In “The Perfect Storm,” Gloucester fishermen, played by George Clooney and Mark Wahlberg, discover their fishing boat propelled into three raging weather fronts that collide and become the fiercest storm in modern history. Maybe it is hyperbolic to compare “The Perfect Storm” to what the Massachusetts Supreme Judicial Court (“SJC”) must decide in Dorrian v. LVNV Funding, LLC. Yet, the issue that will be decided has caused a 13.7 billion dollar industry angst and thus far has cost millions of dollars in settlements and attorney fees.
On January 4, 2018, the SJC heard oral arguments in Dorrian. It is expected to finally settle a dispute that postures the Massachusetts Division of Banks (“Division of Banks” or “DOB”) against the judiciary, and consumer lawyers against the debt buying industry, over whether passive debt buying businesses must be licensed as debt collectors by the Division of Banks.
A passive debt buyer is a business that purchases delinquent debts for investment purposes only. Passive debt buyers do not directly collect debt. Rather, they hire licensed debt collectors or attorneys to collect the purchased debts. The Division of Banks, the authority that issues debt collection licenses in the Commonwealth, has consistently held that licenses are not required for passive debt buyers if a licensed debt collector or an attorney admitted to practice law in Massachusetts collects the debt. These same words are still posted on the consumer page of the Mass.gov website, even though several trial courts and an appellate court have held otherwise. Dorrian is one of several class action cases presided over by Superior Court Justice Janet Sanders, charging passive debt buyers with collecting defaulted accounts from Massachusetts residents without a license even though these buyers of bad debt are not collecting anything.
G.L. c. 93, section 24A provides as follows:
(a) No person shall directly or indirectly engage in the commonwealth in the business of a debt collector, or engage in the commonwealth in soliciting the right to collect or receive payment for another of an account, bill or other indebtedness, or advertise for or solicit in print the right to collect or receive payment for another of an account, bill or other indebtedness, without first obtaining from the commissioner a license to carry on the business, nor unless the person or the person for whom he or it may be acting as agent has on file with the state treasurer a good and sufficient bond. (emphasis added)
A debt collector is defined in G.L. c. section 24 as “any person who uses an instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of a debt, or who regularly collects or attempts to collect, directly or indirectly, a debt owed or due or asserted to be owed or due another…” (emphasis added).
The Division of Banks, in its advisory opinions, has consistently held that “a debt buyer who purchases debt in default but is not directly engaged in the collection of these purchased debts is not required to obtain a debt collector license provided that all collection activity performed on behalf of such debt buyer is done by a properly licensed debt collector in the Commonwealth or an attorney licensed to practice law in the Commonwealth.” Massachusetts Div of Banks adv op. (October 13, 2006).
Section 24A provides that a license is required if the debt collector is collecting the debt of another. Passive debt buyers own the debt. Clearly, they are not “collecting the debt of another.” So, the applicability of section 24A turns on the meaning of “indirectly.” The definition of debt collector refers to someone who “regularly collects or attempts to collect a debt, directly or indirectly, a debt owed….or due to another.” The word “indirectly” refers to collecting a debt due to another. How does that apply to a debt buyer who owns the debt? How can a debt buyer be a debt collector if it owns the debt that is being collected by a lawyer or collection agency and not by the debt buyer? Dorrian failed to address this critical issue. Rather, it focused on the term “indirectly.” In her decision, Judge Sanders plainly said that the Division of Banks is wrong. She criticized the DOB for creating a passive debt buyer category, not referred to in either G.L c., 24 or 24A. To accept this interpretation, she said, “would…render meaningless the word ‘indirectly’ which the legislature…deliberately included” in both sections. Dorrian v. LVNV Funding, LLC, Superior Court Civil Action No. 14-2684 BLS2 at 14 (March 30, 2017).
Judge Sanders may not address therein whether a debt buyer is a debt collector if the debt that is being collected is its own. She does, however, discuss this issue in Gomes, et al v. Midland Funding, LLC, Superior Court Civil Action No. 2011-01469-BLS2 (September 19, 2012). Rather than address the plain and unambiguous meaning of “a debt owed…or due to another,” she refers to the Fair Debt Collection Practices Act, 15 U.S.C. 1692(a), a statute on which the Massachusetts Debt Collection Practices Act (“MDCPA”) is modeled, and cites federal cases stating that “purchasers of defaulted debts are no less a debt collector simply because the activity at issue is the collection of debt that it now owns.” Id. At the time, the federal judiciary was split on this position. Nevertheless, she ignored the clear and unambiguous language of G.L. c 93, sections 24 and 24A. Instead, she focused on cases supporting the plaintiffs’ position.
The Supreme Court – Henson v. Santander Consumer USA
Whether or not debt buyers, passive or otherwise, are debt collectors has since been settled by the U.S. Supreme Court in Henson v. Santander Consumer USA, Inc., 137 S.Ct. 1718 (June 12, 2017). The Henson Court unanimously held that a debt collector is defined as one “who regularly collects or attempts to collect, directly or indirectly, a debt owed or due or asserted to be owed or due another.” This definition does not include debt buyers because debt buyers do not collect debts “owed or due another.” Id. The phrase “directly or indirectly” only applies to the second part of the definition and it modifies the term “debt” which includes only those “debts” that are “owed or due another.” This plain reading of the FDCPA – which is identical to the MDCPA – establishes conclusively that debt purchasers are not “debt collectors” under the law. According to Henson, the only way a debt purchaser can qualify as a debt collector is if the debt purchaser “uses an instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of a debt.” G.L. c. 93, section 24 (emphasis added); cf. FDCPA, 15 U.S.C. section 1692a(6)
The collection of a debt requires affirmative conduct, not mere passive receipt. The principal purpose of a passive debt buyer’s business is not the collection of debt. Rather, it is the acquisition of debt. That debt may be resold, used as collateral for financing, placed with debt collectors for collection, or used for any other legal purpose.
What will the SJC do?
Whether the SJC will agree with the Supreme Court’s interpretation remains to be seen. If Dorrian is reversed, the passive debt buyer conundrum will be solved. But what if Dorrian is affirmed? Potentially, the debt buyers who relied on the DOB’s twelve years of consistent advisory opinions stating that passive debt buyers need not apply for a collection license, will have insurmountable legal exposure. The judgments they already received against nonpaying consumer defendants may be voided by courts. Potentially, these debt buyers may be required to refund hundreds of millions of dollars remitted to them by the debt collectors they hired. Adding insult to injury, even if the debt buyers had applied to the Division of Banks for collection licenses, by its own admission, the DOB did NOT grant licenses to passive debt buyers because, in its view, passive debt buyers did not need them. So, debt buyers were, and still are, stuck in between a rock and a hard place. They sailed directly into a perfect storm.
If the SJC adopts the Henson case and sides with the Massachusetts Division of Banks, passive debt buyers will be permitted to continue to refer the accounts they own to Massachusetts debt collectors. Their businesses will no longer be interrupted by licensing concerns. But if the SJC rules that passive debt buyers are debt collectors, and therefore are required to have debt collection licenses prior to referring its accounts to collection agencies and lawyers, they will be put into an untenable position. An entire industry will be disabled. The largest debt buyers will have to refund hundreds of million dollars to consumers who, in the first instance, justly owed the debts.
To avoid injustice, the SJC can frame an equitable remedy
In 1877, the SJC was conferred with equity jurisdiction. The "grant of equitable powers does not permit a court to disregard statutory requirements." Freeman v. Chaplic, 388 Mass. 398 , 406 n.15 (1983). A fair solution would be to grandfather into the statutory scheme passive debt buyers who relied on the DOB’s advisory opinions and allow them six months to apply for a collection license. The DOB should be ordered to expeditiously process these collection license applications. Debt buyers should not be disgorged any money. The consumers who owed the money should not be granted a windfall and receive refunds. In its decision, the SJC could state that henceforth all debt buyers, passive or otherwise, will need to be granted a collection license by the DOB before its defaulted accounts can be collected. In this manner, an entire industry can avoid catastrophy. Justice would be served to allay the perfect storm into which debt buyers were impelled.