Passive Debt Buyers Beware: Third Circuit Broadens FDCPA Liability Under the 'Principal Purpose' Definition
Persons or entities that engage third parties to collect consumer debts they acquired when the debts were in default, known as "passive debt buyers," are "debt collectors" subject to the Fair Debt Collection Practices Act (FDCPA) and "should bear the burden of monitoring the activities of those they enlist to collect debts on their behalf," according to a panel of the U.S. Court of Appeals for the Third Circuit. Barbato vs. Crown Asset Management is the Third Circuit's second recent decision addressing the FDCPA's application to debt buyers, and further chips away at a debt buyer's defenses to FDCPA claims that appeared to remain available following the U.S. Supreme Court's 2017 decision in Henson vs. Santander Consumer USA Inc. Further, these decisions highlight the need for debt buyers to reevaluate their business practices, discuss the implications of these decisions with third parties performing collection work, and establish procedures to monitor the third party's collection efforts.
In Henson, the Supreme Court held that the plain language of the "regularly collects or attempts to collect debts . . . owed or due . . . another" portion of the FDCPA's "debt collector" definition focuses on third-party collection agents working for a debt owner. The Court found the debt buyer in Henson did not trigger this portion of the definition by collecting debts for its own account. Significantly, Henson left open the question of whether a debt buyer would qualify as a "debt collector" under the portion of the FDCPA definition that makes an entity a "debt collector" if the "principal purpose" of its business "is the collection of any debts."
In Barbato, the plaintiff's credit card debt was sold to Crown Asset Management, which engaged Turning Point Capital, Inc., to collect the debt. The plaintiff filed a lawsuit in federal district court against Crown and Turning Point (under its new name, Greystone Alliance, LLC) alleging FDCPA claims against both defendants based on collection letters and voicemail messages the plaintiff received from Turning Point. The letters allegedly neglected to inform her how to exercise her validation rights and the voicemail messages allegedly failed to indicate that the calls were from a debt collector. Following Greystone's dismissal from the case, the plaintiff and Crown filed cross-motions for summary judgment to resolve, among other issues, whether Crown was a "debt collector" under the FDCPA.
Before Henson was decided, the district court denied Crown's summary judgment attempt, ruling that because Crown's "principal purpose" was debt collection and it acquired the plaintiff's debt after default, Crown was a "debt collector" under the FDCPA. Once armed with the Supreme Court's Henson decision, however, Crown sought reconsideration of its summary judgment motion, arguing that since it owned the plaintiff's debt but outsourced collection, it was a debt buyer/creditor and not a "debt collector." Rejecting Crown's arguments, the district court reaffirmed that Crown was a "debt collector" under the FDCPA's "principal purpose" definition. Following the district court's certification, the Third Circuit granted Crown's petition for an interlocutory appeal.
The Third Circuit panel framed the issue as "whether an entity that acquires debt for the 'purpose of . . . collection' but outsources the actual collection activity qualifies as a 'debt collector.'" In the Third Circuit's view, Crown's business met the FDCPA's "principal purpose" definition and it "[could not] avoid the dictates of the FDCPA merely by hiring a third party to do its collecting." Crown argued that Congress only intended the FDCPA to cover an entity that actually collected debts (i.e., made phone calls and sent letters) as opposed to passive debt purchasers.
The Third Circuit disagreed, emphasizing that Crown's business focused on obtaining revenue by liquidating consumer debts and, therefore, fell within the FDCPA's "principal purpose" definition. The Third Circuit stressed Congress's use of the noun "collection" in the FDCPA's "principal purpose" definition, without specifying "who must do the collecting or to whom the debt must be owed." Acknowledging that the Supreme Court in Henson "went out of its way" not to address whether debt buyers could also qualify as debt collectors under the "principal purpose" definition, the Third Circuit stated that "[a]s long as a business’s raison d’etre is obtaining payment on the debts that it acquires, it is a debt collector. Who actually obtains the payment or how they do so is of no moment."
Seven months before the Barbato decision, a Third Circuit panel ruled in Tepper v. Amos Fin., LLC that debt buyers can qualify as "debt collectors" under the FDCPA's "principal purpose" definition. The Third Circuit rejected the debt buyer's argument that by holding that a debt buyer that collected defaulted debts for its own account was not a "debt collector," Henson rendered it a "creditor" and thus foreclosed the possibility of it also being a "debt collector." Barbato creates additional FDCPA risk for passive debt buyers by taking Tepper a step further and rejecting the argument that debt buyers who outsource collection are not "debt collectors" because they do not engage in overt collection activities.
Ballard Spahr's Consumer Financial Services Group regularly advises clients on compliance with the FDCPA and state debt collection laws, and defends clients in FDCPA law suits and enforcement matters. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
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