New Ruling Ratified a Far-Reaching Definition of 'Debt Collector' Under the FDCPA
On March 9, the U.S. Court of Appeals for the Ninth Circuit issued a split decision that considered whether a business that purchased and profited from consumer debts but outsourced direct collection activities is characterized as a “debt collector” subject to the Fair Debt Collection Practices Act (FDCPA). Joining the Third Circuit, the court held in McAdory v. M.N.S. & Associaties, that an entity that otherwise satisfies the “principal purpose” definition of debt collector pursuant to 15 U.S.C. Section 1692(a)(6) may not escape responsibility under the FDCPA simply by retaining a third party to carry out its debt collection activities.
This ruling is significant for not only debt purchasers, but also for secured lenders that take over accounts receivable from a defaulting borrower and then outsource the collection efforts.
Congress enacted the FDCPA in 1977 to allow consumers to bring action against “debt collectors” for various abuses of the FDCPA’s provisions. Under the FDCPA, a “debt collector” is defined 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 debts,” (the “principal purpose” prong) or “[any person] who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another” (the “regularly collects” prong).
In 2019, the Third Circuit considered the “principal purpose” prong in Barbato v. Crown Asset Management and found that “an entity that has the ‘collection of any debts’ as its ‘important aim’ is a debt collector under [the principal purpose] definition.” The court went on to reason that “as long as a business’ raison d’etre is obtaining payment on the debts that it acquires, it is a debt collector,” and “who actually obtains the payments or how they do so is of no moment.” The Ninth Circuit largely relied upon the Third Circuit’s ruling in Barbato in reaching a similar conclusion in McAdory.
Jillian McAdory owed a debt that was bought by DNF Associates, LLC (DNF). DNF assigned the debt to a collection agency. When she filed suit, however, McAdory did not allege that DNF ever contacted her directly. Instead, the complaint alleges that DNF “contracted with a network of other debt collectors that directly contacted consumers in DNF’s name and at its direction,” including M.N.S. & Associates (MNF). McAdory’s complaint alleges that DNF and MNS committed eight individual violations of the FDCPA due to MNS’ conduct, particularly leaving McAdory a voicemail mentioning “enforcement review” and “asset verification,” and removing funds from her account prior to the authorized payment date.
The district court granted DNF’s motion to dismiss ruling that McAdory’s complaint failed to state a claim against DNF because “debt purchasing companies like DNF who have no interactions with debtors and merely contract with third parties to collect on the debts they have purchased simply do not have the principal purpose of collecting debts.” In granting the motion, Judge Hernandez reasoned that Congress meant for the FDCPA to apply only to debt collectors that directly contact consumers.
On appeal, the Ninth Circuit reversed the lower court’s finding by “declining to read a direct interaction requirement into the principal purpose prong” of the FDCPA. DNF argued that the term “collection” in the “principal purpose” prong demands an entity’s principal purpose to be the act of collecting debts directly from a consumer. However, according to the court, embracing DNF’s reading of the prong would “largely collapse the two alternative definitions of debt collector” as afforded by the FDCPA.
Alternatively, the court heavily adopted the Third Circuit’s analysis in Barbato. Similar to DNF, the defendant in Barbato did not directly collect debts from consumers, but instead outsourced its debt collection to other businesses. The Third Circuit stated that “‘collection’ by its very definition may be indirect[,]” and concluded, “the existence of a middleman does not change the essential nature—the ‘principal purpose’—of [the defendant’s business].” The Ninth Circuit went on to find that when determining a business’ principal purpose, “the relevant question … is whether debt collection is incidental to the business’s objectives or whether it is the business’s dominant or principal objective.” Therefore, the court found that McAdory’s allegation that DNF’s only business purpose was debt collection was adequate to allege that DNF was a debt collector under the “principal purpose” prong and therefore subject to the FDCPA.
In the dissenting opinion, Judge Carlos Bea took issue with the majority’s ramifications for vicarious liability. Because there were no allegations that DNF directly violated any of McAdory’s rights pursuant to the FDCPA, Bea refused the idea that DNF should be found liable for MNS’ alleged wrongdoing and argued that the allegations in the complaint concerning DNF’s business purpose were not sufficient to prove that debt collection was its principal purpose. According to Bea, “income, by itself, cannot tell us much about the activity’s importance to DNF. For aught that appears in the allegations of the complaint, the ‘vast majority’ of DNF’s profit could very well come from other activities having nothing to do with debt collection.”
The outcome of this decision is significant and important for any debt purchasers, including secured lenders that take over accounts receivable as part of a collateral package. By uniting with the Third Circuit in removing the requirement of direct interaction under the FDCPA’s definition of “debt collector,” the Ninth Circuit’s ruling in McAdory highlights a flourishing trend among courts of broadening the scope and applicability of the FDCPA. This ruling also illustrates the Ninth Circuit’s unwillingness to accompany other circuits which have found that the FDCPA’s definitions of “debt collector” and “creditor” are mutually exclusive. Companies that purchase and profit from consumer debts should continue keeping a close eye on the ever-changing litigation surrounding the FDCPA and adapt their business practices to account for the possibility of increased liability exposure. Given the current trends, this may become the “law of the land.” Most debt buyers will likely want to figure out the steps that are essential to ensure that their actions, and those of any independent third parties they retain to collect debts, abide by the substantive provisions of the FDCPA.