Chad Schlosser and Frances Schlosser v. Fairbanks Capital Corporation

Citations: 323 F.3d 534; 2003 WL 1401417Docket: 01-3487

Court: Court of Appeals for the Seventh Circuit; April 16, 2003; Federal Appellate Court

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Fairbanks Capital Corporation acquired 12,800 high-interest mortgages from ContiMortgage, including one belonging to Chad and Frances Schlosser, who were incorrectly identified as being in default. Fairbanks, acting as a debt collector, sent a letter to the Schlossers asserting the loan was in default and threatening foreclosure. The letter included formal notice of default and the Schlossers' rights to contest the debt. Despite the Schlossers' attempts to make payments and assert that they were not in default, Fairbanks refused payment and initiated foreclosure proceedings, which were later dismissed.

The Schlossers filed a lawsuit claiming Fairbanks violated the Fair Debt Collection Practices Act (FDCPA) by failing to inform them of their right to contest the debt in writing, as mandated by 15 U.S.C. § 1692g(a). They also raised a claim under the Illinois Consumer Fraud Act. The district court dismissed the FDCPA claim, ruling that Fairbanks did not qualify as a debt collector since the debt was not actually in default at the time of acquisition. The court denied the Schlossers' motion for class certification and declined to exercise supplemental jurisdiction over the state law claim. The Schlossers appealed the dismissal of their FDCPA claim, challenging the district court's interpretation of the law.

The FDCPA delineates between "debt collectors" and "creditors," with creditors generally motivated by maintaining goodwill and thus not covered by the Act. Creditors are defined as those who create or are owed a debt, while debt collectors attempt to collect debts owed to others. The Act distinguishes these categories based on the status of the debt at the time of assignment: if a debt is in default when acquired, the assignee is considered a debt collector; if not, they are deemed a creditor. In this case, Fairbanks contends it is not a debt collector since the Schlossers' loan was not in default upon acquisition. This position is supported by the precedent set in Bailey, where a mortgage servicing company was not classified as a debt collector for collecting a forbearance agreement that was current. However, Fairbanks's situation involves complexities regarding the actual default status of the debt when acquired and whether its mistaken assertions impact its classification under the FDCPA. The court reviews this matter de novo, accepting the allegations in the complaint as true, and recognizes that there is no precedent directly addressing the relevance of Fairbanks's collection activities to its status under the Act.

Fairbanks's interpretation of the Fair Debt Collection Practices Act (FDCPA) suggests that collection activities are exempt from regulation if the debt was not in default at the time it was acquired. This interpretation leads to outcomes that conflict with the statute's purpose, particularly the validation requirements under 15 U.S.C. § 1692g, which are intended to prevent collection actions based on incorrect information. Fairbanks's view implies that if a debt collector mistakenly identifies a debt as in default, they would only be liable for failing to provide notice on debts they correctly identified as in default, leaving those mistakenly deemed in default without recourse under the statute.

The court argues that Congress could not have intended such contradictory results, and while clear statutory language typically guides judicial interpretation, unreasonable outcomes allow courts to seek alternative interpretations. The court suggests that the language of § 1692a(6)(F)(iii) can be read to emphasize the status of the debt being collected, rather than solely the default status at the time of acquisition. This interpretation aligns with the FDCPA's broader intent to regulate debt collection practices regardless of the validity of the debt in question, as indicated by definitions within the Act and supporting case law. Thus, the FDCPA holds debt collectors accountable for abusive practices irrespective of whether the debt is legitimately owed.

The obligation's status at the time of assignment is critical to determining the nature of the assignee's activities towards the consumer, as regulated by the statute. If a loan is current upon acquisition, the assignee's relationship with the debtor mirrors that of the original lender, allowing for regulated servicing practices. Conversely, if the loan is in default, the relationship shifts solely to collection activities. However, if the assignee is mistaken about the loan's status, their ignorance should not exempt them from compliance with the Fair Debt Collection Practices Act (FDCPA). 

The statutory framework suggests that Congress likely did not intend for the assignee's lack of knowledge to dictate their regulatory obligations. Specifically, under 15 U.S.C. § 1692a(4), an assignee who acquires a debt in default solely for collection purposes is not classified as a creditor. Fairbanks, which received an assignment of a debt in default aimed at facilitating collection, does not meet the creditor definition and thus cannot claim exemption from being considered a debt collector. Fairbanks's interpretation of the statute fails to reconcile with the exclusion of its creditor status, lacking evidence supporting its position. Therefore, the court rejects Fairbanks's arguments regarding its classification and reverses the district court's judgment, remanding the case for further proceedings. 

An alternative scenario is noted where if Fairbanks had acquired the loan for servicing and later discovered it was in default, it could have been classified as a creditor under § 1692a(4) and thus outside the Act's scope.