ANNE ZOLTANI, J.
The U.S. Supreme Court recently issued two rulings involving the federal Fair Debt Collection Practices Act. This article discusses these rulings and their impact on consumer protection and consumer bankruptcy practitioners.
In response to common debt-buying industry practices of “disruptive dinnertime calls, downright deceit,”1 and other unconscionable conduct, Congress enacted the Fair Debt Collection Practices Act (FDCPA).2 Two recent U.S. Supreme Court decisions, Henson v. Santander Consumer USA Inc.
3 and Midland Funding, LLC v. Johnson, address facets of the FDCPA, highlighting issues relevant for debt collection, consumer protection, and consumer bankruptcy practitioners. In Santander, the Court considered whether a debt collector that collects purchased debt is a “debt collector” within the meaning of the FDCPA.5 In Midland Funding, the Court examined whether fling a time-barred bankruptcy proof of claim violates the FDCPA.6
The import of these two opinions must be assessed against the FDCPA backdrop. The FDCPA prohibits certain “wayward practices”7 of the debt collection industry and authorizes causes of action and significant fines to enforce its prohibitions.8 The FDCPA’s purpose is to “eliminate abusive debt collection practices” and to ensure that those who refrain from “abusive debt collection practices are not competitively disadvantaged.”9 Only “debt collectors,” however, are subject to the FDCPA.10
Henson v. Santander Consumer USA Inc.
In Santander, the first opinion authored by Justice Neil Gorsuch, the Court made clear that individuals and entities that regularly FEATURE BUSINESS LAW purchase debts originated by someone else and then seek to collect those debts for their own account are not "debt collectors" within the meaning of the FDCPA.11 In Santander, Ricky Henson, Ian Glover, Karen Pacouloute, and Paulette House (borrowers) borrowed money from CitiFinancial Auto (lender) to purchase cars.12 When the borrowers failed to make their car payments, the lender repossessed their vehicles and informed them that they each owed a deficiency. Subsequently, the borrowers became part of a class action suit against the lender that was based on violations of state repossession laws.14 While the class action was pending, Santander Consumer USA Inc. (Santander) purchased the borrowers' delinquent accounts from the lender.15 Santander was aware that the delinquent accounts were the subject of a class action lawsuit and a preliminarily approved settlement, in which the lender agreed to waive the deficiency balances against the borrowers.16 Subsequently, the settlement agreement was approved by the district court.17 In an attempt to "collect more than the few cents on the dollar that it paid for defaulted loans,"18 Santander contacted the borrowers, misrepresenting the amount of debt owed and its authority to collect such debt.19 The borrowers filed a lawsuit in the U.S. District Court of Maryland based on FDCPA violations, alleging that Santander was aware the delinquent accounts were the subject of a class action lawsuit and settlement, which had been preliminarily approved. Santander filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing it was a creditor exempt from liability under the FDCPA because it held the debt and collected the same on its own behalf. The district court found no indication that Santander acquired the debt "solely for the purpose of collection,"21 as opposed to servicing, and concluded the borrowers failed to allege Santander was "attempting to improperly shield itself"22 under the 15 U.S.C. § 1692a(4) creditor exemption.23 The district court rejected the borrowers' contention that Santander was a "debt collector" because it purchased debts in default to collect them.24 The Fourth Circuit agreed. It noted, however, that "some circuits faced with the same question have ruled otherwise."25 Accordingly, the U.S. Supreme Court took the case to resolve this conflict.26
The Court began its analysis with a faithful adherence to the statutory text. First, the Court focused on the plain language definition of the term "debt collector" in 15 U.S.C. § 1692a.27 Next, it noted as determinative that the plain language does not suggest "how a debt owner came to be a debt owner."28 The Court recognized 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.'"29 With these tenets in mind, the Court held that Santander may collect purchased debts for its own account without falling under the statutory definition of "debt collector."30
The Court rejected the borrowers' argument that one becomes a "debt collector" when it obtains a debt that was previously owed (the "p«s£participle of the verb 'to owe'"31 ) another.32 The borrowers contended that if Congress intended to exempt "all present debt owners" from being "debt collectors" it would have used the present participle "owing," meaning that "debt collectors" must collect debts currently owing another. The Court found the borrowers' argument unconvincing as "even a matter of good grammar, let alone ordinary meaning."33 The Court further posed an explanatory hypothetical, inviting the reader to " [j]ust imagine if you told a friend that you were seeking to 'collect a debt owed to Steve.' Doesn't it seem likely your friend would understand you as speaking about a debt currently owed to Steve, not a debt Steve used to own and that's now actually yours?"34
Finally, the Court dismissed the borrowers' policy arguments that delinquent debt buyers are more like "debt collectors" than loan originators and should be treated as such to be consistent with the underlying purpose of the FDCPA. In the end, lustice Gorsuch concluded it was "not the proper role of the judiciary" to amend "the work of the People's representatives."
Following Santander, debt-buying companies that purchase delinquent debts to collect on their own account as opposed to servicing rights now have a strong defense against FDCPA claims brought against them for engaging in any "wayward collection practices."36 Amid the definitive resolution on this issue, some questions remain unanswered. Foremost, whether Santander was a "debt collector" because "it regularly act[ed] as a third party collection agent for debts owed to others" was not decided. In leaving this question unanswered, Santander offers litde guidance on the broader issue of whether the term "debt collector" encompasses those "engaged 'in any business the principal purpose of which is the collection of any debts."'38 Given the scope of these unanswered questions, practitioners should advise business clients that collect purchased debt for their own account to continue careful compliance with the FDCPA.
Midland Funding LLC v. Johnson
In Midland Funding, Aleida Johnson filed a personal chapter 13 bankruptcy case, in which creditor Midland Funding, LLC (Midland) filed a proof of claim. Midland's claim accurately reflected that the last time any charge appeared o n the debtor's account had been more than 10 years prior—well after the applicable six-year statute of limitations had expired. The debtor objected, and the bankruptcy court disallowed the claim.41 The debtor then sued Midland in the District Court for the Southern District of Alabama, alleging that filing a claim "on an obviously time-barred debt was 'deceptive,' 'misleading,' 'unconscionable,' and 'unfair'" under the FDCPA.42 The district court dismissed the suit, holding that "the [Bankruptcy] Code authorizes filing a proof of claim on a debt known to be stale... [and] the [FDCPA] must give way to the [Bankruptcy] Code."43 The Eleventh Circuit reversed.44 Midland filed a petition for certiorari, noting a division of opinion among the circuits as to whether Midland's conduct violated the FDCPA.45 The U.S. Supreme Court granted certiorari and reversed the Eleventh Circuit.
Filing a Time-Barred Claim Does Not Violate the FDCPA
The Midland Court held that filing a proof of claim that on its face indicates the statute of limitations for the underlying debt has expired does not violate the FDCPA.47The Court reasoned that Midland's conduct was not "false, deceptive, or misleading"48 because a creditor has a right to payment of a debt even after the statute of limitations period has expired. The Court began its opinion by noting that Midland's proof of claim fell within the Bankruptcy Code's (Code) definition of the term claim.[...