Who is a Debt Collector? Eleventh Circuit Ruling Narrows Definition Under FDCPA for Debt Purchasers

It has been a busy year for consumer finance decisions in the U.S. Court of Appeals for the Eleventh Circuit.  In July of 2014, the Eleventh Circuit became the first circuit court to extend sections 1692e and 1692f of the Fair Debt Collection Practices Act ("FDCPA") to proofs of claim filed in a bankruptcy case.  Crawford v. LVNV Funding, LLC, et al. (In re Crawford).  Although Crawford represented a serious blow to the debt collection industry, the Eleventh Circuit's landmark decision in Davidson v. Capital One Bank (USA) N.A. has now seemingly narrowed the definition of 'debt collector' under the FDCPA for debt purchasers.

In Davidson, No. 14-14200 (11th Cir. August 21, 2015), the Plaintiff filed a purported class action suit alleging that Capital One falsely stated the amount of his debt and that Capital One had 'robo-signed' the affidavit in support of its state-court collection complaint, all in violation of section 1692e of the FDCPA.  At issue before the Eleventh Circuit was whether Capital One should be considered a debt collector or a creditor for purposes of the FDCPA;  Capital One had acquired Plaintiff's debt from the original creditor, HSBC, while the debt was in default.

The FDCPA defines debt collectors as "(1) 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 (2) who regularly collects or attempts to collect, directly or indirectly, debts owed or due asserted to be owed or due another."  See §1692a(6).   However, this section also excludes several categories of persons, including "any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such a person."  See §1692a(6)(F)(iii). As the Eleventh Circuit noted,  "a person that otherwise meets the definition of 'debt collector' may be excluded from the term if he obtained the debt from another, is collecting the debt for another, and the debt was acquired prior to default."  (The most common example of an entity falling within this exception are mortgage servicing companies.)

In its motion to dismiss Plaintiff's Amended Complaint, Capital One argued that it was not a 'debt collector,' for purposes of the FDCPA because it regularly collected debts that were owed to it and not debts 'owed or due another.'  Moreover, Capital One argued that Plaintiff's complaint did not state that the principal purpose of Capital One's business was debt collection. 

Plaintiff, however,  argued §1692a(6)(F)(iii)  specifically applies to entities that acquire debt from another and whether they are deemed creditors or debt collectors depends on the default status of the debt at the time it was acquired.

Despite Plaintiff's argument, and decisions from other Circuits agreeing with Plaintiff, the Eleventh Circuit held that Capital One was not a debt collector under either of §1692a(6)'s definitions, based on a strict reading of the provision.  The Court held that before an entity can qualify as a 'debt collector', it must first satisfy the substantive requirements found in §1692a(6), neither of which depend on the default status of the underlying debt.  Regarding Plaintiff's main argument, the Court held that "when §1692a(6)(F)(iii) is read in its statutory context, it reveals itself to be nothing more than a single exclusion for a certain group of persons from a statutory definition that Davidson effectively urges us to ignore."  Ultimately, the Court held that "a person who does not otherwise meet the requirements of §1692a(6) is not a 'debt collector' under the FDCPA, even where the consumer's debt was in default at the time the person acquired it."

The Eleventh Circuit decision is in line with a recent decision from the Ninth Circuit (Schlegel v. Wells Fargo Bank, N.A., 720 F.3d 1204(9th Cir. 2013)), which held that Wells Fargo was not a debt collector even though it acquired plaintiff's loan after default because it did not meet either of the two definitions under §1692a(6).  However, Davidson seems to contradict decisions by the Third (FTC v. Check Investors, Inc., 502 F.3d 159 (3d Cir. 2007)) and Seventh Circuits (Schlosser v. Fairbanks Capital Corp., 323 F.3d 534 7th Cir. 2003)).  Both the Third and Seventh Circuits have held that one attempting to collect a debt is a 'debt collector' under the FDCPA if the debt in question was in default when acquired. 

Davidson is a significant decision for all those engaged in debt collection and is extremely favorable for debt purchasers, especially passive debt purchasers, who have been previously viewed as debt collectors under the FDCPA.  While it remains to be seen whether other courts will adopt the reasoning of the Eleventh Circuit, or whether the issue will eventually reach the Supreme Court, Davidson is a victory for debt purchasers whose principal business purpose is not debt collection.  Conversely, FDCPA plaintiffs will now have to carefully craft their allegations to adequately plead that a purported debt collector meets one of the two definitions found in §1692a(6), without regard to the default status of the underlying debt. 

Clark Hill's Consumer Financial Services Regulatory & Compliance Group provides strategic legal counsel to clients in all areas of consumer finance. We provide counsel, consultation and litigation services to financial institutions, law firms and debt buyers throughout the country. Our group can help navigate this rapidly evolving regulatory environment. Our team of lawyers and government and regulatory advisors has extensive experience in-and an in-depth understanding of-the laws and regulations governing consumer financial products and services. We can assist in developing and implementing compliance programs, as well as defending consumer litigation and regulatory enforcement actions.