WASHINGTON (CN) – Poised to set precedent on the different regulations for debt collectors and creditors, the Supreme Court wrestled Tuesday with the finer points of the Fair Debt Collection Act.
Though the bank Santander Consumer USA considers itself the latter, it faced a class action led by Ricky Henson because it bought a portfolio of auto loans from CitiFinancial, a qualified debt collector subject to the FDCPA.
At oral arguments Tuesday, Justice Elena Kagan held Santander’s attorney on his attempt to distance his bank from the federal regulation.
“What happened in the time between when your client serviced the debt and the time when your client purchased the debt that in any way changes the relationship with the borrower such that Congress wouldn’t be concerned any longer with its behavior?” Kagan asked.
Kannon Shanmugam, an attorney with the firm Williams & Connolly, argued that after Santander purchased CitiFinancial’s loan portfolio, it no longer qualified as a debt collector because lenders who initiate and collect their own loans are exempt from regulations under FDCPA.
“Notably, at the point at which we acquired essentially the remainder of [CitiFinancial’s] auto lending business, we really stepped into [CitiFinancial’s] shoes in a practically significant way,” Shanmugam said. “At that point, we took over the business and it was as if we were the original creditor.”
When Santander sent out letters of collection, Shanmugam added, it did so on its own letterhead.
“At that point, it was as if we had all of the same incentives as the originator of the debt. We certainly had an incentive to ensure payment, but we also had an incentive to maintain a business relationship with those customers,” he said.
Chief Justice John Roberts did not appear convinced.
“But you were an entirely different business than the person in whose shoes you stepped,” Roberts said. “I don’t see that. And they’ve already got the loans. I don’t see why you have the same incentives to maintain their goodwill.”
Shanmugam countered that Santander was a company of a different type in a different time.
“I do think we would have incentives to maintain their goodwill in the way that the sort of fly-by-night debt collectors that Congress was seeking to target 40 years ago when it enacted the FDCPA … to the extent that this argument really goes into broader policy arguments that the petitioners are making, I think [they] rely on the fact that we were previously servicers, as a kind of door into those policy arguments,” he said.
Kevin Russell, of the Bethesda, Maryland, firm Goldstein & Russell, argued for the debtors.
He said that the exemption claim didn’t square with the language in the legislation because Santander knew that the debts it tried to collect were tied up in a separate class action settlement against CitiFinancial.
Russell pointed out that the FDCPA defines a debt collector as someone who “regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be or due another.”
Offering a brief grammar lesson on the word “owed,” Russell said that “it is a participle that can be both a past participle, referring to a prior time frame, or a present participle, referring to the present.”
Justice Kagan asked Russell to use the word as he defined it in a sentence.
“You can talk about somebody collecting a debt owed another,” Russell ventured. “And then the context could make clear that it was a debt that had been paid off or discharged in a bankruptcy.”
Kagan pressed for a more direct response.
“I mean, I’m just wondering… I understand that you have your superfluidity argument, which is in your view, a kind of context clue,” she said. “But if you just look at the language, can you come up with any sentence which points toward your reading rather than toward Mr. Shanmugam’s?”
Russell insisted that the language was unambiguous.
For attorney Joseph Palmore of the firm Morrison and Foerster, the Santander argument fared better with the court.
“The justices asked hard questions of both sides, but Santander’s arguments about what the statute means were more straightforward, and I believe they got more traction,” Palmore said in an email interview Tuesday afternoon. “A ruling for Santander would keep the statute focused on the independent debt collectors Congress intended to cover. Congress did not want the statute to apply to diversified financial institutions that buy and sell debt as just part of their overall business.”
Palmore filed an amicus brief in support of Santander on Tuesday afternoon.