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Debt Collection: A Primer on Fair Debt Collection Practices

Debt Collection: A Primer on Fair Debt Collection Practices


NCBA's The Litigator
(November 20, 2012)

These days, one can hardly open a web browser, turn on the radio, or visit a mailbox without encountering some reminder that we are a nation of debtors. Collectively, the amount of our outstanding balances is mind-boggling. U.S. consumers’ non-real estate indebtedness at the end of 2011 was $2.635 trillion.1 Further, last year approximately 30 million individuals—14 percent of American adults—had debt that was subject to the collections process.2

Some of this debt can be attributed to consumer spending choices or a consumer’s loss of a job. A sizable portion consists of medical costs, an issue upon which The New York Times, the Charlotte Observer, and the Raleigh News & Observer have reported in the last few months.3

Given the recent financial collapse and the lumbering economic recovery, creditors continue to feel intense pressure to collect overdue accounts and debtors have increasing difficulty paying their debts. To that end, creditors can work on their own behalf to recover money owed to them by consumers or turn to third-party collections groups for help. However, these efforts should be undertaken with deliberation.

Frustrated consumers who feel harassed have unprecedented access to information about their rights, a willing and able plaintiffs’ bar to bring their claims, and the ability to file online complaints with the Federal Trade Commission. Steep financial penalties, negative press coverage, and litigation costs are some of the consequences creditors and debt collectors can face if they run afoul of federal and state collections laws.

This article seeks to outline some of the issues that North Carolina businesses and their attorneys need to consider as they approach issues surrounding collection of overdue consumer debt—either directly or through a third party debt collection agency. The article addresses the federal Fair Debt Collection Practices Act and the North Carolina Debt Collection Act, as well as issues of vicarious liability related to the retention of third-party debt collectors.

The Legal Frameworks
While a panoply of laws address consumer protection and credit reporting, a full accounting of which is beyond the scope of this article, the chief laws concerning consumer debt collection in North Carolina (and among the most commonly cited in litigation) are the federal Fair Debt Collection Practices Act4 (FDCPA), and the North Carolina Debt Collection Act5 (NCDCA). These statutory regimes have much in common, but the scope of federal and state laws differs in significant ways. The FDCPA, for example, generally applies to any person who is in the business of debt collection from a consumer for another person or entity, but generally does not apply to a creditor collecting on its own account.6 The NCDCA, on the other hand, applies to any person engaged in debt collection from a consumer, including a creditor collecting its own accounts.7  Nevertheless, the NCDCA is limited by the “learned professional” exception in Chapter 75, which excludes professional service activities (e.g., legal or medical services), while the FDCPA has no similar exception. These statutes are described in more detail below.

The FDCPA
General Applicability.
Congress passed the FDCPA in 1977 to “eliminate abusive debt collection practices” and to protect law-abiding debt collectors from being put at a competitive disadvantage by the sharp practices of rule-breaking debt collectors.8 To achieve these goals, the FDCPA includes a private right of action for consumers, who can recover damages and attorneys’ fees for violations of the statute.9 To complicate matters for those regulated by the Act, the FDCPA is, in essence, a strict liability statute.10

Maintaining a suit under the FDCPA requires satisfaction of four essential elements: (1) a consumer (“any natural person obligated or allegedly obligated to pay any debt”); (2) a consumer debt (“any obligation … [incurred] primarily for personal, family or household purposes”); (3) a debt collector (any person using interstate commerce who regularly collects debts)11; and (4) a violation of the FDCPA. Typically two threshold questions determine whether the FDCPA applies, namely was the alleged “debt” for a consumer purpose and was the defendant a “debt collector.”

With respect to “consumer debt,” the Federal Trade Commission has published guidance as to the kinds of obligations that fall within the FDCPA.12 Such debts include, among others, medical bills, car purchases, credit card payments, dishonored checks used for the purchase of goods and services for family, household or personal purposes, and some student loans. Commercial debts, however, are not covered by the Act. Thus, whether a debt was for consumer or commercial purposes is a threshold inquiry for a creditor or collector pursuing a debt and for a consumer advocate evaluating a debtor’s FDCPA claim.

Next, all involved must evaluate whether the FDCPA reaches the entity seeking to collect the debt. The FDCPA applies to “debt collectors,” i.e., third-parties who regularly collect debts owed to another. Although not initially covered by the FDCPA, the Supreme Court has ruled that lawyers and law firms who “regularly” engage in attempts to collect debts owed another were “debt collectors” for purposes of the act.13 Creditors working to collect on their own account, on the other hand, are carved out of the FDCPA, unless they erroneously hold themselves out to be debt collectors.14

Additionally, the FDCPA works in concert with other laws regarding consumer debt and credit reporting. When bringing novel FDCPA claims, those representing consumers must examine whether the debt collector’s alleged violations are somehow addressed by other federal statutes or state law and whether certain state law provisions may be preempted. For example, claims based upon reporting debts to consumer reporting agencies or credit bureaus are preempted by federal law.15 Thus, when bringing or facing a claim related to debt collection, all involved should consider how the FDCPA interacts with state law. See Below.

Communications With Debtors Under the FDCPA

The FDCPA spells out certain dos and don’ts for debt collectors who contact consumer debtors. Harassment, false statements, and unfair practices are prohibited generally under the act. Among other rules and restrictions, the FDCPA:

  • Restricts the time of day for making phone calls to consumers;
  • Stops a debt collector from contacting a debtor who is known to be represented by legal counsel, unless the debtor’s lawyer fails to respond within a reasonable time;
  • Bans calls to the debtor’s workplace if the collector knows or should know that the debtor’s employer forbids such contacts;
  • Prevents use of post cards, see-through envelopes, or other stationery which could alert a third party of the debt and collection activities;
  • Prohibits use of obscene or profane language;
  • Forbids threats of violence or criminal conduct against anyone; and
  • Forbids harassment through use of repeat telephone calls or allowing a phone to ring repeatedly with the intent to annoy or harass.

Of course, given the general prohibition against false, deceptive, and misleading promises, this laundry list is necessarily incomplete. Debt collectors subject to the FDCPA must be careful about any questionable conduct that may “approach the line,” as courts will examine any allegedly improper conduct under a “least sophisticated consumer” standard, which is designed to ensure that the FDCPA protects “all consumers, the gullible as well as the shrewd.”16

Debt collectors also must be careful to make required disclosures to consumers. These go well beyond the familiar “THIS IS AN ATTEMPT TO COLLECT A DEBT” rider with which most attorneys are familiar. In particular, within five days of its initial communication with a consumer in connection with the collection of any debt, a debt collector must 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 the consumer may dispute the debt (or a portion thereof) within 30 days or the debt will be assumed to be valid; (4) a statement that the debt collector will obtain verification of the debt if the consumer disputes the debt writing within 30 days; and (5) a statement that upon the consumer’s request, she will be provided with the name and address of the original creditor.17 These disclosures are sometimes called a “mini-Miranda” warning. Failure to provide them can lead to liability under the FDCPA.

Damages. A debt collector who violates the FCDPA may be liable for actual damages; statutory damages for each violation not exceeding $1,000; or in the case of a class action, for an amount not to exceed the lesser of $500,000 or one percent of the net worth of the debt collector; and attorneys’ fees.18 In no small part, it appears that the attorneys’ fees provision of the statute helps power litigation. Many law firms in North Carolina and throughout the country specialize in bringing suit under the FDCPA on behalf of consumers, even though attorneys’ fees often will exceed the debt at issue.19 As an example, a recent case in Greensboro resulted in a judgment of $37,500 in damages, but the collection agency could be held liable for as much as $150,000 in attorneys’ fees.20

While the FDCPA is a strict liability statute, under limited circumstances, a debt collector may minimize or avoid liability for violations that were unintentional. If a violation resulted from a “bona fide” error, provided that the defendant can show that it adopted reasonable procedures to avoid such errors, liability may be avoided.21 The debt collector bears the burden of proving that its procedures were reasonably designed to avoid an error, but be aware that courts may consider the frequency of past violations in this calculus. Finally, another common defense is the statute of limitations, as suits brought for a violation of the FDCPA must be filed within one year of the violation.22

The NCDCA
The NCDCA shares many similarities to the FDCPA and seeks to address similar consumer debt collection practices. However, business counselors and consumer advocates must approach this statute differently because the NCDCA also applies to creditors seeking to recover their own debts.23

The Prima Facie Case. Before a claim for unfair debt collection can be substantiated under the NCDCA, a plaintiff must satisfy three threshold determinations. First, the obligation owed must be a “debt”; second, the one owing the obligation must be a “consumer”; and third, the one trying to collect the obligation must be a “debt collector.”24 Once these requirements are met, a claim for unfair debt collection practices must satisfy the three generalized requirements found in N.C.G.S. § 75-1.1 for all unfair and deceptive trade practice claims: (1) an unfair act (2) in or affecting commerce (3) proximately causing injury to the plaintiff.25

Like the FDCPA, the NCDCA contains laundry lists of prohibitions for debt collectors. Again, acts of threats and coercion, harassment, deceptive representation, use of unconscionable means, and certain contacts with third-parties about the consumer’s debt are prohibited. Even so, certain alleged “unfair acts” will be unavailing where the purported bad conduct falls either under the purview of other federal statutes or outside the NCDCA.26 As noted above, to the extent a plaintiff alleges that a report to credit reporting agencies constitutes a violation of the NCDCA or the North Carolina Unfair and Deceptive Trade Practices Act, such claims should be preempted by the federal Fair Credit Reporting Act (“FCRA”).27

Moreover, the NCDCA may not apply in certain situations that appear to fall within its scope. At first blush, creditors or debt collectors who have mistakenly sought to collect from the wrong individual would appear to be liable under the NCDCA. After all, a consumer is defined as “any natural person who has incurred a debt or alleged debt for personal, family, household or agricultural purposes.” However, cases interpreting the NCDCA have provided an avenue of escape. For example, a federal district court decision held that the NCDCA would not permit a claim by an individual alleging that the creditor tried to collect from the wrong person because the court determined that the plaintiff was not a “consumer” under the NCDCA. Notably, plaintiffs in these circumstances may be able to pursue other claims in court, but they should be foreclosed from bringing a claim under NCDCA.28

Learned Profession Exemption. Because the NCDCA is part of the State’s broader statutory structure to address unfair and deceptive trade practices, North Carolina courts have held that plaintiffs alleging a violation of NCDCA must satisfy the requirements of N.C.G.S. § 75-1.1—including the requirement that defendant’s actions are “in or affecting commerce.” In North Carolina, “commerce” includes “all business activities, however denominated, but does not include professional services rendered by a member of a learned profession (e.g., legal and medical professionals and their businesses).”29 Under this “learned professional” exception, a NCDCA claim against a professional who qualifies for the exemption fails as a matter of law.30 Thus, whenever a professional service provider is involved in the debt itself or in the collection, all involved must assess the effect of this exception on any NCDCA claim.

Damages. In 2009, the damages provision of the NCDCA was amended such that a debt collector who violates the article can be liable for any actual damage sustained by the debtor and civil penalties in the amount of $500 – $4,000, per violation. Damages are cumulative, and both punitive damages and attorneys’ fees can be awarded to the consumer.31

Issues Concerning Vicarious Liability
Under traditional agency principles, a business generally is legally responsible for actions of its employees within the scope of their employment under respondeat superior. However, the agency inquiry is less clear when collection is pursued by a third-party independent contractor.32 The general rule is that a principal is not liable for the torts of an independent contractor which it does not control, so long as the principal has used ordinary care to secure a competent contractor. Since a creditor is not directly liable under the FDCPA, its liability typically does not increase based upon the collection efforts of a third-party independent contractor, although cases on this issue are rare.33 Under the NCDCA, a creditor can be liable for collection of its own debt and may face derivative liability for actions of a third-party independent contractor in certain situations. Thus, creditors must use some degree of diligence in selecting and retaining a third-party collection agency.

In the absence of negligence in the selection of a collection agency, the derivative liability inquiry involves a multi-part test evaluating the degree and types of control that the creditor has over the collection agency.34 A court’s evaluation of the vicarious liability question will include review of the written contract between the creditor and collection agency and, if necessary, an evaluation of the business relationship at issue, including the creditor’s direction or authorization of collection activities, payment mechanisms, and general independence. This issue has arisen in the Fourth Circuit; based upon the facts of that case, the court affirmed a judgment holding that a hospital was not vicariously liable for the conduct of its retained collection agency.35 The court held that the hospital “established that it neither controlled nor had the right to control the work of” the collection agency and, thus, could not be held vicariously liable. Even if a creditor is successful in avoiding direct liability for actions of its retained collection agency, it should be aware of any rights to indemnity or other contractual remedies if liability results from an error or instruction by the creditor.

Conclusion
State and federal laws governing consumer debt collection are complex, providing challenges to parties and counsel seeking to bring and to defend such legal actions. Statutory structures at the federal and state level provide claims for certain individuals based upon certain actions (or inactions) related to certain debts. However, these statutes do not encompass every effort to collect amounts due from individuals. Further, the rights under the two acts are not identical (or even parallel in many cases) and several avenues exist to limit or avoid liability for such activities, whether taken directly by a creditor or by a third-party collection agency. Plaintiffs must evaluate all statutes potentially at issue before bringing such a claim. Similarly, businesses should be deliberate when selecting and retaining a collection agency and when facing a claim arising from efforts at collecting debts from individuals.

This article originally appeared in the June 2012 issue of The Litigator, published by the NCBA’s Litigation Section.

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1. Fed. Reserve Bank of N.Y., Research & Statistics Grp., Quarterly Rep. on Household Debt & Credit (February 2012), available at http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q42011.pdf.
2. Consumer Fin. Prot. Bureau, Fair Debt Collection Practices Act Annual Rep. (March 2012), available at http://files.consumerfinance.gov/f/201203_cfpb_FDCPA_annual_report.pdf.
3. Jessica Silver-Greenberg, Debt Collector Is Faulted for Tough Tactics in Hospitals, N.Y. Times, April 24, 2012 (available at http://www.nytimes.com/2012/04/25/business/debt-collector-is-faulted-for-tough-tactics-in-hospitals.html?_r=2&hp); Joseph Neff, Persistent Collections not Unique to Charlotte Area, Charlotte Observer, April 23, 2012 (available at http://www.charlotteobserver.com)
4. 15 U.S.C. §§1692 et seq.
5. N.C. Gen. Stat. §§ 75-50 et seq.
6. 15 U.S.C. § 1692a(6).
7. N.C.G.S. § 75-50(3).
8. 15 U.S.C. § 1692(e).
9. 15 U.S.C. § 1692k(3).
10. Davis v. TransUnion, LLC, 526 F. Supp. 2d 577, 586 (W.D.N.C. 2007); Bentley v. Great Lakes Collection Bureau, Inc., 6 F.3d 60 (2d Cir. 1993); Russell v. Equifax, 74 F.3d 30 (2d Cir. 1996).
11. 15 U.S.C. § 1692a.
12. Federal Trade Commission—Statements of General Policy or Interpretation Staff Commentary on the Fair Debt Collection Practices Act, 53 Fed. Reg. 50097-50, 100-02 (1988).
13. Heintz v Jenkins, 514 U.S. 291, 299 (1995).
14. 15 U.S.C. § 1692a(6); Davis v. Dillard Nat’l Bank, No. 1:02CV00546, 2003 U.S. Dist. LEXIS 9420, *11-12 (M.D.N.C. June 4, 2003).
15. See 15 U.S.C. § 1681t(b)(1)(F) (“No requirement or prohibition may be imposed under the laws of any State (1) with respect to any subject matter regulated under . . . (F) section 1681s-2 of this title, relating to the responsibilities of persons who furnish information to consumer reporting agencies . . .”).
16. United States v. Nat’l Fin. Servs. Inc., 98 F.3d 131, 136 (4th Cir. 1996) (explaining that the least sophisticated consumer test protects “naive consumers,” and also “prevents liability for bizarre or idiosyncratic interpretations of collection notices by preserving a quotient of reasonableness and presuming a basic level of understanding and willingness to read with care”).
17. 15 U.S.C. § 1692g.
18. 15 U.S.C. § 1692k.
19. See Zagorski v. Midwest Billing Services, Inc., 128 F.3d 1164, 1167 (7th Cir. 1997) (purpose of this fee-shifting provision is to attract competent counsel); Graziano v. Harrison, 950 F.2d 107, 113 (3d Cir. 1991) (in litigation under the FDCPA, an award of attorney fees is mandatory, not discretionary); see also In Re Boddy, 950 F.2d 334 (6th Cir. 1991).
20.Russell v. Absolute Collection Serv., No. 1:09CV515 (M.D.N.C. April 14, 2012).
21. 15 U.S.C. §1692k(c).
22. 15 U.S.C. §1692k(d).
23. N.C.G.S. § 75-50(3).)
24. N.C.G.S. § 75-50(1)-(3); Reid v. Ayers, 138 N.C. App. 261, 262-263; 531 S.E.2d 231, 233-234 (2000).
25. Reid at 264-265, 531 S.E.2d at 234 (citing First Atl. Mgmt. Corp. v. Dunlea Realty Co., 131 N.C. App. 242, 252, 507 S.E.2d 56, 63 (1998)).
26. N.C.G.S. § 75-56(a).
27. See 15 U.S.C. § 1681t(b)(1)(F); see also Ross v. FDIC, 625 F.3d 808, 813 (4th Cir. 2010), cert. denied, 131 S.Ct. 2991 (2011).
28. Fisher v. Eastern Air Lines, Inc., 517 F. Supp. 672, 673 (M.D.N.C. 1981); see also Jenkins v. Allied Interstate, Inc., No. 5:08-CV-125-DCK, 2009 U.S. Dist. LEXIS 94183, *13 (W.D.N.C. Sept. 28, 2009) (adopting reasoning from Fisher and stating that “to be entitled to protection under the North Carolina statute prohibiting certain acts by debt collectors, the person must have had at least some connection with the underlying debt or alleged debt. Plaintiff does not meet this criteria because, as both the Plaintiff and Defendant acknowledge, the Plaintiff had not actually incurred the debt that the Defendant sought to collect.”).
29. N.C.G.S. § 75-1.1(b).
30. Godfredson v. JBC Legal Grp., P.C., 387 F. Supp. 2d 543, 548-549 (E.D.N.C. 2005); David Lake Cmty. Ass’n v. Feldmann, 138 N.C. App. 292, 297, 530 S.E.2d 865, 869 (2000).
31. N.C.G.S. § 75-56(b), (c); Friday v. United
Dominion Realty Trust, Inc., 155 N.C. App. 671, 575 S.E.2d 532 (2003).
32. Charles E. Daye & Mark W. Morris, North Carolina Law of Torts § 23.30 (2d ed. 1999); Market America, Inc. v. Christman-Orth, 135 N.C. App. 143, 152, 520 S.E.2d 570, 577 (1999).
33. Price v. Brock & Scott, PLLC, No. 1:10CV40, 2011 U.S. Dist. LEXIS 38275 (M.D.N.C. Apr. 6, 2011); Bradford v. HSBC Mortg. Corp., 2011 U.S. Dist. LEX¬IS 141658. *20 (E.D. Va. Dec. 8, 2011) (a “creditor cannot incur vicarious liability for FDCPA violations by an independent debt collector that acts on the creditor’s behalf”).
34. North Carolina Law of Torts § 23.20 (identifying factors and supporting cases); see also Hayes v. Elon College, 224 N.C. 11, 16, 29 S.E.2d 137, 140 (1944) (listing factors identified by the North Carolina Supreme Court).
35. See Judy v. Fid. Nat’l Collections, No. 1:02CV156, 2003 U.S. Dist. LEXIS 27547, *24 (N.D.W.V. Nov. 7, 2003), aff’d, Judy v. W. Va. Univ. Bd. of Governors, 118 Fed. Appx. 737 (4th Cir. 2004).

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