Page 13 - John Hundley 2012

Sharp Thinking

No. 62 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. April 2012

Debt Collection Law Often Misunderstood

Understanding of Federal Statute Often Lacking Even Among Those Who Use It

By John T. Hundley, Jhundley@lotsharp.com, 618-242-0246

Individuals who are mistakenly dunned by debt collectors have standing to seek relief under the
Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 et seq. (“FDCPA”), a federal appeals court ruled
recently. However, debts not arising from consensual consumer transactions for goods or services are
not “debts” covered by that act, another appeals court has ruled.

The standing decision came in Dunham v. Portfolio Recovery Assoc., LLC, 663 F.3d 997 (8th Cir.
2011). In that case, the debt collector sent a dunning letter to the wrong James Dunham, and the
recipient sued, claiming the collector had not undertaken
adequate investigation to verify the debt. The court rejected First of three issues on the federal
the collector’s argument that standing was limited to the Fair Debt Collection Practices Act.
“consumer” who was the actual debtor, but affirmed
judgment for defendant on the alternative ground that it had

made an adequate verification effort even though it had not contacted the original creditor in that effort.

The “consensual consumer transaction” test for covered “debts” was adopted by the 7th Circuit U.S.
Court of Appeals in Gulley v. Markoff & Krasny, 664 F.3d 1073 (7th Cir. 2011). There a landowner had
sued a collection firm complaining of its practices in collecting municipal fines. The court ruled such
fines were not covered by the FDCPA.

The pair of cases demonstrates the complexity of the federal statute, which we will address in this
and the next two issues of Sharp Thinking.

Covered “Debts” Limited. Because the act aims to protect consumers, a debt subject thereto
is defined as an “obligation or alleged obligation of a consumer to pay money arising out of a
transaction in which the money, property, insurance, or services which are the subject
of the transaction are primarily for personal, family, or household purposes”. §
1692a(5). Hence the act generally will not apply to business debts. Miller v. McCalla,
Raymer, Padrick, Cobb, Nichols & Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000). An
extension of credit is not the talisman for deciding whether a liability is a debt.
Rather, the most critical factor seems to be whether the alleged liability is based on a
contract or other consensual obligation. See Bass v. Stolper, Koritzinsky, Brewster &

Neider, S.C., 111 F.3d 1322 (7th Cir. 1997); Gulley v. Markoff & Krasny, discussed above.

Who Is A “Debt Collector”? Most FDCPA proscriptions apply only to “debt collectors”, a term
which generally includes “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.” §
1692a(6); McCready v. eBay, Inc., 453 F.3d 882 (7th Cir. 2006). The effect of the word “another” in
that passage is to exclude from the statute most creditors pursuing their own claims. McKinney v.

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