The United States Supreme Court issued a significant decision in Henson v. Santander Consumer USA, Inc. drastically restricting the universe of companies subject to potential liability under the Fair Debt Collection Practices Act (FDCPA). In a unanimous decision authored by new Justice Neil Gorsuch, the Court held that companies that buy defaulted debts are not “debt collectors” under the FDCPA because they are not, by definition, “collect[ing] or attempt[ing] to collect . . . debts owed or due . . . another,” under 15 U.S.C. §1692a(6). The upshot of the decision is that companies that actually buy bad debts—as opposed to just the servicing or collection rights for loans in default—have a solid defense to FDCPA claims.
In Henson, the plaintiffs brought a class action lawsuit against Santander, claiming that Santander had acquired the plaintiffs’ automobile loans from the original lender after the loans were in default and then subsequently violated the FDCPA through its debt collection practices. The plaintiffs did not dispute that Santander had acquired the entire loans from the originator, as opposed to merely acquiring the servicing rights; nonetheless, the plaintiffs claimed that Santander qualified as a “debt collector” under 15 U.S.C. § 1692a. The district court dismissed the claims after concluding that Santander was not a “debt collector,” and the United States Court of Appeals for the 4th Circuit affirmed, following the precedents of the 9th and 11th Circuits and splitting with decisions by the 3rd, 6th, and 7th Circuits.
After granting the plaintiffs’ petition for a writ of certiorari, the unanimous Supreme Court affirmed the 4th Circuit’s decision. In his first opinion on the court, Justice Gorsuch rejected the plaintiffs’ position, pointing out the inherent problem of claiming that Santander was a “debt collector,” when the statutory definition of “debt collector” requires the debt to be owed to “another.” The opinion further rejected the plaintiffs’ arguments that an entity becomes a “debt collector” when it obtains a debt that was originally “owed”—in the past tense—to the originator, or by regularly purchasing debts that are already in default.
Henson is great news for companies that buy debts in default, as it provides a very strong basis for defending FDCPA claims that might have otherwise resulted in liability under the FDCPA. Despite the vigor of Justice Gorsuch’s opinion, however, at least two cautions are in order. First, Henson does not help companies that have merely acquired servicing rights to debts in default, as they may very well still qualify as debt collectors because they seek to collect debts owed to another. Second, the Court pointedly refused to consider the plaintiffs’ alternative arguments that Santander was a debt collector because it allegedly regularly attempts to collect debts for other companies as a servicer—though not the specific debts at issue in Henson—and because it is allegedly engaged in a business “the principal purpose of which is the collection of any debts.” The Court punted those issues for another day, which foreshadows arguments to be litigated in the federal courts for years to come.