The Third Circuit jumped through a loophole the Supreme Court left open intentionally in Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718 (2017), by holding a debt purchaser is subject to the federal Fair Debt Collection Practices Act, or FDCPA, if its principal business is the collection of debts.
In Henson, the maiden opinion by newly-appointed Justice Neil M. Gorsuch, the headline holding was: Someone who purchases a defaulted debt is not a “debt collector” and is therefore not subject to the FDCPA, 15 U.S.C. § 1692, et seq.
A bank in Henson had purchased a debt already in default that had been originated by another lender. The opinion was often (but incorrectly) interpreted to mean that the FDCPA can never apply to a debt collector who has purchased a defaulted debt for its own account. However, Justice Gorsuch was careful to highlight two questions the Court did not decide:
- The debtor argued that the bank came within the FDCPA because it regularly collected debts for another. Justice Gorsuch said that question was not raised in the petition for certiorari, and the Court did not agree to review it; and
- Justice Gorsuch said the Supreme Court had not agreed to address another aspect of the definition of a debt collector in Section 1692a(6), which includes someone “in any business the principal purpose of which is the collection of any debts.”
In his August 7 opinion for the Third Circuit based on the “plain text” of the statute, Circuit Judge Thomas L. Ambro latched onto the second unresolved question by holding that the FDCPA applies to “an entity whose principal purpose of business is the collection of any debts . . . regardless of whether the entity owns the debts it collects.”
The Facts in the Third Circuit
The facts on the appeal before Judge Ambro were similar to those in Henson, except that the plaintiff in Henson had not argued below that the bank’s principal business was debt collection.
In the Third Circuit, the plaintiffs owned a home subject to a mortgage owing to a bank taken over by the Federal Deposit Insurance Corp. Initially, they continued making monthly payments after the takeover, but the FDIC neither cashed nor returned the checks. Eventually, the plaintiffs stopped sending monthly checks.
The FDIC declared the loan in default and sold it to a purchaser who demanded payment in full in an amount more than the plaintiffs owed. Having made several communications that might violate the FDCPA, the purchaser initiated foreclosure proceedings.
The homeowners filed suit in district court, alleging violations of the FDCPA. In several pleadings, the defendant-purchaser admitted that its sole business was acquiring and collecting debts.
Following a bench trial but before the district court rendered its decision, the Supreme Court handed down Henson. After additional briefing, the district court ruled that the purchaser was a debt collector and was liable for having violated the FDCPA.
The purchaser appealed, contending in the Third Circuit that it was not a debt collector subject to the FDCPA because it owned the debt.
Judge Ambro’s Analysis
The FDCPA applies to a “debt collector” but not to a “creditor.” A “debt collector” is defined as someone who uses the mails or interstate commerce “in any business the principal purpose of which is the collection of any debts” or someone “who regularly collects” debts owed to “another.” 15 U.S.C. § 1692a(6).
A “creditor” under the FDCPA is someone who extends credit or is someone “to whom a debt is owed.” The term “creditor” excludes “any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.” 15 U.S.C. § 1692a(4) and (6).
Before Henson, the law in the Third Circuit followed the so-called default test in Pollice v. National Tax Funding L.P., 225 F.3d 379, 403 (3d Cir. 2000), where the purchaser of a debt is a debt collector subject to the FDCPA if the debt was purchased after default.
Under Pollice, the purchaser in Third Circuit appeal would have been a “debt collector,” but Judge Ambro said that Henson “recently repealed the ‘default’ test we followed.”
Judge Ambro said that only one circuit court since Henson has ruled on the FDCPA in a precedential opinion. In that case, the District of Columbia Circuit held that the defendant was not a debt collector because there was no evidence that the bank’s principal business was the collection of debt or that it was collecting the debt for someone else.
Addressing “the task before us today,” Judge Ambro said that no circuit has issued a precedential opinion “on Henson’s applicability to the ‘principal purpose’ definition of ‘debt collector.’” Picking what Henson held and what it did not hold, he said that Henson “affects” but “did not decide” who “fits the ‘principal purpose’ definition of ‘debt collector.’”
Judge Ambro said that the phrase “any debt” as used in the statute does “not distinguish to whom the debt is owed.” In contrast, he said, “debts owed or due . . . another” only applies to the “regularly collects” definition.
Contending that it could not be a debt collector because it also met the definition of creditor, the purchaser in substance argued that the definitions are mutually exclusive. Judge Ambro rejected the argument because, “following Henson, an entity that satisfies both is within the [FDCPA’s] reach.”
Whether the defendant owns the debt, Judge Ambro said, “does not resolve whether that entity is a debt collector.” Because the purchaser conceded that its principal business was collecting debts, Judge Ambro held that the debt buyer was subject to the penalties in the FDCPA because it was a “debt collector under the ‘principal purpose’ definition.”
To read ABI’s discussion of Henson, click here.