Recent Third Circuit Decision holds consumer debt buyer subject to the FDCPA

In Barbato v. Greystone Alliance, LLC, 2019 WL 847920 (3d Cir. Feb. 22, 2019), the Third Circuit U.S. Court of Appeals considered whether defendant/appellant Crown Asset Management (Crown), a “passive” debt buyer, was subject to the FDCPA. Notwithstanding the fact that Crown hired an independent third party to collect on the subject debt, the Third Circuit found Crown was “debt collector” within the purview of the FDCPA because its “principal purpose” was the collection of debts. Thus, Crown Asset could be held potentially liable for its collector’s violations of the FDCPA simply by virtue of its purchase and ownership of the underlying debt. This decision represents the continued expansion of the FDCPA and raises concern for entities that purchase both performing and defaulted debt.

Crown is a purchaser of charged-off receivables that retains a third-party servicer or debt collection law firm to collect on the subject debt. Crown does not have any direct contact with consumers, but derives its revenue from liquidating the consumer debt it acquired. In this case, Crown retained Turning Point Capital, Inc. (Turning Point) to undertake collection actions on the plaintiff’s account, which arose from a credit card account from GE Electric Capital Corp and GE Money Bank. Pursuant to its agreement with Crown, Turning Point sent the plaintiff a collection letter and left her two voicemail messages that allegedly violated the FDCPA. The district court found Crown was a “debt collector” subject to the FDCPA because its “principal purpose” was the collection of debts.

On appeal, the Third Circuit examined the FDCPA’s definition of a “debt collector” as any person: (1) “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” Definition), or (2) “who regularly collects or attempts to collect, directly or indirectly, debts owed or due, or asserted to be owed or due, or asserted to be owed or due another,” (the “Regularly Collects” Definition). Id. at *6. It held that the FDCPA “provides two separate paths to establishing an entity’s status as a “debt collector.” Id. (citing Henson v. Santander Consumer USA, Inc., 137 S. Ct. 1718, 1721 (2017)). The court noted that the debt collection industry has changed since the enactment of the FDCPA and “the simple creditor-debt collector duo has been complicated by the advent and growth of debt buying.”  Id.

The Third Circuit examined whether Crown’s activities qualified it as a debt collector within the Principal Purpose Definition only. Analyzing the statutory definitions of both Definitions, it held that the Principal Purpose Definition “sweeps more broadly” than the Regularly Collects Definition. Id. The court rejected Crown’s contention that it could not be a “debt collector” under the FDCPA for the reason that it did not engage in “overt acts of collection” because, among other things, “collection” by its very definition may be indirect. Id. at *7. The Third Circuit held that “the existence of a middleman does not change the essential nature – the ‘principal purpose’ – of Crown’s business.” Id. It therefore found that Crown “falls squarely” within the Principal Purpose Definition because its only business is the purchasing of debts for the purpose of collection of those debts. Id. Tellingly, the Third Circuit emphasized that this was a “fair result” because a “debt collector” like Crown “should bear the burden of monitoring the activities of those it enlists to collect debts on its behalf. Id

In reaching its decision, the Third Circuit also distinguished the Supreme Court’s recent decision in Henson, where it held that “a third-party buyer of debt that seeks to collect debt owed to it does not fit the second definition because it does not ‘regularly seek to collect debts ‘owed…another.’” Similarly, the Henson Court saw no basis in the text of the FDCPA to conclude “that an entity that obtains debts after default automatically qualifies as a ‘debt collector’ under the definition.” Id. at *4. 

According to the Third Circuit, the Supreme Court “explicitly declined to address whether such debt buyers could nevertheless qualify as debt collectors under the ‘principal purpose’ definition” in Henson. Id. at *5. Thus, it distinguished Henson as considering only the Regularly Collects Definition and failing to address the “wholly separate ‘principal purpose’ definition.” Id. The Third Circuit further disregarded its prior holdings regarding “the binary nature” of creditors and debt collectors under the FDCPA and held that “an entity that satisfies both [definitions][of a creditor and debt collector] is within the Act’s reach.” Id.  

The Third Circuit remanded the case for consideration of whether Crown is liable for claims relating to Turning Point’s actions. The Barbato decision puts “passive” debt buyers on notice of potential liability for the actions of its debt collectors. The decision also raises the question of whether indirect lenders or similar finance companies would be subject to FDCPA liability as “debt collectors” under the FDCPA. Please contact Ryan DiClemente, Esq. for more information on FDCPA compliance and litigation strategies.