The U.S. Supreme Court decided two cases this past term under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”). Both decisions relate to the debt-buying industry, an industry that did not exist when the FDCPA was enacted. Both decisions reject initiatives by the consumer attorney bar.
Readers are probably aware that the FDCPA prohibits certain “unsavory” conduct in the collection of “debts” (as defined by the FDCPA). To be liable under the FDCPA, however, one must fall within the statute’s coverage. The Act’s prohibitions apply only to “debt collectors.”
The term “debt collector” is defined in 15 U.S.C. § 1692(a)(6). The definition creates a dichotomy. Those who own debts are creditors and their attempts to collect those debts do not make them “debt collectors” subject to the federal FDCPA. To be a “debt collector” under the federal FDCPA one must be collecting the debt for another who owns the debt.
The dichotomy is easy to understand once you realize the FDCPA arose from efforts to regulate collection agencies— companies that collect debts owned by others. It was widely believed that collection agencies engaged in unsavory conduct that was not common among debt owners (department stores etc.) collecting debts through “in house” collection divisions. It was believed debt owners were interested in preserving their customer relationships and reputations.
The owners of debts (creditors) obviously face a “make or buy” decision. They can do their own collection work, but doing so involves out-of-pocket costs and opportunity costs. They can hire a collection agency, but the agency will want to be paid and the creditor-owner may still receive no more than “cents on the dollar.” These days creditors -- particularly large institutional creditors-- have a third option. They can make an outright transfer of all their rights to a “debt buyer.” The sale of the debts will only garner "cents on the dollar" for the creditor, but it removes uncertainty.
Henson v. Santander Consumer USA, Inc., 137 S.Ct. 1718 (2017), just decided by the Court, concerns the startling growth of the “debt buyer” industry following the enactment of the FDCPA. “Debt buyers” have naturally maintained they are owners of debts and therefore not “debt collectors” subject to the federal FDCPA. The consumer attorney bar, however, has taken a different view. The consumer attorneys have argued debt buyers are “debt collectors” under the FDCPA because they are not the original creditors. Unlike the department store or dentist trying to get paid, the consumer attorneys have argued, debt buyers have no reason for existing but to collect debts. Taking a functional “walks like a duck, quacks like a duck” view, the consumer attorneys have argued debt buyers make a living by collecting debts so they should be treated as "debt collectors."
Henson rejects the argument put forth by the consumer attorney bar. It holds that persons who regularly purchase debts originated by someone else and then seek to collect those debts for their own account are not “debt collectors” subject to the FDCPA.
Henson was a unanimous (9-0) decision. That is not surprising; it was an easy case. Congress did not intend the FDCPA to apply to owners of debt because Congress did not see owners of debt as needing regulation. The FDCPA simply was not enacted to address the alleged abuses of a debt buying industry that did not even exist when the FDCPA was enacted. So far as the justices are concerned, the consumer attorneys may have good policy arguments but it is simply not the role of the Courts to enact laws that Congress did not enact. If the consumer advocates want debt buyers to be treated as debt collectors, they need to lobby Congress to change the FDCPA's definition of “debt collector.” If their arguments are as good as they suggest, they stand a good chance of bringing about a change in the law.
A word of caution to creditors. Do not assume exemption from the FDCPA's definition of "debt collector" is a green light for "unsavory conduct." Even if one is not subject to the federal FDCPA, one may be subject to other laws. California has an analog to the federal FDCPA called the Rosenthal Fair Debt Collection Practices Act (RFDCPA). Generally speaking, the RFDCPA incorporates by reference the prohibitions of the Federal FDCPA. Nevertheless, it uses a broader definition of “debt collector” that encompasses creditors. One of the issues tried in my first FDCPA case was whether the cross-defendant was a "debt collector" under the FDCPA. He beat that rap, but was nevertheless held to be a "debt collector" under the RFDCPA. He lost the trial and there were plenty of California cases to support the proposition that the ensuing attorney fee award could not be reduced on a theory of partial success.
That brings me to the Supreme Court's other FDCPA decision-- Midland Funding, LLC v. Johnson, 137 S.Ct. 1407, 2017 WL 2039159 (May 15, 2017). Midland concerns time-barred debts and, more specifically, their role in bankruptcy.
Many states do not regard an obligation as extinguished solely through the passage of time. Accordingly, in these states one can bring suit on a time-barred obligation and it is the burden of the defendant to assert a “statute of limitations” defense -- a defense urging that the period for bringing suit has lapsed. A statute of limitations defense, however, is typically viewed as a personal privilege that can be waived or forfeited if it is not asserted. Debt collectors may be eager to bring suits on time-barred debts because few debtors will respond to the lawsuits. Even if a debtor does respond, the debtor forget to raise a statute of limitations defense. Thus, debt collectors can sue on time-barred debts and obtain judgments by default or otherwise.
That is where federal law has come into play. The FDCPA prohibits “debt collectors” from using “false, deceptive, or misleading representation[s]” or “unfair or unconscionable means” in connection with the collection of any “debt.” 15 U.S.C. §§ 1692e, 1692f. Notwithstanding state law, just about every court to consider the question has held under these provisions that a debt collector who knowingly files a lawsuit to collect a time-barred debt violates the FDCPA. See,e.g., Phillips v. Asset Acceptance, LLC, 736 F.3d 1076, 1079 (7th Cir. 2013); Kimber v. Federal Financial Corp, 668 F. Supp. 1480, 1487 (MD. Ala. 1987).
But what happens when a debtor files a petition in bankruptcy? The party filing the petition, the debtor, commences a proceeding in which creditors (which will include those who have purchased claims from others) may be permitted to file claims against the assets of the bankruptcy estate. Is the filing of an obviously time-barred claim in the bankruptcy proceeding a violation of the FDCPA as a false, deceptive, misleading, unfair, or unconscionable debt collection practice? In a 5-3 decision penned by Justice Breyer (and in which Justice Gorsuch took no part), the Supreme Court said the answer is no. Why? "Bankruptcy is different."
Copyright (C) 2017, Charles Q. Jakob. All Rights Reserved.