Third Circuit Strips Debt Buyers of Defenses Under the FDCPA

March 6, 2019

The Third Circuit slammed the door on several theories a debt buyer might use to escape liability under the federal Fair Debt Collection Practices Act, known as the FDCPA, 15 U.S.C. § 1692-1692p.

Most prominently, Circuit Judge Cheryl Ann Krause ruled in her February 22 opinion that a buyer of defaulted debt can be liable under the FDCPA even if the buyer has outsourced all of the collection work to a third party.

The debt buyer was in the business of purchasing charged-off consumer receivables and had hired a collection agency to perform all of the actual collection work. The debt buyer itself had no contact with the consumer and did not approve the collection agency’s communications with the consumer.

In a lawsuit removed from state court, the consumer sued both the debt buyer and the collection agent. For reasons Judge Krause did not explain, the consumer dismissed the suit against the collection agent, leaving the debt buyer as the only defendant.

On cross motions for summary judgment, the district court ruled that the debt buyer qualified as a “debt collector” who could be liable under the FDCPA. However, the district court did not grant summary judgment in favor of the consumer because she had not yet shown that the debt buyer was vicariously liable for the collection agent’s actions.

The Third Circuit accepted a direct appeal to decide whether the debt buyer was a “debt collector” subject to the FDCPA.

On appeal, the debt buyer argued, among other things, that it was not a “debt collector” because it did not itself engage in any debt-collection activities. Judge Krause said that there were two potentially applicable definitions of “debt collector” in the FDCPA, 15 U.S.C. § 1692(a).

A debt collector can be someone who uses interstate commerce “in any business the principal purpose of which is the collection of any debts” or someone “who regularly collects or attempts to collect, directly or indirectly, debts owed or due . . . another.” Judge Krause focused on the “principal purpose” prong of the definition.

The debt buyer hoped to find support in Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718 (2017), where the Supreme Court held that someone who purchases defaulted debt is not automatically a “debt collector” subject to the FDCPA. Instead, Judge Krause focused the language in Henson where the Supreme Court explicitly declined to rule on whether a debt buyer is covered by the FDCPA if the buyer falls under the “principal purpose” definition in Section 1692a(6).

Judge Krause said that the debt buyer was a “debt collector” under the “plain meaning of the statutory text,” because the purpose of the business was collecting debts. Using dictionary definitions of crucial words, she said that “an entity that has the ‘collection of debts’ as its ‘most important’ ‘aim’ is a debt collector under this definition.”

Injecting French into the definition, Judge Krause said a “debt collector” includes a business whose “raison d’ètre is obtaining payment of debts it acquires,” adding, “Who actually obtains the payment or how they do so is of no moment.” She added that the “existence of a middleman does not change the . . . ‘principal purpose’” of the debt buyer’s business.

Heading off another appeal after remand, Judge Krause reached out to discuss two issues where the district court had already misapprehended rules governing vicarious liability.

First, Judge Krause said, vicarious liability does not depend on showing actual control over the specific activity that allegedly violates the FDCPA, citing the Seventh Circuit.

Second, she said that the debtor buyer’s liability does not depend on finding that the collection agent was a debt collector in its own right.

Judge Krause said that “‘an entity that itself is a “debt collector” . . . should bear the burden of monitoring the activities of those it enlists to collect debts on its behalf,’” quoting Third Circuit precedent.

A good deal of Judge Krause’s opinion drew from the Third Circuit’s recent FDCPA opinion in Tepper v. Amos Financial LLC, 898 F.3d 364, 366 (3d Cir. 2018). 

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