District Court (Ind.) Says “Early Out” Debt Servicer Was Not a Debt Collector Under FDCPA Because Account Was Not In “Default”

In Wagoner v. Npas, Inc., No. 3:18-CV-520 DRL-MGG, 2020 U.S. Dist. LEXIS 73381 (N.D. Ind. Apr. 27, 2020), Judge Leichty granted summary judgment under the FDCPA to an ‘early out’ debt servicer.

NPAS serves as an “early-out” collector and extended business office for healthcare systems. A company hired to service the debt of another—i.e., send bills and collect routine payments—falls under the “creditor” category so long as the debt wasn’t in default at the time it obtained the account. See Schlosser, 323 F.3d at 536; Magee v. AllianceOne, Ltd., 487 F. Supp.2d 1024, 1028 (S.D. Ind. 2007) (Lawrence, J.). If a company continues to service it as a current account, “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.” Schlosser, 323 F.3d at 536; accord S. Rep. No. 95-382 (1977), reprinted in 1977 U.S.C.C.A.N. 1695, 1698 (FDCPA not meant to cover “companies [ ] who service outstanding debts for others, so long as the debts were not in default when taken for servicing”). The critical inquiry today is thus the debt’s status at the time it was obtained—whether in default or not. See Schlosser, 323 F.3d at 536. “[T]he word ‘obtained’ can (and often does) refer to taking possession of a piece of property without also taking ownership . . . . And it’s easy enough to see how you might also come to possess (obtain) a debt without taking ownership of it. You might, for example, take possession of a debt for servicing and collection even while the debt formally remains owed another.” Henson, 137 S. Ct. at 1723. NPAS did just that. The MSA enables NPAS to service the hospital’s accounts, albeit while the hospital retains certain controls and ownership over the accounts—in particular, requiring all payments to be made to SJRMC, not NPAS. The statutory definition of debt collector and the exception speak in terms of a debt’s status. 15 U.S.C. § 1692a(6) (“debts owed or due or asserted to be owed or due another”); 15 U.S.C. § 1692a(6)(F) (“any debt owed or due or asserted to be owed or due another”). By its language, the FDCPA thus calls on the court to consider the debt’s actual status, see Bailey v. Sec. Nat’l Servicing Corp., 154 F.3d 384, 387-88 (7th Cir. 1998), and its asserted status, even if the collector has made a mistake in its assertion about the debt, see Schlosser, 323 F.3d at 538. Looking to the debt’s status reveals whether the activity directed at the consumer is servicing or collection. Id. If the debt is current when it is acquired, “the relationship between the assignee and the debtor is, for purposes of regulating communications and collection practices, effectively the same as that between the originator and the debtor.” Id. On the other hand, “[i]f the loan is in default, no ongoing relationship is likely and the only activity will be collection.” Id. Effectively the court is presented with a one-sided flashcard—the word “default” printed on the front and a blank slate on the back. The court must decide whether the debt was in default under the FDCPA though Congress didn’t define the term “default.” . . . “Default” means the “[f]ailure to meet financial commitments; non-payment of money owed; the state of being unable to fulfil financial obligations,” Default, Oxford English Dictionary Online (Mar. 2020), or the “omission or failure to perform a legal or contractual duty; esp., the failure to pay a debt when due,” Default, Black’s Law Dictionary (11th ed. 2019). See also In Default, Oxford English Dictionary Online (Mar. 2020) (“a state of being unpaid”). The word “default” cannot be divorced from the statute’s remaining text. . . . By its plain language, the FDCPA had more in mind than just a ripe debt when it described a debt “in default.” In this statute, a debt in default cannot then mean merely the money owed or the obligation to pay financial commitments alone. The words walking hand-in-hand with “default” in this exception winnow the optional definitions to the failure to pay a debt when due in reference to a legal or contractual duty. A debt will not go into default until after it has become owed and due. Several courts have stressed that strict use of the dictionary definition of “default” would erase the difference between an account that is merely delinquent and one that is in default. See Alibrandi v. Fin. Outsourcing Servs., 333 F.3d 82, 86-87 (2d Cir. 2003) (collecting cases); see also De Dios v. Int’l Realty & Invs., 641 F.3d 1071, 1075 n.3 (9th Cir. 2011) (“The Act’s legislative history is consistent with construing ‘in default’ to mean a debt that is at least delinquent, and sometimes more than overdue.”). Courts have looked to other federal statutes to show that there is generally a period between the moment of non-payment and the designation of default, often called a period of delinquency. See Alibrandi, 333 F.3d at 87 (collecting cases); see, e.g., 34 C.F.R. § 682.200(b) (270-330 days after nonpayment); 7 C.F.R. § 762.141(a) (30 days for farm loans); 12 C.F.R. § 336.3(c) (90 days for loans by federal insured depository institutions to Federal Deposit Insurance Corporation employees); 34 C.F.R. § 685.102(b) (270 days for certain student loans). For instance, in cases involving student loan collections under the FDCPA, federal courts have looked to the definition of default within the Federal Family Education Loan Program, which indicates that debts go into default after so many days of delinquency. See Alibrandi, 333 F.3d at 87; see, e.g., Skerry v. Mass. Higher Educ. Assistance Corp., 73 F. Supp.2d 47, 51 (D. Mass. 1999). . .Courts examine statutes and contracts to determine when debts are owed, and when debts are due; it makes little sense not to consult and enforce contracts to determine when debts are in default. The definition of “default” contemplates this very thing. See Default, Black’s Law Dictionary (11th ed. 2019) (“omission or failure to perform a legal or contractual duty; esp., the failure to pay a debt when due”) (emphasis added). In addition, superimposing “default” on a debt without reference to the contract would not just ignore the realities of the creditor-debtor relationship but have the “paradoxical effect of immediately exposing debtors to the sort of adverse measures, such as acceleration, repossession, increased interest rates, and negative reports to credit bureaus, from which the [FDCPA] intended to afford debtors a measure of protection.” Alibrandi, 333 F.3d at 87. The FDCPA’s remedial purposes would not be served by declaring every debt in “default” the moment a payment becomes due without reference to the contract, much less when a debtor might believe that has happened. So enigmatically would this occur when, for instance, a contract declared a “debt due” on a particular date yet nonetheless afforded a grace period before a debt became “in default;” or when a contract declared a “debt owed” on a certain date but deferred payment until insurance had been applied. Courts needn’t look so askance at reasonable contract terms. . . . In the end, the court sees no reason to go beyond the FDCPA’s plain text to appreciate that a debt in default has meaning other than (and really subsequent to) a debt owed or due, or to define “default” other than through its plain meaning. “If judges won’t defer to clear statutory language, legislators will have difficulty imparting a stable meaning to the statutes they enact.” Schlosser, 323 F.3d at 538 (quoting Krzalic v. Republic Title Co., 314 F.3d 875, 879-80 (7th Cir. 2002)). Besides which, the court’s job is to enforce the constitutionally valid law Congress has written, not rewrite it—”to apply, not amend, the work of the People’s representatives.” Henson, 137 S. Ct. at 1726. The statutory exception within 15 U.S.C. § 1692a(6)(F) plainly distinguishes a debt owed or due and a debt in default. In this case, the court needn’t consult legislative history or other federal statutes to draw that distinction when Congress has done that already in the words it chose. Likewise, the law needn’t be massaged to read in a mechanically set period of delinquency before a debt goes into default. The fact that many contracts and statutes choose to provide such a delinquency period does not necessitate its inclusion in every case, see, e.g., Hartman v. Meridian Fin. Servs., 191 F. Supp.2d 1031, 1043-44 (W.D. Wis. 2002), particularly when Congress has not expressly written one into the FDCPA. It could be that a contract defines a time of delinquency—when an initial non-payment has occurred, but the debtor still has the opportunity to resume payments or pay before a date where the debt will then be declared in default. See, e.g., Alibrandi, 333 F.3d at 87 n.5. A contract may incorporate a grace period. In contrast, an agreement could also allow for a creditor to declare an account in default the moment non-payment occurs. See Prince, 346 F. Supp.2d at 748 (agreement allowed creditor to declare the debt in default in the event debtor “fail[ed] to pay minimum payment on time”); Hartman, 191 F. Supp.2d at 1043-44 (agreement stated that debt was in default at the moment the debtor missed a payment). That declaration of default may well occur—either actually or because a collector asserts as much, albeit mistakenly. It ultimately is a case-by-case analysis. See, e.g., Prince, 346 F. Supp.2d at 747.  Consistent with its broad remedial purpose, the FDCPA builds in flexibility on when a specific debt will prove in default for the host of circumstances it was meant to redress. By its plain language, a debt will go beyond one owed or due and go into default when a statute, contract, or other relevant circumstance bearing on the debt’s legal or asserted status says it does. Default means the failure to perform a legal or contractual duty, particularly the failure to pay a debt when due. Congress blazed a clear trail—the court need only follow the torchbearing language faithfully. Here endeth the lesson. The court begins then by analyzing the actual status of this debt (holding until later a discussion of its asserted status). . . .

While contractually there may have been a debt owed at this time, it certainly had not yet materialized into a debt due, much less one in default.  . . .Accordingly, these debts were not actually in default when NPAS obtained them. The court turns next to the asserted status of the debts. . . .The only assertion about the debts here was that an amount was owed and due, but not in default. NPAS wasn’t a debtor collector subject to the FDCPA. NPAS has been the subject of many other cases. This court’s ruling stands in line with the spoken majority. . . .Because the accounts here were not in default at the time NPAS obtained them, NPAS was not a debt collector for purposes of the FDCPA. The court must grant summary judgment to NPAS accordingly. Fed. R. Civ. P. 56(a).