held the trial court did not abuse its discretion in denying plaintiff the right to file a second amended complaint because of plaintiff’s failure to establish that company is subject to the PCDCA. Therefore, the Third Circuit affirmed the trial court’s decision to dismiss the lawsuit with prejudice and held that the dismissal with prejudice was not an abuse of discretion.
Separately, a concurring opinion addressed two issues raised by the parties and by the Pennsylvania’s Secretary of Banking’s amicus brief. The concurring justice opined that although the company held a Pennsylvania Consumer Credit Code license, this license alone did not authorize the company to collect interest over 6% under 7 P.S. §§ 6203. Additionally, the concurring judge opined that the plaintiff’s allegations could be construed to assert a violation of Pennsylvania’s separately codified Loan Interest and Protection Law (LIPL) and therefore also a violation the FDCPA. However, the concurring justice would have held that there was no violation of the LIPL because the bank was properly exempted from the LIPL and properly assigned the right to collect the debt and interest to the company.
As a result, the concurring justice explained, the company also did not violate the LIPL because Section 2210 of Pennsylvania’s Commercial Code provides that contract rights — including rights to collect debts and interest — are freely assignable and that “the assignee stands in the same shoes as the assignor,” U.S. Steel Homes Credit Corp. v. S. Shore Dev. Corp., 419 A.2d 785, 789 (Pa. Super. Ct. 1980).