Locke Lord QuickStudy: Henson v. Santander: Resolving Circuit Split, Supreme Court Holds Debt Buyer Not a Debt Collector under FDCPA

The U.S. Supreme Court in Henson v. Santander Consumer USA, Inc., 2017 WL 2507342, ruled that purchasing and then collecting a defaulted debt does not, standing alone, make an entity a “debt collector” as defined by the Fair Debt Collection Practices Act. But the Court’s opinion was narrow; it explicitly declined to address whether a debt buyer could qualify as a debt collector under other provisions of the FDCPA. Thus, while the decision eliminates one potential argument against debt buyers, there are other arguments for plaintiffs or regulators to seek to apply the FDCPA to debt buyers.

Issue: Is a consumer-finance company that purchases and collects defaulted debt a “debt collector” under the FDCPA?
Plaintiffs received auto loans from CitiFinancial Auto and later defaulted on those loans. After selling plaintiffs’ cars for less than the unpaid balance, CitiFinancial sold the remaining debts to Santander, which attempted to collect, and plaintiffs later sued Santander alleging its collection efforts violated the FDCPA.

Santander moved to dismiss arguing that it was not a debt collector under the FDCPA because it was collecting the debt for itself rather than another. The statute regulates the conduct of debt collectors, which it defines as a business either “the primary purpose of which is the collection of any debts” or that “regularly collects or attempt to collects … debts owed or due … to another.” 15 U.S.C. § 1692a(6). Santander argued that it was not a debt collector because the primary purpose of its business was not debt collection (Santander also originates and services loans) and because here it was not collecting debt owed to another.

Plaintiffs argued Santander should be considered a debt collector primarily because Santander acquired plaintiffs’ loans after plaintiffs defaulted. Plaintiffs’ argument relied on negative implication. Specifically, plaintiffs argued that the FDCPA excludes from the definition of “creditor” entities that acquire defaulted debts “solely for the purpose of facilitating collection of such debt for another.” 15 U.S.C. § 1692a(4). Plaintiffs also noted while the statute excludes from the definition of debt collectors entities (typically loan servicers) that collect debts for others, that exclusion only applies to entities that begin servicing before the debt is in default. 15 U.S.C. § 1692a(6)(F). Plaintiffs argued these provisions show an intention to include within debt collectors entities that purchase debts after those debts default.

Fourth Circuit: Santander is not a debt collector because it owned the debt.
The district court concluded that Santander was not a debt collector and dismissed the case, and the Fourth Circuit affirmed. The Fourth Circuit reasoned that plaintiffs were wrongly focused on exceptions to various definitions but never showed that Santander met the statutory definition of debt collector. The Fourth Circuit also held that Santander did not fall within the statutory definition of debt collector because the “primary purpose” of its business was not debt collection; Santander was instead a consumer-finance company that also made, serviced, and sold loans. Further, while Santander sometimes collected loans due to other entities, it did not do so here; plaintiffs’ loans were all owned by Santander so it was collecting its own debt.

The Fourth Circuit’s holding furthered a circuit split on the definition of debt collector. The Fourth, Ninth, and Eleventh Circuits all found entities that acquired and collected on defaulted debts were not debt collectors, while the Third, Fifth, Sixth, and Seventh Circuits had reached different conclusions. See Schlegel v. Wells Fargo Bank, N.A., 720 F.3d 1204, 1209 (9th Cir. 2013) (“Wells Fargo’s collection efforts in this case relate only to debts owed to itself”); Davidson v. Capital One Bank (USA), 797 F.3d 1309, 1311 (11th Cir. 2015) (affirming dismissal); but see FTC v. Check Investors, Inc., 502 F.3d 159, 171-73 (3rd Cir. 2007) (“Congress has unambiguously directed our focus to the time the debt was acquired in determining whether one is acting as a creditor or debt collector under the FDCPA”); Miller v. BAC Home Loans Servicing, L.P., 726 F.3d 717, 722 (5th Cir. 2013) (defendant was debt collector); Bridge v. Ocwen Fed. Bank, FSB, 681 F.3d 355, 359 (6th Cir. 2012) (same); Ruth v. Triumph P’ships, 577 F.3d 790, 796 (7th Cir. 2009) (same).

Supreme Court: Purchasing and collecting on a defaulted debt does not, by itself, make an entity a debt collector.
The Court agreed with the Fourth Circuit that once Santander purchased the defaulted debt, it was collecting its own debt and not a debt due to another, so the collection activity did not render Santander a debt collector. Henson, 2017 WL 2507342, at * 3. The Court rejected the argument that purchasing a debt after it is in default automatically makes the entity a debt collector. While the statute excludes servicers who begin servicing before default from the definition of debt collectors, that doesn’t imply that purchasers who acquire the debt after default are debt collectors. The key question was whether the defendant was collecting for itself of another. Id. at *6 (“under the definition at issue before us you have to attempt to collect debts owed another before you can ever qualify as a debt collector”) (emphasis in original).

The Court also rejected the policy arguments advanced by the petitioners, which focused on how Congress may have worded the statute differently if it had known of the increased prevalence of debt buyers. The Court ruled that such policy arguments were properly directed at Congress rather than the Court. Id. (“it is never our job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done had it faced a question that, on everyone’s account, it never faced.”).

Impact: Companies may be shielded from FDCPA claims arising from loans they own.
The Court’s ruling should help defendants where an FDCPA claim arises from a loan that has been purchased by the defendant prior to debt-collection efforts, and overrules contrary holdings in four Circuit Courts of Appeal. But the opinion was narrow. The Court explicitly declined to address whether debt buyers could be considered debt collectors based on a finding that “the principal purpose” of their business is “the collection of any debts”, or whether debt buyers who also service loans held by other entities could be found to “regularly collect[]” debts owed to others. Henson, 2017 WL 2507342, at *3, citing 15 U.S.C. § 1692a(6). This ambiguity gives future litigants arguments that debt buyers may still be debt collectors depending on that entity’s mix of business lines. So, FDCPA litigation against debt buyers will likely continue, but at least one argument has been eliminated.