First Party vs. Third Party Collections: Contractual Language Matters

The line between first-party and third-party collections can be fuzzy, and consumer attorneys regularly claim first-party collections are subject to the Fair Debt Collection Practices Act (FDCPA). Recently, a court in the Northern District of Illinois found in favor of a first-party debt collector and provided some clarity around how to draw the distinction.

In Mladenov v. R1 RCM Inc., 21-cv-1509 (N.D. Ill. Jan 22, 2024) a consumer brought suit against a debt collection agency for letters sent that allegedly did not comply with FDCPA requirements. The debt in question stemmed from medical services rendered by a hospital following a car accident. The agency sent two statements to the consumer informing them of the debt that was owed; the second was sent after the consumer’s attorney asked the agency to cease all communications. Each letter included some language typically found in third-party debt collection letters.  

The consumer paid the debt after the second statement but subsequently filed a lawsuit claiming the debt collector violated the FDCPA. The debt collector defended the suit by claiming the debt was not in default when assigned by its client, and therefore, the FDCPA did not apply. The consumer responded by claiming the cumulative effect of the letters reasonably led him to believe that the collection agency was attempting to collect a defaulted debt. 

The Court agreed with the debt collector and held the FDCPA did not apply to it or the letters it sent. 

In analyzing the issues, the Court pointed out that whether a debt collector is a first-party or third-party collector is a factual determination to be made on a case-by-case basis. The court rejected the consumer’s assertion that the cumulative effect of the letters should be considered. Instead, the court focused on the status of the debt and noted that the contractual agreement between the debtor, creditor, and agency should be used to help establish whether the debt was in default. 

In reaching its conclusion , the court reviewed the agreement between the debt collector and its client and found that pursuant to that contractual language,  the debt collector “acts as an extension of [its client] in servicing and billing patient accounts[,]” and “performs ‘early out’ services through which it resolves ‘balances on unpaid accounts prior to the time that the account is deemed delinquent.’” The debt collector also serves its client by coordinating collections on debt that has defaulted with third-party agencies. Further, at no point did the debt collector or its client treat this debt as in default. Therefore, in the court’s opinion, the contract and undisputed facts showed that the debt collector was only performing precollections for its client and thus was not a “debt collector” under the FDCPA.

Read the full opinion here. 

insideARM Perspective

For those performing first-party collection services for their clients, or thinking about doing so, this case highlights the importance of the contractual language establishing the first-party, early-out, or pre-collect relationship. In this case, the contract between the debt collector and its client was clear: the debt collector was “acting as an extension” of its client. This phrase and the surrounding language in the contract painted a clear picture for the court and allowed the debt collector to end the lawsuit without the need for a trial. Reading between the lines, had this language been omitted from the contract, or been too broad or otherwise unclear, we might have seen a different result.