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In Tompkins v. Selip & Stylianou, 2019 WL 522143 (D.N.J., Feb. 11, 2019), Chief Judge Jose Linares denied defendant's motion to dismiss a putative state-wide class action complaint filed by plaintiff Robert Tompkins against defendant RAB Performance Recoveries.

The complaint alleged that RAB violated section e(10) of the federal Fair Debt Collections Practices Act (15 U.S.C. 1692e(10)), which prohibits the “use of any false representation or deceptive means to collect or attempt to collect any debt.” The court ruled that the Tompkins' allegation—that RAB's communication to plaintiff attempting to collect a debt falsely represented that RAB had a legal right to collect the debt—was sufficient to defeat RAB's motion and enable plaintiff to proceed.

The foundation for this ruling was that RAB was required to have a license under the New Jersey Consumer Finance Licensing Act, N.J.S.A. 17:11C-1 et seq. (NJCFLA) to pursue collection of the debts it purchased. In the court's view, RAB's lack of such a license meant that it had no legal right to collect the debt. This foundation, however, appears questionable. This article explains why.

Factual Background

Tompkins' debt is described simply as “a financial obligation [incurred by Tompkins] to Juniper Bank for personal expenses.” Following Tompkins' default, Juniper Bank assigned the debt to RAB, RAB obtained a default judgment against Tompkins in New Jersey state court and, years later, RAB sent Tompkins a letter claiming a balance due of $2,243.47 and a notice of application for wage execution. The complaint followed.

NJCFLA

The NJCFLA is considered a small loan licensing act. It requires persons engaging in the “consumer loan business” (other than exempt entities, such as banks), i.e., “consumer lenders,” to be licensed by the Department of Banking and Insurance (Department). It also defines “consumer loans” and the “consumer loan business,” regulates the activities of consumer lenders and subjects them to Department supervision, imposes restrictions and limitations on the making and servicing of the loans it covers, establishes administrative and criminal penalties for violations, and voids loans for certain transgressions.

The NJCFLA primarily defines the “consumer loan business” as the business of making loans in the amount of $50,000 or less, which are for use primarily for “personal, family or household” purposes (“Consumer Loans”) and “charging, contracting for, or receiving a greater rate of interest … therefor than the lender would be permitted by law to charge if he were not a licensee hereunder….” However, it also includes the business of: (1) “soliciting or taking applications for such loans of $50,000 or less”; (2) “negotiating or arranging or aiding the borrower or lender in procuring or making such loans of $50,000 or less”; and (3) “buying, discounting or endorsing notes … in amounts of $50,000 or less.” Note that this third prong does not include the phrase “such loans,” an omission that Tompkins focused on in his effort to defeat RAB's motion.

The general civil usury limit in New Jersey for loans of $50,000 or less is 16% per year, meaning that only lenders making Consumer Loans at rates above 16% must obtain a NJCFLA license. Persons that only make, or are involved in some significant way in the making of, Consumer Loans at interest rates of 16% or less need not hold a NJCFLA license, and there is good reason to believe that the NJCFLA simply does not apply to such loans (even after they are sold).

Decision Not in Harmony With Statute as a Whole

RAB argued that it need not have a NJCFLA license to collect on Tompkins' loan since it never charged or received interest at an annual rate greater than 16%. As stated above, the NJCFLA appears to be concerned only with Consumer Loans that carry interest rates of 16% or less.

The court rejected RAB's argument, holding that, because the NJCFLA defines the “consumer loan business” as including the business of “buying, discounting or endorsing notes … in amounts of $50,000 or less,” without any further qualification, it applies to RAB. This reading of the statute, however, seems inconsistent with the statutory scheme. It results in a scenario where buyers of loans that are less than $50,000 in amount but are otherwise totally outside the scope of the NJCFLA—because the loan interest rates are 16% or less, the loans were for a business purpose, or the loans were originated by a bank or other exempt entity (which may legally charge rates above 16%)—must be licensed to collect on these loans, despite that those who actually made, brokered, negotiated, solicited, took applications for, and/or otherwise arranged or helped to arrange, the loans, or collected on the loans (without also buying, discounting or endorsing the loan notes) would not have to be licensed. This conflicts with the well-recognized rule of statutory construction that statutes should be read in their entirety, with each part or section being construed in connection with every other part or section to provide a harmonious whole. The court's reading makes the NJCFLA anything but harmonious.

The Tompkins decision also appears to create additional incongruities when one examines the requirements and restrictions that the NJCFLA places on consumer lenders. For example, the NJCFLA requires consumer lenders to: (1) obtain a license for each of its branch offices; (2) apply for and obtain Department approval before consummating any sale or transfer of a controlling interest; (3) allow access to and examination of its records by Department examiners; (4) maintain and preserve specified records for at least three years; and (5) file annual reports of its operations. Under Tompkins, these requirements would apply to a debt buyer of a loan of $50,000 or less made by a lender that was not required to be licensed under the NJCFLA—either because the lender is an exempt entity, the loan interest rate did not exceed 16%, or the loan was primarily for a business purpose—but would not apply to the lender itself, or to any other person that brokered, negotiated, solicited, took applications for, otherwise arranged or helped to arrange, the loan, or engaged in efforts to collect on the loan without actually buying the loan note.

More significantly, perhaps, §41(f) of the NJCFLA states: “No consumer loans … of $50,000 or less for which a greater rate of interest … than is permitted by this act has been charged, contracted for, or received … shall be enforced in this State.” As indicated above, the NJCFLA allows licensed consumer lenders to charge, contract for or receive interest at an annual rate greater than 16% on consumer purpose loans of $50,000 or less, whereas other persons (absent some other provision of New Jersey law that exempts them from the civil usury limit) may only charge, contract for or receive interest at an annual rate of 16% or less on such loans. The clear implication of this provision is that consumer loans of $50,000 or less on which a person, not licensed under the NJCFLA, charges, contracts for, or receives interest at a rate no higher than 16% per year are enforceable. Yet, according to Tompkins, only the originating lender, or a debt collector hired by the originating lender (that does not also buy the debt) may legally engage in collection activities in connection with such a loan; a buyer of the debt may not.

Finally, although the court in Tompkins cites and relies upon four prior New Jersey district court decisions, in none of those cases, or in Tompkins itself, is there any mention, much less, discussion of the above incongruities. Indeed, in the first of these decisions (Veras v. LVNV Funding, 2014 WL 1050512 *4 (D.N.J. 2014)), which is cited and relied upon in each of the others, the court concluded that a license was required after simply quoting the “buying, discounting or endorsing notes” prong of the “consumer loan business” definition, without any discussion or analysis. Additionally, in the other prior cases, it does not appear that the debt buyer made a serious effort to challenge plaintiff's assertion that it needed a license, and, in one of those cases, plaintiff apparently alleged that defendant obtained the loan from an unlicensed lender that was subject to the NJCFLA, making it materially distinguishable from Tompkins. And in none of these district court decisions, including Tompkins, does the court cite to a like decision of a New Jersey state court, apparently because there is none.

Conclusion

Tompkins and the cases cited therein illustrate the risk when federal district courts, on their own and as a matter of first impression, interpret issues of state law, without first seeking guidance from the state court system or the views of the state agency delegated with authority to administer and interpret the particular state law. A decision to extend the NJCFLA's licensing requirement, which seems clearly intended to apply only to persons involved in the making, servicing or collecting of higher-interest consumer-purpose loans of $50,000 or less, to persons attempting to collect other types of loans seems best left to a New Jersey state court to decide, hopefully with input from the Department (the agency delegated with rule writing and enforcement authority over the NJCFLA).

As stated by former New Jersey Supreme Court Chief Justice Weintraub in Perez v. Rent-a-Center, 186 N.J. 188, 208 (2006): “[C]ases inevitably arise in which a literal application of the language used would lead to results incompatible with the legislative design.” This appears to be such a case.

Robert M. Jaworski is an attorney in Holland & Knight's Philadelphia office. As a member of the firm's financial services regulatory team, he provides banks and other financial institutions with day-to-day advice and counsel on federal and state compliance and regulatory issues. He thanks Len Bernstein, co-chair of the firm's financial services regulatory team, for the substantial assistance he provided in the preparation of this article.