Justices on the Supreme Court appeared exasperated with both sides during oral arguments Tuesday for a case that would define whether companies that buy distressed debt and attempt to collect on it are covered under a federal statute setting limits on their activities.
Several justices on the high court criticized the plaintiffs’ expansive definitions of which entities might be considered debt collectors under the Fair Debt Collection Practices Act of 1978, which bars certain kinds of abusive, deceptive or aggressive debt collection practices. But some of those same justices also seemed to think that purchasing distressed debt could be used as a loophole that financial services firms could exploit to get around that law.
The outcome of the Supreme Court hearing could have sweeping impacts for banks, many of whom have some exposure to the secondary market for defaulted debt. The Consumer Financial Protection Bureau has been increasingly focused on the debt collection business, and issued a reform plan last year that largely spared banks from consideration, but a favorable ruling for the plaintiffs could change that calculation. Banks have also been increasingly subject to lawsuits alleging violations of the FDCPA in recent years, a costly prospect that the high court’s ruling could impact.
Henson, et al. v. Santander is the consolidation of a series of cases in a number of circuit courts that have percolated through the appellate system over years. It specifically concerns Santander Consumer USA’s acquisition of various auto loans from CitiAuto. The complaint alleges that Santander should be considered a debt collector under the 1978 fair debt collections law and be restricted in the methods and activities it may pursue to collect on those debts. But Santander maintains that the law doesn't apply to it in this case, but only to firms who are collecting debts owed by another company.
At issue is the law's definition of a "debt collector" as either someone whose “principal purpose” is “the collection of any debts” or one who “regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” The law includes an exemption for creditors seeking to collect on debts they originated, that “generally are restrained by the desire to protect their good will when collecting past due accounts,” according to the Senate report accompanying the original legislation. But the statute also says that a debt “which was not in default at the time it was obtained” can qualify for the creditor exemption.
Attorney Kevin Russell, arguing for the plaintiffs suing Santander, said the concept of “owed” can be interpreted to apply even if the company to whom the debt is owed has sold that interest to the collector. But Justice Elena Kagan said she couldn’t find a way to make that definition work.
“My problem about this word is I can never get it to mean what you want it to mean no matter how I construct the sentence,” Kagan said.
Justice Samuel Alito was similarly unpersuaded by the plaintiffs’ interpretation of the statute.
“The degree of absurdity you have to show under [the statute] depends of the ambiguity of ‘be owed or due,' " Alito said. “You’re really going uphill on that.”
Justice Stephen Breyer added that companies buy and sell other companies all the time, and that includes the purchased company’s receivables — be they in arrears, in default, or any other condition. Applying the faor debt and collections law to a company in such a position is unlikely to be in line with Congressional intent, Breyer said.
“What about companies that buy up other companies and sell them?” Breyer asked. “They buy the receivables … and there they are, those receivables once owed to the company they bought. If I accept your definition … I have difficulties.”
Russell argued that if the countervailing interpretation — that if a debt is sold or assigned prior to being in default, the FDCPA does not apply — is adopted, it generates an absurd result, namely that debt servicing companies are suddenly exempt from the law by virtue of the timing of their assignment.
“That interpretation suggests that any debt collector who is assigned a debt that is not in default — maybe only in [arrears], which happens a lot — is entitled to this exemption, and there is nothing … to believe that Congress intended to provide them with that exemption,” Russell said. “A debt buyer is much more like a debt servicer than a [creditor].”
Attorney Kannon Shanmugam, representing Santander, said the question of assignment is not the issue before the court, arguing that the question is simply whether the company in question bought the debt and is therefore granted the creditor exemptions granted in the law, or it has entered into some other arrangement that may not grant it that exemption.
“Assignment is neither here nor there with respect to this exclusion,” Shanmugam said. “I think the dispositive consideration is whether the servicer or party acquires complete ownership or something less than that.”
But members of the court were critical of that question as well. Kagan suggested that if the same company could alternatively be a debt collector or not a debt collector simply by virtue of whether they bought the debt from the originator, that renders little practical distinction.
“The [defendant] services this debt and was considered a debt collector. Then they purchased it and all of a sudden [they’re not]?” Kagan asked.
Chief Justice Roberts similarly was skeptical of the defense’s assertion that companies who buy the distressed debt of an originator inherit the goodwill that creditors are assumed to wish to preserve between themselves and the borrowers.
“You’re in an entirely different business” from the debt originator, Roberts said. “What I don’t see is how you have the same incentives to maintain goodwill.”
Shanmugam said the idea that the court is considering a case of a rogue buyer of distressed debt is far from accurate — in this case, Santander bought another bank’s portfolio of auto loans after it decided to exit that market. That included performing and non-performing loans, he said, and represents a circumstance more similar to Justice Breyer’s hypothetical scenario than a predatory debt collector finding a way around the law. And distressed debt is not a hot commodity that investment banks or capital markets are eager to purchase, he said.
“There simply is no evidence that the Goldman Sachses or BlackRocks are moving into the business of debt collection,” Shanmugam said. “What Santander was doing is not buying distressed debt. Citi got out of the auto lending business … and Santander purchased their entire portfolio.”
Not all of the justices tipped their hands as to how they might rule. Justice Neil Gorsuch — who was only confirmed to the court earlier this month and heard his first oral arguments on Monday — did not speak at all during the oral argument. Neither did conservative Justice Clarence Thomas (who rarely speaks during oral argument) or Justice Anthony Kennedy, who is seen as a swing vote on the court.