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Two Supreme Court Cases Attacking Fair Debt Collection Practices Act

The Supreme Court has recently damaged debt defendants’ rights with two very important decisions, one allowing debt collectors to bombard the bankruptcy courts with outdated claims, and the other holding that junk debt buyers are not debt collectors under one important definition of the Fair Debt Collection Practices Act (FDCPA) These rulings may have changed the landscape of defense, but one thing is clear: you need to know your rights more now than ever. Pro se defense may be the only kind of debt defense you can get anymore.

Pro Se Defense

Let’s start with what “pro se defense” is. Pro se means representing yourself in a lawsuit. This will save a tremendous amount in legal fees, but it ALSO means taking on the burdens and risks of doing the defense yourself. These burdens and risks are not small, and I’ve always called hiring the right lawyer the “gold standard” of defense. But in most debt cases people can handle their own defense because the law is not complicated and the cases are document, rather than witness, intensive. Pro se defense even has some significant advantages in the debt law context.

The recent Supreme Court rulings are going to force more people to take a more active role in their defense.

Who is a Debt Collector

In Henson et al. v. Santander Consumer USA, Inc., No. 16349 (Slip Op. 6-12-17), the Supreme Court ruled that junk debt buyers are not“debt collectors” under one provision of the Fair Debt Collection Practices Act (FDCPA). I discuss that case, its impact, and what action people need to take regarding it, in my article and video, “Who Is a Debt Collector – Supreme Court Tries to Destroy the Fair Debt Collection Practices Act and what to Do about that.” In general, the effect of Santander is to make it more difficult to establish that a junk debt buyer is a debt collector, and it may signify that the Supreme Court would not let you sue junk debt buyers under the FDCPA at all.

Santander is going to make it more difficult for you to get a lawyer to defend you in a debt case – and more expensive if you can get one. That’s because the FDCPA applies only to debt collectors and gives you certain counterclaims, and certain defenses, that make defending you easier. The FDCPA also includes a “fee-shifting” provision which allows a consumer to make a debt collector pay for most of the time a lawyer spends on a case. These things – ease of defense and a rich company to pay fees – make FDCPA cases attractive to lawyers. Take away the FDCPA, and the lawyers are going to have to charge more – a LOT more. And they simply won’t take as many cases because they’re harder. This means that debt law defendants, already drastically underrepresented, are going to find it much more difficult to hire lawyers.

The decision in Santander threatens to neutralize the FDCPA and let junk debt buyers – who now make up the vast majority of debt collectors – run completely wild. They will be much freer to abuse, deceive, harass – in short, all the tricks that brought about the FDCPA in the first place because the laws regulating them will have been predominantly removed. At the same time it makes getting a lawyer much more difficult, the decision in Santander will likely result in a large number of new and wrong lawsuits. HOWEVER, Santander does not negate any (or very few, anyway) of your defenses in a debt law case, and it does not reduce the burden of proof for debt collectors. You can still win, in other words, but you very well may have to do it yourself.

Bankrupts Beware

Bankruptcy is one refuge debtors have from debt collectors. In general, you can file bankruptcy and force all your creditors to stop contacting you and, instead, file their claims in your bankruptcy action. In theory, the court will then either grant those claims or deny them according to what is right. The dirty little secret of bankruptcy, though, is that if claims are not disputed, they are generally granted. In bankruptcy cases brought by poor people (you can bet Donald Trump never had this problem), the lawyers representing the bankrupts have little incentive to dispute wrongful claims. There’s a U.S. trustee who is supposed to oversee the process and protect the bankrupt and legitimate creditors from bad claims, but guess what?

They usually don’t.

So bad claims get allowed. In most bankruptcies, allowing a bad claim means that it’s going to get paid (eventually) by the person filing for bankruptcy.

Junk Debt Buyers Make Things Worse

Enter the junk debt buyers. They buy vast amounts of LONG overdue debt – debt far beyond the statute of limitations – and file claims in bankruptcy cases. This bogs the bankruptcy courts and everyone involved down, and as a practical matter results in people paying billions of dollars to debt collectors who have no real right to collect. This crushes the people who declared bankruptcy and rips off the legitimate creditors whose debts get paid at a lower rate.

Some debtors were suing debt collectors under the FDCPA for filing claims in bankruptcy that were beyond the statute of limitations. Because of the FDCPA’s fee-shifting provision, the debtors’ bankruptcy lawyers had at least some financial incentive to bring these claims and dispute unenforceable claims. They were doing so as part of the bankruptcy proceedings, and the debtors were also bringing suit outside of the bankruptcy context as well.

The Supreme Court negated the FDCPA’s protection with its holding in Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17). In that case, the Court ruled that debt collectors could file claims in bankruptcy that they know are unenforceable in an ordinary court (and would violate the FDCPA if filed there).  For a fuller discussion of that case, look at my article and video, “Bankrupts Beware, FDCPA No Longer Applies – Opening the Floodgates to Bad Claims.”

What the Midland Funding case means, in practical effect, is that even if you’re in bankruptcy you’re going to have to know and protect your own rights. Your lawyer has VERY LITTLE incentive to challenge bad claims, and likewise the U.S. Trustee has VERY LITTLE time (or incentive) to do it. If the claims are allowed, you will be stuck paying them in all likelihood. That means that even if you file for bankruptcy you must be prepared to defend yourself against the debt collectors. You will AT LEAST need to know your rights, and you will very probably have to defend them pro se despite having a bankruptcy lawyer.

Conclusion

 

The net result of the Supreme Court’s decisions in Henson and Santander is that debt defendants will get much less help from lawyers. These cases are still possible to defend against and win – they’re as easy as any law gets, probably. Because so many fewer cases will in fact be litigated, your chances of winning have actually probably gone UP: it is even less profitable for debt collectors to fight now than it used to be because they will have so many more easy wins. But you are more likely to have to do it yourself now than ever.

Make it hard for them.

Supreme Court Attacks FDCPA – Erodes Definition of Debt Collector

The Supreme Court has recently issued rulings very harmful to people with debt collectors harassing or suing them. Its ruling in Henson et al. v. Santander Consumer USA, Inc., No. 16349 (Slip Op. 6-12-17) (“Santander”), seems to try to negate application of the Fair Debt Collection Practices Act (FDCPA) to the vast majority of debt collectors. I expect this decision will make it far more difficult for debt defendants to obtain legal representation and will cause debt collectors to engage in more deceptive, dishonest and abusive behavior.

Fair Debt Collection Practices Act

When Congress passed the FDCPA, the corruption and destructiveness of debt collectors were so rampant that debt collection was considered a threat to the American way of life. The FDCPA was accordingly designed to prevent fraud, deception and unfairness in general in the collection of debts, with Congress going to so far as to name numerous specific actions as “per se” violations of the Act but also to include the more general description of “unfair” debt collection practices. The reason for identifying numerous specific practices, as well as including the more general rule, was to prevent debt collectors from changing the forms their actions took without changing what they were basically doing.

The Supreme Court has just reduced that Congressional intent to a farce, applying just half of the statutory definition of “debt collector” to a case and finding that, under that half of the definition, junk debt buyers were not debt collectors.

Real-Life Debt Collection

What happens in most debt collection is that creditors sell charged-off debt to debt buyers who exist entirely to collect that money by hook or by crook. Instead of hiring debt collectors to collect on debts and then paying them out of the proceeds, the creditors now get their money first and let the debt collectors take their money from the debtors. All that has happened is that nominal ownership of the debt has changed. In other words, debt collectors have assumed a different form to pursue the very same activities.

Henson et al. v. Santander Consumer USA, Inc.

The Supreme Court has said that it would not allow parties to elevate form over substance and evade the impact of laws only about twenty million times during the course of its existence. Santander cheerfully elevates form over substance to allow the same actors to perform the same abhorrent deeds that the FDCPA was designed to prevent.

One could also characterize the Court’s ruling as dishonest in that it only analyzed half of the definition of “debt collectors.” In looking at Section 1692a(6), the court examined the defining language as “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 court’s decision then repeatedly referred to and emphasized the words “due another,” arguing that companies were only debt collectors if they fit that traditional form of collectors.

How the FDCPA Defines “Debt Collector”

Perhaps we should look at the part of the definition preceding the language in question to get a truer view of the statute’s clear intention:

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, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

Section 1692a(6) (underlined portion is the part ignored by the Supreme Court in Santander, italicized word “any” is for emphasis)

Doesn’t it seem reasonable to read “any debts” literally, so that if the principal purpose of a business is to collect debts, they’re a debt collector? Of course it does, and that would obviously include businesses that exist to purchase debts and collect on them. The Court opinion glibly slides over that, saying that “the parties haven’t much litigated that alternative definition of debt collector and in granting certiorari we didn’t agree to consider it, either.” Santander, Slip Op. at 5. In other words, the Supreme Court agreed to hear only so much of the case as allowed them to shove a dagger into the apparent heart of the FDCPA – not enough of the case to show what the FDCPA actually intended or to do justice.

In theory, the decision in Santander leaves open the possibility that this “alternative” definition would extend the meaning of “debt collector” to junk debt buyers. On the other hand, the decision looks to me like a court in search of a justification for a desired outcome, and it has to be viewed as a negative indication for the Court’s integrity. Particularly in the context of its decision in Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17) (see my article, “Opening the Floodgates of Bad Claims”), it shows actual hostility to the laws that protect consumers from debt collectors and a willingness to engage in intellectually dishonest games to destroy them. As a practical matter, it will likely be several years before the Supreme Court revisits the definition of “debt collector” and applies the entire definition to the question of junk debt buyers.

Pleading that a Junk Debt Buyer is a “Debt Collector”

The Supreme Court passed over the part of the definition of debt collector that defined businesses in terms of their “principal purpose” in favor of the “regularly collected” language. Why? Probably because debt defendants have normally found it very easy to prove that a company “regularly collected” debts – in fact, under prevailing Eighth Circuit law, for example, if a law firm represents collectors in as few as three to five cases per year it is considered to be “regularly collecting” debts. Under fact pleading rules, one must plead facts constituting a basis for your legal conclusion. So debt defendants routinely allege something like the following:

Heartless, Ruthless and Merciless, Attorneys at Law, represent debt collectors in dozens of lawsuits attempting to collect debts per year and are, accordingly, debt collectors, and

Heartless Debt Collector, Inc., regularly sues persons for debts purchased after default…

In other words, debt defendants have typically used the “regularly collected” language because it is easy to demonstrate as a matter of public record. Establishing a business’s “principal purpose” will be much more difficult. My attempts to find an authoritative definition for “principal purpose” of a business turned up zero cases. While I’m confident that there must be some cases that address the issue, it is certainly not many. The term “principal purpose” is frequently used in judicial decisions, but its use is primarily generic, as a synonym for “main” or “major.” I found no cases quantifying the term in any way.

The junk debt buyers, who purchase billions of dollars of debt for no other purpose than to collect it in any way they can, will argue that their “principal purpose” is to “service” that debt. In their lexicon that really means extort payment in as many ways, over as long a period, as possible. But they will claim all manner of beneficial purposes for their activities, and this will alter the nature of the proof required to establish that the company is a debt collector. Rather than being a matter of public record, information regarding a business’s “principal purpose” will be in the possession of the debt collector – and that means that parties attempting to obtain that information will encounter the same series of stone walls, delays and unethical and oppressive litigation strategies they encounter in all their other discovery attempts.

Considering the current ideology and integrity of the Supreme Court, of which debt collectors are very well aware, who knows what the courts will officially “believe?” As a debt defendant, you must now allege and attempt to prove that the debt collector’s main business is to collect debts, but the judicial wind will be in your face.

What Debt Defendants Should Do

Debt defendants have all the same defenses to debt lawsuits they ever did – or almost all of them. Santander applies very little to the defense of debt suits.

On the other hand, many and perhaps most lawyers are going to be scared away from taking debt cases. Many lawyers who have not closely examined Santander will simply regard the FDCPA as not applying to junk debt buyers – and that is almost all the debt collectors in litigation these days. These lawyers will decline to take debt defense cases or will charge much more, and accomplish much less, than they would have, because they will not think they can counterclaim on your behalf. Lawyers who have closely examined Santander and see the same things I do will have to charge more for their services and warn clients that chances of prevailing are not as good as they used to be.

This means that far more debt defendants will be on their own. The only way many of them will be able to have a defense at all will be if they defend themselves.

If you are currently involved in a debt lawsuit – with or without a lawyer, or as a lawyer on behalf of clients – and have a counterclaim, you should expect to see a motion to dismiss based on Santander. I believe you will want to amend your counterclaim to include the “principal purpose” language mentioned above. You will also need to conduct discovery designed to prove the company’s principal purpose.