#1 Understand and Leverage Your Patients’ Financial Profile

In an opinion issued yesterday, the Ninth Circuit Court of Appeals reversed a district court’s summary judgment in favor of the defendant in an action under the Fair Debt Collection Practices Act (FDCPA). The Act requires that within five days of “the initial communication” with a consumer about the collection of a debt, a debt collector must send the consumer a notice containing specific disclosures. The panel held that this requirement, set forth in 15 U.S.C. § 1692g(a), does not apply only to the initial debt collector that tries to collect, but also applies to subsequent collectors that communicate about the same debt.

The question presented to the appellate court was whether the phrase “the initial communication” as used in the FDCPA means the first communication from the initial debt collector that tries to collect, or whether it means the first communication a consumer receives from any collector about a debt, including subsequent collectors that communicate about the same debt.

The case is Hernandez v. Williams, Zinman & Parham, P.C. (Case No. 14-15672, Ninth Circuit Court of Appeals). A copy of the opinion can be found here.

Background

This case began with a loan that Maria Hernandez took out to finance an automobile purchase. After Hernandez stopped making payments on the loan, Thunderbird Collection Specialists, Inc. (Thunderbird), a debt collector, sent her a letter seeking to collect the debt. Hernandez did not respond to the letter.

Following Thunderbird’s unsuccessful attempt to collect Hernandez’s debt, Thunderbird retained the law firm Williams, Zinman & Parham PC (“WZP”) as counsel to assist in its collection efforts. In December 2011, WZP sent Hernandez a collection letter, which was its initial communication with her. The letter notified Hernandez that WZP, a debt collector, represented Thunderbird regarding a debt incurred by Hernandez with the original creditor.

While WZP informed Hernandez that she could dispute the debt or request additional information about the original creditor, it did not tell her that she could do so only in writing. Hernandez filed the instant lawsuit against WZP in the United States District Court for the District of Arizona as a putative class action, alleging that WZP violated the FDCPA by sending a debt collection letter that lacked the disclosures required under § 1692g(a) of the FDCPA.

The parties agreed that WZP qualifies as a debt collector under the FDCPA. In addition to identifying itself as a “debt collector” in its December letter, WZP conceded in its briefing and at oral argument that, when communicating with Hernandez, it was acting as a “debt collector” for purposes of the FDCPA.

§ 1692g(a) of the FDCPA provides:

(a)   Notice of debt;

Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing —

1. the amount of the debt;
2. the name of the creditor to whom the debt is owed;
3. a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector;
4. a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and
5. a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.

Editor’s note: The above is commonly referred to as the “Validation Notice.”

Hernandez alleged that WZP’s failure to notify her that any dispute about the debt had to be in writing to obtain verification of it, or that any request had to be in writing to obtain the name and address of the original creditor, violated §§ 1692g(a)(4) and (a)(5), respectively.

In the district court action, the parties filed cross-motions for summary judgment on Hernandez’s FDCPA claims. In its motion, WZP did not address whether its letter lacked the content required by § 1692g(a). Rather, it contended that it was not required to comply with that provision because Thunderbird’s March letter was the “initial communication” sent to Hernandez with respect to the debt at issue and therefore the sole communication triggering § 1692g(a)’s requirements. The district court agreed and granted summary judgment in favor of WZP.

Hernandez timely appealed, contending that § 1692g(a) imposes the requirement to send a validation notice on each and every debt collector that communicates with a consumer about a given debt.

The Consumer Financial Protection Bureau, (CFPB) and the Federal Trade Commission, (FTC) filed Amicus briefs in the appeal, both supporting the Hernandez interpretation. In their briefs they argued that § 1692g(a) should be interpreted to apply to WZP’s initial communication to Hernandez, and they urged the appellate court to defer to their interpretation should the court find the statutory text to be ambiguous.

The Court’s Opinion

The sole dispute on appeal was whether the phrase “the initial communication” as used in § 1692g(a) refers only to the very first communication sent about a debt or instead to the first communication sent by each and every debt collector that seeks to collect it, including those collectors that take over collection efforts from a prior debt collector.

The Ninth Circuit Appellate panel began their discussion by noting that the issue was of first impression for this court and that the issue has divided the district courts, and has not yet been addressed in a published opinion by any of our other circuits. A footnote in the opinion reads:

Two of our sister circuits declined to apply § 1692g’s requirements to a subsequent debt collector, but they did so in unpublished decisions without explaining the basis for their construction of the statute. See Lee v. Cohen, McNeile & Pappas, P.C., 520 F. App’x 649 (10th Cir. 2013) (unpublished); Oppong v. First Union Mortg. Corp., 326 F. App’x 663 (3d Cir. 2009) (per curiam) (unpublished).

In answer to this question, the court held “that although the sentence in § 1692g(a) in which the phrase “the initial communication” appears is ambiguous when read in isolation, when the sentence is read in the context of the FDCPA as a whole and in light of the statute’s remedial purpose, it is clear that the validation notice requirement applies to each debt collector that attempts to collect a debt.”

insideARM Perspective

This opinion, while interesting, is hardly surprising. The most conservative companies in the industry already follow this logic and provide full validation notices when beginning collection activity on all placements.

It should also be noted that the practice of collection agencies hiring law firms to assist in collection activity has also been significantly reduced in recent years. First, very few large clients allow it any longer, preferring to manage the litigation process themselves, Secondly, the ability to properly supervise and manage activity of a retained law firm has become a challenge and an expense. Many agencies have ceased the practice for that reason. (Note: Litigation is still a remedy that is widely used.  However, many clients now place to directly to attorney or utilize a legal network to more closely manage the process. It is the placement of legal accounts by an agency that has slowed.)

insideARM suspects (hopes) that this issue may also be further clarified in the upcoming debt collection rulemaking process.

There are also related scenarios that should be considered in light of this opinion. Two come to mind immediately:

First, 15-20 years ago when the first wave of sales of collection agencies and consolidation into bigger businesses “hit” the ARM industry, buyers of ARM businesses faced this question with every transaction. Should the buyer of a business send out new validation notices to all existing inventory of the seller? It is easy to view the buyer as a new and different collector. The conservative approach would be to send new validation notices.  That cost could be quite large, depending on the size of open and active inventory. Industry consolidation has picked up again in recent years, so this issue has returned.

Second, if and when a company changes its name, should the agency consider sending out new validation notices? That decision is infinitely more complicated. On the one hand, the consumer that received an original notice from the company under an old name has no way of knowing that the company calling or writing under a new name is really the same company. On the other hand, would a second validation notice to a consumer coming from the new company name be considered misleading to the “least sophisticated consumer?”