Lexstat 1-8 debtor-creditor law § 02 Debtor-Creditor Law

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Debtor-Creditor Law

Copyright 2009, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I Consumer Credit

CHAPTER 8 Fair Debt Collection

1-8 Debtor-Creditor Law § 8.02
§ 8.02 Persons and Transactions Covered by the Fair Debt Collection Practices Act
Coverage by the FDCPA is largely determined by the definition of "debt collector."n1 That definition is lengthy and incorporates three other terms, also defined in the Act--"consumer," "debt," and "creditor."n2 This makes coverage questions the most complex area of the FDCPA.

The Act generally applies to collection agencies, attorneys, creditors using a false name, creditors collecting for another person, certain activities of repossession companies, suppliers or designers of deceptive forms, purchasers of debt after default, debt poolers (for profit), and check "guarantee" services.

The Act may not require compliance of any person who does not "regularly" engage in debt collection. The Act applies only to "debts" which arise out of consumer not business transactions.

Generally excluded are creditors (collecting their own debts)--retail stores, banks, finance companies, etc.; assignees (before default)--car finance companies, banks, etc.; government employees, business debts, and nonprofit credit counseling services.

A purchaser of a debt in default is a debt collector under the FDCPA, not an exempt creditor.n3

[1] Persons Who Must Comply as Debt Collectors

[a] Any Person Whose Principal Business Is Collecting Debts Is a "Debt Collector."

The term "debt collector" means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts.n4

This phrase and the one following it provide the general language defining members of the class "debt collector," the term triggering most provisions of the Act. Since nearly all collectors use a telephone or the mails in their business, the limiting requirement of this part of the definition is that the collector's principal business purpose must be to collect consumer obligations.

Under the foregoing definition, most debt collection agencies and their employees are covered by the FDCPA, whether or not they own the debts they collect. Collection lawyers may be covered by this phrase as well as the following phrase in the Act. A collection agency's collection law firm is a debt collector, and the collection agency may be liable for the firm's FDCPA violations.n5 The definition may cover flat-rate debt collectors (companies hired by a creditor for a flat fee simply to mail debtors letters requesting payment directly to the creditor) and credit counselors who, for a profit, arrange for payment of consumers' debts. It may cover a check guarantee service.

[b] Any Person Who Regularly Collects Debts Owed to Another Is a "Debt Collector."

The term "debt collector" means any person who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.n6

The persons covered by this language overlap to a great extent those covered by the preceding phrase defining "debt collector." Many collectors are brought in, however, who are not covered by the preceding phrase. These include collectors who partly engage in a business other than collecting debts (e.g., extending credit, practice of law or credit reporting).n7 Ownership of the debt is not necessarily determinative of coverage.n8

[c] Creditors Using False Names Are "Debt Collectors."n9

Creditors are generally exempt from FDCPA coverage.n10 This sentence of the FDCPA makes a creditor subject to the Act when it uses a name other than its own which suggests the involvement of a third-party collector, poses as a collection agency, or uses a third party's name in its collection efforts. The creditor may also become subject to the Act with its in-house lawyer who collects on letterhead suggesting that it is from a separate law office.n11 A creditor does not run afoul of this provision by referring a customer to its internal loan counseling department.n12

[d] Repossession and Foreclosure Companies Are Treated as "Debt Collectors" Under Some Circumstances

For the purpose of section 1692f(6) of this title,n13 such term ["debt collector'] also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.n14 This sentence contained in the definition of "debt collector" subjects repossession companies and others whose principal business is enforcing security interests to the FDCPA's proscriptionn15 of specific unfair or unconscionable means of enforcing security interests.

Because the 15 U.S.C. section 1692f(6) proscriptions only apply if nonjudicial means are being used, security interest enforcers are constrained by this phrase only if they resort to self-help repossession, nonjudicial foreclosure, or other out-of-court enforcement tactics as opposed to replevin or similar judicial proceedings.n16

Some courts have split on the application of other provisions of the FDCPA to non-judicialn17 and judicial foreclosure.n18

In 2006 the Fourth and Fifth Circuits independently came to the conclusion that foreclosure lawyers may come under the general definition of debt collector subject to all of the FDCPA requirements. In Wilson v. Draper & Goldberg, P.L.L.C.,n19 the Fourth Circuit held that the FDCPA applies to lawyers conducting a deed of trust foreclosure, at least when the lawyers tell the debtor how much must be paid to reinstate the mortgage. The court rejected all three of the foreclosure lawyers' arguments: (1) because they were engaging in a foreclosure, no "debt" as defined by the Act was involved; (2) they were exempt as "fiduciaries;" and (3) as enforcers of a security interest, they were only required to comply with the requirements of 15 U.S.C. § 1692f(6). A dissenting opinion argued that the debt collectors should have fallen within the exemption for fiduciaries.

The court found two bases to reject the argument that there was no debt involved. First, the court rejected several decisionsn20 that held that merely enforcing a security interest did not involve an obligation to pay money; to the contrary, following the Third Circuit's reasoning in Piper v. Portnoff Law Assocs. that the FDCPA may apply to in rem proceedings, the court held that the underlying mortgage was a qualifying transaction involving the loan of money. Second, the court pointed out that the collection attorneys in any event had sought payment of money in this case by writing the homeowner stating how much was to be paid to reinstate the mortgage.

The Fifth Circuit reached the same result in Kaltenbach v. Richards, a pro se case, without referring to the Fourth Circuit decision.n21 The Fifth Circuit looked at the breadth of FDCPA definition of debt collector and held that the complaint's allegation that the foreclosure attorney was a "debt collector" engaged in "collection activities" sufficed to state a claim against the foreclosure attorney for failing to provide the notice of debt validation rights. The foreclosure attorney argued that the last sentence of the definition of debt collector limited its compliance obligation to only the requirements of section 1692f(6). The Fifth Circuit rejected that construction and deferred to the Federal Trade Commission's interpretation that an enforcer of security interests could be subject to all the requirements of the FDCPA, not just section 1692f(6).n22 The Fifth Circuit pointed out that any other interpretation would make the FDCPA's convenient venue requirement for foreclosure in section 1692i superfluous, violating an important principal of statutory construction.

Finally, the Fifth Circuit noted that the focus of the key definition of "debt collector" is "regular" collection activities, not the specific foreclosure activities, of the foreclosing attorney. If the foreclosure attorney regularly seeks or obtains payments from the consumer, it would be subject to all the requirements of the FDCPA, even if it was not seeking payment at the time of the FDCPA violation in the particular case.

The overwhelming majority of foreclosures result in payment of the mortgage through refinancing or the homeowner's sale of the home before the foreclosure sale, or the reinstatement of the mortgage after payments, rather than foreclosure of the mortgage.n23 This strongly suggests that foreclosure attorneys are regularly collecting debts while they pursue foreclosure.

[e] Flat Rate Collectors or Others Supplying Forms That Misrepresent Extent That They or Another Is Involved in Collecting a Debt Violate the Act

This sectionn24 is the only proscription of the Act not limited to "debt collectors." Even individuals specifically excluded from the FDCPA definition of "debt collector," e.g., creditors, are liable for violations of this section.

[i] Extent of Participation in the Collection Process

There is no set minimum level of sufficient participation in the collection of a debt to take a flat-rate or any other collector outside the proscription of section 1692j.

[ii] Lawyers Must Review File Before Signing Collection Letter

By implication, a letter on a lawyer's letterhead would imply greater participation than a letter on a collection agency's letterhead because of the stronger remedies usually pursued by attorneys. If an attorney, for example, supplied form letters to a creditor or collection agency and did not otherwise participate in the collection efforts in the manner implied by the letters, he or she violates this section.n25

[f] Lawyers Regularly Collecting Consumer Debts Must Now Comply With All FDCPA Provisions

[i] 1986 Attorney Amendment

An attorney who regularly collects consumer debts is subject to all provisions of the FDCPA.n26 Even in-house counsel collecting a debt for his or her employer may be covered if he or she sends collection letters that are designed to make the debtor believe that a private attorney has intervened.n27

[ii] Scope of FDCPA Attorney Coverage

The definition of "debt collector" includes any attorney "who regularly collects or attempts to collect, directly or indirectly, [consumer] debts owed or due or asserted to be owed or due another."n28 The key to the breadth of this definition is the concept of engaging in collection activities "regularly." An attorney meets the "regularly" test if the attorney engages in debt collection in more than isolated instances, if it is a minor but regular part of the attorney's practice, or if the attorney collects debts more than a few times in a year. An attorney who very seldom collects debts is not covered.n29

The Second Circuit found in Goldstein n30 that a lawyer issuing 145 notices demanding delinquent rent in a twelve-month period as part of an ongoing relationship with a landlord was "regularly" collecting debt as required to be covered by the FDCPA despite the collection work constituting less than.5% of his revenues. The court reviewed five factors: the number, frequency, and pattern of collection communications; staff and systems assigned to collections work; and an ongoing relationship with the creditor.n31 The court also noted that a law firm's marketing of collection services would also weigh in favor of finding regularity.

The Goldstein decision is significant as it joins the Fifth Circuitn32 in rejecting a line of decisions that focuses on the law firm's debt collection cases or revenues as a portion of its total cases or revenues, rather than looking at the whole picture including the number of collection cases handled.n33 Other courts find ninety collection cases in five months or four percentn34 of the caseload sufficient to meet the regularity test but not just twenty-threen35 or thirty-fiven36 collection cases in one year or so.

The FDCPA's legislative history elaborates on what was meant by "regularly": "The requirement that debt collection be done regularly would exclude a person who collects a debt for another in an isolated instance, but would include those who collect for others in the regular course of business."n37

In contrast, the Sixth Circuit held that a collection lawyer must be substantially involved in debt collection work to be covered by the FDCPA. The Sixth Circuit inferred that the removal from the FDCPA of a broad exemption for attorneys in 1986 raised the threshold from "more than isolated instances of collection" and "in the regular course of business" to a requirement of "substantial" attorney debt collection for coverage to take effect.n38

[iii] Issues Unique to Attorney Debt Collectors

[A] Venue Provision

The venue provision requires that debt collectors bring suit only in the district where the consumer signed the contract upon which the suit is based or where the consumer resides.n39 Actions to enforce an interest in real property may be brought only where the property is located.n40 Any less protective state law venue provision is preempted.n41

[B] Communications With Third Parties

The Act's limitations on communication with third parties raise special issues in the context of discovery and post-judgment proceedings. However, the FDCPA contemplates the need to deal with third parties during litigation.n42

[C] Notice of Validation Rights

As a result of amendments to the FDCPA years apart, the initial notice of validation rights and of the debt collection purposen43 need not be made until later if the first communication by a collection attorney to a consumer is a formal pleading. In that situation the notice of the consumer's debt validation rights must be sent in the initial communication after any formal pleading. This is likely to be in the collection attorney's conversations with the consumer about the validity of the claim against the consumer or regarding payment of the claim or judgment. Because the later event triggering the debt validation notice may not be readily anticipated by the debt collector's system, it may be safer to provide the debt validation and the debt collection warning in a pre-suit demand letter encouraging the airing of disputes before suit. This helps assure that the collection suit is the collection device of last, rather than first, resort.

[D] Other Pitfalls to Avoid

Most of the practices forbidden by the FDCPA have long been prohibited by ethical standards applicable to attorneys. Violation of these ethical standards may now lead to the consumer's recovery of FDCPA actual and statutory damages and attorney fees.

Collection attorneys should avoid these other common trouble areas:

Threatening to sue when there is no intention or ability to do so;

Misrepresenting the source of the collection letter or the attorney's involvement (by allowing a collection agency to send out a demand letter over the name of an attorney);n44

Imposing specious deadlines;

Misleading representations as to the effect of litigation;

Filing suit other than in the court permitted by 15 U.S.C. section 1692.

[iv] Attorney Liable for Allowing Signature to Appear on Collection Letters Without Reviewing File

15 U.S.C. section 1692e(3) prohibits misrepresenting that "any communication is from an attorney." Where an attorney exercised no control or supervision over a debt collection letter, the appearance of his name and signature on a letter would violate 15 U.S.C. sections 1692e and 1692e(10).n45

A Seventh Circuit decision revisits the issue of how much involvement is sufficient for a collection lawyer to sign his name to a collection letter without misrepresenting that he is involved as a lawyer in the collection of the debt. The decision builds on prior decisions of the court, and finds a lawyer's cursory information about individual GM credit cards insufficient to make a legal judgment that there was a legitimate claim to pursue. The court found that the collection attorney did not make a "considered, professional judgment" that individual consumers were delinquent and were candidates for legal action or that the dunning letter should be sent to them. Factors showing lack of attorney involvement were:

The creditor made the decision about which consumers should receive the letters.

The creditor did not provide sufficient information about the account for the collection lawyer to reach an independent, professional judgment about liability and collectibility.

The use of the same form letter in every case and the great volume of accounts to which it was sent reinforced the finding that there was no use of professional judgment.

The collection lawyer's role in dealing with responses to the letter was not more than ministerially referring most of them back to creditor. He had no authority to negotiate payments or settle the debt.

The collection lawyer's flat fee of $2.45 per letter suggested that he was not being paid by the creditor for his legal judgment but rather for the marquee value of his name.

The collection lawyer was not ever authorized to file suit for the creditor.n46

[v] Second Circuit Allows Lawyer to Dun and Disclose Before Reviewing Claim

In a decision that will give a big boost to the amount of junk mail consumers get, the Second Circuit, in Greco v. Trauner, Cohen & Thomas,n47 allowed a lawyer to send mass-mailed duns before making any evaluation of the legal merits of a claim as long as the lawyer clearly discloses to the consumer that the lawyer has not reviewed the claim. The court reasoned that even an unsophisticated consumer would not be misled where the collector's disclosure was clear and there was nothing in the letter to suggest the sender was actually acting in the capacity of a lawyer.

With no struggle, the court distinguished its prior decisions in Clomon n48 and Miller n49 finding deception when a lawyer sent a dun without being involved in evaluating the legality of the claim. The court was able to build on hedging language in the Miller decision:
[T]he use of an attorney's signature implies--at least in the absence of language to the contrary--that the attorney signing the letter formed an opinion about how to manage the case of the debtor to whom the letter was sent.n50

The court distinguished Clomon and Miller based on the disclaimer, the lack of any language in the letter conflicting with the disclaimer, and the lack of any signature on the letter. The Clomon and Miller dunning letters contained strong requests for payment, facsimile signatures, and no disclaimers. In this case there was a clear disclosure, only a request the consumer call the law firm, the debt validation rights notice, and the law firm's name typed on the signature line.

[vi] FDCPA and Lawyers' Ethical Obligations Intertwine

Concepts of unfairness for FDCPA purposes can be established by the American Bar Association's Code of Professional Responsibility or the state bar association's equivalent and its predecessors.

[A] Lawyers' Collection Letters Must Avoid False Threat of Suit

There can be little doubt that a letter from an attorney inherently conveys the impression that litigation is imminent. This impression is false if the attorney does not in fact have the authority and intention to promptly bring suit. In that case, this can be an ethical violation.

A collection letter may mislead even further by implying that a lawsuit has already been filed against the debtor. An American Bar Association ethical opinion condemned a collection letter that simulated legal process because, "unless carefully read, [it] will create the false impression that suit has been filed."n51

The Fair Debt Collection Practices Act prohibits false or misleading representations, but also prohibits false or misleading implications.n52

[B] Interstate Collection Letters Must Avoid Misrepresenting Lawyer's Authority to Sue

A lawyer who sends a collection letter into a state in which he or she is not admitted to practice, without disclosing that fact, may violate the FDCPA.n53 The failure to disclose the states in which the lawyer is admitted to practice is a deceptive omission.

[C] Representing Only Part of the Effects of Suit Is Deceptive

A demand letter can be deceptive if it fails to mention that post-judgment remedies include exemptions and due process protections: a judgment debtor is entitled to notice, and some of his or her property is safeguarded by exemption statutes. Without these qualifications, the mention of post-judgment remedies in an attorney's letter is misleading, can cause undue concern, and violates the FDCPA.n54

[D] Intermingling Activities of Collection Agency and Attorney May Be Unlawful

Collection agencies and lawyers that work together must take care that their roles are kept separate. Consumers should not be confused about whether a collection letter is from the attorney or the collection agency. Misrepresentation of the source of a document is specifically prohibited by the FDCPA. n55 The FDCPA also specifically prohibits the false representation or implication "that any communication is from an attorney."n56

The FTC takes the position that it is deceptive for a collection agency to send a letter under an attorney's letterhead without the attorney's supervision.n57 This has also been found to be an ethical violation.

[g] FDCPA Applies to Debt Buyers

The FDCPA covers debt buyers who engage in debt collection activities.n58 In Federal Trade Comm'n v. Check Investors, Inc., n59 the Third Circuit held that it is immaterial that the defendants actually owned the debt they were trying to collect; that did not make them creditors under the Act. The focus must be on ''whether a debt was in default when acquired to determine the status of 'creditor' vs. 'debt collector.' ''n60 This reinforces the case law on the FDCPA's applicability to the growing number of debt buyers. One court held that the debt buyer's parent company was also a debt collector since the facts showed that the parent was ''thoroughly enmeshed in the debt collection business'' and ''a significant participant in the debt collection process.n61 The seminal decision on the coverage of debt buyers is Kimber v. Federal Fin. Corp. n62 The coverage of a debt buyer that delegates all of the actual debt collection work depends on the nature and level of its involvement with the collection entity.

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