Debt Buyer May Qualify as “Debt Collector” Under FDCPA
The U.S. Court of Appeals for the Eighth Circuit affirmed the district court’s decision in part, agreeing that the debt buyer was subject to the FDCPA because it fell within the statute’s definition of a “debt collector.” Though in Henson v. Santander Consumer USA Inc., the U.S. Supreme Court held that debt purchasers were not debt collectors under the part of the definition including those who regularly collect debts owed to another, the Eight Circuit noted that Henson did not address another portion of the definition targeting those engaged in “any business the principal purpose of which is the collection of any debts.”
The Eighth Circuit observed that the debt buyer had “take[n] affirmative steps to maximize collection of the debts it has purchased” by hiring an attorney and filing a collections suit. Because “[p]urchase and collection [were] not separate activities” for the buyer, the appellate court concluded that the district court did not err in holding the debt buyer was a “debt collector” within the meaning of the FDCPA.
Actual Knowledge and Agency Relationship Is Required for Liability
The Eighth Circuit then addressed whether the debt buyer was in fact liable to the consumer, ultimately reversing the district court’s decision. Relying on its own precedent in Paul J. Schmitt v. FMA Alliance, it first determined that the debt buyer could not be vicariously liable under agency law principles, which hold that “while the knowledge of the agent is imputed to the principal, the converse is not true.” Because the debt collector did not have actual knowledge the consumer was represented by counsel when making contact, the appeals court determined that there was no underlying statutory violation to which vicarious liability could apply.
However, the Eighth Circuit concluded that the debt buyer could be directly liable under the FDCPA if it had an agency relationship with the collector. It held that the district court had erred by assuming an agency relationship existed between the buyer and collector without evidence. Accordingly, the appellate court remanded for further proceedings to determine whether an agency relationship existed.
Evidence of Relationship Is Key
ABA Litigation Section leaders observe that while the holding in Reygadas is relatively narrow, it still leaves room to hold debt buyers accountable for the actions of its debt collectors. “The court did not feel that it had been presented with enough evidence—or any evidence—about the relationship between the debt holder and the debt collector,” explains Blakeley E. Griffith, Las Vegas, NV, cochair of the Litigation Section’s Bankruptcy & Insolvency Committee. However, Griffith continues, “in most circumstances, the debt holder could be liable under a principal-agent theory.”
“This decision ultimately determines that there may possibly be a principal-agent relationship that can lead to liability between debt purchasers and others,” agrees David A. Crichlow, New York, NY, cochair of the Section’s Bankruptcy & Insolvency Committee.
Although the Eighth Circuit seemingly rewarded the debt buyer for failing to communicate with the debt collector, Griffith does not anticipate it influencing parties’ behavior on a larger scale. “I don’t think that this opinion encourages a debt collector to share less information with someone that it has hired to collect the debt,” she opines.
Need for New Standards
Section leaders also believe Reygadas highlights the need for updates to outdated financial services laws. The FDCPA “was mainly written when interactions were more traditional,” notes Donald R. Pocock, Winston-Salem, NC, cochair of the Section’s Consumer Litigation Committee. “Now, it needs to adapt to the modern market, and anticipate the future of modern lending practices,” he advises. “People now use credit for everything, so that facilitates a lot of economic activity, but also creates new areas of consumer issues that have not been experienced before and is not addressed by the FDCPA.”
