Schlosser, Chad v. Fairbanks Capital ( 2003 )


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  •                           In the
    United States Court of Appeals
    For the Seventh Circuit
    ____________
    No. 01-3487
    CHAD SCHLOSSER and FRANCES SCHLOSSER,
    Plaintiffs-Appellants,
    v.
    FAIRBANKS CAPITAL CORPORATION,
    Defendant-Appellee.
    ____________
    Appeal from the United States District Court
    for the Central District of Illinois.
    No. 2:01 C 2121—Michael P. McCuskey, Judge.
    ____________
    ARGUED FEBRUARY 11, 2002—DECIDED MARCH 20, 2003
    ____________
    Before RIPPLE, DIANE P. WOOD, and WILLIAMS, Circuit
    Judges.
    WILLIAMS, Circuit Judge. Fairbanks Capital Corp.
    acquired 12,800 allegedly delinquent high-interest mort-
    gages from ContiMortgage, including one owed by the
    plaintiffs, Chad and Frances Schlosser. Identifying itself
    as a debt collector, Fairbanks sent the Schlossers a letter
    asserting that the debt was in default. Fairbanks was
    mistaken; the Schlossers were not in default. The Schlos-
    sers filed suit claiming that Fairbanks’s letter failed to
    notify them of their right to contest the debt, as required
    by the Fair Debt Collection Practices Act (FDCPA), 15
    2                                               No. 01-3487
    U.S.C. § 1692g(a). Fairbanks’s mistake, as it turned out,
    worked to its advantage: the district court concluded that,
    because the debt was not actually in default when Fair-
    banks acquired it, Fairbanks was not a debt collector
    within the meaning of the FDCPA. The court granted
    Fairbanks’s motion to dismiss, and the Schlossers appeal.
    We disagree with the district court’s interpretation of the
    FDCPA and therefore reverse.
    I. BACKGROUND
    Fairbanks purchased the Schlossers’ mortgage from
    ContiMortgage as part of Fairbanks’s acquisition of 128,000
    subprime mortgages, 10% of which were identified as in
    default. According to ContiMortgage’s records, the Schlos-
    sers’ mortgage was delinquent at the time of the transfer,
    and Fairbanks treated it as such. It sent a letter to the
    Schlossers, identifying itself as a debt collector, notifying
    the Schlossers that they were in default, and attempting
    to collect:
    DEMAND LETTER—YOU COULD LOSE YOUR
    HOME! . . .
    This letter constitutes formal notice of default
    under the terms of the Note and Deed of Trust or
    Mortgage because of failure to make payments
    required. . . .
    This letter is a formal demand to pay the amounts
    due. In the event that these sums are not paid to
    Fairbanks Capital Corp. “Fairbanks” within 30
    days of this letter the entire unpaid balance, to-
    gether with accrued interest, legal fees and ex-
    penses, WILL BE ACCELERATED and foreclo-
    sure proceedings will be instituted. . . .
    You have the right to bring a court action if you
    claim that the loan is not in default or if you be-
    No. 01-3487                                                 3
    lieve that you have any other defense to the acceler-
    ation and sale. . . .
    This letter is from a debt collector and is an at-
    tempt to collect a debt. Any information obtained
    will be used for that purpose.
    When the Schlossers tried to make their regular monthly
    payment to Fairbanks, Fairbanks refused, again asserting
    that the loan was in default, and instead instituted fore-
    closure proceedings. The Schlossers sent letters insisting
    that they weren’t in default and eventually Fairbanks
    caused the foreclosure action to be dismissed.
    The Schlossers filed suit against Fairbanks for violation
    of the FDCPA, claiming (on behalf of themselves and a
    class of similar debtors) that Fairbanks’s letter did not
    notify them of their right to contest the debt in writ-
    ing, which would have required Fairbanks to verify the
    debt before continuing collection activity. See 15 U.S.C.
    § 1692g(a)(4). They also asserted an individual claim
    under the Illinois Consumer Fraud Act, 815 Ill. Comp. Stat.
    505/2. The district court granted Fairbanks’s motion to
    dismiss the FDCPA claim, denied as moot the Schlossers’
    motion for class certification, and declined to take sup-
    plemental jurisdiction over the state law claim. The
    Schlossers appeal.
    II. ANALYSIS
    As the district court recognized, the FDCPA distin-
    guishes between “debt collectors” and “creditors.” Credi-
    tors, “who generally are restrained by the desire to protect
    their good will when collecting past due accounts,” S. Rep.
    95-382, at 2 (1977), reprinted in 1977 U.S.C.C.A.N. 1695,
    1696, are not covered by the Act. Instead, the Act is
    aimed at debt collectors, who may have “no future contact
    with the consumer and often are unconcerned with the
    4                                                 No. 01-3487
    consumer’s opinion of them.” See id. In general, a creditor
    is broadly defined as one who “offers or extends credit
    creating a debt or to whom a debt is owed,” 15 U.S.C.
    § 1692a(4), whereas a debt collector is one who attempts
    to collect debts “owed or due or asserted to be owed or
    due another.” Id. § 1692a(6).
    For purposes of applying the Act to a particular debt,
    these two categories—debt collectors and creditors—are
    mutually exclusive. However, for debts that do not origi-
    nate with the one attempting collection, but are acquired
    from another, the collection activity related to that debt
    could logically fall into either category. If 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 collec-
    tion, it is acting more like a debt collector. To distinguish
    between these two possibilities, the Act uses the status
    of the debt at the time of the assignment:
    (6) The term “debt collector” means any person
    who . . . regularly collects or attempts to collect,
    directly or indirectly, debts owed or due or asserted
    to be owed or due another. . . . The 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 (emphasis added). In other words, the
    Act treats assignees as debt collectors if the debt sought
    to be collected was in default when acquired by the as-
    signee, and as creditors if it was not. See Bailey v. Sec. Nat’l
    Serving Corp., 
    154 F.3d 384
    , 387 (7th Cir. 1998); Whittaker
    v. Ameritech Corp., 
    129 F.3d 952
    , 958 (7th Cir. 1998); see
    also Pollice v. Nat’l Tax Funding, L.P., 
    225 F.3d 379
    , 403-04
    No. 01-3487                                                 5
    (3d Cir. 2000); 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).
    Fairbanks argues (and the district court held) that
    under the plain language of the statutory definition, it is
    not a debt collector because the Schlossers’ loan was
    not actually in default when Fairbanks acquired it. Fair-
    banks relies on Bailey, in which we held that a mortgage
    servicing company was not a debt collector under the
    FDCPA when it attempted to collect on a forbearance
    agreement acquired from HUD. See 
    154 F.3d at 388
    .
    Payments on that agreement were current, but the orig-
    inal mortgage, which was replaced by the forbearance
    agreement, had been in default. 
    Id.
     We held that “[c]om-
    mon sense and the plain meaning” of the statute dictated
    application of the exclusion in § 1692a(6)(F)(iii) because
    the defendant was not attempting to collect on the orig-
    inal note, but rather the forbearance agreement, which
    was not in default at the time it was acquired. Id. at 387-88.
    Although, as in Bailey, the debt in this case was not
    actually in default, Fairbanks acquired it as a debt in
    default, and its collection activities were based on that
    understanding. As applied to these circumstances, the
    meaning of § 1692a(6)(F)(iii) is less obvious than it was
    in Bailey, which did not address the question posed by
    this case: do Fairbanks’s mistaken assertions and collec-
    tion activity have any relevance to the application of
    the exclusion, or does it depend only on the actual status
    of the loan when it was acquired? We have found no
    opinions addressing this question, which we review
    de novo, assuming for purposes of the motion to dismiss
    that the allegations of the complaint are true. See
    Marshall-Mosby v. Corporate Receivables, Inc., 
    205 F.3d 323
    , 326 (7th Cir. 2000).
    Fairbanks’s interpretation, which exempts its collection
    activities from the statute if the debt was not actually in
    6                                               No. 01-3487
    default when acquired, produces results that are odd in
    light of the conduct regulated by the statute. For ex-
    ample, § 1692g, upon which the Schlossers’ suit is based,
    requires debt collectors to notify the debtor that she may
    contest the debt in writing, and that if she does, the
    collector will obtain verification of the debt. 15 U.S.C.
    § 1692g(a). This validation provision is aimed at pre-
    venting collection efforts based on mistaken informa-
    tion. See S. Rep. No. 95-382, at 4 (1977), reprinted in 1977
    U.S.C.C.A.N. 1695, 1699. Yet Fairbanks’s interpretation
    makes its mistake about the status of the loan irrelevant.
    So those like Fairbanks that obtain a mix of loans, only
    some of which are in default, would be subject to the
    FDCPA if they fail to provide the required notice of the
    mechanism for correcting mistakes when they attempt to
    collect a loan they assert is in default—but only as to
    those loans about which they are not mistaken. And the
    same would be true for professional debt collectors in the
    business of acquiring defaulted loans for collection; debtors
    correctly asserted as being in default when the loan was
    acquired could challenge the failure to provide notices
    aimed at correcting mistakes, while those mistakenly
    identified as in default would have no recourse under the
    statute. We cannot believe that Congress intended such
    implausible results, and therefore, even if Fairbanks’s
    reading is the most straightforward, it is not necessarily
    the correct one:
    Usually when a statutory provision is clear on its
    face the court stops there, in order to preserve
    language as an effective medium of communica-
    tion from legislatures to courts. If judges won’t
    defer to clear statutory language, legislators will
    have difficulty imparting a stable meaning to the
    statutes they enact. But if the clear language, when
    read in the context of the statute as a whole or of
    the commercial or other real-world (as opposed to
    No. 01-3487                                                    7
    law-world or word-world) activity that the statute
    is regulating, points to an unreasonable result,
    courts do not consider themselves bound by “plain
    meaning,” but have recourse to other interpretive
    tools in an effort to make sense of the statute.
    Krzalic v. Republic Title Co., 
    314 F.3d 875
    , 879-80 (7th
    Cir. 2002) (citing Public Citizen v. U.S. Dep’t of Justice, 
    491 U.S. 440
    , 453-55 (1989); Green v. Bock Laundry Mach. Co.,
    
    490 U.S. 504
    , 527 (1989) (Scalia, J., concurring); AM Int’l,
    Inc. v. Graphic Mgmt. Assocs., Inc., 
    44 F.3d 572
    , 577 (7th
    Cir. 1995)); see also United States v. X-Citement Video, Inc.,
    
    513 U.S. 64
    , 69-70 (1994); Foufas v. Dru, 
    319 F.3d 284
    , 287
    (7th Cir. 2003).
    We think the language of § 1692a(6)(F)(iii) is suscep-
    tible to an alternative interpretation, one that avoids
    these odd results and is more consistent with the rest of
    the statute. Fairbanks’s interpretation narrowly focuses
    on the limitation in subparagraph (iii) regarding the de-
    fault status of the debt. See 15 U.S.C. § 1692a(6)(F)(iii)
    (“concerns a debt which was not in default”). But the
    antecedent of that limitation is “such activity,” which in
    turn refers to “collecting or attempting to collect any
    debt owed or due or asserted to be owed or due.” See id.
    § 1692a(6)(F). This suggests that the relevant status is that
    of the debt or asserted debt that is the subject of the
    collection activity, particularly when read along with the
    statute’s definition of “debt” as an “obligation or alleged
    obligation,” see id. § 1692a(5), which (along with other
    definitions in the Act, see, e.g., id. § 1692a(3) (defining “con-
    sumer” as one “obligated or allegedly obligated to pay
    any debt”)) extends the reach of the statute to collection
    activities without regard to whether the debt sought to
    be collected is actually owed. See Schroyer v. Frankel,
    
    197 F.3d 1170
    , 1178 (6th Cir. 1999) (“[T]he FDCPA holds
    ‘debt collectors liable for various abusive, deceptive, and
    unfair debt collection practices regardless of whether the
    8                                                No. 01-3487
    debt is valid.’ ”) (quoting McCartney v. First City Bank, 
    970 F.2d 45
     (5th Cir. 1992)); see also Baker v. G. C. Servs. Corp.,
    
    677 F.2d 775
    , 777 (9th Cir. 1982).
    Focusing on the status of the obligation asserted by
    the assignee is reasonable in light of the conduct regu-
    lated by the statute. For those who acquire debts orig-
    inated 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 collection
    practices, effectively the same as that between the origina-
    tor and the debtor. If the loan is in default, no ongoing
    relationship is likely and the only activity will be collec-
    tion. But if the parties to the assignment are mistaken
    about the true status, that status will not determine the
    nature of the activities directed at the consumer. It makes
    little sense, in terms of the conduct sought to be regu-
    lated, to exempt an assignee from the application of the
    FDCPA based on a status it is unaware of and that is
    contrary to its assertions to the debtor. The assignee
    would have little incentive to acquire accurate informa-
    tion about the status of the loan because, in the context
    of the mistake in this case, its ignorance leaves it free
    from the statute’s requirements.
    It is of course conceivable that Congress intended a
    bright-line rule based on the actual status of the debt at
    the time of assignment without regard to the assignee’s
    knowledge or assertions about the debt, even if such a
    rule would be under-inclusive. But another provision of
    the statute suggests otherwise; according to the parallel
    exclusion for assignees from the statute’s definition of
    “creditors” (read together with the definition of debt in
    § 1692a(5)), the purpose of the acquisition matters:
    No. 01-3487                                                   9
    such term [creditor] does not include any person
    to the extent that he receives an assignment or
    transfer of [an obligation or alleged obligation] in
    default solely for the purpose of facilitating col-
    lection of such debt for another.
    See 15 U.S.C. § 1692a(4). Under this definition, Fairbanks
    is not a creditor because it received an assignment of
    “an alleged obligation in default” solely for the purpose
    of facilitating collection (or so we could reasonably infer
    from the allegations of the complaint). If this view of
    § 1692a(4) is correct, then Fairbanks cannot be right that
    it is not a debt collector. The structure of the Act suggests
    that it must be one or the other.1
    Fairbanks, relying exclusively on its textual argument
    based on § 1692a(6)(F)(iii), does not attempt to recon-
    cile its interpretation with the definition of creditor in
    § 1692a(4), nor does it present any evidence that Congress
    intended an interpretation that creates the implausible
    results we described earlier. See Green, 
    490 U.S. at 527
    (Scalia, J., concurring) (rejecting interpretation based on
    plain meaning because “counsel have not provided, nor
    have we discovered, a shred of evidence that anyone
    has ever proposed or assumed such a bizarre disposition”).
    We therefore reject Fairbanks’s interpretation and hold
    that, based on the allegations of the complaint, the ex-
    clusion in § 1692a(6)(F)(iii) does not apply because Fair-
    banks attempted to collect on a debt that it asserted to
    be in default and because that asserted default existed
    when Fairbanks acquired the debt.
    1
    If the mistake in this case went the other way, and Fairbanks
    purchased the loan for the purpose of servicing and treated it
    as such, but it turned out to actually be in default, then under
    § 1692a(4) it would be classified as a creditor and therefore
    outside the scope of the Act.
    10                                           No. 01-3487
    III. CONCLUSION
    The judgment of the district court is REVERSED and the
    case is REMANDED for further proceedings.
    A true Copy:
    Teste:
    ________________________________
    Clerk of the United States Court of
    Appeals for the Seventh Circuit
    USCA-02-C-0072—3-20-03