On February 22, the Third Circuit sidestepped the Supreme Court's 2017 holding in Henson v. Santander Consumer USA Inc. and found that a purchaser of defaulted debt qualified as a debt collector under the Fair Debt Collection Practices Act.
In Barbato v. Greystone Alliance, the Third Circuit considered whether an entity that purchased charged off receivables and outsourced the actual collection activity was subject to the FDCPA. In analyzing the issue, the court explained that the FDCPA's definition of the term debt collector has two prongs, and if an entity satisfies either of them, it is a debt collector subject to the Act. Under the "principal purpose" prong, a debt collector includes any person who "uses any instrumentality of interstate commerce or the mails in any business the principal purpose of is the collection of any debts." Under the "regularly collects" prong, a debt collector includes any person who "regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another."
The defendant in Barbato, Crown Asset Management, purchased defaulted debt and outsourced the collection function to a third party. After being sued for allegedly violating the FDCPA, Crown argued (among other things) that under the Supreme Court's decision in Henson, the Act did not apply to it because Crown owned the debts and thus did not regularly seek to collect debts owed to another. In response to this argument, the Third Circuit explained that while Henson clarified the scope of the "regularly collects" definition, the Supreme Court "went out of its way in Henson to say that it was not opining on whether debt buyers could also qualify as debt collectors under [the principal purpose prong]."
Applying the principal purpose prong to Crown, the Third Circuit found that the company fits squarely within the statutory definition because "Crown's only business is the purchasing of debts for the purpose of collecting on those debts." The court went on to reject Crown's argument that Congress did not intend the FDCPA to apply to a passive debt owner that outsources the actual collection. The court reasoned that unlike a traditional creditor that is incentivized to "cultivate good will among its customers and for which debt collection is one of perhaps many parts of its business," Crown's only need for consumers is to make them pay their debts. This makes Crown more like the "repo man" the FDCPA was intended to cover than a first party creditor. It also gives Crown a good reason to outsource the collection function to repo man-like service providers. Further, the text of the principal purpose definition refers to "any business the principal purpose of which is the collection of debts," regardless of whether it delegates the collection function. Given that the statutory text is clear, the court found it unnecessary to resort to legislative intent.
In light of the Barbato decision, purchasers of debt in the Third Circuit whose principal purpose is debt collection might want to consider reviewing their practices to determine whether they are in compliance with the FDCPA.
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