Home / Compliance / Passive Debt Buyer Still Meets Definition of ‘Debt Collector’ Under FDCPA, As Judge Refuses to Dismiss Class-Action Lawsuit Over Collection Letter

Passive Debt Buyer Still Meets Definition of ‘Debt Collector’ Under FDCPA, As Judge Refuses to Dismiss Class-Action Lawsuit Over Collection Letter

A case that was originally filed nearly six years ago and has already been to the Seventh Circuit Court of Appeals has a new twist; this time a judge has refused to dismiss a class-action lawsuit alleging a collection letter violated the Fair Debt Collection Practices Act by offering to settle a debt in which the statute of limitations had expired.

A copy of the ruling in the case of McMahon v. LVNV Funding, Resurgent Capital Services, Alegis Group, and Tate & Kirlin Associates, can be accessed here.

Judge Jorge Alonso of the Northern District of Illinois covered a lot of ground in his ruling from earlier this week. He partially granted summary judgment on behalf of the plaintiffs while also denying it, in part, and denied a summary judgment request on behalf of the defendants, while also granting a motion from the defendants to exclude a plaintiff’s expert’s testimony. The judge also did not agree with an argument from the defendants that they should not be defined as a debt collector under the FDCPA because of the Supreme Court ruling in Henson v. Santander, which held that, in some cases, debt buyers should not be defined as debt collectors because they do not collect on debts owed to other entities.

The plaintiff filed a class-action lawsuit after receiving a letter attempting to settle a time-barred debt. The letter did not mention the debt was time-barred.

The District Court originally denied class-action certification in the case, which the plaintiffs appealed to the Seventh Circuit. The Appeals Court reversed the decision and remanded the case back to the District Court.

The District Court looked at a recent ruling from the Seventh Circuit in the case of Pantoja v. Portfolio Recovery Associates to determine whether the McMahon letter was misleading. In that case, the collection letter included the language: “because of the age of your debt, we will not sue you for it.” Since the McMahon letter did not include any such language, Judge Alonso ruled it to be deceptive.

Pantoja held that a letter offering to settle a time-barred debt for a fraction of the original amount and stating, “Because of the age of your debt, we will not sue you for it,” violates the FDCPA because it does not “make clear to the recipient that the law prohibits the collector from suing to collect [such an] old debt.” Based on a straightforward application of that holding to this case, the McMahon letter is deceptive as a matter of law because the McMahon letter does not contain any unambiguous warning about the possibility of losing the protection of the statute of limitations by accepting the “offer” to “settle.”

The defendants attempted to argue that LVNV should not be defined as a “debt collector” under the FDCPA as a result of the Supreme Court’s ruling in Henson v. Santander, but Judge Alonso said the case was not an apples-to-apples comparison.

Let’s start with the full definition of “debt collector” from the FDCPA:

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.

From Judge Alonso:

In Henson, the Supreme Court addressed only whether the alleged debt collector met the second prong of the definition; it explicitly did not address the first prong. Henson establishes that LVNV is not a debt collector under the scond prong, but according to plaintiff, LVNV is a debt collector under the first prong because the principal purpose of its business is debt collection. Defendant replies that there is insufficient evidence to support any such conclusion.

The fact that LVNV does not engage in any collection activity on its own should mean that it is not a “debt collector” as defined by the FDCPA because its “principal purpose” is not debt collection, the defendants argued, citing several cases to bolster its claim. In deciding that the LVNV is a debt collector, the judge wrote:

The Court fails to see why it should matter if the debt buyer hires a third party to actually collect its debt, i.e., to be the one who interacts with the debtor to obtain payment. If the collection of debts is precisely what sustains the business, unaided by any other significant sources of revenue, then the “collection of . . . debts” must be the business’s “primary purpose.”

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