Purchaser of Defaulted Debt Not Subject to FCPA Liability Because it Acts as Creditor, Not Debt Collector

The United States Circuit Court for the 4th Circuit, which governs Delaware, Maryland, North Carolina, South Carolina, Virginia and West Virginia issued a significant published opinion favorable to creditors 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.