Debt Servicer Automatically Becomes Debt Collector Under FDCPA (Fair Debt Collection Practices Act) If Lender Previously Declared Loan In Default Second Circuit Holds
In 1978, Congress added Title VIII to the Consumer Credit Protection Act entitled the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§ 1692 et seq., as a line of defense between consumers and debt collectors. (Some states, such as California, have enacted parallel state laws, but those are outside the scope of this article.) Congress intended the FDCPA to establish certain ethical guidelines for the collection of consumer debts, and to provide debtors with a means for challenging payoff demands and determining the validity and accuracy of asserted debts. FDCPA has become fertile ground for class action lawsuits; in some of these class actions, the plaintiff’s lawyer has been so bold as to name law firms and attorneys as defendants, in addition to debt collectors. The lawyer who represents debt collectors must use care as the FDCPA has resulted in surprising rulings. One such surprising case, at least for the defense team, is Alibrandi v. Financial Outsourcing Serv., Inc., 333 F.3d 82 (2d Cir. 2003), a New York putative class action.
By way of background, the FDCPA mandates that debt collectors include certain warnings in their first correspondence with debtors. 15 U.S.C. § 1692e(11). For example, the debt collector must inform the debtor of the name of the creditor, the amount of the debt, and the debtor’s right to challenge the validity of the debt. See 15 U.S.C. § 1692g(a). It is a general rule, however, that these warnings need be provided only by a “debt collector” – they need not be provided by a “debt servicer.” See Alibrandi, at 83 (“Significantly, if Financial Outsourcing were a debt service provider, its correspondence with debtors would not have to include the statutory warnings.”).
Alibrandi leased an automobile from First Union. When the lease ended in October 1999, First Union calculated that Alibrandi owed additional sums for “excess wear and tear,” and retained a debt collector, North Shore, and in November 1999 NS sent a payment demand to Alibrandi that stated “[s]erious collection of your account with our client, First Union National Bank, begins with this letter” and that the included the warnings required by the FDCPA. Alibrandi¸ at 83. By late January 2000, “Alibrandi had neither disputed for paid the debt,” and First Union replaced North Shore with Financial Outsourcing with the intent that Financial Outsourcing act “not as a debt collector but as a debt ‘service provider’ whose job was to remind account holders to pay debts that were outstanding but not in default.” Id. (italics added). Consistent therewith, Financial Outsourcing’s contract with First Union expressly provided that First Union “does not consider these accounts delinquent” and that Financial Outsourcing “shall act as a service provider and not as a collection agency,” and that “[u]ndisputed accounts that are not paid within 120 days will be recalled and assigned to a collection agency for resolution.” Id., at 84 (italics added). Financial Outsourcing was unaware of North Shore’s letter to Alibrandi. Id.
Financial Outsourcing thereafter sent a letter to Alibrandi stating in part, “We are servicing the above referenced account on behalf of First Union National Bank. Your account is not in default.” Alibrandi, at 84 (italics added). The letter did not contain the FDCPA-required warnings. Alibrandi filed a putative class action lawsuit alleging violations of the FDCPA. The district court granted Financial Outsourcing’s motion for summary judgment because it was not a debt collector. Id. The Second Circuit reversed:
We hold that if First Union retained North Shore . . . and, by reason of a letter that North Shore as its agent sent to Alibrandi, in effect declared Alibrandi’s debt to be in default before First Union referred his account to Financial Outsourcing, the January 27, 2000 letter was required to include the warnings [required by the FDCPA]. Alibrandi, at 83.
The Second Circuit found that the case turned on the meaning of the term “default” under the FDCPA. Id., at 85. But after a length analysis, the Court concluded only that the term should be interpreted in the manner contractually agreed to by the parties. Id., at 87 n.5. Turning to the facts of Alibrandi’s case, the Circuit Court held that if the debt was in default at the time First Union retained Financial Outsourcing, then it necessarily remained in default thereafter, irrespective of the terms of Financial Outsourcing’s contract with First Union:
The status of the debt would not have been altered by the expedient of a letter agreement between First Union and Financial Outsourcing. Financial Outsourcing may sincerely have believed it was servicing a debt that was not in default, but that is irrelevant. If First Union had, through North Shore, declared Alibrandi’s debt to be in default, then the default would have continued during Financial Outsourcing’s subsequent collection efforts and Financial Outsourcing would have been obligated to include in its correspondence with Alibrandi the warnings required by the Act. Alibrandi, at 88 (italics added).