Significant Recent Opinions Impacting FDCPA Liability

Recently, the United States Court of Appeals for the Second Circuit vacated the dismissal of a complaint alleging a violation of 15 U.S.C. § 1692e when a debt collector that notified consumers of their account balance failed to disclose that the balance may increase due to interest and costs.  Avila v. Riexinger, 2016 WL 1104776 (2d Cir. March 22, 2016).  The Second Circuit oversees Connecticut, New York and Vermont.

§ 1692e provides that a debt collector “may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.”  In Avila, because the collection notices stated the current balance but did not disclose the balance was continuing to accrue interest or that if debtors did not pay within a certain amount of time they would be charged a late fee, the Court found that the least sophisticated consumer could be misled into believing she could pay her debt in full by paying the amount in the notice even though if not paid until a later date there could be interest and fees added.

Avila followed the “safe harbor” approach adopted in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, & Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000).  The Seventh Circuit covers Illinois, Indiana and Wisconsin.  In Miller, involving the § 1692g(a)(1) “debt validation notice”, the notice stated only the unpaid principal balance and added that it did not include unpaid interest and fees.  The notice violated § 1692g(a)(1) because stating only the principal balance was not “the [full] amount of the debt”.  Judge Posner fashioned the following “safe harbor” statement (or similar language) debt collectors may use to comply with the section:

As of the date of this letter, you owe $___ [the exact amount due].  Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1–800– [phone number].

Avila at *4, citing Miller at 876.

Federal district courts in Virginia have taken a different approach.  In Kelley v. Nationstar, 2013 WL 5874704 (E.D. Va. October 31, 2013), the court considered the Miller “safe harbor” statement to be dicta (not part of the formal holding of the case) and concluded that stating the full amount of the debt as of a specific date, or as of the date of the letter, satisfied § 1692g(a)(1), noting the Fourth Circuit had not interpreted this section of the Act.  “Nationwide's (sic) FDCPA Letter reads: “Your total debt as of 10/15/12 is $202,197.63.”  If Nationstar had stopped with this sentence, it would have satisfied § 1692g(a)(1).”  Kelley, at *5.  Unfortunately for Nationstar, its debt validation letter also included an itemization of principal, interest, fees and expenses that did not add up to the statement of the total amount of the debt.  Denying Nationstar’s motion to dismiss, the court found that the notice was confusing to the “least sophisticated consumer” because it was susceptible to two alternative interpretations of the amount of debt owed on the account.  

Unhelpfully, the court also observed that Nationstar’s debt validation notice included the statement: “Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater”, but in its decision made no further reference to this language being either necessary or superfluous with respect to compliance with § 1692(a)(1).

The decision in Kelley found favor in Davis v. Segan, 2016 WL 254388 (E.D. Va. January 19, 2016).  “The court in Kelley acknowledged the difficulty in conveying an amount due on a future date “[b]ecause of the nature of loans with daily compounding interest charges, in order to state the correct amount of the debt, the debt collector must state it as of a specific day.”  Kelley, 2013 WL 5874704, at *5.  “[A] collection letter which states either the amount due as of the date of the letter or as of a specific date is in compliance with § 1692g.” Id. (citation omitted).”  Davis, at *3.

To remain compliant with FDCPA it is important that debt collectors track developments in the jurisdiction in which they do business or practice law, and be mindful that a decision in one circuit or district court may not be adopted – indeed may be rejected - in another. 

Purchaser of Defaulted Debt not Subject to FDCPA Liability Because it Acts as Creditor, not Debt Collector

The United States Fourth Circuit Court of Appeals, with jurisdiction over Delaware, Maryland, North Carolina, South Carolina, Virginia and West Virginia issued a significant published opinion in Henson v. Santander Consumer USA, Inc., No. 15-1187 (4th Cir. March 23, 2016).

Plaintiff consumer borrowers alleged that Citi made loans to them for the purchase of automobiles and, when they defaulted, Citi repossessed the vehicles and sold the loans, bearing deficiency balances, to Santander.   The complaint asserted that after Santander purchased the debt it began communicating with plaintiffs in an attempt to collect the debts owed in violation of the FDCPA, allegedly misrepresenting the amount of the debt and Santander’s entitlement to collect it.  The district court granted Santander’s motion to dismiss the complaint pursuant to Rule 12(b)(6) on the basis of Santander’s defense that it was not a debt collector under 15 U.S.C. § 1692a(6).

On appeal, Plaintiffs contended that the default status of the debt at the time Santander purchased it determines its status as a debt collector because of one of the exclusions to the definition of “debt collector” contained in 15 U.S.C. § 1692a(6)(F)(iii):  excluded from the definition is “any person collecting or attempting to collect any debt . . . owed or due another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained….”  (Emphasis added.)

The Court of Appeals disagreed:

We conclude that the default status of a debt has no bearing on whether a person qualifies as a debt collector under the threshold definition set forth in 15 U.S.C. § 1692a(6). That determination is ordinarily based on whether a person collects debt on behalf of others or for its own account, the main exception being when the “principal purpose” of the person’s business is to collect debt.

Id. at 8 (emphasis in original).

The Court noted that § 1692a(6) defines “debt collector” in two parts:  classes of persons included within the term, and classes of persons excluded from the definition.  The first part of § 1692a(6) “defines a debt collector as (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.”  The second part of § 1692a(6), defining the classes of persons excluded from the definition of “debt collector”, includes the exclusion in § 1692a(6)(F)(iii):  “[t]he term [debt collector] does not include . . . any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.”  Id. at 10.  Because Plaintiffs alleged that Santander had purchased the debt before it engaged in the alleged unlawful collection efforts, the complaint failed to demonstrate Santander was collecting debts owed to another.  The second part of the definition did not, therefore, come into consideration – whether Santander was excluded from the definition of “debt collector” based on whether the debt was already in default when Santander obtained it.  Simply put, the Court cannot reach Plaintiffs’ claim that the debt was in default because that could only be considered if Santander were not seeking to collect its own debt. 

The opinion is significant on this principal point, and it is also interesting because the Court knocks down a number of other contentions made by plaintiffs that might be replicated in other litigation brought by consumers, including that Santander, which had been a debt collector with respect to these same loans before it purchased them, remained a debt collector afterwards.  The Court observed that Congress’ intent in enacting the FDCPA was to target abusive conduct by persons acting as debt collectors.  Because many financial companies such as Santander carry out a wide variety of activities, including lending money, collecting their own debt, servicing their own debt, and servicing other persons’ debts, plaintiffs’ argument would have the effect of subjecting all Santander’s activities to the FDCPA, which was not what Congress intended.  

This is an important decision because it clarifies the manner in which the analysis of whether a person is a creditor or a debt collector should be made.  Plaintiffs had tried to turn the analysis on its head, by arguing the exclusion first, before considering the principal definition.  The opinion should provide clarity to all entities concerned about FDCPA compliance:  providing they wait to commence collection activity until they have completed the purchase of the debt obligations, they will be acting as creditors and therefore largely immune from complaints relying on the FDCPA.  And, if they had been debt collectors while acting for the noteholders under a prior arrangement, they can transform their status from debt collector to creditor.

Published by Hutchens Law Firm on June 15, 2016