|
|
Creditor Liability Under the FDCPA
01
June 1998 Creditor Liability Under
the FDCPA
by: Michael A. Klutho and Christopher R. Morris
BASSFORD,
LOCKHART, TRUESDELL & BRIGGS, P.A.
3550 Multifoods Tower
33 South
Sixth Street
Minneapolis, Minnesota 55402
(612) 333-3000
1. INTRODUCTION
Congress passed the
Fair Debt Collections Practices Act ("FDCPA") in 1977 to curb certain unseemly
debt collection practices, such as late-night phone calls to consumers,
embarrassing communications to third parties, and other assorted activities. As
lawsuits alleging violations of the FDCPA have multiplied in recent years,
attorneys representing debtors have attempted to push the Act beyond its
intended limits, and are increasingly alleging hyper-technical violations as
the bases for these suits. More recently, creditors such as medical providers
and insurance companies have become a new target for these suits. Unfortunately
and understandably, many creditors are not aware of the FDCPA requirements and
hence are essentially blindsided by such suits. The reason plaintiff attorneys
seek to name creditors as defendants is (1) to add a "deep pocket" to the
lawsuit, and/or (2) to force the collection agency co-defendant to settle the
entire claim, to preserve the business relationship with the creditor. To do
otherwise forces the creditor client to defend itself against an FDCPA lawsuit
which essentially arises from the alleged conduct of the agency.
For these
reasons, creditors must familiarize themselves with the requirements of the
FDCPA and adopt procedures to avoid any potential liability arising from
collection activities. Such procedures should include maintaining a separate
and documented, independent contractor relationship with the collection agency,
and avoiding any direct involvement by the creditor in the collection process
after referring a debt to an agency for collection. See, e.g. Teng v.
Metropolitan Retain Recovery Inc., 851 F. Supp. 61 (E.D.N.Y. 1994)
(creditor who maintained independent contractor relationship with agency not
liable for FDCPA violations). Further, creditors should take care to retain
collection agencies which have themselves adopted the necessary procedures to
avoid any violations of the FDCPA. Employees of the creditor should not be used
to handle any collection activity (other than simply transmitting the necessary
information to the collection agency's office). To be safe, dunning letters
should bear the collection agency's name and address, and should direct the
debtor to respond to the agency's office--not to the creditor. As always,
collection agencies must make sure that their own employees are well versed in
the requirements of the FDCPA.
2.
UNDER WHAT CIRCUMSTANCES ARE CREDITORS SUBJECT TO THE FDCPA?
As a
starting point, the FDCPA applies only to "consumer debt"--obligations arising
out of a transaction in which the money, property, insurance or services
purchased are primarily for "personal, family, or household purposes". 15
U.S.C. § 1692a(5). Thus, commercial and business debts are not subject to
the FDCPA. Further, the Act only applies to "debt collectors," which it defines
as persons who use any instrumentality of interstate commerce or the mails in
any business the principal purpose of which is the collection of any debts, or
who "regularly" collect or attempt to collect, directly or indirectly, debts
owed or due or asserted to be owed or due another. 15 U.S.C. § 1692a(6).
The term does not include "any officer or employee of a creditor while in the
name of the creditor, collecting debts for such creditor." 15 U.S.C. §
1692a(6)(A) (emphasis supplied). Based on the language quoted above, in the
vast majority of cases, creditors should not have any liability arising from
the FDCPA. However, the term "debt collector" does include a creditor who, "in
the process of collecting his own debts, uses any name other than his own which
would indicate that a third person is collecting or attempting to collect such
debts." 15 U.S.C. § 1692a(6)(A) (emphasis supplied).
Fortunately, many
courts have dismissed FDCPA type lawsuits which have been brought against
creditors. For example, federal district courts have frequently recognized that
actual creditors are outside the scope of the FDCPA. See, James v. Ford Motor
Credit Co., 842 F. Supp. 1202, 1207 (D. Minn. 1984); Wegmans Food Markets,
Inc. v. Scrimpsher, 17 B.R. 999 (N.D. N.Y. 1982) (where communications sent
to debtor requested payment directly to creditor, creditor was not a "debt
collector"); Howe v. Readers' Digest Assoc., Inc., 686 F. Supp. 461 (S.D. N.Y.
1988) (creditor who retains a debt collection service for purposes of
collecting debts is not a "debt collector" and not subject to liability for any
alleged violations). Also, in September, 1996, the Federal Court in the
Northern District of Illinois ruled that an automobile insurer is not a "debt
collector" within the meaning of the FDCPA. Vasquez v. Allstate Ins.
Co., 937 F. Supp. 773 (N.D. Ill. 1996) (rejecting plaintiff's argument that
a department of the creditor corporation should be viewed as separate from the
corporation).
3. CREDITOR LIABILITY
FOR FLAT-RATERS
Providing "flat-rate" or "pre-collection" services to
creditors raises special liability concerns under the FDCPA, for both the
collector and the creditor. Section 1692j provides:
(a) It is unlawful to
design, compile, and furnish any form knowing that such form would be used to
create the false belief in a consumer that a person other than the creditor of
such consumer is participating in a collection of or in an attempt to collect a
debt such consumer allegedly owes such creditor, when in fact such person is
not so participating.
(b) Any person who violates this section shall be
liable to the same extent and in the same manner as a debt collector is liable
under Section 813 for failure to comply with a provision of this title.
This section prohibits the
practice of selling dunning letters to creditors, to be sent by the creditor to
the debtor without any meaningful participation by the party selling the
letters (whose name also presumably appears on the letterhead). Typically, such
letters will instruct the debtor to contact the creditor directly. Plaintiff
attorneys will use that instruction as support for claiming that the collector
had little or no participation in sending the letter, and that therefore, the
letter is misleading. Plaintiff attorneys will also claim that the creditor is
liable under section 1692j(b), which states that persons violating the section
"shall be liable to the same extent" as a debt collector.
Letters bearing
the name of a collection agency, and directing that payment be made to the
creditor, will always create a heightened risk for FDCPA lawsuits, regardless
of whether section 1692j was in fact violated. However, such suits can be
successfully defended if the collector participates in the collection process
in a meaningful way, and documents such participation. For example, the letters
should be sent by the collector, not the creditor. The more tasks performed by
the collector, as opposed to the creditor, the better. See Anthes v.
Transworld Systems, Inc., 765 F. Supp. 162 (D. Del. 1991) (creditor not
liable where it had no active role in collection process); Bingham v.
Collection Bureau, Inc., 505 F. Supp. 864 (N. Dak. 1981) (where collector
followed up flat-rate letters with telephone contacts or possible assignment
for civil action, section 1692j not violated).
4. NON-FDCPA CLAIMS ASSERTED AGAINST CREDITORS
Plaintiff
attorneys have recently begun asserting other sundry common law theories of
liability against creditors. These theories include "negligent referral" to a
collection agency, and vicarious liability of creditors for the acts of a
collection agency. While these theories of liability are misguided, they are
being asserted more frequently, and even defending against a meritless lawsuit
causes expense and disruption. The following is a sample of the claims we have
encountered in representing creditors which were sued along with their
collection agencies/attorneys.
a. Respondeat
superior.
Claims for respondeat superior against creditors ordinarily
should be dismissed as improper. Respondeat superior is applicable only where
an agency relationship exists. See, Howe v. Readers Digest Assn., Inc.,
686 F. Supp. 461 (S.D.N.Y. 1988) (where plaintiff failed to produce any
evidence of agency or employment relationship between the creditor and
collector, the creditor is entitled to summary judgment as to any FDCPA claims
versus the creditor); Teng v. Metropolitan Recovery, Inc. 851 F. Supp.
61, 66 (E.D.N.Y. 1994) (issue is whether the creditor has the authority "to
control the detailed physical performance of the contract"). Typically,
collection agencies do not act as the legal agent of the creditor. However,
care should be taken to avoid even the appearance of an agency relationship.
b. State consumer laws.
Debtors have also asserted claims against
creditors based on state consumer fraud laws. However, such laws typically
apply only where there is a nexus between the alleged fraud and sale of
merchandise. See, e.g. Banbury v. Omnitrition Intern., Inc., 533 N.W. 2d
876 (Minn. App. 1985). By the time the collection activity is begun, the "sale
of merchandise" is already complete, so there can be no such nexus.
c.
Negligent referral.
Demonstrating boundless creativity, plaintiff
lawyers will sometimes assert novel causes of action, such as "negligent
referral" to a collection agency which is unlicensed, and/or which subsequently
violated the FDCPA in some manner. Because there is no common law authority for
such a claim, plaintiffs may try to bootstrap these claims on various
provisions of the FDCPA. Once again, because creditors are not subject to the
FDCPA, such claims should be dismissed as meritless.
d. Licensing
statutes.
Similarly, debtors may allege claims against creditors for
violation of state laws requiring persons who carry on business as a collection
agency to obtain a license. Such statutes typically do not apply to creditors,
because they are not "debt collectors" as contemplated by most state laws, or
by the FDCPA. Moreover, state licensing statutes may only provide for criminal
penalties, rather than a private cause of action. Therefore, debtors typically
do not have standing to assert claims under state licensing statutes.
5. CONCLUSION
These are just a sampling of the theories
asserted by plaintiff attorneys in an effort to hold creditors liable. The
inclusion of creditors as additional co-defendants is typically a ploy to apply
leverage to the collection agency/lawyer co-defendant to settle the entire case
and thereby extricate the creditor client. Any creditor who is involved in
collecting its own debts, or referring collections to agencies or attorneys,
should be aware of these potential liabilities to ward off potential, frivolous
lawsuits. |
