Opinions of the United 2007 Decisions States Court of Appeals for the Third Circuit
9-6-2007
FTC v. Check Investors Inc Precedential or Non-Precedential: Precedential
Docket No. 05-3558
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2007
Recommended Citation "FTC v. Check Investors Inc" (2007). 2007 Decisions. Paper 353. http://digitalcommons.law.villanova.edu/thirdcircuit_2007/353
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova University School of Law Digital Repository. It has been accepted for inclusion in 2007 Decisions by an authorized administrator of Villanova University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu. PRECEDENTIAL
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
Nos: 05-3558/3957
FEDERAL TRADE COMMISSION
v.
CHECK INVESTORS, INC.; CHECK ENFORCEMENT; JAREDCO, INC.; BARRY S. SUSSMAN; ELIZABETH M. SUSSMAN; CHARLES T. HUTCHINS
Charles T. Hutchins,
Appellant No. 05-3558
Case No: 05-3957
CHECK INVESTORS, INC.; CHECK ENFORCEMENT; JAREDCO, INC.; BARRY S. SUSSMAN; ELIZABETH M. SUSSMAN; CHARLES T. HUTCHINS
O:\PRECEDENTIAL\2005\053558p.wpd 1 Check Investors, Inc., Check Enforcement, Jaredco, Inc., Barry S. Sussman
Appellants No. 3957
Appeal from the United States District Court for the District of New Jersey (Civ. No. 03-cv-02115) District Judge: Hon. John W. Bissell
Argued October 4, 2006
Before: McKEE, AMBRO, NYGAARD, Circuit Judges,
(Opinion filed: September 6, 2007 )
CHARLES T. HUTCHINS, ESQ. (Argued) KBR LOGCAP III HQ APO AE 09342 Pro se
STEPHEN ROBERT LaCHEEN, ESQ. (Argued) ANNE M. DIXON, ESQ. 1429 Walnut Street Suite 1301 Philadelphia, PA 19106 Attorneys for Appellants, Check Investors, Inc., Check Enforcement, Inc., Jaredco, Inc., and Barry Sussman O:\PRECEDENTIAL\2005\053558p.wpd 2 WILLIAM BLUMENTHAL, ESQ. General Counsel, Federal Trade Commission JOHN F. DALY, ESQ. Deputy General Counsel for Litigation, Federal Trade Commission LAWRENCE DeMILLE-WAGMAN, ESQ. (Argued) Attorney, Federal Trade Commission 600 Pennsylvania Avenue, N.W. Washington, D.C. 20580 Attorneys for Appellee
OPINION
McKEE, Circuit Judge.
Check Investors, Inc., Check Enforcement, Inc., Jaredco,
Inc., Barry Sussman (hereinafter collectively “Check
Investors”)1 and Charles T. Hutchins2 appeal the district court’s
grant of injunctive relief and $10.2 million in fines in this action
1 Barry Sussman is or was the Vice-President of Check Investors, Inc., and the President of Check Enforcement, Inc., and Jaredco, Inc. 2 Charles T. Hutchins is or was general counsel to Check Investors, Jaredco and Check Enforcers. O:\PRECEDENTIAL\2005\053558p.wpd 3 that the Federal Trade Commission initiated against them. The
FTC claimed that their debt collection practices violated the
Federal Trade Commission Act (“FTC Act”), 15 U.S.C. §§ 41
et seq., and various provisions of the Fair Debt Collection
Practices Act (“FDCPA”), 15 U.S.C. §§ 1692 et seq. For the
reasons that follow, we will affirm.
I. FACTS3
Check Investors is in the business of purchasing large
numbers of checks written on accounts with insufficient funds
(“NSF checks”). The payors of those checks typically wrote
them in connection with retail transactions and purchases.
Check Investors purchased over 2.2 million NSF checks having
an estimated face value of approximately $348 million. The
checks were purchased from companies such as Telecheck, Inc.,
3 The facts are not in dispute. O:\PRECEDENTIAL\2005\053558p.wpd 4 Certegy, Inc., and Cross Check, Inc. (collectively “Telecheck”).
Telecheck is in the business of guaranteeing checks
tendered to pay for consumer transactions. When checks are
dishonored, Telecheck pays the merchant/payee the full face
value of the check, thereby making the merchant whole. The
merchant therefore has no need to attempt to collect the check
from the payor/customer. In return for the payment, the
merchant assigns all of its rights and benefits to Telecheck, and
Telecheck then attempts to collect on the defaulted check to
reimburse itself for its payment.
Telecheck first attempts to collect by making three
electronic re-presentments of an NSF check to the financial
institution the instrument was drawn on. If unsuccessful,
Telecheck then sends the payor notices and attempts to contact
him/her by telephone. This process may continue for
approximately sixty to ninety days. If these efforts fail, O:\PRECEDENTIAL\2005\053558p.wpd 5 Telecheck hires a debt collector, who makes further attempts to
collect on the check from the payor. If the debt collector is not
able to collect after six months to a year, Telecheck contracts
with a second debt collector. Both the first and second debt
collectors work on a contingency basis, and, if successful, will
receive one-third of the payment received. If the second debt
collector is also unsuccessful, Telecheck sells the rights it
acquired from the original merchant to Check Investors, and
Check Investors initiates additional collection efforts.
Initially, Check Investors collected NSF checks on behalf
of large retail clients. However, by 2002 it was purchasing NSF
checks from check guarantee companies such as Telecheck for
pennies on the dollar and collecting on its own behalf as part of
the process we have just described.
According to the Federal Trade Commission, Check
Investors was the brainchild of Barry Sussman. After O:\PRECEDENTIAL\2005\053558p.wpd 6 graduating from law school (and after serving time in prison for
attempting to collect debts by posing as an FBI agent), Sussman
theorized that if a debt collection business collected only debts
it actually owned based on purchasing NSF checks, it would not
be subject to the FDCPA, and would therefore be free to use
collection techniques prohibited by the FDCPA such as
harassment and deception.
In collecting checks, Check Investors routinely added a
fee of $125 or $130 to the face amount of each check; an
amount that exceeded the legal limit for such fees under the
laws of most states. Check Investors would then aggressively
dun the defaulting payors without disclosing either the original
face amount of the check, or that the amount it was demanding
in “satisfaction” of the check included a fee that was higher than
permitted under the laws of the applicable state.
Check Investors used both dunning letters and phone O:\PRECEDENTIAL\2005\053558p.wpd 7 calls to collect debts. However, its primary modus operandi
was to accuse consumers of being criminals or crooks, and
threatening them with arrest and criminal or civil prosecution.
The collectors it employed were provided with a script that
directed them to begin calls by advising consumers that a
“criminal complaint recommendation” was pending, and that
the consumer would be arrested and prosecuted if he/she did not
pay the amount demanded in full. Collectors were allowed to
personalize the approach they used, but the approach always
focused on threats of prosecution. By way of example, one of
Check Investor’s collectors left the following message on a
consumer’s answering machine:
This message is for the criminal check writer, Stephanie . If you think that you could rip these merchants off with your hot checks and hide behind your telephone, I guess you’ll just have to explain to the judge why you stole from this merchant, from [name of merchant], with your fraudulent check. At this moment, we do not O:\PRECEDENTIAL\2005\053558p.wpd 8 have any intentions of working this matter out with you voluntarily. You may need to turn yourself in to the local county sheriff’s office.
Another consumer was told that if she did not pay, her children
would “watch their mother being taken away in handcuffs,” and
they would “be bringing their mommy care packages in prison.”
Check Investors also threatened consumers by sending
a form collection letter that purported to be from defendant
Hutchins, who as noted, see n.2, supra, is an attorney. The
letter informed the recipient that Hutchins had been retained by
a client who was considering taking criminal or civil action.
Hutchins did not actually send the letters or sign them, he had
no idea about the number of letters that were sent out purporting
to be from him, and he made no inquiry about the status of any
of the debts underlying the letters that were sent.4
4 Hutchins claims that he established numerous (continued...) O:\PRECEDENTIAL\2005\053558p.wpd 9 Check Investors’ threats of prosecution were made
without regard to the amount of the underlying obligation.
Employees of Check Investors told one consumer who allegedly
wrote an NSF check for $14.70 that she would be “sitting in
jail” unless she immediately paid $144.70 (the amount of the
original check plus Check Investors’ additional fee of $130).
Faced with the threat, the consumer paid the full amount
demanded.
Check Investors’ threats of prosecution were all false. It
never notified law enforcement authorities, nor did it take any
steps to initiate civil suit against any consumer. Indeed,
perhaps because of the small face amount of many of the debts
4 (...continued) procedures to screen out innocent victims of fraud, identity theft, checks listed in bankruptcy, stop-payment checks and disputed checks to ensure that Check Investor’s recovery actions related only to NFS checks. O:\PRECEDENTIAL\2005\053558p.wpd 10 it was collecting, Hutchins conceded that it would have been a
“ridiculous proposition” to file suit.
Check Investors’ tactics apparently knew no limits. It
routinely contacted family members of obligors. In one case,
Check Investors’ repeatedly called a 64-year old mother
regarding her son’s debt; fearing that her son would be arrested
and carted off to jail, she paid the amount of the demand.
Another technique that Check Investors employed can best be
described as “saturation phoning.” One consumer stated that
Check Investors’ collectors called him 17 times in 10 minutes.
Collectors also used abusive language, referring to consumers
as “deadbeats,” “retards,” “thieves,” and “idiots.” The tactics
often yielded results. Between January 1, 2000, and January 6,
2003, Check Investor’s collection efforts netted $10.2 million
from more than 42,000 consumers.
II. DISTRICT COURT PROCEEDINGS O:\PRECEDENTIAL\2005\053558p.wpd 11 On May 12, 2003, the Federal Trade Commission filed
a seven-count complaint in the United States District Court for
the District of New Jersey against Check Investors5 and
Hutchins alleging that they had violated Section 5(a) of the FTC
Act, 15 U.S.C. § 45(a), and various provisions the FDCPA, in
their attempts to collect from consumers who had written NSF
checks. More specifically, the FTC alleged that Check
Investors was a “debt collector,” collecting “debts”, within the
meaning of the FDCPA. The complaint further alleged that, in
the course of collecting debts, Check Investors had violated,
inter alia, 15 U.S.C. § 1692d (by using abusive language, and
calling consumers repeatedly); § 1692e (by falsely representing
that communications came from an attorney, by falsely
5 Barry Sussman’s wife, Elisabeth Sussman, was also named as a defendant. However, on October 5, 2004, the district court entered a Stipulation and Order settling all claims against her. O:\PRECEDENTIAL\2005\053558p.wpd 12 representing that the consumer would be arrested or imprisoned
or had committed a crime, and by falsely threatening legal
action); and § 1692f (by adding impermissible charges to the
face amounts of the debts it was collecting). The complaint also
alleged that many of the acts that violated the FDCPA also
violated the FTC Act. The FTC sought to enjoin Check
Investors’ conduct and obtain restitution for injured consumers,
including a refund of the money Check Investors had collected
using these techniques.
The district court issued a temporary restraining order
enjoining Check Investors from engaging in the conduct alleged
in the FTC’s complaint, and the court also froze most of Check
Investors’ assets.6 On August 14, 2003, the district court
6 Check Investors did not deny the tactics that FTC alleged. Rather, it insisted that the NSF obligations it was attempting to collect were not subject to the FDCPA or the (continued...) O:\PRECEDENTIAL\2005\053558p.wpd 13 entered a preliminary injunction against Check Investors, which
continued the injunctive provisions and the asset freeze of the
TRO.
Both parties thereafter filed cross-motions for summary
judgment. The district court granted the FTC’s motion and
denied Check Investors’ motion. Check Investors did not
dispute that it engaged in any of the conduct alleged in the
FTC’s complaint, and there was therefore no genuine issue of
material fact about its collection tactics. Rather, Check
Investors opposed the FTC’s motion for summary judgment
(and supported its own motion for summary judgment) by
arguing that the FDCPA did not apply because it was collecting
NSF checks that it had purchased outright from the original
payees. According to Check Investors, it was therefore acting
6 (...continued) FTC Act. O:\PRECEDENTIAL\2005\053558p.wpd 14 as a creditor collecting its own obligations rather than as debt
collector collecting obligations owed to a third party.
Check Investors also argued that the payors on the NSF
checks it had purchased had violated state laws pertaining to
presenting “bad checks” and by committing fraud. Accordingly,
in Check Investors view, the payors should be considered
criminals or tortfeasers, not consumers, and they were therefore
not entitled to the consumer protection of the FDCPA.
The district court rejected these arguments, in part
because Check Investors presented no evidence to show that all
the payors in question had the intent required for criminal or
civil liability when they wrote the checks. The court also held
that persons who write NSF checks are entitled to the FDCPA’s
protections in any event. The district court thus held that Check
Investors was a “debt collector” collecting “debts” within the
meaning of the FDCPA, and that it was therefore subject to the O:\PRECEDENTIAL\2005\053558p.wpd 15 prohibitions that Act places on debt collectors’ efforts to collect
debts. Finally, the court held that Check Investors made
material misrepresentations in the course of its collections, and
that these misrepresentations also violated the FTC Act.
The district court permanently enjoined Check Investors
from engaging in any debt collection activities or selling any of
the debts that consumers purportedly owed to it. The court
concluded that all defendants were jointly and severally liable
to the FTC for restitution in the amount of $10,204,445.00.
Thereafter, Hutchins (No. 05-3558), and Check Investors (No.
05-3957) appealed the court’s ruling.7
III. THE FAIR DEBT COLLECTION PRACTICES
ACT
“The FDCPA was enacted in 1977 as an amendment to
7 Check Investors has filed a brief in support of its appeal and has joined in the brief filed by Hutchins. O:\PRECEDENTIAL\2005\053558p.wpd 16 the Consumer Credit Protection Act ‘to protect consumers from
a host of unfair, harassing, and deceptive collection practices
without imposing unnecessary restrictions on ethical debt
collectors.’” Staub v. Harris, 626 F.2d 275, 276-77 (3d Cir.
1980) (quoting Consumer Credit Protection Act, S. Rep. No.
95-382, at 1-2 (1977), reprinted in 1977 U.S.C.C.A.N. 1695,
1696). “The primary goal of the FDCPA is to protect
consumers from abusive, deceptive, and unfair debt collection
practices, including threats of violence, use of obscene
language, certain contacts with acquaintances of the consumer,
late night phone calls, and simulated legal process.” Bass v.
Stolper, Koritzinsky, Brewster & Neider, S.C., 111 F.3d 1322,
1324 (7th Cir. 1997) (citation omitted). “A basic tenet of the Act
is that all consumers, even those who have mismanaged their
financial affairs resulting in default on their debt, deserve the
right to be treated in a reasonable and civil manner.” Id. O:\PRECEDENTIAL\2005\053558p.wpd 17 (citation omitted).
Although Check Investors uses broad strokes to paint all
of the payors of its NSF checks as deadbeats, criminals and/or
tortfeasors, Congress’s findings in enacting the FDCPA are to
the contrary. The relevant Senate report noted, inter alia, that
[o]ne of the most frequent fallacies concerning debt collection legislation is the contention that the primary beneficiaries are “deadbeats.” In fact, however, there is universal agreement among scholars, law enforcement officials, and even debt collectors that the number of persons who willfully refuse to pay debts is minuscule.
S. Rep. No. 93-382, at 2 (1977), reprinted in 1977 U.S.C.C.A.N.
at 1696. Rather, Congress recognized that “the vast majority of
consumers who obtain credit fully intend to repay their debts.
When default occurs, it is nearly always due to an unforeseen
event such as unemployment, overextension, serious illness or
marital difficulties or divorce.”
Id. Congress also recognized that “[a]busive debt collection O:\PRECEDENTIAL\2005\053558p.wpd 18 practices contribute to the number of personal bankruptcies, to
marital instability, to the loss of jobs, and to invasions of
individual privacy.” 15 U.S.C. § 1692(a). Thus, Congress
concluded that “[t]he issue is not one of uncollected debts, but
rather whether or not consumers must lose their civil rights and
be terrorized and abused by unethical debt collectors.” H.R.
Rep. No. 95-131, at 3 (1977).
“In the most general terms, the FDCPA prohibits a debt
collector from using certain enumerated collection methods . .
. to collect a ‘debt’ from a consumer.” Bass, 111 F.3d at 1324.
The FDCPA prohibits debt collectors from, inter alia, engaging
in any conduct “the natural consequence of which is to harass,
oppress, or abuse any person,” 15 U.S.C. § 1692d; from using
“any false, deceptive, or misleading representations or means in
connection with the collection of any debt,” 15 U.S.C. § 1692e;
or from using “unfair or unconscionable means to collect or O:\PRECEDENTIAL\2005\053558p.wpd 19 attempt to collect any debt,” 15 U.S.C. § 1692f.
Within each broad category of prohibited conduct, the
FDCPA includes examples of specific practices that are
prohibited. Those prohibited practices could have been
modeled on the various tactics Check Investors employed to
collect the NSF checks it purchased. For example, the
prohibition on harassing, oppressive or abusive practices
precludes a debt collector from using abusive language, 15
U.S.C. § 1692d(2), or from repeatedly calling a consumer, 15
U.S.C. § 1692d(3). The prohibition on false, deceptive or
misleading representations precludes a debt collector from
falsely representing that a dunning letter was sent by an
attorney, 15 U.S.C. § 1692e(3), from falsely representing that
nonpayment will result in arrest or imprisonment, 15 U.S.C. §
1692e(4), or that a consumer committed a crime, 15 U.S.C. §
1692e(7). The prohibition on unfair or unconscionable O:\PRECEDENTIAL\2005\053558p.wpd 20 practices precludes a debt collector from adding any charge to
the underlying debt unless that charge is authorized by law or
the agreement creating the debt. 15 U.S.C. § 1692f(1).
The FDCPA allows consumers to sue an offending
creditor for actual damages, attorney’s fees and costs, as well as
statutory damages up to $1,000 . 15 U.S.C. § 1692k(a). The
FDCPA also provides the FTC with enforcement authority. 15
U.S.C. § 1692l(a).
IV. THE FEDERAL TRADE COMMISSION ACT
Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), prohibits,
inter alia, “unfair or deceptive acts or practices in or affecting
commerce.” Section 13(b), 15 U.S.C. § 53(b), provides that “in
proper cases the Commission may seek, and after proper proof,
the [district] court may issue, a permanent injunction.” “The
deceptive acts or practices forbidden by the [FTC] Act include
those used in the collection of debts.” Trans World Accounts, O:\PRECEDENTIAL\2005\053558p.wpd 21 Inc. v. FTC, 594 F.2d 212, 214 (9th Cir. 1979). Trans World
was a debt collection agency that sent out a series of five or six
dunning letters, in a format that closely resembled Western
Union Telegrams, that threatened immediate legal action against
the debtors if payment was not made within a specified period.
Id. In reality, however, it took Trans World about ninety days
from the receipt of the first letter to even consider whether legal
action should be taken against any individual debtor. Id.
The FTC issued an administrative complaint charging
Trans World with the commission of unfair and deceptive
practices in violation of Section 5 of the FTC Act. Id. The
complaint alleged that the letters misrepresented the imminence
of legal action, and that they were deceptive in format because
they were made to look like Western Union telegrams. Id. An
administrative law judge entered a decision sustaining the
allegations of the complaint, and Trans World appealed to the O:\PRECEDENTIAL\2005\053558p.wpd 22 FTC. Id. The FTC adopted, in large measure, the findings and
conclusions of the ALJ and entered an order prohibiting the
practices used in the collection process. Id. On Trans World’s
petition for review, the Court of Appeals for the Ninth Circuit
found, inter alia, that there was substantial evidence supporting
the finding of deception in the use of the letter format that
closely resembled telegrams, which letters threatened legal
action when no action was contemplated. Id. at 215.
In Floersheim v. FTC, 411 F.2d 874 (9th Cir. 1969), the
seller of forms used to help creditors collect debts petitioned for
review of a cease and desist order of the FTC. The court held
that the evidence supported the FTC’s finding that the seller’s
forms, which were mailed from the seller’s Washington, D.C.,
office even though the seller lived in and sold the forms from
Los Angeles, California, which repeated the words,
“Washington, D.C.,” and used an elaborate type style so as to O:\PRECEDENTIAL\2005\053558p.wpd 23 simulate legal documents, were deceptive in exploiting the
assumption of many low income debtors that anything that
official-looking coming from Washington, D.C., had been sent
by the federal government.
V. DISCUSSION
Neither Check Investors nor Hutchins disputes the FTC’s
claim that they employed harassing and abusive tactics to
collect NSF checks or that they collected amounts in excess of
the amounts allowed by law. Rather, as noted earlier, they
argue that the FDCPA and the FTC Act do not apply to them
because they were not collecting “debts,” the people who wrote
the NSF checks were not “consumers,” and they were not “debt
collectors,” as those terms are defined in the FDCPA.8 Each
8 These are purely legal questions over which we have plenary review. Centerpoint Properties v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 (continued...) O:\PRECEDENTIAL\2005\053558p.wpd 24 argument is discussed separately below.9
A. Are the NSF Checks “Debts” Under the FDCPA?
“A threshold requirement for application of the FDCPA
is that the prohibited practices are used in an attempt to collect
a ‘debt.’” Zimmerman v. HBO Affiliate Group, 834 F.2d 1163,
1167 (3d Cir. 1987). Congress incorporated a broad definition
of both “debt” and “debt collector” into the FDCPA in order to
achieve its remedial purpose. 15 U.S.C. §§ 1692a(5), 1692a(6).
The FDCPA defines a “debt” as
any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject to the transaction are primarily for personal, family, or
8 (...continued) F.3d 205, 208 (3d Cir. 2001). 9 Check Investors makes its own arguments in its appeal and has adopted the arguments Hutchins makes in his appeal. O:\PRECEDENTIAL\2005\053558p.wpd 25 household purposes, whether or not such obligation has been reduced to judgment.
15 U.S.C. § 1692a(5) (emphasis added).
Appellants claim that the FDCPA does not apply to them
because the NSF checks they purchased were not “debts” within
the meaning of the FDCPA. They begin by noting that all 50
states criminalize the act of writing a check knowing that it will
be dishonored; and that the law of many states creates a
presumption of knowledge and/or willfulness when a check is
written on insufficient funds and not paid within a certain period
after it has been dishonored, or after the payor receives notice
that it has been dishonored. Appellants also stress that since
writing a fraudulent check gives rise to tort liability, and since
they only attempted to collect NSF checks after a presumption
of knowledge or willfulness arose under state law, their NSF
checks were not “debts” within the meaning of the FDCPA
O:\PRECEDENTIAL\2005\053558p.wpd 26 because they did not arise out of a consumer “transaction.”
Rather, according to Appellants, their NSF checks arose out of
criminal or tortious conduct.10
Four Courts of Appeals have rejected this argument. and
held that payment with a NSF check creates a “debt” as defined
in the FDCPA. See Bass, 111 F.3d at 1322; Duffy v. Landberg,
133 F.3d 1120 (8th Cir. 1998); Charles v. Lundgren & Assocs.,
119 F.3d 739 (9th Cir. 1997); Snow v. Riddle, 143 F.3d 1350
(10 Cir. 1998).
The Court of Appeals for the Seventh Circuit was first to
reject this argument in Bass, and its analysis has been followed
by three other courts of appeals. In Bass, the court explained:
10 However, Check Investors and Hutchins do not dispute the fact that the obligors they attempted to collect from used the checks in question to obtain “money, property, insurance, or services primarily for personal, family, or household purposes.” O:\PRECEDENTIAL\2005\053558p.wpd 27 [T]he plain language of the Act defines “debt” quite broadly as “any obligation to pay arising out of a [consumer] transaction.” In examining this definition, we first focus on the clear and absolute language in the phrase, “any obligation to pay.” Such absolute language may not be alternatively read to reference only a limited set of obligations as appellants suggest. As long as the transaction creates an obligation to pay, a debt is created. We harbor no doubt that a check evidences the drawer’s obligation to pay for the purchases made with the check, and should the check be dishonored, the payment obligation remains.
111 F.3d at 1325 (citations omitted) (emphasis added); see also
Duffy, 133 F.3d at 1123 (“Since a check written by a consumer
in a transaction for goods or services evidences the ‘drawer’s
obligation to pay’ and this obligation remains even if the check
is dishonored, abusive collection practices related to the
dishonored check are prohibited by the FDCPA.”) (quoting
Bass, 111 F.3d at 1325).
Although we have not yet addressed this precise issue,
we have held that a transaction’s status as a “debt” under the O:\PRECEDENTIAL\2005\053558p.wpd 28 FDCPA must be determined at the time that the obligation first
arose. See Pollice v. National Tax Funding, L.P., 225 F.3d 379,
400 (3d Cir. 2000). In Pollice, we held that water and sewer
obligations constituted a “debt” based on their status when they
first arose, and they remained a “debt” after assignment to a
collection agency. Thus, our view of a “debt” under the
FDCPA is consistent with the four courts of appeals that have
held that an NSF check is a “debt.”
Nonetheless, Check Investors and Hutchins attempt to
circumvent the impact of our analysis in Pollice by relying on
our earlier decision in Zimmerman v. HBO Affiliates Group, 834
F.2d 1163 (3d Cir. 1987). In Zimmerman, we held that the
FDCPA did not apply to attempts by cable television companies
to collect money from people who allegedly stole cable
television signals by installing illegal antennas. Id. at 1167-69.
Check Investors and Hutchins now argue that since the payors O:\PRECEDENTIAL\2005\053558p.wpd 29 on its NSF checks were also subject to criminal or tort liability,
Zimmerman compels the conclusion that the FDCPA does not
apply to their collection efforts. We disagree.
In Zimmerman, we explained that the FDCPA was
enacted to protect people who have “contracted for goods or
services and [are] unable to pay for them,” and that it was not
intended to “protect against a perceived problem with the use of
abusive practices in collecting tort settlements from alleged
tortfeasors through threats of legal action.” Id. at 1168. We
also explained this in Pollice, 225 F.3d at 401 n.24, by noting:
“[c]learly, there was no ‘debt’ in Zimmerman because the
obligations arose out of a theft rather than a ‘transaction.’”
Check Investors and Hutchins argue that the payors on
their NSF checks are similarly situated to the “consumers” who
stole cable television signals in Zimmerman, and that, like those
“consumers,” the payors here are not entitled to the protection O:\PRECEDENTIAL\2005\053558p.wpd 30 embodied in the FDCPA because they are criminals and
tortfeasors rather than “consumers.” They argue that, as in
Zimmerman, no “debt” was created by executing the NSF
checks here because there was no “transaction,” as that term is
commonly understood and as it is used in the FDCPA.
As the court explained in Bass when rejecting identical
arguments there:
Appellants misstate the law when they categorize all dishonored checks as criminal and tortious. Both under the common law of fraud, a specific intent crime, and under most criminal statutes which specifically address dishonored checks, liability attaches only if the drawer either knew or intended that the check be dishonored at the time the check was drawn. A bank may refuse payment on a check for a variety of reasons lacking in the necessary fraudulent intent: administrative holds on the account of which the drawer is unaware, bank error, and the drawer’s reliance on deposited checks that themselves are dishonored, to name a few. Even when the drawer is at fault for the dishonor, the requisite intent may be absent – for example, when the drawer makes a simple miscalculation or has a O:\PRECEDENTIAL\2005\053558p.wpd 31 subsequent emergency need for funds.
We recognize that by the time a dishonored check has been turned over to a third party collector, the issuer has typically received notice of dishonor yet has still refused to pay. Nevertheless, an issuer whose intention not to pay the check arises only at some point after it is issued has still not, in most jurisdictions, committed a fraudulent or criminal act. The requisite knowledge or intent that the check be dishonored must arise at the time the check is written. We therefore must reject appellants’ argument that all dishonored checks are fraudulent and thus not covered by the [FDCPA].
111 F.3d at 1329 (emphasis in original) (footnote omitted).
Moreover, even if some of the payors of NSF checks had
engaged in fraud at the time of the transaction, the court held in
Bass that there is no “fraud exception” in the FDCPA. Given
the explicit and unambiguous text of the FDCPA, we agree.
In Bass, a debt collector argued that the FDCPA should
not apply to debts it was collecting because it was attempting to
collect an NSF check that was presumed to be fraudulent under O:\PRECEDENTIAL\2005\053558p.wpd 32 Wisconsin law. 111 F.3d at 1329. The court of appeals rejected
that argument because the presumption that the check writer
engaged in fraud was rebuttable under Wisconsin law, and
because the debt collector had not made the showing required
to establish fraudulent intent under state law. Id. In rejecting
the defendants’ argument, the court commented that, even if the
requisite intent had been established, the court would be
reluctant to “create a fraud exception where none exists in the
[FDCPA’s] text.” Id. at 1329-30. The court explained:
A review of the legislative history reveals that Congress considered the entire field of defaulting debtors, stating its belief that most debtors fully intended to repay their debts. “Most” is not “all,” however, yet Congress still chose not to exempt debt collectors from following the Act if they could prove that the consumer intended his check to be dishonored or accepted credit from a merchant intending default. No section of the Act requires an inquiry into worthiness of the debtor, or purports to protect only “deserving” debtors. To the contrary, Congress has clearly indicated its belief that no consumer deserves to be abused in O:\PRECEDENTIAL\2005\053558p.wpd 33 the collection process. Moreover, we think that such a fraud exception would violate the spirit of the Act. The Act’s singular focus is on curbing abusive and deceptive collection practices, not abusive and deceptive consumer payment practices. We are not unaware that in some cases . . . the absence of a fraud exception will allow consumers who intend to pass worthless checks to invoke the protections of the FDCPA. . . . Absent an explicit showing that Congress intended a fraud exception to the Act, the wrong occasioned by debtor fraud is more appropriately redressed under the statutory and common law remedies already in place, not by a judicially-created exception that selectively gives a green light to the very abuses proscribed by the Act.
Id. at 1330.
The court thereafter amplified this discussion in Keele v.
Wexler, 149 F.3d 589 (7th Cir. 1998). There, the court
explained:
We touched upon a similar request in Bass without formally deciding the issue, but did express at length “our discomfort with the proposition that the courts should create a fraud exception where none exists in the Act’s text.” Unfortunately for the [debt collector], this “discomfort” has not subsided since Bass, and it is time we put to rest any lingering doubts as to the nonexistence of a fraud exception to the FDCPA. O:\PRECEDENTIAL\2005\053558p.wpd 34 Id. at 595 (citation omitted). The court’s analysis continued:
[T]he FDCPA’s legislative history reflects that Congress acknowledged there may be a “number of persons who willfully refuse to pay just debts,” but apparently “believe[d] that the serious and widespread abuses” of debt collectors outweighed the necessity to carve out an exception for these so called “deadbeats.” If the Act was designed to protect those who willfully refused to pay their debts, it makes little sense why consumers who write checks, knowing they will be dishonored, should not enjoy the same protections.
Id. at 596 (citations omitted).
We agree that, given the legislative history of the
FDCPA, its structure and text, we could not craft the kind of
fraud exception that underlies the arguments of Check Investors
without amending the statute.
B. The Payors of the NSF Checks are “Consumers” under the FDCPA.
As noted earlier, “[t]he FDCPA was enacted in 1997 as
an amendment to the Consumer Credit Protection Act to protect O:\PRECEDENTIAL\2005\053558p.wpd 35 consumers from a host of unfair, harassing, and deceptive
collection practices without imposing unnecessary restrictions
on ethical debt collectors.” Staub, 626 F.2d at 276-77 (citation
and internal quotations omitted). Check Investors and Hutchins
argue that the payors of the NSF checks are not “consumers”
and therefore are not protected by the FDCPA. More
specifically, they argue that
[a]n individual’s conduct, when taken as a whole, determines whether he or she qualifies as a consumer for FDCPA purposes. An individual who issues a NSF check or a closed account check, in exchange for money, goods, services or insurance, and who subsequently fails to make restitution within the criminal code statutory period established by the state legislature, is not a FDCPA consumer because the individual has not acted like a consumer.
However, the argument ignores that the FTC’s cause of action
is controlled by the FDCPA. That governing statute defines
“consumer” as “any natural person obligated or allegedly
O:\PRECEDENTIAL\2005\053558p.wpd 36 obligated to pay any debt.” 15 U.S.C. § 1692a(3) (emphasis
added). Even if we accept the claim that these payors are
criminals and tortfeasors, those labels would advance neither
our inquiry, nor Appellants’ position, because “any” is all
inclusive and does not exclude criminals or tortfeasors. Rather,
it unambiguously includes them. As noted above in our
discussion of the analysis in Bass and Keele, it is clear that
Congress realized that some people who write “bad checks” do
so knowingly and willfully and that their conduct is fraudulent.
It is just as clear that Congress enacted a definition of
“consumer” that did not exclude such persons from the
protections they would otherwise be afforded under the
FDCPA. Yet, Appellants’ argument requires that we ignore the
phrase: “any natural person,” that Congress used to define
“consumer.”
Just as the obligations underlying the NSF checks are O:\PRECEDENTIAL\2005\053558p.wpd 37 “debts” that the payor remains obligated to pay, see Duffy, 133
F.3d at 1123 (“[A] check written by a consumer in a transaction
for goods or services evidences the “drawer’s obligation to pay”
and this obligation remains even if the check is dishonored. . .
.”), the payors of those checks are “consumers” within the
meaning of the FDCPA.
C. Appellants are “Debt Collectors” and not “Creditors” Under the FDCPA.
“The FDCPA’s provisions generally apply only to debt
collectors.” Pollice, 225 F.3d at 403 (citation and internal
quotations omitted). “Creditors – as opposed to debt collectors
– generally are not subject to the FDCPA.” Id. (citation and
internal quotations omitted). A “debt collector” is broadly
defined as one who attempts to collect debts “owed or due or
asserted to be owed or due another,” 15 U.S.C. § 1692a(6). A
“creditor” is one who “offers or extends to offer credit creating
O:\PRECEDENTIAL\2005\053558p.wpd 38 a debt or to whom a debt is owed.” 15 U.S.C. § 1692(a)(4).
The district court held that Check Investors and
Hutchins11 are “debt collectors” as defined by the FDCPA
because Check Investors obtained the “debts,” i.e., the NSF
checks, after they were in default.12 It relied on our decision in
Pollice v. National Tax Funding, L.P., supra. There, National
Tax Funding (“NTF”) purchased homeowner’s water and sewer
obligations from a municipality and sought to collect on those
11 Attorneys who regularly engage in debt collection or debt collection litigation are covered by the FDCPA, and their litigation activities must comply with the requirements of the FDCPA. Heintz v. Jenkins, 514 U.S. 291, 292 (1995). 12 Hutchins contends that because a check is an unconditional promise to pay, a check can never be in default. We disagree. “Default” is “the omission or failure to perform a legal or contractual duty; esp., the failure to pay a debt when due.” Blacks Law Dictionary 449 (8th ed. 2004). Because the checks Check Investors purchased from Telecheck had already been dishonored, they were in default when purchased. Holmes v. Telecredit Service Corp., 735 F. Supp. 1289, 1293 (D. Del. 1990). O:\PRECEDENTIAL\2005\053558p.wpd 39 obligations for its own benefit. We held that water and sewer
obligations are “debts” within the meaning of the FDCPA. We
also held that NTF was a “debt collector” and that the district
court should not have dismissed FDCPA claims against it. We
Courts have indicated that an assignee of an obligation is not a “debt collector” if the obligation is not in default at the time of assignment; conversely, an assignee may be deemed a “debt collector” if the obligation is already in default when it is assigned. . . . Here, there is no dispute that the various claims assigned to NTF were in default prior to their assignment to NTF. Further, there is no question that the “principal purpose” of NTF’s business is the “collection of any debts,” namely defaulted obligations which it purchases from municipalities.
225 F.3d at 403-404 (citations omitted). This is equally true of
Hutchins and Check Investors. Nevertheless, they contend that
the district court’s holding that they are “debt collectors” was
O:\PRECEDENTIAL\2005\053558p.wpd 40 error because they are actually “creditors”13 collecting debts
actually owed to them, as opposed to “debt collectors”
collecting obligations owed to someone else. The FDCPA
defines “creditor” as
any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.
15 U.S.C. § 1692a(4) (emphasis added). Appellants contend
that because Check Investors bought the NSF checks from
Telecheck, Check Investors is the actual owner of those checks
and is therefore not collecting “debts of another,” as a debt
collector would. Rather, according to Appellants, Check
Investors is actually the entity “to whom a debt is owed.” They
13 The district court held that Check Investors and Hutchins were “debt collectors” as defined in the FDCPA. It did not address their claim that they were “creditors.” O:\PRECEDENTIAL\2005\053558p.wpd 41 claim further that because Check Investors is owed the debt, it
did not “receive[] an assignment or transfer” of the NSF checks
“solely for the purpose of” collecting the debt for Telecheck.
Thus, Appellants argue that Check Investors satisfies the
statutory definition of a “creditor,” and, therefore, they are not
subject to the provisions of the FDCPA. Although the argument
is rather clever, it is wrong. It 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.
Admittedly, Check Investors appears at first blush to
satisfy the statutory definition of a creditor. As the Court of
Appeals for the Seventh Circuit noted in Schlosser v. Fairbanks
Capital Corp., 323 F.3d 534, 536 (7th Cir. 2003), “for debts that
do not originate with the one attempting collection, but are
acquired from another, the collection activity related to that debt O:\PRECEDENTIAL\2005\053558p.wpd 42 could logically fall into either category.”
However, as to a specific debt, one cannot be both a “creditor”
and a “debt collector,” as defined in the FDCPA, because those
terms are mutually exclusive. As the court explained in
Schlosser, “[i]f the one who acquired the debt continues to
service it, it is acting much like the original creditor that created
the debt. On the other hand, if it simply acquires the debt for
collection, it is acting more like a debt collector.” Id. Thus, in
determining if one is a “creditor” or a “debt collector,” courts
have focused on the status of the debt at the time it was
acquired. 15 U.S.C. § 1692a controls that inquiry. That
provision provides in relevant part:
(6) The term “debt collector” means 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 O:\PRECEDENTIAL\2005\053558p.wpd 43 term does not include – (F) any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity . . . (iii) concerns a debt which was not in default at the time it was obtained by such person. . . .
15 U.S.C. § 1692a(6)(F)(iii). In Pollice, we relied on this
provision of the FDCPA to hold that one attempting to collect
a debt is a “debt collector” under the FDCPA if the debt in
question was in default when acquired. Conversely, we
concluded that § 1692a means that an entity is a creditor if the
debt it is attempting to collect was not in default when it was
acquired. 225 F.3d at 403-04. Other courts agree. See
Schlosser, 323 F.3d at 536; Bailey v. Security Nat’l Servicing
Corp., 154 F.3d 384, 387 (7th Cir. 1998); Whitaker v. Ameritech
Corp., 129 F.3d 952, 958 (7th Cir. 1997); Wadlington v. Credit
Acceptance Corp., 76 F.3d 103, 106-07 (6th Cir. 1996); Perry
v. Stewart Title Co., 756 F.2d 1197, 1208 (5th Cir. 1985).
O:\PRECEDENTIAL\2005\053558p.wpd 44 Admittedly, focusing on the status of the debt when it
was acquired overlooks the fact that the person engaging in the
collection activity may actually be owed the debt and is,
therefore, at least nominally a creditor. Nevertheless, pursuant
to § 1692a, Congress has unambiguously directed our focus to
the time the debt was acquired in determining whether one is
acting as a creditor or debt collector under the FDCPA. The
legislative history explains the wisdom of that provision. The
term “debt collector,” subject to the exclusions discussed below,
was intended to cover all third persons who regularly collect
debts. “The primary persons intended to be covered are
independent debt collectors.” S. Rep. No. 95-382, at 2, 1997
U.S.C.A.A. at 1697. The Senate Committee explained that the
FDCPA was limited to third-party collectors of past due debts
because, unlike creditors, “who generally are restrained by the
desire to protect their good will when collecting past due O:\PRECEDENTIAL\2005\053558p.wpd 45 accounts,” independent collectors are likely to have “no future
contact with the consumer and often are unconcerned with the
consumer’s opinion of them.” Id. at 1696.
Thus, as the court explained in Schlosser:
Focusing on the status of the obligation asserted by the assignee is reasonable in light of the conduct regulated by the statute. For those who acquire debts originated by others, the distinction drawn by the statute – whether the loan was in default at the time of the assignment – makes sense as an indication of whether the activity directed at the consumer will be servicing or collection. If the loan is current when it is acquired, the relationship between the assignee and the debtor is, for purposes of regulating communications and collections practices, effectively the same as that between originator and the debtor. If the loan is in default, no ongoing relationship is likely and the only activity will be collection.
323 F.3d at 538.
Here, Check Investors acquired the defaulted checks only
for collection purposes. Indeed, it is in business to do just that:
O:\PRECEDENTIAL\2005\053558p.wpd 46 acquire seriously defaulted debt, the age of which allows Check
Investors to acquire it for a few pennies on the dollar. The low
cost of acquisition allows for substantial profit if the checks are
subsequently collected.14 This is particularly true given the size
of the “fees” that Check Investors adds on to each check.
The fact that the NSF checks were purchased and owned
outright by Check Investors, rather than Check Investors merely
receiving an assignment of the rights of the original payee is
therefore irrelevant for purposes of determining whether Check
Investors was acting as a debt collector or creditor. Check
Investors clearly had no intention of servicing the debt. Check
Investors and Hutchins do not dispute the FTC’s claim that they
14 This is particularly true given the size of the “fees” that Check Investors adds to each check. Their tactics then allow them a remarkable measure of success even though prior debt collection efforts have failed. The result is a very profitable enterprise. O:\PRECEDENTIAL\2005\053558p.wpd 47 employed harassing and abusive tactics to collect the debts they
acquired and added “collection fees” that exceeded limitations
imposed by state laws. No merchant worried about goodwill or
the future of his/her business would have engaged in the kind of
conduct that was the daily fare of the collectors at Check
Investors. Neither Check Investors nor Hutchinson intended
any future contact with the payees of the NSF checks they
acquired, and their collection practices reflected as much. The
collectors working there resorted to whatever harassment
appeared likely to succeed; the only limit appears to have been
a given tactic’s likelihood of bearing fruit by yielding a profit.
If the future of Appellants’ business was in any way dependent
upon their goodwill, they would not have dreamed of
unleashing their collectors in this manner. Not only do we
conclude that Appellants are “debt collectors” rather than
“creditors,” we believe that their course of conduct exemplifies O:\PRECEDENTIAL\2005\053558p.wpd 48 why Congress enacted the FDCPA and the wisdom of doing so.
It also shows why Congress has directed us to focus on whether
a debt was in default when acquired to determine the status of
“creditor” vs. “debt collector.”
D. The Federal Trade Commission Act.
As noted earlier, Hutchins and Check Investors do not
dispute the FTC’s claim that their collection practices
constituted unfair and deceptive practices under the FTC Act.
Instead, they argue that the payors of their NSF checks were not
“consumers.” “[T]he deceptive acts or practices forbidden by
the [FTC Act] include those used in the collection of debts.”
Trans World Accounts, Inc. v. FTC, 594 F.2d 212, 214 (9th Cir.
1979). Accordingly, we must also reject the argument that the
payors of the NSF checks were not “consumers” under the FTC
Act.
Nevertheless, Check Investors argues that O:\PRECEDENTIAL\2005\053558p.wpd 49 [t]his is not a case where consumers are being solicited to buy time-shares in non-existent condos or swamp land in Florida, and that the district court erred in determining that the Check Investors’ practices were, in fact, deceptive as to a consumer.
Selling time shares for swamp land in Florida is but one kind of
deceptive business practice. The collection techniques involved
here are another. Moreover, Check Investors offered nothing in
the district court to challenge the FTC’s allegations that its
collection practices included material misrepresentations in
violation of the FTC Act. Accordingly, we will not consider
that argument, raised for the first time on appeal, absent a
compelling circumstance requiring us to consider it. Srien v.
Frankford Trust Co., 323 F.3d 214, 224 n.8 (3d Cir. 2003).
Check Investors does not allege the existence of any compelling
circumstance, and we can think of none. Thus, we will not
consider its argument that the district court erred in finding that
O:\PRECEDENTIAL\2005\053558p.wpd 50 its practices were deceptive to a consumer.
VI. CONCLUSION
For all of the above reasons, we will affirm the district
court.
O:\PRECEDENTIAL\2005\053558p.wpd 51