Creditor Liability Under the FDCPA

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.

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