Passive debt buyers are debt collectors under the Fair Debt Collection Practices Act (FDCPA) if their “principal purpose” is buying debt, even if they outsource collections, the U.S. Court of Appeals for the Third Circuit has ruled, broadening liability under the statute.

Finding that the “principal purpose” of the defendants’ business was the collection of debts, the court said they “should bear the burden of monitoring the activities of those they enlist to collect debts on their behalf.”

What happened

Mary Barbato obtained a consumer credit card from GE Electric Capital Corporation and GE Money Bank in 2007. She made her last payment on the account in November 2010, leaving an outstanding balance. GE subsequently charged off the balance and, after multiple sales and assignments, Crown Asset Management purchased Barbato’s debt.

Crown referred the debt to third party Turning Point Capital for collection. Turning Point sent Barbato a collection letter in February 2013, identifying itself as a “National Debt Collection Agency” and Crown as its client. Turning Point also called Barbato and left her two voicemail messages.

Barbato filed suit against Crown alleging violations of the FDCPA. The parties filed cross motions for summary judgment on the question of whether Crown was a debt collector pursuant to the statute.

Under 15 U.S.C. § 1692a(6), the FDCPA provides two definitions of “debt collectors”: those engaged “in any business the principal purpose of which is the collection of any debts” and those “who regularly collect[]” debts “owed or due another.”

The plaintiff argued that Crown satisfied the “principal purpose” definition because it purchased debts when they were in default and its principal purpose of business was the collection of those defaulted debts, even if it hired third-party debt collectors to do the collecting. Crown countered that it took no action toward the plaintiff and that its principal purpose was actually the acquisition of debt, not its collection.

A district court sided with Barbato. But then the U.S. Supreme Court issued a decision in Henson v. Santander, Inc., prompting Crown to file for reconsideration. In Justice Neil Gorsuch’s first opinion since joining the Court, he wrote for a unanimous Court that an entity collecting on debt that was in default and purchased for its own account is not subject to the FDCPA because it is not a “debt collector” as defined by the “regularly collects” debts “owed or due another” prong of the statute.

Relying on the decision, Crown contended that it could no longer be considered a debt collector because it purchased the debt for its own account. But the district court stood behind its original decision, distinguishing the Henson opinion because the decision expressly applied only to the “regularly collects” and not the “principal purpose” prong of the definition.

Crown appealed to the Third Circuit. In a unanimous opinion, the federal appellate panel affirmed, ruling that the defendant was a debt collector pursuant to the FDCPA.

The defendant “overstated the effect of Henson,” the panel wrote. While the Supreme Court clarified the “regularly collects” definition, it “explicitly declined to address whether such debt buyers could nevertheless qualify as debt collectors under the ‘principal purpose’ definition.”

That left existing Third Circuit precedent in place, specifically a 2000 decision in Pollice v. National Tax Funding, L.P., where the panel held that a defendant was a “debt collector” under the FDCPA because it purchased defaulted obligations from municipalities even though third parties did the actual collecting.

Crown also pushed for a reading of the term “collection” to apply only to those that engage in “overt acts of collection” by interacting with consumers. “As much as Crown might wish that it were otherwise, nothing suggests that the definition is so limited,” the panel wrote, looking to dictionary definitions of the term “collection” and noting that Congress used the noun in the “principal purpose” definition while sticking with the verb “to collect” in the “regularly collects” definition.

“As long as a business’s raison d’être is obtaining payment on the debts that it acquires, it is a debt collector,” the Third Circuit declared. “Who actually obtains the payment or how they do so is of no moment.” Collection by its very definition may be indirect, the court added, and that is the type of collection in which Crown engages, buying consumer debt and hiring others to collect on it. “The existence of a middleman does not change the essential nature—the ‘principal purpose’—of Crown’s business.”

Crown could buy debt for the charitable purpose of forgiving it or with the plan of reselling it to unrelated parties at a profit, the court pointed out.

“In both of those cases, the entity’s ‘principal purpose’ would not be collection,” the panel wrote. “But Crown does neither of those things. Indeed, the record reflects that Crown’s only business is the purchasing of debts for the purpose of collecting on those debts, and, as Crown candidly acknowledged at oral argument, without the collection of those debts, Crown would cease to exist. In short, Crown falls squarely within § 1692a(6)’s ‘principal purpose’ definition.”

The panel affirmed denial of the defendant’s motion for reconsideration and remanded for a determination of liability under the statute.

To read the opinion in Barbato v. Greystone Alliance, LLC, click here.

Why it matters

The Third Circuit decision expands FDCPA liability for passive debt buyers under the statute’s “principal purpose” definition. The “principal purpose” prong is now one of the most hotly contested FDCPA battlegrounds because the Supreme Court’s ruling in Henson did not address it. That may soon change. The Third Circuit’s ruling is in conflict with at least some district court decisions from other circuits. See, e.g., McAdory v. M.N.S. & Assocs., LLC, No. 3:17-CV-00777-HZ, 2017 WL 5071263, *3 (D. Or. Nov. 3, 2017) (“Debt purchasing companies []who have no interactions with debtors and merely contract with third parties to collect on the debts they have purchased simply do not have the principal purpose of collecting debts.”).

And what “principal purpose” even means will continue to be debated. See, e.g., Mitchell v. LVNV Funding, LLC, No. 2:12-CV-523-TLS, 2017 WL 6406594, at *7 (N.D. Ind. Dec. 15, 2017) (business’s principal purpose was a question of fact, and suggesting that a company with a “broad variety of business activity of a consumer finance company, like Santander” may not fit the bill).

Until these issues play out and the Supreme Court holds otherwise, entities with a primary business line engaging in passive debt purchases, even those who outsource all actual collection efforts, cannot simply rely on Henson as rendering them immune to the FDCPA’s technical requirements (keep in mind, even the anti-abuse provisions still applied to the exempt debt collector in Henson). And for passive debt buyers with substantial other lines of business, the current state of the law merits some consideration of bringing collection functions in-house so as to take advantage of the Henson partial exemption.