It’s been 46 years since “debt collector” was defined in the federal Fair Debt Collection Practices FDCPA (FDCPA) so why do courts still disagree with its meaning?  One reason may be that the FDCPA was enacted prior to the maturation of the consumer debt buyer industry, leaving the FDCPA’s legislative history void of any discussion regarding whether a buyer of consumer debt is a ‘debt collector.’ Courts have been filling in the gap; however, the lack of consistency in their decisions continues to burden litigants and the court system.

The existence of so-called passive debt buyers has increased exponentially since the passing of the FDCPA.  A passive debt buyer is an entity that purchases debt portfolios of defaulted charged off accounts owed by consumers, and then contracts third party vendors, usually licensed collection agencies or collection attorneys, to attempt to collect the defaulted accounts. These entities are considered ‘passive’ because they do not collect their own debt; the third parties handle all aspects of collecting debts.

Though the debt buyer industry has become prolific, Congress has not, to date, considered whether passive debt buyers should be considered debt collectors within the meaning of the FDCPA.  Courts have tried to answer that question, but their decisions are not uniform, making it difficult for anyone to discern the true meaning of ‘debt collector.’  This article addresses with some of these cases and offers a suggestion how debt buyers should be described by the courts.

The FDCPA is dated. It was approved on September 20, 1977.   It’s purposes are to eliminate abusive practices in the collection of consumer debts, to promote fair debt collection, and to provided consumers an ability to dispute and otherwise obtain the validation of debt.  However, the FDCPA has two potential definitions of ‘debt collector.’

Debt Collector means [first] “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts (“the Principal Purpose test”), or [second], [one] who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another (“the Regularly Collects test”)…….”

Who qualifies as a debt collector is an issue raised by litigants that courts must address frequently.  As Congress never considered how to describe passive debt buyers under the FDCPA, Courts must attempt to decide whether passive debt buyers are debt collectors under the FDCPA. Recent cases include Campbell v. LVNV Funding, LLC., 2022 WL 96172286 (2022); Young v. Midland Funding,  84 Cal.App.5th 34 (2022); and Endres v. UHG I LLC, 2022 WL 462005 (2022).  Two of these cases support the proposition that a passive debt buyer is a debt collector under the Principal Purpose test.  The issue will continue to be raised until the U.S. Supreme Court settles the controversy over the Principal Purpose test or Congress amends or otherwise clarifies the FDCPA.

In the U.S. Supreme Court case, Henson v. Santander, 137 S. Ct. 1718 LLC,(2017), the court determined whether a party that purchases a consumer debt, and then attempts to collect it, is a debt collector within the meaning of the FDCPA.  The Court interpreted the Regularly Collects test only and declined to analyze the Principal Purpose test.  The Court ruled that when one purchases a debt originated by someone else, thereby owns it after purchase, and then seeks to collect that debt for its own account, the entity does not fall under the Regularly Collects test.  It is, therefore, not a debt collector.  The Court rationalized that because the debt buyer is the current owner of the debt, and is collecting the debt, the current debt owner is collecting its own debt.  Unlike lower courts, the Henson court, with respect to the definition of debt collector, does not distinguish between a company that buys charged off debts and a company that buys debts on which the consumers are still paying.  A debt is a debt. 

Since Henson, few courts have interpreted the Principal Purpose test.  Two courts that have interpreted this test have reached opposite conclusions.  In Barbato v. Greystone Alliance, 916 F.3d 260 (3rd Cir 2019), the Third Circuit side-stepped the plain and unambiguous meaning of the statute.  Rather, this court interpreted the statute and concluded that the Principal Purpose test includes passive debt buyers even though the owners of these assets do nothing to collect the claims other than hire third party debt collectors. 

Even though the U.S. Supreme Court in Henson clearly states that the FDCPA is meant to reach those that directly contact the account debtors, the Barbato Court finds that the same language is farther reaching and meant to include indirect acts, like those of a passive debt buyer hiring a third party debt collector.  The court in Barbato reasons that the FDCPA does not limit the definition of debt collector to the ones that take the direct actions. Rather, it includes any person or entity that uses instrumentalities of interstate commerce, whether direct or indirect. Unfortunately, the U.S. Supreme Court did not take this decision on appeal.

In Dorrian v. LVNV Funding, LLC, 479 Mass. 265 (2018), the Court considered whether the defendant qualified as a debt collector under the FDCPA, the Massachusetts Debt Collections Practices Act (“MDCPA”) and Massachusetts Consumer Protection Act (“MCPA”).  The MDCPA and the FDCPA define a debt collector in the same manner.  In this case, the defendant, a passive debt buyer, did not attempt to collect any of the debts it acquired.  Consequently, it could not be licensed as a debt collector under Massachusetts law.  

The plaintiff claimed that the defendant was a debt collector as defined by the FDCPA, MDCPA, and MCPA.  That by not being licensed as a debt collector, the defendant was in violation of the law. The Dorrian Court dissected the plain language of these statutes and found it “instructive but not conclusive” as to whether a passive debt buyer is a debt collector. Rather, the Court relied on the opinion of the Massachusetts Division of Banks interpretation of the FDCPA which drew a line between passive debt buyers and debt collectors by whether or not they are directly involved in collection activities with consumers. The Court reasoned that the FDCPA is meant to stop the harassing and abusive acts aimed at consumers. Consequently, an entity must take direct actions against a consumer debtor to be defined as a debt collector under the Principal Purpose definition. 

The two courts also disagree on the meaning of the “principal purpose” of a passive debtor buyer. The Barbato Court decided that if a party’s most important aim is the collection of debt, then the party is a debt collector. The Barbato Court reasoned that because the company would cease to exist if it did not have its purchased debt collected, then it is a debt collector. This is an oversimplification of a passive debt buyer’s business. The Dorrian Court reasons that a passive debt buyer’s business is to invest capital in debt, and its profits are derived from the eventual collection of debt. However, the Dorrian Court notes that the passive debt buyer takes no action to collect the debt. The collection of the debt is completely contracted to a third party. The third party undertakes all aspects of the debt collection.

The primary purpose of a company that may buy debt is to gather investment money or other money drawn from lines of credit. Once the company gathers that money, it has to find investment opportunities. After a tranche of debt is purchased, the new owner needs to contract with third parties to collect the debt portfolio. If one was to reasonably apply the principal purpose test, the so called principal purpose of these companies is to raise money to purchase assets that return a dividend to its shareholders.  

The Barbato Court is correct in stating that the passive debt buyer would cease to exist if its agents do not collect debts, but wouldn’t every lending institution fail if it ceased to receive a return on its loans? A bank lends money to businesses and consumers in the hopes of seeing a return on its investment. To do so, it needs to collect promissory notes and realize profits on bank investments. If it fails to do so, the bank too will fail. Would that make the bank a debt collector? Also, to state that a passive debt buyer is a debt collector simply because it chooses to invest in debts would be incorrect. If someone chooses to invest in a retail store, is that investor now in the retail business? If an investor chose to invest in a car company, would he now be a car maker? No, we would not say that unless, the shareholder takes some direct action to build a car or run a retail store. 

The Hensen Court, Dorrian Court, and Barbato Courts agree that Congress intended to end unfair and deceptive practices of debt collectors when communicating with consumers. The Courts also agree that since the passing of the FDCPA, one of the largest changes was the creation of a debt buying market. There is nothing in the legislative history that shows that Congress ever considered debt buyers when it passed the FDCPA. The Barbato Court speculates that treating passive debt buyers as debt collectors furthers Congress’ intent to stop abusive and deceptive debt collections practices. The Dorrian Court disagrees. Without analyzing the Principal Purpose test the U.S. Supreme Court in Henson disagrees as well.

As the Hensen Court states people can reasonably disagree over whether Congress should change the FDCPA to include more parties within the definition of debt collector.  “…it's hardly unknown for new business models to emerge in response to regulation, and for regulation in turn to address new business models. Constant competition between constable and quarry, regulator and regulated, can come as no surprise in our changing world. But neither should the proper role of the judiciary in that process—to apply, not amend, the work of the People's representatives.” Henson, 582 U.S. 79, 90, 137 S. Ct. 1718, 1725–26, (2017).

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