In a June 12, 2017 decision, the U.S. Supreme Court unanimously held that certain consumer finance companies that purchase and collect defaulted debts originated by other lenders are exempt from the strictures of the Fair Debt Collection Practices Act of 1977 (the FDCPA or the Act). Henson v. Santander Consumer USA, 137 S. Ct. 1718 (2017). The case, which turns on who qualifies as a “debt collector” under the FDCPA, has significant implications for the distressed debt industry and will likely lead to industry-wide changes as companies restructure so as to benefit from the guidance contained in this ruling.

Background

Henson arose from an appeal of a Fourth Circuit decision affirming the U.S. District Court for the District of Maryland's dismissal of claims against Santander Consumer USA. The underlying complaint involved allegations that Santander, a bank that purchased defaulted automobile loans from their originator, was a “debt collector” under the FDCPA and that it violated the FDCPA by making certain misrepresentations in the process of collecting on those purchased, defaulted loans. The district court found that the plaintiffs failed to allege sufficient facts to demonstrate that Santander was a “debt collector” under the FDCPA and dismissed the case against Santander pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim for which relief can be granted. Henson v. Santander Consumer USA, No. Case No. RDB-12-3519, 2014 WL 1806915, at *3 (D. Md. May 6, 2014); Henson v. Santander Consumer USA, 817 F.3d 131, 133 (4th Cir. 2016), cert. granted, 137 S. Ct. 810, 196 L. Ed. 2d 595 (2017), and aff'd, 137 S. Ct. 1718, 198 L. Ed. 2d 177 (2017).

Like the lower court cases, the Supreme Court appeal hinged upon whether Santander qualified as a “debt collector” under the FDCPA. The FDCPA was enacted by Congress in 1977 to “eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.” 15 U.S.C. §1692(e). The Act “authorizes private lawsuits and weighty fines designed to deter wayward collection practices.” Henson, 137 S. Ct. at 1720. Pursuant to the FDCPA, a “debt collector” is “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 … . ” 15 U.S.C. §1692a(6).

On appeal, the parties agreed that “third party debt collection agents generally qualify as 'debt collectors' under the relevant statutory language, while those who seek only to collect for themselves loans they originated generally do not.” Henson, 137 S. Ct. at 1721. The case therefore turned on whether “individuals and entities who regularly purchase debts originated by someone else and then seek to collect those debts for their own account” qualify as “debt collectors” under the Act. Id. The parties did not attempt to argue that Santander “regularly act[ed] as a third party collection agent for debts owed to others” or was “engaged in any business the principal purpose of which [was] the collection of any debts.”1 Id. (citing 15 U.S.C. §1692a(6)) (internal marks omitted). Accordingly, the Supreme Court declined to address those issues, stating, with regard to the latter definition, that “the parties haven't much litigated that alternative definition and in granting certiorari we didn't agree to address it either.” Id.

Supreme Court's Analysis and Holding

The Supreme Court examined the plain language of the FDCPA definition of “debt collector,” considered the internal context of the “statutory phrase,” and evaluated the definition within the context of “neighboring provisions of the Act.” Id. at 1721-23. The Supreme Court found that each of those analyses militated in favor of excluding Santander, in its capacity as a debt purchaser collecting on debts it owned, from the FDCPA's definition of “debt collector.”