What is the Hunstein Case and Why Does it Matter?

tom wolfe
Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

On April 21, 2021, the Eleventh Circuit Court of Appeals issued a ruling in a case brought under the federal Fair Debt Collection Practices Act (“FDCPA”)[1] that could have far-reaching implications for debt collectors that utilize vendors, and also presents some difficult questions for California financial institutions. In Hunstein v. Preferred Collection and Management Services, Inc.,[2] the Court held that a debt collector violated §1692c(b) of the FDCPA when it electronically transmitted information about the consumer’s debt to a third party service provider without the consumer’s consent. While Hunstein is an Eleventh Circuit decision (i.e., Alabama, Florida and Georgia) and not currently binding on the Ninth Circuit (including California and Nevada), federal appellate cases can serve as persuasive authority for other circuits considering similar questions, so it is an important one to watch.

Background

The case involves a consumer who incurred a debt to a hospital for medical bills. The hospital assigned the debt to Preferred Collection and Management Services, Inc., a debt collector. The debt collector then hired Compumail, a third-party commercial mail vendor, to whom it electronically transmitted certain information about the debt that the vendor would use to create, print, and mail a “dunning” letter (a collection letter requesting payment) to the consumer. The transmitted information included the consumer’s name, outstanding balance, the fact that his debt resulted from his son’s medical treatment, and his son’s name.

The consumer filed a lawsuit against the debt collector alleging, among other things, that sending his personal information to the vendor constituted a violation of §1692c(b) of the FDCPA, which states:

Except as provided in section 1692b of this title [re: requesting location information], without the prior consent of the consumer given directly to the debt collector, or the express permission of a court of competent jurisdiction, or as reasonably necessary to effectuate a postjudgment judicial remedy, a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector.

In other words, with limited exception, absent the consumer’s prior consent, a debt collector may only communicate with the consumer and select others “in connection with the collection of any debt.”

The district court dismissed the action for failure to state a claim, finding that the consumer failed to sufficiently allege that the transmittal of information to the vendor violated §1692c(b) because it didn’t qualify as a communication “in connection with the collection of any debt.”

Eleventh Circuit Decision

As a threshold issue, the Court first considered the question of whether a violation of §1692c(b) gives rise to a concrete injury in fact necessary to establish Article III standing. Upon examining existing caselaw and noting the potential invasion of privacy torts that could result from violating the statute, the Court concluded that it does.

The Court then turned to the main issue of whether the debt collector’s communication with its vendor was a communication “in connection with the collection of any debt” in violation of §1692c(b). The facts clearly establish that the plaintiff was a consumer covered by the statute, and that the transmittal of the information by the debt collector to the vendor was a communication. Therefore, the sole question was whether the debt collector’s communication with its vendor was “in connection with the collection of any debt,” in violation of §1692c(b).

While the consumer argued that the plain meaning of the phrase “in connection with the collection of any debt” should prevail. The Court found the words “in connection with” to broadly mean “with reference to” or “concerning,” and determined that the consumer had sufficiently alleged a communication concerning the collection of the debt.

In response, the debt collector argued first that such a communication must necessarily include an express or implied demand for payment. The Court rejected this interpretation, finding it at odds with the exceptions under §1692c(b) where no such demand would reasonably be included. The debt collector then argued that the Court should adopt the multi-factor balancing test contained in an unpublished Sixth Circuit opinion that considered the following seven factors:

(1) the nature of the relationship of the parties; (2) whether the communication expressly demanded payment or stated a balance due; (3) whether it was sent in response to an inquiry or request by the debtor; (4) whether the statements were part of a strategy to make payment more likely; (5) whether the communication was from a debt collector; (6) whether it stated that it was an attempt to collect a debt; and (7) whether it threatened consequences should the debtor fail to pay.

The Court rejected this approach because the cited cases not only pertained to a different provision of the FDCPA, but the phrase at issue has “a discernible ordinary meaning that obviates the need for resort to extratextual ‘factors.’”

Lastly, the debt collector argued that the widespread “industry practice” use of mail vendors and the lack of any caselaw finding this practice to violate the FDCPA supported its permissibility. The Court rejected this argument as well on the grounds that the permissibility of such communications was not actually before the courts in any of the cases cited, so the lack of a finding on the issue would not necessarily prove that these disclosures were permissible.

The Court fully acknowledged that finding a debt collector’s communications with its dunning vendor to violate §1692c(b) would likely upset the status quo in the debt-collection industry. And recognizing that the purposes for which debt collectors are likely to share consumer information with third party vendors is not limited to dunning letters, it also acknowledged that such an interpretation would likely require debt collectors to bring a number of previously outsourced functions back in house at significant cost, with little to no added benefit to consumer privacy. However, the Court pointed out that its job is to interpret the law as written and it’s the responsibility of Congress to change it if needed.

Reversing the district court and remanding it for further proceedings, the Eleventh Circuit found that: 1) a violation of §1692c(b) gives rise to a concrete injury in fact sufficient to establish Article III standing; and 2) a debt collector’s transmittal of the consumer’s debt-related information to its dunning vendor constituted a communication “in connection with the collection of any debt” under §1692c(b).

Fortunately, this case is not yet over.

Implications for Credit Unions

As noted above, Hunstein is an Eleventh Circuit decision not currently binding on California or Nevada credit unions. However, federal appellate decisions retain the potential to become binding on all circuits if escalated to the U.S. Supreme Court, and may be considered by other circuits reviewing similar questions regardless. Debt collectors currently subject to Hunstein will be significantly impacted in their ability to retain and work with third party vendors, resulting in the potential for higher costs and operational challenges. Credit unions with members in affected jurisdictions may also find themselves subject to Hunstein.

Unique Implications for California

For California’s credit unions, Hunstein has shined a light on what appears to be some unresolved inconsistencies with the way §1692c(b) is applied to “debt collectors,” as that term is defined by California’s Rosenthal Fair Debt Collection Practices Act (“Rosenthal”).[3] First of all, it’s important to distinguish between how the federal and state laws define a “debt collector.” Under the FDCPA, a creditor collecting its own debts (such as a credit union) is not considered a “debt collector.” Section 1692a(6)(A) defines a “debt collector” as follows:

(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.

Notwithstanding the exclusion provided by clause (F) of the last sentence of this paragraph, the term includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. For the purpose of section 1692f(6) of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests. The term does not include—

(A) any officer or employee of a creditor while, in the name of the creditor, collecting debts for such creditor;…

However, under Rosenthal, that same creditor would also be considered a “debt collector” when collecting its own debts. Calif. Civil Code §1788.2(c) defines a “debt collector” as follows:

(c) The term “debt collector” means any person who, in the ordinary course of business, regularly, on behalf of that person or others, engages in debt collection. The term includes any person who composes and sells, or offers to compose and sell, forms, letters, and other collection media used or intended to be used for debt collection.

Rosenthal incorporates much of the FDCPA. Specifically, under Calif. Civil Code §1788.17, California’s “debt collectors” (including credit unions and other creditors collecting their own debts) must also comply with most of the provisions of the FDCPA applicable to “debt collectors,” and therein lies the issue.

While there is nothing under either Rosenthal or the FDCPA that prevents a creditor from communicating with a debt collector, §1692c(b) only allows a debt collector to communicate with the consumer, the creditor, and other limited persons in connection with the collection of the debt without first obtaining consumer consent. A California credit union, as a debt collector, would also be subject to this provision. And there is no express exception to allow a debt collector to communicate with either a third-party debt collector or a vendor.

Therefore, in light of Hunstein, §1692c(b) could effectively:

(i) prohibit a credit union, or any creditor that is also deemed a debt collector under Rosenthal, from communicating about an assignment or sale of a debt to a third party debt collector (essentially preventing any assignment or sale of a debt);

(ii) prohibit a credit union, or any creditor that is also deemed a debt collector under Rosenthal, from communicating with a vendor to assist with debt collection (essentially preventing the use of vendors); and

(iii) prohibit a third-party debt collector from communicating with a vendor to assist with debt collection (essentially preventing third-party debt collectors from using vendors for any purpose, including for the mailing of collection notices or periodic statements).

Unfortunately, it’s not a stretch to think that a strict reading on §1692c(b) could extend the meaning of communications “in connection with the collection of any debt” to include things such as periodic statements and other vendors, such as repossession agents, foreclosure trustees, or any other vendor not expressly exempted from §1692c(b).

Credit unions are encouraged to discuss the implications of Hunstein with their legal counsel to determine whether any preemptive procedural changes are warranted.

A Word About Recent Developments

Hunstein is not over. On May 26, 2021, the defendant debt collector petitioned for a rehearing en banc and sixteen different amicus briefs were submitted in support of the petition by various industry groups. One such brief was filed by the Credit Union National Association (CUNA) jointly with the American Bankers Association, American Financial Services Association, Chamber of Commerce of the United States, Consumer Bankers Association, Housing Policy Council, and Mortgage Bankers Association. In the brief, the issue is presented as follows:

Whether the Court should adopt an interpretation of Section 1692c(b) that avoids rendering it unconstitutional under the First Amendment by imposing overly broad restrictions on the free speech rights of FDCPA “debt collectors” that do not directly advance the interest of prohibiting abusive debt collection practices and are not narrowly tailored to protect consumer privacy?

On June 14, 2021, the Eleventh Circuit issued an order stating that the Court was withholding issuance of the mandate, a procedural step to ensure that the opinion does not become final pending a determination on the en banc petition.

Interestingly, on June 25, 2021, the U.S. Supreme Court decision in TransUnion, LLC v. Ramirez[4] addressed Article III standing and some of the issues raised in the en banc petition. In a footnote to the opinion, the Court essentially confirmed that sending information to a letter vendor for the purpose of printing and mailing a communication is not an actionable publication that would cause an injury-in-fact necessary for Article III standing. Attorneys for the defendant debt collector have submitted this as supplemental authority in support of its en banc petition.

Article by Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

 

[1] Federal Fair Debt Collection Practices Act, 15 U.S.C. §§1692-1692p.

[2] Hunstein v. Preferred Collection & Mgmt. Servs, Inc., 994 F.3d 1341 (11th Cir., April 21, 2021).

[3] Rosenthal Fair Debt Collection Practices Act, Calif. Civil Code §§1788-1788.3.

[4] TransUnion, LLC v. Ramirez, No. 20-297, 594 U.S. ____ (2021).

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