Utah District Court Finds Petition Clause Bars FDCPA Suit Brought Against Debt Buyer for Filing Collection Suit Without a License

Over the last several years, debt buyers have been subject
to a steady stream of lawsuits (often filed as a class) in Utah wherein consumer attorneys have taken advantage of Utah’s
vague licensing statute and pursued debt buyers with a vengeance. Despite the financial success consumer attorneys have found pursuing these matters, the party may be coming to an end as the result of an Order issued by Judge Howard Neilson in the case of Holmes v. Crown Asset Management, LLC case No 2:19-cv-00758 (Dist. Ct. Utah August 6, 2021)

Background: The basis for the lack-of-license lawsuits:

Utah Code Section §12-1-1 states that “[n]o person shall
conduct a collection agency, collection bureau, or collection office in [Utah]
or … collect or receive payment for another…” without a license. The statute
does not address debt buyers which do not have an office in Utah and only collect debt they own. 

Seizing on this area of gray, in a series of near cookie-cutter
complaints, consumer attorneys have alleged that debt buyers filing lawsuits against
consumers without holding a debt collection license have violated the Fair Debt
Collection Practices Act (FDCPA) and Utah state law. Notably, these lawsuits
typically involve cases where the debt buyer successfully obtained a judgment
against the consumer in state court.

The FDCPA claims typically allege that by filing collection lawsuits
without a license, the debt buyer violated the FDCPA by (a) taking an action that
could not legally be taken; and (b) using unfair and unconscionable means to
collect a debt.  The Utah state law
claims consumers file against debt buyers are typically based solely on the alleged
failure to obtain a debt collection license before attempting to collect the debt.
 

The defense in the Holmes case:

In response to the suit filed against it by multiple
consumers, Crown Asset Management (Crown) argued that the Petitions Clause of
the U.S. Constitution barred the suit. For those of us not generally familiar
with the Petitions Clause (admittedly, whatever I learned about this in law school
was long gone from my head, probably replaced by some meaningless baseball
statistic), the “Petition Clause” is found in Article I of the U.S. Constitution
which provides that “Congress shall make no law . . . abridging . . . the right
of the people . . . to petition the Government for a redress of grievances.”  Per Judge Neilson, the case law on the matter provides
that the Petition Clause thus immunizes litigants from liability for their
petitioning activities (i.e., filing a lawsuit) unless the petitioning is a
sham.

To determine whether a lawsuit is a sham, the Court
implemented a two-step approach which asks (1) is the petitioning objectively
reasonable? (2) if not objectively reasonable, what is the subjective intent
behind the petitioning?” Under this approach, Judge Nielson concluded that the Crown lawsuits were not a
sham, as Crown actually prevailed in each suit. Further, the lawsuits could not be considered a sham since the vague nature of the Utah
statute could have led Crown to reasonably believe that it was permitted to
file the lawsuits without a license. Since the Utah statute does not define what a “collection
agency,” “collection bureau,” or “collection office” is, Crown, which only
collected debts it owns, could have reasonably believed it did not fit into any
of those categories.

What about all the cases holding collection suits are
subject to the FDCPA?

While the Order in the Holmes case makes clear that immunity
provided by the Petition Clause is a constitutional right, it provides
additional clarity by distinguishing two Supreme Court cases that have allowed FDCPA
suits based on collections litigation to proceed. Specifically, the Order distinguishes
Heintz v. Jenkins, 514 U.S. 291 (1995), on the basis that Heintz rejected only the categorical
proposition that the act never applies to lawyers in litigation; and Jerman
v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573 (2010)
on the basis that Jerman, held only that the FDCPA’s bona fide error
defense does not apply to legal errors.

Unlike Heintz
and Jerman, the entirety of the consumers’ claims in the Holmes
matter were based solely upon
the filing of the state court lawsuits and did not allege any other act or
omission by the debt buyer. As such, Judge Nielson concluded that since a
lawsuit to recover a debt is covered by Petition Clause Immunity, Crown could
not be held liable under the FDCPA for seeking to recover debts through the
state court, absent a showing that Crown filed sham petitions. This is so even though
the consumers alleged the debt buyer used “false, deceptive, and misleading
representations” to attempt to collect the debt in violation of the FDCPA.  

insideARM
Perspective:

First, Kudos to Crown Asset Management and its counsel Mark Nickel and David Garner of Gordon  & Rees, for presenting this argument to the court. These lack-of-license cases against debt buyers in Utah began to surface
around 2018.  The results have been
mixed, and many have ended in settlements. Until the August 6, 2021 Order in the Holmes matter,
there had not been a decision that clearly put an end to the litigation.  As an added bonus, in addition to dismissing the suit,
Judge Neilson provided a highly detailed analysis of the Petitions Clause and
its application to the facts, which is clear enough that it may give other debt
buyers a means to dispose of similar lawsuits. 

That said, consumer
attorneys in Utah have undoubtedly lined their pockets in abundance by filing
these suits; whether they appeal or not remains to be seen. Like everything
else in the accounts receivable management industry, it will take time to see
the true impact of this case