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Supreme Court Update: Supreme Court rules purchasers of defaulted debts are creditors and not debt collectors under the FDCPA

In a follow-up to our previous post where on, On April 8, 2017, the United States Supreme Court heard oral arguments in Henson v. Santander Consumer USA. Inc., No. 16-349, 2017 WL 125669, — S.Ct. — (U.S. Jan. 13, 2017). In this particular case,

the Supreme Court has ruled that purchasers of defaulted debts are are creditors and not debt collectors under the FDCPA.

Stay tuned for more legal updates on our blog at Scherer Legal, P.C.

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Supreme Court to decide if a purchaser of defaulted debts is considered a “debt collector” or a “creditor” under the Fair Debt Collection Practices Act.

On April 8, 2017, the United States Supreme Court heard oral arguments in Henson v. Santander Consumer USA. Inc., No. 16-349, 2017 WL 125669, — S.Ct. — (U.S. Jan. 13, 2017).   The Court’s decision will resolve a split of authority on this issue among the various federal courts of appeal.     The key issue in Henson is whether a company that  attempts to collect debts it purchases after the debts are placed in a default status by the original lender  is a “debt collector” subject to the Fair Debt Collection Practices Act ( FDCPA).

In the underlying case, Henson v. Santander Consumer USA Inc., 817 F.3d 131, 138 (4th Cir. 2016)  CitiFinancial Auto Credit, Inc. made loans to a group of consumers to purchase  automobiles.  Ultimately, the consumers defaulted on the loans.  Citi repossessed the collateral and sold the vehicles for an amount less than the amount owed on the loans which created a deficiency balance.  Santander Consumer USA, Inc. purchased the consumers’ defaulted loans from Citi, and subsequently attempted  to collect the balance owed on those debts.  Prior to purchasing these loans, Santander had acted as a debt collector to collect these deficiencies on behalf of Citi.

The consumers filed a class action against Santander and argued that after Santander purchased the defaulted loans, its actions to collect the debt were in violation of the FDCPA  by allegedly misrepresenting the amount of the debt and that Santander was entitled  to collect it.   The district court dismissed the FDCPA claims against Santander and held under these facts Santander was not a  debt collector.

The consumers filed an appeal to the Fourth Circuit Court of Appeals  and argued   that the default status of the debt determines whether a debt purchaser is a debt collector or a creditor.  The consumers argued that Santander’s debt collection activities made it a “debt collector because Santander acquired the consumers’ debts after default.   The consumers argument centered on language found in the exclusion to the definition of “creditor” in § 1692a(4) of the FDCPA, which 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.”  The consumers claimed that Santander falls within this exclusion to the definition of a creditor, and therefore should be considered  a debt collector and thus subject to the provisions set for in the FDCPA.

The Fourth Circuit affirmed the district court’s decision and took issue with the consumers interpretation of the FDCPA’s definition of creditor, which excludes only those who are facilitating the collection of defaulted debts for another.  The Fourth Circuit opined that the default status of a debt does not determine whether or not an entity is a debt collector under the FDCPA.  The court of appeals found that the analysis should be based on whether a person collects debt on behalf of others or for its own account with  the main exception being when the principal purpose of the person’s business is to collect debt.

The Fourth Circuit laid out the three definitions of who is considered a debt collector under §1692a(6) of the FDCPA : (1) a person whose principal purpose is to collect debts; (2) a person who regularly collects debts owed to another; or (3) a person who collects its own debts, using a name other than its own as if it were a debt collector.  If an entity does not fall under one of these definitions, the exclusions to the definition of debt collector does not be considered at all.

Using this test, the Fourth Circuit found that Santander was not a debt collector under the FDCPA because  Santander’s principal business was as a consumer finance company and  not a debt collection company,  Santander was not using a name other than its own to collect debts and, maybe most importantly,  by the time Santander became involved in the alleged illegal debt collection activity,  it was already the owner of the defaulted loans and collecting its own  debts.

Many  legal commentators  think the Supreme Court will find that Santander as a buyer of debt is a creditor rather than debt collector under the FDCPA.   The Supreme Court may be reluctant to seemingly expand the parameters of who is a debt collector under the statute as the facts of this case arguably involve  practices that Congress did not  intended to address.  On the other hand, if the Supreme Court adopts the interpretation of the FDCPA argued by the consumers,  Congress will have the opportunity to  revisit this issue and amend the  statute if it believes the court has not correctly interpreted the legislative intent under  the FDCPA.

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Supreme Court rules filing claim for a time barred debt in bankruptcy cases does not fall within the scope of the Fair Debt Collection Practices Act

By a 5-3 vote, the United States Supreme Court in the case of Midland Funding, LLC, v. Aleida Johnson held that filing a claim for a debt that was past the applicable statute of limitations was not a violation of the provisions of the Fair Debt Collection Practices Act.  After Johnson filed bankruptcy, Midland filed a proof of claim on a debt that was past the statute of limitations of 6 years.   Johnson claimed the filing of this proof of claim was prohibited by the provisions of the Fair Debt Collection Practices Act.    Under this statute, a debt collector is prohibited from asserting any “false, deceptive, or misleading representation,” or using any “unfair or unconscionable means” to collect, or attempt to collect, a debt.  The question presented in this case was whether attempting to collect a debt that was well past the statute of limitations could be considered false, deceptive, misleading, or otherwise carried out by unfair or unconscionable means.

Justice Breyer delivered the opinion of the Court and noted that a claim under the Bankruptcy Code is simply a right to payment and state law generally will determine if a person in fact has this right.  Justice Breyer further noted in many states, creditors may still have the right to payment even when the applicable statute of limitations has expired.   In fact, many states provide that the when the statute of limitations has expired, this extinguishes the remedies the creditor may employ to collect the debt but does not extinguish the right to payment.

In this case, Johnson argued that “claim” under the Bankruptcy Code means “enforceable claim’.  However, Justice Breyer noted the word ‘enforceable” does not appear in the Bankruptcy Code and the term ‘claim” should enjoy a broad interpretation.  Further, any claim that is unenforceable will be disallowed under the Bankruptcy Code.  Time barred claims are also subject to being defeated by the raising of an affirmative defense under the Bankruptcy Code.  The bankruptcy trustee also has a role in objecting to claims that should be disallowed to help protect the rights of the bankruptcy debtor.

In conclusion, the Court opined that Congress intended the Fair Debt Collection Practices Act and the Bankruptcy Code serve different purposes and thus have different structural features and scopes.   Congress passed the Fair Debt Collection Practices Act to help consumers and possibly avoid filing bankruptcy at all.   The Bankruptcy Code, on the other hand, was to create and maintain what the Court has characterized the “delicate balance of a debtor’s protections and obligations”.    Consequently, the Court refused to implicate the provisions of the Fair Debt Collection Practices Act to close the loopholes Johnson believed existed under the Bankruptcy Code.