Watch Out: The FDCPA May Apply to Your Contract-Based Recovery Efforts
September, 2003
by C. Kyle Lang and Dean S. Rauchwerger
Watch Out: The FDCPA May Apply To Your
Contract-Based Recovery Efforts
by Dean S. Rauchwerger
drauchwerger@clausen.com
C. Kyle Lang
clang@clausen.com
The Fair Debt Collection Practices Act, 15 U.S.C. § 1692 (2002) (“FDCPA”), applies to any debt incurred by a consumer for personal, family or household use. Although the FDCPA does not apply to a consumer debt being collected by the creditor, it does apply to any third party attempting to collect on the debt, including attorneys. The debt must be incurred as the result of a consumer transaction, resulting in typical tort-based subrogation claims being excluded from the FDCPA’s reach. However, a recent decision of the U.S. Court of Appeals for the Fifth Circuit applied the FDCPA to a contract-based subrogation action. Hamilton v. United Healthcare of Louisiana, 310 F.3d 385, 392 (5th Cir. 2002).
Facts
In Hamilton, an insured’s son (covered under the insured’s group health insurance policy as a dependant) was severely injured in a car accident. The insurer paid over $100,000 in benefits and was allegedly subrogated by its policy to any monies received by the insured, including proceeds from any other insurance policies. The insured (father) also had uninsured/underinsured motorist coverage with a separate insurer under an automobile policy, and the second insurer paid over $250,000 in benefits and medical payments to the father. The father’s health insurer, through a separate collection agency, sought recovery from him and the automobile insurer for the proceeds paid by the automobile insurer. The automobile insurer eventually paid $55,000 of the policy amount to the health insurer to settle the subrogation claim. The insured brought a state law claim against the health insurer for the $55,000 settlement money to which he would have otherwise been entitled. When the health insurer removed to federal court, the insured filed a class action claim against the insurer and the collection agency based on, among other things, the FDCPA. The district court dismissed the FDCPA claim, holding that the subrogation claim was not a “debt” within the meaning of the FDCPA.
Analysis
The Fifth Circuit reversed, holding that the subrogation claim arose out of the insured’s contract for insurance, and it was therefore a debt under the FDCPA. The Fifth Circuit remanded the case to the lower court to determine if the insurance company was a debt collector as defined by the statute. Reasoning that the health insurer gained its right to subrogation from the voluntary insurance contract, the court determined that the insurer was seeking to enforce its contract-based subrogation rights against its own insured. The court found that the cases cited by the insurance company, including a tort-based subrogation claim in Hawthorne v. Mac Adjustment, Inc., 140 F.3d 1367 (11th Cir. 1998), were not determinative for a contract-based subrogation claim. “As opposed to Hawthorne, where Hawthorne’s obligations arose from tort law, Hamilton’s obligations arose from a business transaction where Hamilton contracted for personal and family services,” and fit within the FDCPA’s definition of “debt” according to the Fifth Circuit. The court’s connection between the two insurance carriers appears tenuous, and there is a well reasoned dissent by Judge Garza arguing that the definition of “debt” in the FDCPA is not as broad in scope as the majority opinion found. Judge Garza also argued that the majority’s reasoning that Hamilton’s debt arose from a single transaction for insurance was attenuated from the reality that “[the] subrogation claim asserted by United arose out of a string of events” connected however slightly by two separate contracts for insurance. No other court appears to have addressed this issue, and with the logical reasoning of Judge Garza’s dissent, it is difficult to tell which way the next circuit will decide. The district court on remand dismissed the FDCPA claim for a second time, finding that the collection agency and insurance company were not “debt collectors.” Hamilton v. Trover Solutions, Inc., 2003 U.S. Dist. Lexis 8296, *10 (E.D. LA.). Time will tell whether the Fifth Circuit ruling is an anomaly or will be a watershed of decisions that place contract - based subrogation actions within the grasp of the FDCPA.
Learning Points:
Stiff Penalties for Non-Compliance. Even a technical defect in an attempt to collect on a debt can result in civil penalties for the collector, his company and an attorney working on the collection. The FDCPA allows for a maximum fine of $1,000 for each offense, which is often more than the debt itself. Most FDCPA claims are also brought as class actions because of the form nature of collection letters; thus, one violation is usually not an isolated incident. In the case of a class action, the seemingly small individual fine can mount to the statutory maximum of $500,000 for the entire class, add to that the “reasonable” attorney’s fees for a successful action to enforce the FDCPA, and a losing defendant is facing significant liability exposure for what may be a seemingly insignificant infraction.
FDCPA Compliance Requirements. “Honesty is the best policy” when dealing with a debt covered by the FDCPA. In the initial contact with a debtor, you must give the “mini-miranda” styled warning that you are attempting to collect on a debt and any information that you receive from them will be used toward that goal. Also, a debt collector must inform the debtor in writing, either in the first communication or within five (5) days of the initial contact that the debtor has thirty (30) days to dispute the debt in writing. If the debt is not disputed in this time period then the debt is considered valid. If the debtor does dispute the debt, then you must cease all collection activity until you receive verification of the debt from the original creditor and forward this verification to the debtor. In this communication of rights letter, you cannot “overshadow” the debtor’s rights with conflicting language that they have anything less than thirty days. Courts use a “least sophisticated” or “unsophisticated” consumer standard, depending on the jurisdiction, when ruling on the level of confusion created by the creditor, and clear and exact language is strongly encouraged. If a debtor writes to a debt collector to stop all contacts with them they must do so. Of course, this does not erase the debt but leaves filing suit as the only remedy remaining. The act further regulates the harassing, bullying or threatening of debtors, establishes an 8 a.m. to 9 p.m. window for contacting debtors, and restricts the scope of contact with third parties to merely gaining location information.
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