Joining the Third Circuit, the Ninth Circuit held 2/1 that a buyer of defaulted debt can be liable under the FDCPA as a “debt collector,” even if the buyer has outsourced all of the collection work to a third party.
The decisions by the Third and Ninth Circuits answered one of many questions left open by 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 federal Fair Debt Collection Practices Act, or FDCPA, 15 U.S.C. § 1692-1692p. Although purchasing consumer debt does not automatically make the buyer a “debt collector” subject to the FDCPA, the two circuits are describing when a debt buyer can be liable for violating the FDCPA.
To read ABI’s report on Henson, click here.
The Debt Buyer Farms Out Collection Work
The consumer-plaintiff incurred and failed to pay a debt to a jewelry store. The jeweler sold the debt to a third party. In the complaint filed in district court in Oregon, the plaintiff did not allege that the purchaser of the debt had contact with her.
Instead, the plaintiff alleged that the purchaser outsourced debt-collection activities to a debt collector. The complaint claims that the debt collector violated the FDCPA in several respects.
The purchaser of the debt filed a motion to dismiss, arguing that it could not be liable because it did not directly interact with consumers to collect debt. The district court granted the motion to dismiss.
The Circuit’s Split Decision
For herself and Circuit Judge Jerome Farris, Circuit Judge Morgan B. Christen reversed the district court and reinstated the lawsuit, with a caveat we will discuss later.
In large part, Judge Christen adopted the rationale of the Third Circuit in Barbato v. Greystone All. LLC, 916 F.3d 260 (3d Cir.), cert. denied sub nom., Crown Asset Mgmt. LLC v. Barbato, 140 S. Ct. 245 (2019). To read ABI’s report on Barbato, click here.
To be liable for violating the FDCPA, the defendant must be a “debt collector.” The appeals in the Third and Ninth Circuits both turned on the definition of a “debt collector” in 11 U.S.C. § 1962a(6).
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.” Like the Third Circuit, Judge Christen focused on the “principal purpose” prong of the definition, because the complaint did not allege that the debt purchaser itself collected debts.
The debt purchaser proffered a factual defense by contending that its principal business was buying debt for investment with a view toward turning a profit, not collecting debt. In response, Judge Christen focused on the procedural posture as an appeal from the granting of a motion to dismiss under Rule 12(b)(6) for failure to state a claim.
Under the rule, Judge Christen said the court must accept well-pleaded facts as true and construe them in favor of the plaintiff. In that regard, she characterized the complaint as alleging that the debt buyer’s “principal purpose was to buy consumer debts in order to collect on them, and that this is how [the purchaser] generated most or all of its income.”
Consequently, Judge Christen said the circuit could not consider the buyer’s “fact-based argument.” Instead, she looked exclusively to the sufficiency of the pleading.
Persuaded by the Third Circuit’s logic, Judge Christen “decline[d] to read a direct interaction requirement into the principal purpose prong based on the phrase ‘the collection of any debts.’” If direct interaction were required, she said that the “principal purpose prong would largely collapse the two alternative definitions of debt collector, contrary to the rule that ‘we presume differences in language like this convey differences in meaning.’”
The buyer contended that Congress could not have intended to regulate debt buyers who did not themselves collect debt because the debt collection industry did not exist in 1977 when the FDCPA was enacted. Judge Christen said she was “not persuaded” by the argument.
The primary purpose of the FDCPA, Judge Christen said, is to protect consumers. That purpose, she said, “would be entirely circumvented if the Act’s restrictions did not apply to entities like” the debt purchaser.
In sum, Judge Christen agreed with the Third Circuit and said that a debt purchaser “cannot avoid liability under the FDCPA merely by hiring a third party to perform its debt collection activities.”
The Caveat in the Majority Opinion
Having won the argument that the debt purchaser qualified as a “debt collector” subject to the FDCPA, the plaintiff wasn’t out of the woods entirely. At oral argument, the plaintiff’s counsel said the district court must be shown on remand that the debt purchaser is vicariously liable according to agency principles.
In other words, it was sufficient for the purpose of Rule 12(b)(6) for the plaintiff to allege that the debt purchaser lacked any business purpose other than debt collection. Those allegations, Judge Christen said, were sufficient allegations to characterize the debt purchaser as a “debt collector,” “regardless of whether [the purchaser] outsources debt collection activities to a third party.”
On remand, the plaintiff will presumably be required to prove the allegations in the complaint that the debt purchaser is vicariously liable for the actions of the debt collector it hired.
The Dissent
The majority opinion was 13 pages. Circuit Judge Carlos T. Bea wrote a 19-page dissent.
Judge Bea by no means would have insulated the debt buyer from all liability. He began his dissent by noting how the complaint alleged that the buyer controlled the actions of the debt collector to the extent that a jury could find the debt buyer to be liable for the debt collector’s actions.
Ordinarily, Judge Bea said, those allegations should have been enough to justify reversal because “the District Court failed to recognize that the complaint sufficiently alleged vicarious liability.” However, the plaintiff took the position that vicarious liability would be insufficient without a finding that the debt buyer was also a “debt collector.”
That’s where Judge Bea disagreed with the majority. He believes that the debt buyer was not a “debt collector” and therefore “owes no FDCPA duties to” the plaintiff. In significant part, he argued that the majority engaged in a “flawed grammatical analysis” of the statute.
At the end of his dissent, Judge Bea said he would have reached the same result as the majority had the plaintiff framed its argument differently. Under established Ninth Circuit law, he said that the debt buyer could be held liable under theories of vicarious liability.
Since the plaintiff abandoned the avenue of vicarious liability, Judge Bea said he would have upheld the district court’s dismissal.
Joining the Third Circuit, the Ninth Circuit held 2/1 that a buyer of defaulted debt can be liable under the FDCPA as a “debt collector,” even if the buyer has outsourced all of the collection work to a third party.
The decisions by the Third and Ninth Circuits answered one of many questions left open by 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 federal Fair Debt Collection Practices Act, or FDCPA, 15 U.S.C. § 1692-1692p. Although purchasing consumer debt does not automatically make the buyer a “debt collector” subject to the FDCPA, the two circuits are describing when a debt buyer can be liable for violating the FDCPA.
The Debt Buyer Farms Out Collection Work
The consumer-plaintiff incurred and failed to pay a debt to a jewelry store. The jeweler sold the debt to a third party. In the complaint filed in district court in Oregon, the plaintiff did not allege that the purchaser of the debt had contact with her.
Instead, the plaintiff alleged that the purchaser outsourced debt-collection activities to a debt collector. The complaint claims that the debt collector violated the FDCPA in several respects.
The purchaser of the debt filed a motion to dismiss, arguing that it could not be liable because it did not directly interact with consumers to collect debt. The district court granted the motion to dismiss.