By Jeffrey A. Schreiber* & Vincent P. Reed**
After 46 years since “debt collector” was defined in the federal Fair Debt Collection Practices Act, 15 U.S.C. 1692-1692p (“the Act”), why do courts still disagree with its meaning? The Act was enacted prior to the consumer debt buyer industry matured. Consequently, the legislative history to the Act is void of discussion of whether a buyer of consumer debt is a debt collector within the meaning of the statute. One of the major developments since the passing of the Act, is the onset of so-called passive debt buyers. A passive debt buyer is an entity that purchases debt portfolios of defaulted charged off accounts owed by consumers, and then contracts third party vendors to attempt to collect the defaulted accounts. The third parties, usually licensed collection agencies or collection attorneys, handle all aspects of collecting debts.
The debt buyer industry has become prolific. Congress has not, to date, considered whether passive debt buyers should be considered debt collectors within the meaning of the Act. The courts however, have tried to answer that question. The case law that has evolved has reached opposite conclusions making it difficult for anyone to discern debt collector’s true meaning. This article deals with some of the cases and offers a suggestion how debt buyers should be described by the courts.
The Act, approved on September 20, 1977 (and as subsequently amended), is a consumer protection statute establishing legal protection to consumers from abusive debt collection practices. The statute’s purposes are to eliminate abusive practices in the collection of consumer dets, to promote fair debt collection, and to provided consumers an ability to dispute and otherwise obtain the validation of debt.
Section 803(6) of 15 U.S.C. 1692a contains two definitions of debt collector:
The term ‘debt collector’ means [first] 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 (“the Principal Purpose test”), or [second], [one] who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another (“the Regularly Collects test”)…….
In the U.S. Supreme Court case, Henson v. Santander, 137 S. Ct. 1718 (2017), the court determined whether a party that purchases a consumer debt, and then attempts to collect it, is a debt collector within the meaning of the Act. The Court interpreted the Regularly Collects test only and declined to analyze the Principal Purpose test. The Court ruled that when one purchases a debt originated by someone else, thereby owns it after purchase, and then seeks to collect that debt for its own account, the entity does not fall under the Regularly Collects test and is, therefore, not a debt collector. The Court rationalized that because the debt buyer is the current owner of the debt, and is collecting the debt, the current debt owner is collecting its own debt. Unlike lower courts, the Henson court, with respect to the definition of debt collector, does not distinguish between a company that buys charged off debts and a company that buys debts on which the consumers are still paying. A debt is a debt.
Since Henson, few courts have interpreted the Principal Purpose test. Two courts that have interpreted this test have reached opposite conclusions. In Barbato v. Greystone Alliance, 916 F.3d 260 (3rd Cir 2019), the Third Circuit side-stepped the plain and unambiguous meaning of the statute. Rather, this court interpreted the statute and concluded that the Principal Purpose test includes passive debt buyers even though the owners of these assets do nothing to collect the claims other than hire third party debt collectors. Even though the U.S. Supreme Court in Henson clearly states that the Act is meant to reach those that directly contact the account debtors, the Barbato Court finds that the same language is farther reaching and meant to include indirect acts, like those of a passive debt buyer hiring a third party debt collector. The court in Barbato reasons that the Act does not limit the definition of debt collector to the ones that take the direct actions. Rather, it includes any person or entity that uses instrumentality of interstate commerce, whether direct or indirect. Unfortunately, the U.S. Supreme Court did not take this decision on appeal.
In Dorrian v. LVNV Funding, LLC, 479 Mass. 265 (2018), the Court considered whether the defendant qualified as a debt collector under the Act, the Massachusetts Debt Collections Practices Act (“MDCPA”) and Massachusetts Consumer Protection Act (“MCPA”). The MDCPA and the Act define a debt collector in the same manner. In this case, the defendant, a passive debt buyer, did not attempt to collect any of the debts it acquired. Consequently, it could not be licensed as a debt collector under Massachusetts law. The plaintiff claimed that the defendant was a debt collector as defined by the Act, MDCPA, and MCPA. That by not being licensed as a debt collector, the defendant was in violation of the law. The Dorrian Court dissected the plain language of these statutes and found it “instructive but not conclusive” as to whether a passive debt buyer is a debt collector. Rather, the Court relied on the opinion of the Massachusetts Division of Banks regarding debt collection licensing of passive debt buyers. The Massachusetts Division of Banks is the state agency in charge of issuing debt collection licensing and regulating debt collectors. The Dorrian Court adopted the Massachusetts Division of Banks interpretation of the Act. The Massachusetts Division of Banks drew a line between passive debt buyers and debt collectors as to whether or not they are directly involved in collection activities with consumers. The Court reasoned that the Act is meant to stop the harassing and abusive acts aimed at consumers. Consequently, direct actions against a consumer debtor is needed to be defined as a debt collector under the Principal Purpose definition.
The two courts also disagree on the meaning of the “principal purpose” of a passive debtor buyer. The Barbato Court decided that if a party’s most important aim is the collection of debt, then the party is a debt collector. The Barbato Court reasoned that because the company would cease to exist if it did not have its purchased debt collected, then it is a debt collector. This is an oversimplification of a passive debt buyer’s business. The Dorrian Court correctly reasons that a passive debt buyer’s business is to invest capital in debt, and its profits are derived from the eventual collection of debt. However, the Dorrian Court notes that the passive debt buyer takes no action to collect the debt. The collection of the debt is completely contracted to a third party. The third party undertakes all aspects of the debt collection.
The primary purpose of a company that may buy debt is to gather investment money or other money drawn from lines of credit. Once the passive debt buyer gathers that money, it has to find investment opportunities. After a tranche of debt is purchased, the new owner needs to contract with third parties to collect the debt portfolio. If one was to reasonably apply the principal purpose test, the so called principal purpose of these companies is to raise money to purchase assets that return a dividend to its shareholders. The Barbato Court is correct in stating that the passive debt buyer would cease to exist if its agents do not collect debts, but wouldn’t every lending institution fail if it ceased to receive a return on its loans? A bank lends money to businesses and consumers in the hopes of seeing a return on its investment. To do so, it needs to collect promissory notes and realize profits on bank investments. If it fails to do so, the bank too will fail. Would that make the bank a debt collector? Also, to state that a passive debt buyer is a debt collector simply because it chooses to invest in debts would be incorrect. If someone chooses to invest in a retail store, is that investor now in the retail business? If an investor chose to invest in a car company, would he now be a car maker? No, we would not say that unless, the shareholder takes some direct action to build a car or run a retail store.
The Hensen Court, Dorrian Court, and Barbato Courts agree that Congress intended to end unfair and deceptive practices of debt collectors when communicating with consumers. The Courts also agree that since the passing of the Act, one of the largest changes was the creation of a debt buying market. There is nothing in the legislative history that shows that Congress ever considered debt buyers when it passed the Act. The Barbato Court speculates that treating passive debt buyers as debt collectors furthers Congress’ intent to stop abusive and deceptive debt collections practices. The Dorrian Court disagrees. Without analyzing the Principal Purpose test the U.S. Supreme Court in Henson disagrees as well. As the Hensen Court states, reasonable people (and courts) can disagree how Congress would have handled passive debt buyers. People can reasonably disagree over whether Congress should change the Act to include more parties within the definition of debt collector. “After all, it’s hardly unknown for new business models to emerge in response to regulation, and for regulation in turn to address new business models. Constant competition between constable and quarry, regulator and regulated, can come as no surprise in our changing world. But neither should the proper role of the judiciary in that process—to apply, not amend, the work of the People’s representatives.” Henson, 582 U.S. 79, 90, 137 S. Ct. 1718, 1725–26, (2017).
*Mr. Schreiber is a member of Schreiber Law, LLC, a collection law firm. Mr. Schreiber defends law firms and collection agencies from claims brought under the FDCPA and related federal and state consumer protection laws. He also represents plaintiff credit card issuers and other financial institutions in collection litigation.
**Mr. Reed is a senior associate at Schreiber Law, LLC and concentrates his practice in creditors’ rights litigation.