"Not all storms disrupt your life, some merely clear your path." -- Anonymous
On April 6, 2018, the Massachusetts Supreme Judicial Court (“SJC”) released one of its most controversial decisions affecting debt buyers who purchase defaulted consumer accounts owed by Massachusetts residents. In Dorrian v. LVNV Funding, LLC, the SJC reversed the Superior Court by holding that passive debt buyers are not debt collectors and, therefore, need not be licensed by
the Massachusetts Division of Banks (“DOB”) to place defaulted debts with licensed collection agencies or Massachusetts attorneys for collection purposes. Prior to its decision, litigation against passive debt buyers caused a 13.7 billion dollar industry angst and cost it and its insurers millions of dollars in settlements and attorney fees. The dispute postured the Division of Banks against the Massachusetts judiciary, and consumer lawyers against the debt buying industry, over whether a passive debt buying business must be licensed as a debt collector in the Commonwealth of Massachusetts.
By definition, a passive debt buyer is a business that purchases delinquent debts for investment purposes. Its principal purpose is not the collection of debt. Passive debt buyers do not directly collect debt. Rather, they hire licensed debt collectors or attorneys to collect the purchased debts. Over the last twenty years, the Division of Banks, the authority that issues debt
collection licenses in the Commonwealth, has consistently opined that a passive debt buyer need not be licensed as a debt collector as long as a licensed collection agency or an attorney admitted to practice law in Massachusetts collects the debt. These same words are posted on the consumer page of the Mass.gov website, even though several trial courts and an appellate court had held otherwise. Dorrian (and a consolidated case, Newton v. LVNV Funding, LLC) are two 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 posits 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).
G.L. c. 93, section 24A provides that a license is required if the debt collector is collecting the debt of another. 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? The superior court in 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 have addressed in Dorrian whether a debt buyer is a debt collector if the debt that is being collected is its own. She did, 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 meaning of “a debt owed…or due to another,” she referred 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 misinterpreted the 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 USA
Whether or not debt buyers, passive or otherwise, are debt collectors was settled by the U.S. Supreme Court in Henson v. Santander Consumer USA, Inc., 137 S.Ct. 1718 (June 12, 2017), a case that was released after the Superior Court’s Dorrian decision. 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.” According to Henson, the only manner by which 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 did the SJC do?
The SJC approved the DOB’s “reasonable and expert interpretation in this complex regulatory environment.” The division’s interpretation resolved any ambiguity in the statute’s language, “drawing a line between debt buyers and collectors based on whether they are involved in any collection activities with consumers.” Citing Henson extensively, and adopting its rationale, the SJC agreed that a company that attempts to collect debts owed to it is not covered by the debt collector definition because the company is not collecting or attempting to collect debts owed to another. As a result of the SJC’s decision, debt buyer businesses purchasing defaulted accounts owed by Massachusetts residents no longer will be interrupted by licensing concerns. If, however, the SJC had ruled that debt buyers are debt collectors, and therefore are required to have debt collection licenses prior to referring its accounts to collection agencies and lawyers, debt buyers would have been in an untenable position. An entire industry would have been disabled. Potentially, the largest debt buyers would have had to refund hundreds of millions of dollars to consumers who, in the first instance, justly owed the debts. By the SJC’s decision, the consumer lending industry, so critical to the Massachusetts economy, has avoided catastrophy. Justice has been served to allay the perfect storm into which debt buyers unwittingly sailed.
* Mr. Schreiber is a business and trial lawyer concentrating his practice in creditors’ rights. He is the founding member of Schreiber/Cohen, LLC, a law firm celebrating its 32nd anniversary this year, with offices located throughout New England. Mr. Schreiber is admitted to practice law in MA, NH, CT, NY, VT, PA, DC, and IN.