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From Banking and Finance Law Daily, August 24, 2015

Bank collecting bad credit card account not a debt collector

By Richard A. Roth, J.D.

A national bank collecting a defaulted credit card account it bought from another bank was not a debt collector as defined by the Fair Debt Collection Practices Act, according to the U.S. Court of Appeals for the Eleventh Circuit. Employing a precision analysis of the act, the court decided that it was irrelevant that the consumer’s debt was in default when Capital One Bank (USA) acquired it. Capital One did not qualify as a debt collector because debt collection was not the principal purpose of the bank’s business and the bank did not regularly collect debts due to anyone else (Davidson v. Capital One Bank (USA), N.A., Aug. 21, 2015, Wilson, C.)

The consumer had settled an earlier suit over the account with HSBC Bank by agreeing to pay $500; however, he never made the payment, and HSBC obtained a judgment from the court. The account was included in $28 billion of accounts that Capital One later bought from HSBC.

Shortly after the purchase, Capital One sued the consumer, not for the $500 settlement but rather for $1,149.96, which it claimed was the balance due on the delinquent account. The consumer responded by filing a class action against Capital One claiming FDCPA violations. That suit was dismissed when the district court judge decided that Capital One did not meet the statutory definition of debt collector and thus was not covered by the act.

What is a debt collector? The FDCPA applies only to debt collectors, and it defines what a debt collector is in 15 U.S.C. §1692a(6), the appellate court first said. A company that does not fit that definition is not obligated to meet the requirements of the act.

In general, a debt collector is anyone who uses interstate commerce or the mail “in any business the principal purpose of which is the collection of any debts,” or who “regularly collects, or attempts to collect … debts owed or due or asserted to be owed or due another.” It also distinguishes between debt collectors, who are covered by the act, and creditors, who are not covered.

A creditor is the person who offers or extends credit or a person to whom a debt is owed, i.e. a debt buyer. The act excludes from creditor status any person collecting a debt owed to another “to the extent such activity … concerns a debt which was not in default at the time it was acquired by such person.”

Was the bank covered? The court characterized the consumer’s position as being that anyone who acquires a bad debt for collection purposes is a debt collector, while anyone who acquires a debt that is not in default is a creditor. Debt collectors are covered by the FDCP, but creditors are not.

This simple one-or-the-other interpretation was rejected by the court because it did not account for the basic definition of “debt collector.”

Before anyone can be a debt collector under the act, he must fall into one or the other of the two initial categories, the court said: either the principal purpose of his business must be debt collection or he must regularly collect debts owed to other persons. Whether the debt was delinquent is irrelevant.

Put differently, the question of whether a debt was in default was relevant only to whether the person who acquired the debt was a creditor. A person who acquired a delinquent debt was not a creditor, but only would be a debt collector if one of the debt collector definitions applied, the court said.

Capital One did not meet either of the two definitions, the court then concluded. First, the principal purpose of Capital One’s business was not debt collection.

Second, Capital One only regularly collects debts it owns, not debts due to other persons. The court made clear that it was irrelevant that the debts were originated by a difference creditor and were acquired by Capital One after they became delinquent. All that mattered was that the debts were owed to Capital One at the time when the bank tried to collect them.

Contrary decisions. Despite the Eleventh Circuit’s assertion that its decision was compelled by the plain language of the FDCPA, other appellate courts have reached the contrary conclusion.

The U.S. Court of Appeals for the Sixth Circuit said that “For an entity that did not originate the debt in question but acquired it and attempts to collect on it, that entity is either a creditor or a debt collector depending on the default status of the debt at the time it was acquired” (Bridge v. Ocwen Federal Bank).

Similarly, addressing an unusual situation of a mortgage loan servicer that mistakenly believed a mortgage to be in default, the U.S. Court of Appeals for the Seventh Circuit said that “the Act treats assignees as debt collectors if the debt sought to be collected was in default when acquired by the assignee, and as creditors if it was not” (Schlosser v. Fairbanks Capital Corp.).

The case is No. 14-14200.

Attorneys: Daniel A. Edelman (Edelman Combs Latturner & Goodwin, LLC) for Keith Davidson. Joshua Howard Threadcraft (Burr & Forman, LLP) for Capital One Bank [USA], N.A.

Companies: Capital One Bank (USA), N.A.

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