By Kevin Mehrens
Who is a debt collector in the Ninth Circuit for the purposes of the Fair Debt Collection Practices Act (FDCPA)? Seems like one of those know-it-when-you-see-it kind of answers. The FDCPA tells us that a debt collector is: (1) any person who regularly collects or attempts to collect, directly or indirectly, debts owed or due another, or (2) any business, the “principal purpose” of which is the collection of any consumer debts. A business is a debt collector if they meet either of these two definitions. In the context of debt buyers, since they are the owners of the debt they purchase and not collecting for another, they can’t qualify as a debt collector under the first definition, only the second. (See THIS excellent article from Oregon consumer attorney Kelly Jones regarding the definition of when a business “regularly collects” a debt.) So, the question becomes: what is a debt buyer business’ “principal purpose?”
In March 2020, the Ninth Circuit, in McAdory v. M.N.S. & Associates, 952 F.3d 1089 (9th Cir. 2020), held that an entity which purchases debts and subsequently hires a third-party debt collector to actually perform the collection activities is still a debt collector under the FDCPA. The defendant in McAdory argued that they were not a debt collector but merely a “passive debt buyer” (a term not defined in the FDCPA or elsewhere). But the Ninth Circuit held that the debt purchaser’s “principal purpose” is still the collection of debts, regardless of whether it engages the consumer to collect the debt or hires another debt collector to do so. As long as the third-party is a debt collector the debt buyer is also a debt collector.
Great! So now we know that debt buyers are debt collectors for purposes of the FDCPA. But what happens when the third-party collector is the entity which violated the FDCPA? Is the debt buyer who hired the third-party responsible for such a violation?
On remand to the Oregon District Court, the plaintiff in McAdory filed a motion for summary judgement on the issue of vicarious liability arguing that the debt buyer had the right and responsibility to control the actions the collector they hired. Basically, the plaintiff argued that the third-party collector was the agent for the principal debt buyer under common law agency theories and was therefore responsible for its violations of the law. The principal debt buyer argued that they were not responsible for the actions of the agent. The principal told the agent to obey the law but otherwise left the methods for collecting up to it and took a hands-off approach. On June 7, 2021, the District Court held that the principal “should bear the burden of failing to monitor the activities of those it contracts to carry out its primary purpose.” To say it another way, if a debt collector hires another debt collector to collect debts on its behalf it is responsible for violations committed by the hired collector. Actual control or the right to control on the part of the principal is not required.
This ruling is consistent with both the Third and Seventh Circuits. See, Barbato v. Greystone Alliance, LLC, 916 F.3d 260 (3d Cir. 2019) (instructing the district court that, on remand, the plaintiff did not need to show that the principal debt collector exerted actual control over the third-party in order to be held vicariously liable); Janetos v. Fulton Friedman & Gullace, LLP, 825 F.3d 317 (7th Cir. 2016); (“[I]t is fair and consistent with the Act to require a debt collector who is independently obliged to comply with the Act to monitor the actions of those it enlists to collect debts on its behalf.”).
Great again! Now we know that a company that purchases debts but hires a third-party collector to do the dirty work is a debt collector under the FDCPA. And now we have persuasive authority from the Oregon District Court that the debt buyer is vicariously liable for a third-party debt collector’s violation regardless of the level of control over it due to the nature of the principal/agent relationship. But the District Court didn’t stop there. Recognizing that automatically imputing the actions of the third-party directly to the debt buyer was not currently the law of the Ninth Circuit, the Court went on to analyze common law principles of agency law to further hold the debt buyer liable for its agent’s violations due to it having a right to control the actions of the agent debt collector. This was a fact-based inquiry taking into consideration the nature of the relationship and contract between those parties. When a debt buyer allows a third party to collect on their behalf, they will always retain some level of control if for no other reason than to maximize their profits. The District Court provided the framework for consumers to pierce the relationship between the debt buyer and its debt collector agent.
Debt collectors attempted to create a structure to avoid liability for FDCPA violations. By proclaiming themselves “passive debt buyers” and then hiring insolvent debt collectors to do the physical collection work, debt collectors thought they had found a workaround for FDCPA compliance. The Ninth Circuit saw right through that. They are debt collectors. They cannot get around liability simply by hiring someone else to collect from the consumer.