Justice Neil Gorsuch, the newest addition to the U.S. Supreme Court, recently authored his first opinion and it is one likely to have negative repercussions for large numbers of people who find themselves unable to pay their bills.

Henson v. Santander Consumer USA, decided on June 12, concerns the Fair Debt Collection Practices Act or FDCPA, a federal law that is meant to protect against abusive, unfair, and deceptive practices in the collection of consumer debt– debt incurred primarily for personal, family, or household purposes.

Among other things, the FDCPA prohibits debt collectors from harassing you with repeated phone calls, contacting you at work if you’ve asked them not to or calling you too early (before 8 a.m.) or too late (after 9 p.m.) or at a time known to be inconvenient. They also cannot talk to people other than your spouse about the debt, demand payment of more than is owed, add on unlawful fees and expenses, use obscene or profane language, or threaten you with violence or some other action, such as a lawsuit or arrest, that is illegal or not actually contemplated.

They must identify themselves as debt collectors, provide the name and address of the original creditor, inform you of the right to dispute the debt and send written validation of the debt on request. .

Violators can be sued for actual damages, including the costs of physical and emotional stress, statutory damages of up to $1,000 and the legal fees and costs for the lawsuit.

The FDCPA contains two alternate definitions of “debt collector”: “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”

The case involved auto loans made to Ricky Henson and several others by CitiFinancial Auto. After the loans went into default, Santander Consumer USA was hired to service the debts, which it subsequently purchased and attempted to collect.

Henson and the others claim that those collection efforts violated the FDCPA.

The U.S. District Court for the District of Maryland and the Fourth U.S. Circuit Court of Appeals  both agreed with Santander that it was not a “debt collector” for purposes of the FDCPA because, as the owner of the debt, it was not attempting to collect an obligation “owed or due or asserted to be owed or due another.”

Writing for the Supreme Court, Gorsuch said that both parties agreed that third-party debt collection agents fall under the law while original lenders do not and he framed the question before the Court as whether a debt buyer such as Santander is more like a repo man or a debt originator.

He acknowledged that Court was not deciding whether Santander qualified as a debt collector under the first part of the definition, or because it was generally in the business of collecting debts owed to others, even though it owned these particular ones. Those issues had not been litigated by the parties and the Court had not agreed to decide them when it took the case, observed Gorsuch.

In holding that the FDCPA did not apply because the debts at issue were not owed to another, Gorsuch said he was relying on the text and structure of the statute.

He and the rest of the Court rejected the petitioners’ policy argument: that Congress intended to get independent debt collectors to treat people better and excluded loan originators from the reach of the bill based on the view that they already had sufficient incentive to behave well in dealing with customers.

Henson and the others contended that Congress never had the chance to consider debt buyers because the market for defaulted debt only came into existence after the law was passed in 1977 but would have treated them like independent debt collectors,

Gorsuch termed that “speculation” and refused to presume that a result “consistent with their account of the statute’s overarching goal must be the law.”

Henson drew several amicus briefs on each side, including one on behalf of 27 states (including New York, Pennsylvania, California, Connecticut, Delaware, and Florida but not New Jersey) arguing that debt buyers should be deemed debt collectors under the FDCPA.  They cited their strong interest in protecting consumers from collection abuses and the harms to which they contribute, including personal bankruptcies, marital instability, loss of work and invasion of privacy.

Other briefs urging that the FDCPA should apply to debt buyers were submitted by Public Counsel, the National Consumer Law Center and legal aid groups from three law schools –Yale, Berkeley and Notre Dame.

Amici on the other side included the Association of Credit and Collection Professionals, the U.S. Chamber of Commerce, the American Financial Services Association, the American Bankers Association, Consumer Bankers Association and The Clearing House Association.

Reactions to Henson

The headline of a June 14 article about the Henson ruling by David Dayen on The American Prospect website read “Gorsuch’s First Opinion: Let Debt Collectors Run Amok” and labeled the ruling “a huge win for financial predators.”

Dayen expressed concern that debt collectors will now be able to evade FDCPA restrictions by how they structure their operations. For instance, a debt collector could buy a community bank and assign it the task of debt collection

In his view, the Court could have clarified things by using the FDCPA’s entire definition, eschewing a narrow approach to review as it has done in some cases such as Citizens United, where it loosened limits on political contributions.  “Only when it comes to people hounded by debts do they adhere so narrowly to the question before them,” Dayen lamented.

Commenting from the other side of the aisle was Donald Maurice, of the Maurice Wutscher law firm in Flemington, who represents debt collectors and two days after the decision, took part in a webinar about it offered by the American Bar Association’s Consumer Financial Services Committee and the debt industry trade group RMA, for Receivables Management Association.

From Maurice’s perspective, the alternative definition that the court declined to address will likely be used in an attempt “to end-run the ruling.”

Because of that unresolved issue, RMA has urged the industry to proceed with caution in interpreting Henson. It “raises questions for debt buying companies who purchase and actively collect on their own debt” who while not collecting debt owed another, “are still engaged in collecting debt,” said RMA in a statement issued June 12.

RMA urged consulting with counsel before making operational changes based on the decision.

The Supreme Court took the Henson case to resolve a split in the circuits on whether companies that buy defaulted debts are subject to the FDCPA.

The Eleventh Circuit read the FDCPA the same way as the Fourth Circuit. On the other hand, four circuits–the Third, Fifth, Sixth and Seventh, reached a contrary result, concluding that a debt buyer is a debt collector when it purchases and then collects defaulted debt or, alternatively, that debt collector status depends on whether the default occurred before or after the debt was purchased, a view that would have led to a different result in Henson.


Third Circuit Precedent 

The Third Circuit case, which has been the governing law in New Jersey, is Federal Trade Commission v. Check Investors, Inc. (2007). There, a debt buying and collecting business which had been fined $10.2 million in fines and enjoined against FDCPA violations contended that the law did not apply because it had purchased the debt and was thus a creditor to whom a debt was owed rather than a debt collector pursuing debts owed to someone else.

For the Third Circuit, timing was the crucial factor: whether the debt was in default at the time it was acquired, or became so later. It held that because the debts at issue were bought after default, the Act applied. To hold otherwise, “would elevate form over substance and weave a technical loophole into the fabric of the FDCPA big enough to devour all of the protections Congress intended in enacting that legislation,” stated the court.

The decision in Henson leaves uncertainty about the standards of conduct that govern a sizeable portion of the multi-billion dollar debt collection industry, which affects millions of people.

In a March 2017 report, the Consumer Financial Protection Bureau  (CFPB) characterized it in as an $11.4 billion dollar industry in the U.S. last year, with debt buyers accounting for about $3.6 billion of that revenue, nearly one-third.

The vast majority of the debt collected, about 70%, is credit card debt, followed by automobile loans, telecommunications debt (phones and cable bills) and retail accounts. It can also include personal loans, utility bills, medical bills and mortgages.

Debt buyers buy defaulted debt for pennies on the dollar and try to collect in full.

According to the CFPB, debt collection is the most complained about consumer financial product or service in its system, with the most common issue raised being attempts to collect debts that are allegedly not owed because the they have already been paid or the balance is incorrect. Consumers can have a hard time confirming the validity of medical debt because they are being dunned for services they thought were covered by their health insurance.

The CPFB found that about 70 million Americans, roughly one third of consumers with credit files, were contacted by a creditor or third-party debt collector attempting to collect a debt within the past year.

Henson was the second Supreme Court ruling benefiting debt buyers handed down in the last month or so.

The other, Midland v. Johnson, decided May 15, allows debt buyers to file proofs of claim in a bankruptcy case beyond the statute of limitations without violating the FDCPA. This creates an incentive for debt buyers to pursue expired claims.

Gorsuch did not participate in that 5-3 decision. Justice Breyer wrote the majority opinion, with a dissent by Justice Sonia Sotomayor, who was joined by Justices Ruth Bader Ginsburg and Elena Kagan.