Third Circuit Rules Passive Debt Buyers are Debt Collectors, May Be on the Hook for Collection Agency's FDCPA Violations

Are passive debt buyers debt collectors under the Fair Debt Collection Practices Act (FDCPA)? According to the Third Circuit Court of Appeals in its decision in Barbato v. Greystone Alliance, LLC et al., No. 18-1042 (3d Cir. Feb. 22, 2019), a debt buyer that purchases debts but does no direct collection activity (passive debt buyer) is, indeed, a debt collector and subject to the FDCPA.

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The decision breaks down the FDCPA definition into two categories. According to the court, a debt collector is “any person (1) who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts… or (2) who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due to another.” (Internal quotations omitted.)

While the U.S. Supreme Court stated that a debt buyer is not a debt collector under the latter prong in Henson v. Santander, the consumer here argued that the first prong applies to Crown Asset Management, which purchases debt and has third party collection agencies conduct collection activity. The Middle District of Pennsylvania agreed with the consumer, and now so does the Third Circuit.

The decision discusses the impact of Henson on Third Circuit precedent. Prior to Henson, the Third Circuit used a “default test” to determine whether an entity was a creditor or a debt collector. If the account was acquired prior to default, then the entity is a creditor. If after default, then debt collector. Henson rejected the default test, which now means that the terms “creditor” and “debt collector” are not mutually exclusive.

Since Henson did not address the first prong of the definition and since the two definitions are not mutually exclusive, the court found little weight in applying Henson to its review of the instant case.

Turning to the “principal purpose” discussion, the court rejected Crown’s argument that this applies only to overt collection activity. The court instead found no distinction in whether the collection activity was direct or indirect. The court states:

“Collection” by its very definition may be indirect, and that is the type of collection in which Crown engages: it buys consumer debt and hires debt collectors to collect on it. The existence of a middleman does not change the essential nature—the “principal purpose”—of Crown’s business. As Barbato points out, Crown could buy debt for the charitable purpose of forgiving it, or it could buy debt for the purpose of reselling it to unrelated parties at a profit. In both of those cases, the entity’s “principal purpose” would not be collection. 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.

insideARM Perspective

The Third Circuit’s summary of the District Court’s decision states the following regarding vicarious liability:

The District Court nevertheless denied Barbato’s motion for summary judgment, holding that she had not established that Crown was vicariously liable for Turning Point’s conduct because (1) in the District Court’s view, vicarious liability could be imputed to Crown in these circumstances only if the agent too was a “debt collector,” and (2) the evidence in the record was insufficient to hold that Turning Point was a debt collector under the FDCPA.

(Emphasis added.)

What does this imply? Does this mean that that a passive debt buyer is on the hook for alleged FDCPA violation of its third party collection agency if both are found to be debt collectors by a court? With the current state of litigation and pre-litigation claims against debt collectors, often times filed in droves on hyper-technical issues, what impact will a decision like this one have on the operational relationship between passive debt buyers and their collectors?