The U.S. Court of Appeals for the Third Circuit rejected allegations that two repossession companies violated the federal Fair Debt Collection Practices Act, holding that the companies had a right to repossess a vehicle as collateral for an unpaid loan. 

A copy of the opinion is available at: Link to Opinion.

In April 2012, the borrower, a resident of Pennsylvania, obtained an online loan in the amount of $1,000 from a consumer lending company. The borrower pledged his car as collateral for the loan. Because the consumer lending company was wholly owned by a Native American tribe and incorporated under Chippewa tribal law, it was entitled to and did charge interest at an annual rate of 250 percent on the loan, which is a rate in excess of what is permitted under Pennsylvania law.

After wiring the funds to the borrower, the lender withdrew monthly installments from his bank account in June and July of 2012. The borrower, supposedly not recognizing that these withdrawals were made by the lender pursuant to parties’ loan agreement, removed his funds from the bank account. When the lender sought to make a third withdrawal in August 2012, the bank rejected the transfer for insufficient funds.

The lender contracted with a repo company to repossess the car. The repo company contracted with a second repo company, which took possession of the car. The borrower attempted to recover the vehicle from the second repo company, but was not permitted to do so unless he made payment and signed documents releasing it from liability. After speaking with his attorney, the borrower made payment to satisfy the loan, paid the repossession fees, and signed the releases.

Thereafter, the borrower filed a three-count complaint against the repo companies.  The first count asserted that both repo companies violated the federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§ 1692-1692p, and Pennsylvania’s Fair Credit Extension Uniformity Act (PFCEUA), 73 Pa. Stat. and Cons. Stat. Ann. §§ 2270.1-2270.6, which is based in part on alleged violations of Pennsylvania’s Uniform Commercial Code (UCC), 13 Pa. Cons. Stat. §§ 1101-9710, and Loan Interest and Protection Law (LIPL), 41 Pa. Stat. and Cons. Stat. Ann § 201. 

The premise for the borrower’s FDCPA claim was that the repo companies had no right to possession of the vehicle because the underlying loan between the borrower and the lender was usurious under Pennsylvania law. The premise for the borrower’s PFCEUA claim, which he also identified in the first count, was that the repo companies’ use of “false, deceptive, or misleading representation” to coerce the borrower to sign the releases prior to regaining possession of his vehicle supposedly “violated the PFCEUA through the § 1692e provision of the FDCPA.”   

The second and third counts asserted that the two repo companies constituted a RICO enterprise.  In these counts, the repossession of the car by the two repo companies was alleged to be for the “collection of unlawful debt,” in supposed violation of 18 U.S.C. § 1962(c), and their joint efforts allegedly gave rise to a RICO conspiracy, in supposed violation of 18 U.S.C. § 1962(d).

The District Court granted summary judgment to the defendants on all three claims. The trial court held that the repo companies did not violate the FDCPA because they had a right to possess the vehicle as collateral for the unpaid loan.  The District Court further held that, as a matter of law, repossession of collateral was not “collection of unlawful debt” under RICO, and therefore the borrower could not satisfy the first element of its RICO claims. The District Court did not analyze whether the borrower satisfied the other elements to maintain a claim for RICO violation.

On appeal, the Third Circuit vacated summary judgment on the RICO claims but affirmed summary judgment on the FDCPA claim.

As to the FDCPA claim, the Third Circuit rejected the arguments made by the borrower. The Court held that even if the loan was usurious under the LIPL, that statute does not void the entire loan or make illegal the collection of an unpaid debt therein. Instead, the LIPL makes any “interest specified beyond the lawful rate” voidable. 

Moreover, Pennsylvania law expressly permits possession of collateral after a default. 13 Pa. Cons. Stat. § 9609.  The borrower admitted defaulting on the loan. Thus, the Third Circuit held that he could not now contest a right to repossess the collateral that he pledged to obtain the loan. 

The Court also rejected the borrower’s second argument that reconfiguring the terms of the loan agreement to comply with Pennsylvania law meant his arrearage was $9.60, which was de minimis and did not constitute a material breach of the contract. The Court explained that the LIPL did not empower borrowers to recalculate what they owed or preclude lenders from repossessing collateral in the event of a default.

Accordingly, the Third Circuit affirmed the District Court granting the repo companies summary judgment on the FDCPA claim.

However, the Court vacated the trial court’s summary judgment ruling on the PFCEUA claim and remanded for consideration as to whether the repo companies violated that statute as well as the UCC in requiring the releases to be signed prior to returning possession of the vehicle to the borrower. 

As to the RICO claims, the Third Circuit held that the trial court erred in finding that “collection of an unlawful debt” under RICO was limited to seizure of cash and excluded the repossession of collateral to secure an unlawful debt. The Court noted that “unlawful debt” is defined in the statute as a debt incurred that is unenforceable under state or federal law because of the usury laws, and also incurred with respect to “the business of lending money . . . at a rate usurious under State or Federal law, where the usurious rate is at least twice the enforceable rate.”  18 U.S.C. § 1961(6).

Under RICO, therefore, the Court found that the prohibition on “collection of unlawful debt” extends to attempts to collect on a usurious loan.

To support its opinion, the Third Circuit noted that in the borrower’s case, his car was repossessed, requiring him to either pay off the loan to regain possession of the car, or the vehicle would be liquidated and the proceeds used to repay the loan. Regardless of the disposition of the collateral, the Court saw no distinction between the collection of collateral and the collection of cash.

Moreover, the Third Circuit followed the Supreme Court’s instructions to read RICO broadly and apply the statute to both legitimate and illegitimate enterprises.  Accordingly, the Court found that the borrower could satisfy the first RICO element that there was “collection of unlawful debt.”

As to the other RICO elements, the Third Circuit remanded to the trial court because the record was not sufficiently developed on whether the borrower could prove the existence of an enterprise or of criminal intent.