Debt Settlement Strategy Companies and the FDCPA

COLLECTOR’S INK January 2009 • Volume LIV, No. 1

by Ron Sargis, CAC Legal Counsel

he United States District Court for the Southern Dis- that the defendant regularly uses the US Mail and interstate trict of California recently addressed the scope of the commerce to collect debts, or in the alternative, regularly T FDCPA and the Rosenthal Fair Debt Collection Prac- collects debts owed another. Further, it is alleged that the tices Act. However, rather than a question of whether the defendant in the ordinary course of business engaged in provisions applied to the creditor or whether a debt was in debt collection as defined under the Rosenthal Act. default, the Court was presented with the issue of whether In responding, the defendant sought to dismiss the FDCPA a for-profit debt settlement company was subject to the FD- and the Rosenthal Act claim on two grounds. First, the de- CPA and Rosenthal Act. fendant asserted that the debtors had failed to adequately In Yang v. DTS Financial Group, case no. 07CV1731, the allege that defendant was a debt collector under either plaintiff alleged that DTS had violated both the State and of the statutes. The defendant relied upon the analysis in Federal Debt Collection Practices Acts. The salient facts as a recent District Court case out of New York, Limpert v. stated by the Court alleged in the Complaint included the Cambridge Credit Counseling Corp., 328 F.Supp. 2d 360 following. The plaintiffs became concerned in 2006 about (E.D.N.Y. 2004). In Limpert, the court dismissed a FDCPA their debt burden because they were only able to make the suit filed against credit counselors who offered debt man- minimum payments on certain obligations. In considering agement plans similar to that of the defendant. The Limpert their options, the Plaintiffs discovered the defendant’s web- court concluded that though it was a fine distinction be- site which advertised a “Debt Settlement Strategy,” through tween credit counseling and debt collection, since a debtor which the debtor would pay the defendant instead of credi- voluntarily decides to hire a credit counseling company and tors, and the defendant would then negotiate a fractional there was no evidence that the credit counselors would ha- repayment plan with the creditors. rass debtors, then the credit counselor in Limpert was not a debt collector. In a telephone call, the debtors were told by the defendant that the debtors would pay a monthly amount to the In considering the facts as alleged in Yang, the Court con- defendant. Some of the money paid would eventually be cluded that the debtors had carefully pleaded the case paid to the debtors’ creditors. Under the Debt Settlement around the specific exemption in the FDCPA for nonprofit Strategy, the debtors were not to pay any money to their credit counseling organizations. While the defendant may creditors and were not to communicate with their creditors. be providing credit counseling services, the debtors spe- When the debtors stopped paying, several creditors sued cifically pled that the defendant is a for-profit organization. the debtors. When this occurred, the defendant recom- Since Congress had specifically excluded nonprofit credit mended that the debtors file bankruptcy. counseling from the FDCPA, then the rules for interpreting statutes compel a conclusion that a for-profit credit coun- In the complaint, the debtors further alleged that the seling business falls within the definition of a debt collec- defendant is a for-profit organization providing credit coun- tor. seling and assisting in the debt liquidation by distributing consumer payments to creditors. Thus, the debtors alleged The Court then concluded that since the complaint pled a short and plain statement of the claim arising under the Because this issue arose on a Motion to Dismiss filed by the defendant, FDCPA that tracks the statutory definition of a debt collec- the court assumes that the alleged facts are true. No actual determination of the facts was made by the court.

tor, the case cannot be dismissed at this early stage of the dant in this lawsuit is that Congress believed that it needed litigation. to create an express exemption for nonprofit debt liquidation and disbursement companies. One of the basic prin- With respect to the Rosenthal Act claim, the Court in Yang cipals of statutory construction is that Congress does not first determined that the Rosenthal Act broadly defines a place surplusage in statutes or enacts ineffective laws. If debt collector as “any person who, in the ordinary course Congress determined that it needed to exempt a certain of business regularly, on behalf of himself or herself or oth- class of debt settlement companies from the statute, the ers, engages in debt collection.” Since the complaint al- nonprofit companies, then the converse would be that the leged that the defendant took payments from the debtors for-profit debt settlement companies are subject to the FD- and distributed those sums to creditors, such conduct was CPA. “debt collection” for purposes of the California Statue. This will ultimately present an interesting question of fact Though not dismissing the complaint, the court noted that for the court and possibly a question of law for the Circuit the defendant’s contentions that it is not a debt collector Court of Appeals. However, the practical aspect of this case would be properly addressed through a summary judgment is that it shows the ever shifting nature of the FDCPA and motion. DTS will get its day in court to establish whether its how debtors believe that it should be used to address ev- conduct is that of a debt collector subject to the FDCPA and ery dispute they have concerning unpaid debts. Sometimes the Rosenthal Act, and whether any of the allegations can the stretching of the FDCPA may get to an area where the be proved by the debtors. consumers are having actual problems with someone other This decision highlights the importance to carefully read than a traditional collection agency. In the present case, and respect the language used by Congress in enacting we know that the FTC has expressed concern for several the FDCPA. Under the FDCPA Congress defines a “debt years over the practices of some credit score improvement collector” to be: companies and debt settlement companies. In this case, any person who uses any instrumentality of inter- whether they have valid claims or not, the debtors have state commerce or the mail in any business the found a way to assert FDCPA and Rosenthal Act claims principal purpose of which is the collection of any against a non-traditional collection agency defendant. •• debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. In specifying the statutory exceptions to the definition of a debt collection, Congress expressly provides that the term debt collector does not include –

• (E) any nonprofit organization which, at the request of consumers in the liquidation of their debts by receiving payments from such consumers and distributing such amounts to creditors;… The $64,000 question is whether the FDCPA really defines a debt negotiation and payment company as a “debt collector.” The Court in Yang concluded that a for-profit business which agreed to accept payments from a debtor and then to pay the monies to a creditor meets the literal definition of a debt collector. While not working directly for the creditor, the for-profit debt settlement company is receiving monies to be used for the payment of debts owed to another. While it may be argued that a for-profit debt settlement company was not intended by Congress to be within the definition of a debt collector, a challenge facing the defen-