In a split decision published on March 9, the United States Court of Appeals for the Ninth Circuit held in McAdory v M.N.S. & Associates, LLC and DNF Associates LLC that “an entity that otherwise meets the ‘principal purpose’ definition of debt collector under [under the Fair Debt Collection Practices Act] cannot avoid liability merely by hiring a third party to perform its debt collection activities.”
Under the FDCPA, a “debt collector” is defined as “any business the principal purpose of which is the collection of any debts.” In 2019, the Third Circuit analyzed this provision in Barbato v. Crown Asset Mgmt. LLC, et al., and concluded that “an entity that has the ‘collection of any debts’ as its ‘important aim’ is a debt collector under [the principal purpose] definition. …As long as a business’s raison d’etre is obtaining payment on the debts that it acquires, it is a debt collector.” The Ninth Circuit relied heavily upon Barbato in reaching a similar conclusion in McAdory.
DNF Associates purchased debt that plaintiff Jillian McAdory owed on a retail credit card and assigned the debt to a collection agency. McAdory’s complaint does not allege that she was ever contacted directly by DNF, but that DNF “contracted with a network of other debt collectors that directly contacted consumers in DNF’s name and at its direction[,]” including M.N.S. & Associates. McAdory alleged that DNF and M.N.S. committed eight separate violations of the FDCPA based on M.N.S.’s conduct, specifically leaving her a voicemail message referencing “asset verification” and “enforcement review,” and withdrawing funds from McAdory’s account before an authorized payment date.
DNF moved to dismiss McAdory’s complaint, arguing a company like itself is merely “a debt buyer that outsources collection activities to third-party contracts” and, therefore, “does not meet the FDCPA’s definition of a “‘debt collector.’” Judge Marco A. Hernandez of the United States District Court of Oregon agreed.
In granting DNF’s motion to dismiss, the district court concluded that McAdory’s complaint failed to state a claim against DNF because “[d]ebt purchasing companies like 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.” Judge Hernandez’s logic, Congress intended the FDCPA to apply only to debt collectors that directly interact with consumers.
On appeal, the Ninth Circuit reversed the district court’s order granting DNF’s motion to dismiss and remanded the matter for further proceedings. The Court wrote, “[McAdory’s] complaint alleged that DNF’s principal purpose was to buy consumer debts in order to collect on them, and that this is how DNF generated most or all of its income.” As such, the complaint “sufficiently alleged that DNF’s principal purpose is the collection of debts as defined by the principal purpose prong of [15 U.S.C.] § 1692a(6). …These allegations are sufficient to allege that DNF is a debt collector under the FDCPA, regardless of whether DNF outsources debt collection activities to a third party.”
In reaching its holding, the Ninth Circuit relies heavily on the Third Circuit’s ruling in Barbato. Like DNF, the defendant in Barbato did not personally collect debts from consumers, but instead outsourced its debt collection to other companies. The Third Circuit reasoned that “‘[c]ollection’ by its very definition may be indirect[,]” and concluded, “[t]he existence of a middleman does not change the essential nature—the ‘principal purpose’—of [the defendant’s business].” After describing the Barbato opinion at length, the Ninth Circuit wrote, “We find [the Third Circuit’s] analysis of the statutory text persuasive and decline to read a direct interaction requirement into the principal purpose [provision]…”
In a dissenting opinion, Judge Carlos Bea of the Ninth Circuit argued that the majority erred in concluding that the complaint adequately alleged DNF’s principle purpose is debt collection. The dissent reasoned that, even accepting as true the complaint’s allegation that DNS “derives the vast majority of its income from [debt collection,]” such an allegation is not enough to show that the company’s principal purpose is debt collection. To Judge Bea, “income, by itself, cannot tell us much about the activity’s importance to DNF. For aught that appears in the allegations of the complaint, the ‘vast majority’ of DNF’s profit could very well come from other activities having nothing to do with debt collection[.]”
The dissent concludes, “Section 1962a(6) does not describe as a ‘debt collector’ a person one of whose principal purposes is the collection of any debts. It is an all or nothing description.” Therefore, to Judge Bea, “Clearly, for a profit motivated business, DNF does not qualify as a ‘debt collector’ under the ‘principal purpose’ prong of Sec[tion] 1962a(6).”