This article was written by David N. AnthonyStephen C. PiepgrassAndrew B. Buxbaum, and David Long, Jr.. It was originally published on the Troutman Sanders LLP Consumer Financial Services Law Monitor and is republished here with permission.  

On January 13, 2017, the United States Supreme Court agreed to hear a case presenting the question whether a bank that purchases delinquent debts and begins collecting on those debts can be held liable under the Fair Debt Collection Practices Act (FDCPA). The Court will review the Fourth Circuit’s decision in Henson et al. v. Santander Consumer USA, Inc., to dismiss a FDCPA class action against Santander and to entertain Plaintiffs’ request to determine whether a financing company that regularly attempts to collect delinquent debts is a “debt collector” subject to the FDCPA.

The District Court Proceedings

Ricky Henson and three other Plaintiffs who defaulted on their car payments sued Santander, alleging it violated the FDCPA by misrepresenting the amount of debt owed and its authority to collect such debts. Plaintiffs argued that although Santander is a vehicle financing and lending company, it purchased delinquent debts and began to collect on these debts and, therefore, became a debt collector as defined by the FDCPA. The district court disagreed with Plaintiffs, finding that Santander was a consumer finance company that was collecting debts on its own behalf as a creditor. Plaintiffs then appealed the district court opinion.

The Fourth Circuit Opinion

The Fourth Circuit affirmed the dismissal of Plaintiffs’ claims, stating that Santander was a creditor, not a debt collector, when it purchased Plaintiffs’ car loan. Plaintiffs argued that at the time Santander purchased their car loans those loans were in default; therefore, Santander qualified as a debt collector under the FDCPA. Plaintiffs argued that the term debt collector and creditor are mutually exclusive and whether an entity is a debt collector or a creditor is transaction specific, requiring a determination of whether the debt was acquired before or after default. Here, because the debts were acquired after Plaintiffs were in default, Plaintiffs argued that Santander acted as a debt collector in relevant transactions.

Plaintiffs relied on the Third and Sixth Circuits’ interpretation of “debt collector” under the FDCPA. The Fourth Circuit, however, focused on the plain language of the FDCPA, finding that a debt collector must attempt to collect a debt “for another.” The Fourth Circuit also noted the “principal purpose” exception as elucidated in the FDCPA and that a consumer must show that the entity’s principal purpose is to collect a debt of behalf of others. In reaching its decision, the Court focused on Plaintiffs’ insufficient pleadings, noting that Plaintiffs failed to allege that Santander engaged in illegal collection practices.

In reaching its conclusion that Santander was not a debt collector, the Fourth Circuit noted that the statement “owed or due another” as used in the FDCPA does not necessarily mean “originally owed or due another.” Thus, Plaintiffs’ argument that Santander was a debt collector because it was sold debts from Plaintiffs’ original creditor after Plaintiffs’ loans were in default does not require a finding that Santander was a debt collector when attempting to collect from Plaintiffs.

Practical Impact of Supreme Court’s Decision

Presently, there is a split among the Circuit Courts of Appeal regarding how to determine whether an entity is a “debt collector” or a “creditor”, where the categorization of the entity is not readily apparent. The Third, Sixth and Seventh Circuits have adopted the “mutually exclusive” view. Under this approach, an entity that acquires a debt and subsequently seeks to collect on it must be either a “creditor” or “debt collector.” Under the “mutually exclusive” view an entity is a creditor, not subject to the FDCPA, if (1) it originated the debt, or (2) it purchased the debt before default. Conversely, the Fourth, Ninth, and Eleventh Circuits have found that the terms “creditor” and “debt collector” are not mutually exclusive. Thus, to be considered a debt collector an entity must meet the “principal purpose,” “regularly collects,” or “false name” test as delineated in the FDCPA.

Due to the existing Circuit split, an entity engaging in identical collection practices in two different judicial circuits can face conflicting results. Now that the Supreme Court has agreed to hear this case, we expect the Court to resolve this split, resulting in continuity between the Circuits when categorizing an entity as a debt collector.

The Supreme Court’s decision may result in an expansive reading of the FDCPA, necessitating an analysis of the transfer of the debt to determine whether the entity acted as a debt collector. Alternatively, the Court may clarify that financial services companies that acquire debts in connection with a merger or portfolio sale, but that do not meet the “principal purpose test” under the FDCPA are not debt collectors subject to FDCPA compliance. Either way, the Supreme Court’s decision is likely to impact consumer protection litigation in a meaningful way.

If the Supreme Court agrees with Plaintiffs, non-traditional defendants in FDCPA litigation will be subject to more claims, especially within the Fourth, Ninth, and Eleventh Circuits. However, if the Court sides with Santander, defendants can expect a significant reduction in lawsuits against entities that occasionally buy and collect delinquent debts, but do not have a principal purpose of collecting on debt. We will be closely monitoring the briefs and arguments of the parties as we await the decision by the Supreme Court.


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