Game, Set, But Not Match: The Supreme Court’s Decision in Henson v. Santander

DEBT COLLECTION
Matthew Rosenkoff

By Matthew Rosenkoff

Matthew Rosenkoff is a partner at Taylor English Duma in Atlanta, Georgia and a member of its litigation and dispute resolution practice. He counsels individuals and companies in litigation matters concerning, among other things, contractual disputes, business torts, labor and employment issues, and resort and hospitality disputes. He also routinely represents companies that are the subject of complaints and claims under various consumer protection statutes throughout the U.S., including, but not limited to, the Fair Debt Collection Practices Act, Telephone Consumer Protection Act, Fair Credit Reporting Act, and fair business practices acts.

In many instances, judicial decisions are clear, decisive, and provide specific guidance for businesses to ensure compliance with the law. Too often though, judicial decisions raise more questions than answers. The Supreme Court’s June 12 ruling in Henson v. Santander Consumer USA, Inc. involving the Fair Debt Collection Practices Act (FDCPA) appears to do just that.

Henson answered the seemingly straightforward question of whether the purchaser of a defaulted debt becomes a debt collector simply by virtue of purchasing a defaulted debt. At the core of the Supreme Court’s ruling in Henson is the definition of a “debt collector” under the FDCPA. The FDCPA defines a “debt collector” as “…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, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. Notwithstanding … the term includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts.” See 15 U.S.C. 1692a(6). The definition then provides various exceptions to the term “debt collector,” which are not material for purposes of this article.

The FDCPA only covers debt collectors as statutorily defined. It is also limited to obligations of consumers that arose out of a transaction that was “primarily for personal, family, or household purposes.” See 15 U.S.C. 1692a(5). In many respects, whether an entity is a debt collector is clear and straightforward. In most instances, a third party servicer or law firm directly communicates with a consumer through correspondence or collection calls in an attempt to collect upon an account owed to a third party entity. Usually, there is not much debate in those cases. However, the definition of “debt collector” as per the definition above does not reference debt purchasers. The quandary is whether the debt purchaser falls within the definition of the term “creditor” or “debt collector.”

For years, courts across the country have focused on the timing of when the debt purchaser acquired the debt. The majority of courts concluded that a debt purchaser of a defaulted debt is a debt collector due to the fact the debt was in default at the time of acquisition of the account. The rationale for these positions stemmed, amongst other reasons, from the defined “exclusions” from the term “debt collector.” But, as many argued, the exclusions do not create the definition, and the courts should start and end with the definition of “debt collector.”

Prior to Henson, plaintiffs frequently sought to bring claims against debt purchasers under the FDCPA asserting wide-ranging theories of liability. Of course, there are varying degrees of debt purchasers. Some purchase the accounts and then seek to collect upon them directly. Others act similarly to the original creditor and merely place the accounts with independent debt collectors who conduct the collection activities. Each debt purchaser acts differently than the next. plaintiffs would assert claims against these debt purchasers based not only on the debt purchaser’s own acts but also on the acts of third parties hired by the debt purchaser. However, even in situations where the debt purchaser did nothing more than place the account with a servicer, plaintiffs still asserted claims against the debt purchaser. This is because, under the FDCPA, while creditors cannot be vicariously liable for the acts of the third party debt collectors with whom they place the debt, an entity that is a debt collector can be vicariously liable for the acts of any debt collectors working at their behest, including other third party debt collectors. See Faiella v. Green Tree Servicing LLC, 2017 U.S. Dist. 16-cv-088-JD (D. N.H. February 14, 2017).

Consumer attorneys would assert that because the debt purchasers were debt collectors simply by acquiring the debt in default, they were directly liable for their own actions and also, in situations where the debt purchaser outsources the collection to a third party collection company, vicariously liable for the acts of the third party debt collectors. This results in increased exposure to debt purchasers based on the actions of others. Thus, it was critical for defendant debt purchasers to undercut a primary theory of recovery often asserted by arguing that a debt purchaser is not a debt collector simply due to the status of the debt at the time of acquisition.

In August 2015, breaking with the other Circuit Courts, the Eleventh Circuit in Davidson v. Capital One Bank (USA), N.A., 797 F.3d 1309 (11th Cir. 2015), rejected the argument “that a non-originating debt holder is a ‘debt collector’ for purposes of the FDCPA solely because the debt was in default at the time it was acquired.” Approximately six months later, the Fourth Circuit Court of Appeals in Henson took a similar approach, rejecting the analysis taken by courts across the country and, like the Eleventh Circuit, reading the FDCPA according to its text, first focusing on the definition before considering the exclusion.

In breaking with numerous other circuits, the Fourth Circuit sided with the Eleventh Circuit and held that a debt purchaser was not subject to the FDCPA as a debt collector simply because the debt was in default at the time it was acquired. It was the Fourth Circuit’s opinion which was ultimately reviewed by the Supreme Court.

The Supreme Court presented the issue as a question of “how to classify individuals and entities who regularly purchase debts originated by someone else and then seek to collect those debts for their own account. Does the Act treat the debt purchaser in that scenario more like the repo man or the loan originator?” The Supreme Court agreed with the Fourth Circuit and held that a company which purchased defaulted debt did not trigger the statutory definition of a debt collector.

The Supreme Court explained that the definition’s reference to “owed…another” focuses on third party collection agents and not on the debt owner. The opinion engages in a deep analysis of the terms “owed” and “another,” explaining that “Congress routinely used the word ‘owed’ to refer to present (not past) debt relationships.” In fact, the Supreme Court explained that “[a]ll that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.’ And given that, it would seem a debt purchaser like Santander may indeed collect debts for its own account without triggering the statutory definition in dispute, just as the Fourth Circuit explained.” Henson is a unanimous opinion and, interestingly, the first opinion written by Justice Neil Gorsuch.

Without question, the Supreme Court’s ruling is seen as a boon to the debt purchasing industry. Consumer attorneys who previously asserted that a debt purchaser was a debt collector simply by acquiring the debt in default can no longer assert such an argument. Many consumer attorneys look to the debt purchasers as the deep pockets. Therefore, Henson stopped those claims in their tracks and ostensibly struck down a central argument utilized by the consumer attorneys against debt purchasers.

While a significant victory for the debt purchasing industry, the Supreme Court’s decision left unanswered the question of whether a debt purchaser of an account in default could become a debt collector through some other means. Hensondirectly and definitively answered the question that a debt purchaser of an account in default does not satisfy the definition of a debt collector because the debt purchaser does not regularly collect or attempt to collect a debt owed or due “another.”

However, as noted above, the definition of a debt collector extends beyond attempting to collect debts due another. It also covers businesses whose principal purpose is the collection of any debts. That clause precedes the reference to the collection of debts due “another.” The “or” separating those two clauses is important. The Supreme Court recognized the distinction between these two clauses in the definition and specifically explained that it was not answering the question of whether Santander could qualify as a debt collector under the principal purpose definition because it was not an issue litigated or the subject of the Supreme Court’s grant of certiorari.

Up to this point, the overwhelming number of courts appeared to focus solely on the default status. Litigants routinely argued the default status rather than the principal purpose prong of the definition. Naturally, it is much easier (and cheaper) for both litigants and courts to prove whether a debt was in default than what the principal purpose of an entity is. This seemingly shifted the focus away from the principal business purpose, and resulted in a substantial number of decisions addressing the defaulted status.

As a result of the Supreme Court’s leaving the question unanswered, debt purchasers have successfully scaled the mountain and overcome years of adverse judicial decisions, only to find another challenge in front of them. Now that the defaulted status of the debt is conclusively answered in favor of the debt purchasing industry, how will the courts resolve the forthcoming challenges that a debt purchaser’s principal business purpose is the collection of any debts? Whereas the Supreme Court engaged in a grammatical analysis of “another,” there is no such restriction to the principal purpose clause. Consumer attorneys have argued, and will undoubtedly continue to argue, that the acquisition of defaulted debt reflects nothing other than a purpose for collection. Courts will now be faced with mounting challenges to debt purchasers’ principal business purpose.

An interesting twist is the Supreme Court’s opinion on a definition not addressed, to wit, the definition of a creditor. The FDCPA defines a “creditor” as “any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.” See 15 U.S.C. 1692a(4). Given the Supreme Court’s textual reading of “owed,” a strong argument exists that a debt purchaser meets this definition of a creditor. Plus, for those debt purchasers that keep the debts themselves, the exception for facilitating collection of defaulted debt “for another” would not apply.

This poses an important juxtaposition. Certain courts have previously noted that the terms “creditor” and “debt collector” are mutually exclusive. Thus, in those jurisdictions, there is growing sentiment that Henson may be read to foreclose the principal purpose argument. Even in those jurisdictions where it remains a possibility or an open question, the principal business purpose argument may not get much traction.

After all, one of the exceptions to the term “debt collector” is “any officer or employee of a creditor while, in the name of the creditor, collecting debts for such creditor.” If officers and employees of a creditor collecting in the name of the creditor are excluded from the term “debt collector,” it would hardly comport with the purpose of the FDCPA or make practical sense to then find the entity to be a debt collector when its employees would not be.

The question remains how will courts address the new frontier of FDCPA attacks against debt purchasers? Will debt purchasers be considered creditors, thereby ending the discussion? Will courts open Pandora’s box and start defining “principal purpose,” thereby creating disparate treatment on a case by case basis? Can a debt purchaser be both a “creditor” and a “debt collector” even when its employees would fall outside of the FDCPA’s applicability? Or, is the solution to take the issue to Congress? These issues will need to be addressed in the aftermath of Henson. Plus, debt purchasers must remain cognizant of individual state laws which govern collection practices. It will be up to each state to deal with Henson and apply it to the various state statutes that may govern debt purchasers.

Debt purchasers have undoubtedly secured a critical win on the defaulted status issue. It is unclear, though, whether the more difficult mountain has already been scaled or has not yet been traversed. From a business perspective, hopefully Henson represents the denouement rather than the climax. Either way, it is a far better position to have scaled the first mountain than to be left at the base.

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