Ruling in a class action suit brought against The Money Store and two affiliates, a Federal Court of Appeals in New York broadened the “false name” exception under the Fair Debt Collection Practices Act to broaden the circumstances under which a defendant could be held liable under the statute.

“[W]here a creditor that is collecting its own debts hires a law firm to mail thousands of letters to debtors that misleadingly indicate that the law firm has been retained to collect the creditor’s debts, and where the law firm has not engaged in any other bona fide efforts to collect those debts, the creditor can be held liable for violating the FDCPA pursuant to the statute’s false name exception to creditor immunity,” the court held.

Four plaintiffs filed suit against The Money Store. Each had obtained a mortgage through a different original lender, each mortgage was purchased by The Money Store, and each plaintiff eventually defaulted on his or her mortgage, triggering collection. The defendants violated the FDCPA by allegedly charging improper fees on their accounts, such as excessive late fees and vague and unwarranted fees for “file reviews.”

To handle its collection efforts, The Money Store retained the law firm of Moss, Codilis, Stawiarski, Morris, Schneider & Prior LLP (Moss Codilis). For a flat fee of $50 per letter, the law firm sent debt collection letters to debtors as directed by The Money Store.

The letters stated that “this law firm” has been “retained” in order to “collect a debt for our client,” and that “this firm has been authorized by [The Money Store] to contact you” and “provide[] notice that you are in default” on the mortgage. The letters also stated that, with limited exceptions, “[a]ll communication about this matter must be made through [The Money Store].” Over a five-year period, Moss Codilis sent 88,937 such letters on The Money Store’s behalf for the “Breach Letter Program.”

The extent of the law firm’s involvement remained in dispute: Moss Codilis argued that the program was an exercise in mass processing and essentially sold the services of its letterhead, while The Money Store said the law firm was more actively involved, engaging in communications with some of the debtors and functioning as the primary drafter of the breach letters.

Although creditors are generally not considered debt collectors subject to the FDCPA, the plaintiffs turned to an exception found at 15 U.S.C. § 1692(a)(6). That provision opens the door to potential liability where the creditor “in the process of collecting [its] own debts, uses any name other than [its] own which would indicate that a third person is collecting or attempting to collect such debts.” By using the law firm’s name to send out debt collection letters for debts The Money Store was in fact collecting itself, the defendants falsely used a name other than their own, the plaintiffs contended.

A federal lower court dismissed the suit, refusing to apply the false name exception. But the Second Circuit reversed, finding that The Money Store exposed itself to liability by representing to debtors that the law firm was collecting its debts when in fact the law firm made no bona fide efforts to do so.

Applying an objective standard of whether the “least sophisticated consumer would have the false impression that a third party was collecting the debt,” the federal appellate panel emphasized that the FDCPA was intended to protect consumers from abusive and deceptive debt collection practices.

Three requirements must be met under the statutory language of Section 1692(a)(6), the court said: the creditor must be collecting its own debts, the creditor “uses” a name other than its own, and the creditor’s use of that name falsely indicates that a third person is “collecting or attempting to collect” the debts that the creditor is collecting.

All three elements were satisfied, the court said. Although The Money Store did not utilize a pseudonym or alias (as occurred in the only other false name case decided by the Second Circuit), the court found it was enough that the defendants implied that a third party was collecting its debts.

“When a creditor that is collecting its own debts hires a third party for the purpose of sending letters that represent that the third party is collecting the debts, that is sufficient to show the ‘use’ of a name by the creditor other than its own,” the panel said, satisfying the requirement that creditors “actively engaged” in misrepresenting its identity in some way.

The Money Store also misrepresented the law firm’s role in the collection efforts, meeting the third requirement, the court wrote. Although the law firm generated the breach letters and mailed them to the debtors, those acts alone did not constitute “collecting or attempting to collect” the defendant’s debts. Collecting debts “must mean something more than any role, no matter how tangential, in the collection process,” the court said. “Merely changing the return address from The Money Store to Moss Codilis . . . does not change whether the letter misleads consumers, which . . . is the statutory touchstone for all aspects of the FDCPA, including the false name exception.”

“We therefore hold that, when determining whether a representation to a debtor indicates that a third party is collecting or attempting to collect a creditor’s debts, the appropriate inquiry is whether the third party is making bona fide attempts to collect the debts of the creditor or whether it is merely operating as a ‘conduit’ for a collection process that the creditor controls,” the Second Circuit panel wrote.

At the summary judgment stage, the panel said it could not find that Moss Codilis was engaged in such bona fide efforts. “[T]he jury could conclude that the letters received by plaintiffs appear to be ‘from’ The Money Store in every meaningful sense of the word,” as The Money Store reviewed and maintained possession over its debtors’ files while the law firm simply received spreadsheets with debtors’ names and addresses and added that information to the form letter on Moss Codilis letterhead, sending it out.

“Notwithstanding its limited involvement, Moss Codilis sent out letters to plaintiffs stating that ‘this law firm’ has been ‘retained’ in order to ‘collect a debt for our client.’ The jury could find that this falsely implied that Moss Codilis was attempting to collect The Money Store’s debts and would institute legal action against debtors on behalf of The Money Store if the debtors did not resolve the delinquency,” the court said.

The court did uphold dismissal of the plaintiffs’ Truth in Lending Act (TILA) claims, finding that because The Money Store was the assignee of the plaintiffs’ mortgages, the defendants were therefore not the persons to whom the mortgages were initially payable as reflected on the face of the loan documents, as required by the statute. Therefore – even though some of the plaintiffs actually made their first payment on the mortgage to The Money Store – the defendants were not “creditors” under TILA and could not be liable for violating the statute, the panel wrote.

To read the decision in Vincent v. The Money Store, click here.

Why it matters: The Second Circuit decision opens the door to liability for creditors under the FDCPA by broadening the “false name” exception of the statute, and, as the dissenting opinion noted, the ruling could deter creditors from overseeing collection efforts for fear of coming under the purview of the FDCPA and discourage them from remaining involved in the operations of the debt collection agencies they hire. The “bona fide” test established by the majority “will over time sow ambiguity into an otherwise straightforward statutory scheme, auguring both difficult line-drawing exercises for future courts and uncertain liability for creditors who contract with debt collectors to collect those creditors’ debts,” Circuit Judge Debra Ann Livingston wrote in her dissent. Although the majority disagreed,”[w]e repeat, for emphasis: the exception does not create backdoor vicarious liability for creditors,” the decision could, at the very least, inspire future actions from consumer class action attorneys.