The U.S. Court of Appeals for the Ninth Circuit ruled in McAdory v M.N.S. Associates, LLC and DNF Associates, LLC, in a 2-1 decision, that companies that engage third parties to collect consumer debts they acquired when the debts were in default, known as “passive debt buyers,” qualify as “debt collectors” subject to the Fair Debt Collection Practices Act (FDCPA).
The majority opinion relied on the Third Circuit’s decision last year in Barbato vs. Crown Asset Management which reached a similar conclusion. Like Barbato, the Ninth Circuit’s decision continues to erode any potential defenses to FDCPA claims available to passive debt buyers following the U.S. Supreme Court’s 2017 decision in Henson vs. Santander Consumer USA Inc. The Ninth Circuit’s decision highlights the need for such entities to reevaluate their business practices, discuss the implications of these decisions with third parties performing collection work, and establish procedures to monitor the third party’s collection efforts.
In McAdory, the retailer to whom the plaintiff owed a debt sold the debt to DNF Associates, which engaged MNS Associates to collect the debt. The plaintiff filed a lawsuit in federal district court against DNF and MNS alleging FDCPA claims against both defendants based on a voicemail message left by MNS and the withdrawal of funds from the plaintiff’s account by MNS.
The district court granted DNF’s motion to dismiss, ruling that the plaintiff’s complaint failed to state a claim against DNF because debt buyers such as DNF “who have no interactions with debtors and merely contract with third parties to collect on the debts they have purchased simply do not have the principal purpose of collecting debts.”
The Ninth Circuit framed the issue as “whether a business that buys and profits from consumer debts, but outsources direct collection activities, qualifies as a ‘debt collector’ for purposes of the [FDCPA].” Consistent with Henson, DNF argued that its principal purpose was not collecting debt, but buying debt for investment purposes. The Ninth Circuit determined that it did not have to consider that argument, calling it a “newly raised fact-based argument,” because the plaintiff’s complaint sufficient alleged that DNF’s principal purpose was to collect debt.
Instead, in reversing the district court, the Ninth Circuit ruled that the plaintiff’s allegations were sufficient to allege that DNF was a debt collector under the FDCPA, “regardless of whether DNF outsources debt collection activities to a third party.” According to the Ninth Circuit, the relevant question in applying the principal purpose definition “is whether debt collection is incidental to the business’s objectives or whether it is the business’s dominant, or principal, objective.” It rejected the DNF’s argument that the language of the principal purpose definition requires the business’s principal purpose to be “the act of collecting debts” or that other FDCPA provisions supported the district court’s conclusion that Congress intended the principal purpose definition to apply only to those who have direct contact with consumers.
Although the Ninth Circuit rejected DNF’s reading of the principal purpose definition, it noted that it was not directing the district court on remand “to discard the application of familiar principles of agency law when it addresses vicarious liability” nor was it suggesting “that one businessperson may be liable for another just because they are in the same business.” Thus, the Ninth Circuit left the door open for the district court, applying agency principles, to find that the plaintiff had not established that DNF was vicariously liable for MNF’s alleged FDCPA violations.