FYI: 3rd Cir Broadens Scope of FDCPA in Ruling Creditor is a Debt Collector

An entity whose principal business is to purchase debt, but did not itself collect the debt it purchased, was found to be a debt collector subject to the federal Fair Debt Collection Practices Act (FDCPA), even though the collection activity was undertaken by other entities.

 

The U.S. Court of Appeals for the Third Circuit reached this conclusion by expanding the scope of the statute's liability so far that it now falls into conflict with itself. Put another way, a creditor can be a debt collector of its own performing debt which it assigned to a third party to collect. But the third party that undertakes collection would not be a debt collector, even if its principal purpose was debt collection.

 

Sound confusing? It is, but the story on how the Court arrived there is worth the read.

 

A copy of the opinion is available at:  Link to Opinion

 

 

Who is an FDCPA "Debt Collector"?

 

The FDCPA defines "debt collector" in two ways. The first is an entity whose principal purpose is the collection of debts. The second is an entity that "regularly" collects debts, "directly or indirectly" that are alleged "to be owed or due or another."

 

In this action, the question was whether Greystone Alliance, LLC fit the "principal purpose" definition. The issue was critical to Greystone because if it obtained a finding that it was not a debt collector, it would not face FDCPA liability.

 

Greystone argued its principal business is to purchase charged off receivables, but it did not see itself as a debt collector because it did not collect the debt it purchased. Instead it engaged third-party collection agencies and a law firm for that purpose. Greystone also relied on earlier decisions holding that the FDCPA defined a creditor and debt collector as mutually exclusive, so it could not be both.

 

The Third Circuit's resolution of the issue did not end well for Greystone. The Court noted that its recent decision in Tepper v. Amos held that creditors can also be debt collectors for FDCPA purposes. But Tepper was a slightly different case.

 

Although the entity in Tepper also purchased charged off debt, it also collected that debt in-house. Greystone did not engage in in-house collection and so it set up a plausible argument that it was a creditor unlike the Tepper entity. After all, the definition of the FDCPA includes all types of creditors – those who "offer[] or extend[] credit creating a debt" are creditors. But you don't have to be a lender either, because the FDCPA includes within the creditor definition persons "to whom a debt is owed. . ." Greystone is such a creditor.

 

Creditors as Debt Collectors

 

Greystone was ultimately found to be a debt collector. But since Greystone is also creditor it was necessary for the Third Circuit to dispense with a prior ruling from its 2007 decision in FTC v. Check Investors, Inc. which supported Greystone's position. There, the Third Circuit concluded that ". . .as to a specific debt, one cannot be both a 'creditor' and a 'debt collector,' as defined in the FDCPA, because those terms are mutually exclusive."

 

To determine a person's status under the FDCPA, in FTC v. Check Investors, Inc., the Third Circuit introduced the "default" test that would exclude an entity from "debt collector" status if the debt it acquired was not in default at the time it was acquired. For 12 years, the default test served a clean way for courts to reconcile the debt collector/creditor distinction.

 

Both the Tepper and Barbato decisions concluded that the Supreme Court's 2017 decision in Henson v. Santander Consumer USA Inc. abrogated the "default" status test and, as a result, so too the understanding that the definitions of creditor and debt collector were "mutually exclusive."

 

A Messy End to the Default Status Test

 

But the death of the default status test does not support undoing the principle that one could not be both a creditor and debt collector with respect to the same debt, it only supports it. The test was created for the sole purpose of transforming a debt buyer creditor into a debt collector.

 

As the Third Circuit conceded in FTC v. Check Investors, Inc., the default test "overlooks the fact that the person engaging in the collection activity may actually be owed the debt and is, therefore, at least nominally a creditor." It was necessary to create the test because the Court believed "Congress has unambiguously directed our focus to the time the debt was acquired in determining whether one is acting as a creditor or debt collector under the FDCPA."

 

With the default test gone, the status of Greystone as a creditor would seem to be advanced. It was not the case.

 

Finding "New Ways" to Expand FDCPA Liability

 

Tepper and Barbato flavor their decisions with references to development of the debt buying industry since the 1978 enactment of the FDCPA. This development, according to the Third Circuit in Tepper, necessitated that "courts have had to find new ways to distinguish 'debt collectors' from 'creditors' to determine whether the FDCPA applies to a particular entity." Read another way, it was necessary to create a new way to keep debt buying subject to the FDCPA even though a debt buyer is "nominally a creditor."

 

If Henson ended the default status test, can we still overlook that the fact that a debt purchaser is a creditor? The Barbato decision says you can and pointed to its 2000 decision in Pollice v. National Tax Funding, L.P., where an entity like Greystone purchased defaulted property taxes and municipal sewer and water bills and then engaged others to collect the purchased debts.

 

While that decision too relied on the default status test, Barbato says that was only part of the reasoning. National Tax Funding was found to be a debt collector because "there [was] no question that the `principal purpose' of [the] business is the `collection of any debts,' namely, defaulted obligations which it purchases from municipalities." That is not much of a distinction since the focus in Pollice's rationale was still on the purchase of "defaulted obligations."

 

Perhaps recognizing this weakness, Barbato takes another route. Examining the two categories of the "debt collector" definition, the decision noted that the "principal purpose" definition focuses on "what" a business is collecting. "As long as a business's raison d'être is obtaining payment on the debts that it acquires, it is a debt collector."

 

Expansion of FDCPA Liability to Traditional Creditors and Performing Loans

 

There is a troubling problem in Barbato that is difficult to reconcile. By doing away with the default status test, the mere acquisition of debt is now the trigger, even if the debt is a performing loan.

 

Here lies the conflict. Persons who are collecting debt not in default at the time it was obtained by the collector are excluded from the definition of debt collector under 15 U.S.C. § 1692a(6)(F)(iii), provided they are collecting a debt "owed or due another . . ." But, when one is collecting a debt for itself, after Barbato and Tepper, the default status test is now gone and an entity whose principal purpose is "obtaining payment on the debts that it acquires" is now a debt collector, even when the debt is "not in default."

 

Some can now argue that an entity whose principal purpose is to acquire performing loans with the sole purpose of collecting on those loans is a debt collector under the FDCPA.  Suppose that same entity retains a third party to collect the performing debt. Under 15 U.S.C. § 1692a(6)(F)(iii), the third party is not a collector, even if their principal business is debt collection or they regularly engage in debt collection for another.

 

The internal conflict is created solely because entities like Greystone were intended to be treated as creditors. A creditor collecting its own debt does not need an exemption like that found in § 1692a(6)(F)(iii) because Congress did not contemplate courts would ever read the FDCPA as the Third Circuit did.

 

Perhaps the Third Circuit did not need to go as far as to kill off the default status test and could reason that the structure of the statute implies that the acquisition of defaulted debt as a principal purpose qualifies as the "collection of any debts." But it is hard to imagine the Court going back now after twice concluding that Henson "rejected the 'default' test."

 

The Cost of Barbato and Tepper

 

The debt buying industry has faced FDCPA risk for some time and has created its own standards through its trade organization RMAI, which not only requires FDCPA compliance, but self-imposes standards exceeding it. There is little if any impact on that sector.

 

The cost of Barbato and Tepper's expansion will be paid by indirect lenders, special purpose entities created solely to hold performing debt and the like. The decisions' "new way" of keeping debt buyers within the FDCPA do so by eviscerating the distinction between a creditor and debt collector and the cost for taking that route will be paid by disruption of the far larger consumer financial services industry.

 

In the eyes of the Third Circuit, if an entity's "raison d'être is obtaining payment on the debts that it acquires, it is a debt collector," even if the debt is a performing loan. While the suspect reasoning of Barbato and Tepper may limit their adoption outside the Third Circuit, their application to creditors will be tested often in the coming years.

 

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Holds Mortgagee's Deficiency Claim in Bankruptcy Was Precluded by Failure to Raise in Foreclosure

The U.S. Court of Appeals for the Seventh Circuit recently held that a mortgagee's failure to take a deficiency judgment against a borrower that filed bankruptcy in a concluded state foreclosure action precluded the mortgagee from making a deficiency claim in the borrower's bankruptcy proceeding.

 

A copy of the opinion is available at:  Link to Opinion

 

Two borrowers received a loan secured by a mortgage.  They defaulted on the loan and the mortgagee (Mortgagee) filed a two-count complaint in Illinois state court seeking relief under the mortgage and the note.

 

One of the borrowers and his wife later filed a bankruptcy proceeding.  The Mortgagee asked the bankruptcy judge to lift the automatic stay, which was granted with relief to proceed with the state foreclosure proceeding "with respect to the property."

 

The state court judge then put the property up for auction and confirmed the sale.  The Mortgagee asked for a deficiency judgment against the borrower that did not file bankruptcy, but not against the borrower who filed bankruptcy. 

 

The state court awarded an in personam judgment against the borrower who did not file bankruptcy, and an in rem judgment only against the borrower who filed bankruptcy.  The court retained jurisdiction, but just to enforce the decision and to confirm the sale. The Mortgagee did not appeal and the state litigation concluded with a final judgment in April 2015.

 

In the bankruptcy proceeding, the Mortgagee made a claim against the borrower for the same deficiency amount that the state court had awarded against the borrower who did not file bankruptcy.  The borrower objected arguing that the state court judgment extinguished the Mortgagee's claim under the claim preclusion doctrine because Illinois does now allow claim splitting. 

 

The bankruptcy judge overruled the borrower's objection and allowed the claim.  The borrower appealed to the trial court, which reversed holding that the Mortgagee's failure to take a deficiency judgment against the borrower in state court precluded the deficiency claim. 

 

This appeal followed.

 

The Seventh Circuit observed that Illinois law governs the effect of an Illinois judgment because state court judgments "shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State, Territory or Possession from which they are taken." 28 U.S.C. §1738.

 

Thus, the issue on appeal was whether the Mortgagee could file a new lawsuit in Illinois state court seeking to recover the deficiency amount against the who that filed bankruptcy.

 

Illinois litigants must present all their theories arising from single transaction "in a single proceeding." See, e.g., GE Frankona Reinsurance Co. v. Legion Indemnity Co., 373 Ill. App. 3d 969 (2007).  This holds true in the foreclosure context where "creditors who do not ask for deficiency judgments in the foreclosure actions cannot seek that relief later, in a different proceeding." See LSREF2 Nova Investments III, LLC v. Coleman, 2015 IL App (1st) 140184.

 

The Seventh Circuit found it unnecessary to anticipate how the Supreme Court of Illinois would rule "because all of the state's authorities agree that, if a litigant presents both the mortgage and the note in a single action, and fails to seek a deficiency judgment on the note, it cannot do so in a separate suit."  As such, because the Mortgagee could not now obtain a deficiency judgment in state court, "under §1738 it cannot get one in federal court either."

 

The Mortgagee argued that the state court judgment is not final and lacks any preclusive effect because it "left dangling" the complaint's request to enter a deficiency judgment against the borrower who filed bankruptcy. The Seventh Circuit rejected this argument because once the trial court enters the order approving the sale "Illinois treats a foreclosure action as finally decided."  The trial court entered the final judgment in April 2015 and there has been no activity since.  Thus, the Seventh Circuit held "that the decision is final."

 

The Seventh Circuit also rejected the Mortgagee's final argument that claim preclusion cannot apply because the automatic stay under § 362(a) divested the state court of "jurisdiction" necessary to enter the final judgment. 

 

Initially, the Court held, section 362(a) is not jurisdictional.  It merely provides that for certain matters filing a bankruptcy action "operates as a stay." Section 362(a) "does not establish exclusive federal jurisdiction over any of those matters."

 

Further, the Seventh Circuit note, even federal statutes like antitrust laws that provide for exclusive jurisdiction, "do not supersede §1738."  Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373 (1985). Instead, section 1738 and state-law preclusion rules "govern the defense of preclusion in the federal suit even though federal courts have exclusive jurisdiction" of certain claims.

 

The Mortgagee "had its chance in state court and did not use it."  Thus, the Seventh Circuit affirmed the trial court's judgment.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Holds Mere Need for Extrinsic Evidence to Interpret Ambiguous Contract May Not Be Enough to Avoid Class Cert

The U.S. Court of Appeals for the Seventh Circuit held that merely requiring extrinsic evidence to interpret a provision of a form contract does not render class certification improper, and that absent a more thorough explanation of its reasoning from the trial court, it could not uphold the trial court's ruling decertifying the class.

 

As a result, the Seventh Circuit vacated the decision of the trial court and remanded for further proceedings. 

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff auto dealerships ("Dealerships") entered into Demand Promissory Note and Security Agreements ("Agreements") with the defendant company ("Company") whereby the Company would issue a line of credit for the Dealerships to access in purchasing used vehicles at automobile auctions.

 

The Agreements provided the Dealerships with a revolving line of credit, called a floorplan agreement, to purchase vehicles at an auction which they subsequently sell at their dealerships.

 

In a typical auction and financing transaction, a used car dealer bid's on automobiles at an auction, and if their bid is accepted the dealer takes possession of the vehicle.  The dealer then either pays the auction company directly or utilizes a financing company, such as the Company, which pays the auction house and provides financing by means of the floorplan agreement to the dealer for repayment.  The auction house then forwards title to the entity that paid for the vehicle.

 

However, the Dealerships allege the Company deviated from that sequence because it did not pay the auction house at the time possession was delivered, but instead paid only after it received title to the vehicle purchased, which could take up to eight weeks. 

 

Despite this delay, the Company nevertheless charged interest and curtailment fees to the Dealerships from the date of the initial purchase, even though the Company pays no money on that date.

 

The Dealerships filed a putative class action lawsuit challenging that imposition of interest fees during the period prior to the receipt of title, when the Company was not yet paying any funds to the auction house. 

 

The Dealerships sought class certification to pursue that challenge on behalf of all other dealers who were subject to the same Agreement.

 

The Dealerships' amended complaint asserted numerous claims including breach of contract, constructive fraud, tortious interference, unjust enrichment, RICO violations, and RICO conspiracy.

The trial court originally issued an extensive 30-page opinion granting class certification as to the breach of contract and substantive RICO claims; however, after the Company filed a motion to reconsider, the trial court issued a one-page ruling reversing course and determining that class certification was not appropriate.

 

The matter was then appealed.

 

Initially, the Seventh Circuit noted that while it reviewed "a trial court's decision to grant or deny certification for abuse of discretion," the "review, while deferential, 'can and must be exacting.'"

 

In vacating the decision of the trial court, the Seventh Circuit ruled that the trial court's "denial of class certification lacks sufficient reasoning for our court, on review, to ascertain the basis of its decision." 

 

As you may recall, Federal Rule of Civil Procedure 23(a) sets forth explicit requirements for a case to proceed as a class action: (1) the class is so numerous that joinder of all members is impracticable (numerosity); (2) there are questions of law or fact common to the class (commonality); (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class (typicality); and (4) the representative parties will fairly and adequately protect the interests of the class (adequacy of representation).

 

In addition, one of the four categories set forth in Federal Rule of Civil Procedure 23(b) must be met in order for a case to proceed as a class action.

 

The Dealerships asserted that the case fell within Rule 23(b)(3) which considers whether "questions of law or fact common to class members predominate over any questions affecting only individual members, and … a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."

 

The Seventh Circuit noted that the trial court's "decision withdrawing class status provides only the conclusion that an ambiguous contract 'requires consideration of extrinsic evidence, necessitates individualized proof, and undermines the elements of commonality and predominance for class certification.'"

 

However, the Seventh Circuit ruled that "[n]either the categorization of the contract as ambiguous, nor the prospect of extrinsic evidence, necessarily imperils class status."

 

The Court noted that the parties in the case conceded that the floorplan contract at issue was a standard form contract, and "with a form contract such as this one, uniform application and interpretation of the clauses would be expected absent evidence that the form contracts in fact had meaning that varied from one signatory to another." 

 

Moreover, "[e]ven if the determination that the language is ambiguous as to when interest could accrue opens the door to extrinsic evidence to ascertain the intended meaning of that provision, the determination of its meaning would apply to all signatories and therefore would be capable of class-wide resolution."

 

Finally, the Seventh Circuit observed:  "[W]hen presented with the same issue in its initial class certification – the ambiguity as to when interest would accrue – the court concluded that the ambiguity did not prevent class certification because it was capable of a common answer.  The court has not explained why a different conclusion to that question was reached in the Motion for Reconsideration, instead mentioning only the need for extrinsic evidence."

 

However, "the mere need for extrinsic evidence does not itself render a case an improper vehicle for class litigation," and the trial court provided the Seventh Circuit with "no indication as to what evidence the court believed would render class certification improper." 

 

The Seventh Circuit therefore held that "[a]bsent a more thorough explanation of its reasoning, we cannot uphold the decision decertifying the class." 

 

As a result, the Seventh Circuit vacated the trial court's ruling, and remanded for further proceedings.  

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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