On June 12, 2017, the United States Supreme Court held that a buyer of defaulted consumer debt was not subject to the Fair Debt Collection Practices Act (“FDCPA”). The question of whether such debt buyers fit within the FDCPA’s definition of “debt collector” has long been a subject of contention. While this result will not shield debt buyers entirely from the FDCPA’s purview, it does provide additional defenses against FDCPA liability and has broad potential implications for other consumer protection actions.
In Henson v. Santander Consumer USA, the petitioner had defaulted on a car loan owed to CitiFinancial Auto, which then sold the debt to Santander, which attempted to collect on the debt. The petitioner alleged that Santander’s collection methods violated the FDCPA.
But the FDCPA applies only to “debt collectors.” Was Santander a debt collector? The FDCPA defines that term as follows, subject to certain exceptions:
The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.
The Henson case focused on the latter part of this definition: whether Santander “regularly collects or attempts to collect…debts owed or due…another.” Currently, no FDCPA- implementing regulations exist that might shed further light on that language, and the statute predates the creation and expansion of the debt buying industry.
Looking to the plain language of that statutory definition, the Supreme Court applied a straightforward, textual analysis, and held that entities like Santander—who purchase (and therefore own) the debt they seek to collect—are not attempting to collect “debts owed or due…another.” Instead, they are attempting to collect debts owed or due to themselves. And, consequently, they are not “debt collectors” under the provision of the FDCPA under consideration.
That holding marks a significant win for debt buyers. Not only does it offer a shield to buyers sued directly under the FDCPA, but also, if such buyers then hire third-party debt collectors to collect on those purchased debts, the buyers presumably would be immune from being joined to an FDCPA suit against that third party.
But keep in mind what the Court did not address — the other definition of “debt collector” in the FDCPA. If a company’s “principal purpose” is “the collection of…debts,” it can still be subject to the FDCPA. That language has yet to be clarified by the Supreme Court or through the issuance of a regulation by the Consumer Financial Protection Bureau (CFPB).
Still, the clarity that Henson does provide presents opportunities for new litigation and compliance strategies. In particular, we have identified four key issues for debt buyers to consider given the current state of the law.
- First, as an immediate matter, debt owners sued under the FDCPA may want to force plaintiffs to plead and prove that debt collection is the principal purpose of defendant’s business. When debating whether to make this argument in already-pending cases, however, defendants should keep in mind that doing so could, in some instances, merely result in an amended complaint that cures the pleading inadequacy, or could even expose their books and records that increased scrutiny during discovery.
- Second, those who purchase and hold debt, but use a third party to collect on it, can distinguish their principal purpose of purchasing debt from a principal purpose of actually collecting debt. Interested parties will need to monitor the case law to track the success of such arguments. See, e.g., Kasalo v. Trident Mgmt., LLC, 53 F. Supp. 3d 1072, 1078-79 (N.D. Ill. 2014) (noting that case law addressing the issue is “admittedly sparse,” while concluding that an entity who purchases debt, but “does not attempt to collect” that debt and instead “hires others to do so,” is not an entity whose principal purpose is the collection of any debts). Relatedly, some courts have found that a company who hires third parties to collect debts that they own are vicariously liable for that third party collection agent’s conduct. (And federal banking regulators may hold banks responsible as a matter of third-party liability where a bank’s third-party debt collector violates the FDCPA in collecting on loans originated by the bank, even though the bank itself is not subject to the FDCPA.)
- Third, from a compliance standpoint, many states require that debt collectors be licensed, and use language similar to the FDCPA to define the term “debt collector.” Now, following the Supreme Court’s interpretation of the similar language, these companies might argue that they are not debt collectors under state law either, and thus need not obtain a license to engage in their business. But keep in mind that some state laws that constrain debt collection practices (aside from licensing) can apply more broadly than the FDCPA, and can even cover originators of the debt.
- Fourth, on a broader level, the Court’s textual approach to Henson can instruct litigants and provide new arguments. Justice Neil Gorsuch, writing his first opinion as a member of the Court, focused on the text of the statute, rather than the underlying policy. Other courts, in an attempt to best serve the underlying purpose of the FDCPA, have imposed requirements on debt collectors beyond those found in its plain language. For instance, some courts have found that a debt collector may be liable under the FDCPA’s prohibition on “[t]he false representation or implication that any individual is an attorney or that any communication is from an attorney” when the debt collector sends a communication that is undisputedly “from an attorney,” if the Court believes that the attorney was not “meaningfully involved” in the communication. Henson provides a new opportunity for litigants to focus courts’ attention back on the plain text of the FDCPA. The same is true for those defending against claims that are not supported by the text of other consumer protection statutes. For example, in ACA International, et al. v. FCC, currently pending in the U.S. Court of Appeals for the D.C. Circuit, the Federal Communications Commission claims statutory authority to adapt the Telephone Consumer Protection Act’s definition of an “automatic telephone dialing system” to modern technology not in existence when the statute was enacted in 1991. That position appears to be at odds with the reasoning in Henson, where the Supreme Court rejected the idea that the interpretation of the definition of “debt collector” in the FDCPA should be shaped or influenced by events—the creation of the debt buying industry—that occurred after the statute’s enactment.
In sum, Henson—at least for now—will not shield debt owners entirely from the FDCPA’s purview. But it provides them with new insights that can help inform their legal and compliance strategies.