U.S. District Court Paves Possible Path for Consumer Financial Protection Bureau Suits Against Debt-Collection Firms

In July 2014, the Consumer Financial Protection Bureau (CFPB) filed suit against Frederick J. Hanna & Associates P.C., a Georgia-based debt-collection firm, alleging violations of the Fair Debt Collection Practices Act (FDCPA) and the Consumer Financial Protection Act of 2010 (CFPA).[1] In response, Hanna filed a motion to dismiss, alleging that the claims were barred by the Practice of Law Exclusion within the CFPA, the complaint failed to allege any violations of FDCPA and CFPA, the suit infringed on Hanna’s First Amendment and equal protection rights, and the suit failed to meet the pleading requirements of Rules 8 and 9. Following briefs and oral argument, the district court denied Hanna’s motion in an order that will likely encourage further suits by the CFPB against debt-collection firms.

The court first rejected Hanna’s claim that the Practice of Law Exclusion barred the suit. The exclusion, found at 12 U.S.C. §5517(e), generally states that the CFPB shall not have authority over “activity engaged in by an attorney as part of the practice of law….”[2] Hanna argued that this exclusion was intended to ensure that regulation of the practice of law be left to the states, rather than put in the hands of a federal agency. The court, however, found that the rules of construction contained within the exclusion required a different result. Those rules of construction indicate that the exclusion would not apply in cases where the attorney is engaging in activity with respect to a consumer who is not receiving legal advice or services from the attorney. The court concluded that because Hanna was not providing legal advice or services for a consumer, but rather litigating against consumers, the exclusion would not apply. The court further rejected Hanna’s argument that states have the exclusive right to regulate attorneys, pointing to the fact that the FDCPA is frequently used to regulate attorney activity. Based on the language of the statute and a history of federal courts applying consumer protection law to lawyers, the court determined that the suit was not barred under CFPA.

The court then rejected Hanna’s claim that the CFPB had failed to allege violations of the FDCPA and CFPA. The CFPB’s complaint alleged that Hanna had violated the FDCPA and CFPA by sending deceptive complaints to consumers without proper oversight and review from attorneys. Courts have previously held that a demand letter that is merely signed by an attorney falsely represents to a consumer that an attorney is involved in the case and that a lawsuit might be coming. Hanna argued that a complaint is different from a demand letter because there was no false representation that an attorney may be involved: Without a doubt, when an attorney files a complaint against a consumer, an attorney is involved. The court found that a complaint could still make false representations to a consumer about the validity of the claims within the complaint. In this case, the court determined that, based on the huge number of cases filed by a small number of Hanna attorneys each year, each case was receiving less than one minute of review by an attorney prior to filing. In the short time that Hanna attorneys spent reviewing the cases, they could not possibly confirm that the claims were valid; thus, the complaint could falsely represent that Hanna had a valid case, and constitute a possible violation of the FDCPA and CFPA.

The court was unpersuaded by Hanna’s argument that the CFPB’s suit violated its First Amendment right to petition a court for redress of grievances, noting that courts have found that FDCPA claims do not violate the First Amendment, and reasoning that CFPA claims should be treated similarly. The court was also unpersuaded by Hanna’s argument that a law restricting its ability to pursue certain claims would violate the Fifth Amendment’s equal protection clause. The court ruled that not all claims are entitled to special constitutional protections, and that there need only be a rational basis for the CFPB’s enforcement of consumer protection laws.

Finally, the court rejected Hanna’s arguments that the CFPB’s complaint did not meet the minimum pleading standards of Federal Rules 9(b) and 8. The CFPB’s complaint stated that Hanna used affidavits to prove the validity and ownership of debts, many of which Hanna knew or should have known were executed by parties without personal knowledge of the facts contained within the affidavit. Hanna argued that because the Bureau did not cite any specific affidavits that were improperly executed, its complaint did not satisfy the heightened pleading standards of Rule 9(b) and failed to allege any facts from which the court could infer that the CFPB was entitled to relief, as required under Rule 8. The court first ruled that FDCPA and CFPA claims were not fraud claims and did not require heightened pleading standards. In response to Hanna’s Rule 8 argument, the court ruled that Hanna’s high volume of cases, along with the fact that it represented many debt-buyers, who may not actually have had evidence of the original debt beyond a spreadsheet purchased from the original creditor, were enough to create a presumption that its use of affidavits might give rise to an FDCPA or CFPA claim.

Following the court’s ruling, Hanna moved for permission to file an interlocutory appeal, but that motion was denied. In December 2015, Hanna entered into a settlement agreement with the CFPB, and the case was closed.

Although the court never ruled on whether Hanna had violated either the FDCPA or CFPA, the fact that the complaint was not dismissed suggests that other federal courts may be willing to hear FDCPA and CFPA claims brought by the CFPB against debt-collection attorneys, particularly attorneys that represent debt-buyers.