In a split decision, the United States Court of Appeals for the Second Circuit ruled that a creditor can be held liable for sending letters using a law firm’s letterhead when plaintiffs alleged that the substance of the letters was created by the creditor itself, pursuant to a “program” in which the law firm marketed use of its letterhead by creditors as a “collection tool.” After defaulting on their mortgages, defendants contracted with a law firm to send breach notices to plaintiffs. Plaintiffs filed suit alleging defendants violated the Fair Debt Collection Practices Act and the Truth in Lending Act. In particular, plaintiffs alleged that the breach letters violated FDCPA by creating a false impression that a third party was hired to collect the debt and falsely implied that the law firm was retained to collect the debt and commence legal proceedings.

The issue before the Court was whether FDCPA and TILA applied to a mortgage lender that purchased mortgages initially payable to another lender, and after the homeowners defaulted, hired a law firm to send debt collection letters on its behalf. The ruling concerns an exception to the general rule that creditors are not liable under FDCPA.  Under section 1692a(6) of  FDCPA, a creditor may not send communications under “any name other than [its] own” (e.g., such as the name of a creditor’s in-house collections unit). The Court ruled that plaintiffs stated a triable issue of fact as to whether the creditor was merely using the law firm’s letterhead to send out debt collection letters—and thus “impersonating” a debt collector—or whether the law firm was actively performing debt collection services. The record showed that the law firm physically printed and mailed the letters, but there was some question on the extent of the law firm’s services. Citing an FTC policy statement, the Court held that a law firm must be more than a mere “conduit” of information to qualify as an independent debt collector under FDCPA, and should exercise “considered, professional judgment” regarding the propriety of collection from the particular debtor, which would showing the law firm to be a “bona fide” debt collector.

The Court also affirmed dismissal of a TILA claim alleging that the creditor should have refunded credit balances owed to their accounts, alleging the credit balances resulted from “unauthorized fees and expenses.” Because defendant was not the original creditor of the debts in question, but rather an assignee, TILA liability did not apply. Though the Court questioned whether this result stemmed from a drafting oversight as opposed to a reasoned Congressional determination, the Court nonetheless declined to impose TILA liability on the assignee. A lengthy dissent criticized the majority’s FDCPA holding as “sow[ing] ambiguity into an otherwise straightforward statutory scheme” by allowing suits against creditors to determine whether their lawyers are “insufficiently involved in ‘bona fide’ collection efforts.” In the dissent’s view, any deception lay with the attorney who claimed to be collecting the debt, not with the creditor that used the attorney’s services. But the dissent found no such deception here, given that the attorneys had follow-up communications with the letterhead, and appeared to have some involvement in the drafting of the form debt collection letter.

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