Federal District Court Upholds CFPB Claims Against Debt Collection Law Firm But Rejects Open-Ended Statute of Limitations Arguments

On July 14, 2015, the U.S. District Court for the Northern District of Georgia denied defendants’ motion to dismiss the Consumer Financial Protection Bureau’s (CFPB) claims in CFPB v. Frederick J. Hanna & Associates. The CFPB’s complaint in this case alleges that the defendants, a law firm and its principals, operate “less like a law firm than a factory” that files tens of thousands of collection cases each year. The complaint alleges that the defendants filed over 350,000 collection suits each year, but that attorneys spend less than a minute reviewing and approving each suit. The CFPB’s complaint alleges that the lack of attorney involvement constitutes a violation of the Fair Debt Collection Practices Act’s (FDCPA) and the Consumer Financial Protection Act’s (CFPA) prohibitions on deceptive practices because the collections actions filed by the defendants represented to consumers that attorneys were meaningfully involved in filing those actions when in fact they were not. The CFPB’s complaint also alleges that the defendants’ use of affidavits in which affiants represented they had personal knowledge of the validity and ownership of the debts violated these same statutes.

In denying the motion to dismiss, the court held that the practice-of-law exclusion to the CFPB’s authority — which generally provides that the CFPB may not exercise certain authority with respect to “an activity engaged in by an attorney as part of the practice of law” — does not apply to this case for several reasons. First, the exclusion is only applicable to the CFPB’s authority to prohibit unfair, deceptive or abusive acts or practices, and not to its authority to enforce other laws, such as the FDCPA. Second, the exclusion also does not apply to the CFPB’s deception claims under the CFPA in this case because one of two exceptions to the exclusion applies to the conduct at issue. Specifically, the practice-of-law exclusion does not apply where the underlying claim is not predicated on the provision of legal advice or services to a consumer. Here, the CFPB’s deception claims were based on the legal services provided to debt collectors, not consumers, and thus fall into the exception to the exclusion. This holding may further embolden the CFPB, which has brought enforcement actions against attorneys in a variety of contexts.

The district court also rejected several constitutional challenges asserted by the defendants. First, relying on precedents rejecting similar challenges to FDCPA claims predicated on litigation conduct, the court rejected the defendants’ claim that the CFPB’s lawsuit infringes on their First Amendment right to petition the government for redress of grievances. Second, the court rejected the defendants’ equal protection claim, which was predicated on the defendants’ assertion that the lawsuit burdened their right of access to the courts, holding that there is “no fundamental right at stake here that triggers strict scrutiny.”

The court also rejected the defendants’ arguments on the merits of the CFPB’s claims. First, the court held that the CFPB stated a claim for FDCPA and deception violations based on the alleged lack of attorney involvement in the preparation of the collections complaints filed by the defendants. Reviewing precedents applying the “lack of meaningful” involvement concept to a variety of attorney communications, the court noted that the “main concern in these cases is … that a communication signed by a lawyer but without meaningful attorney involvement falsely leads the consumer to believe that a lawyer has reviewed the debtor’s account and assessed the validity of the creditor’s position.” The court thus held that the filing of lawsuits signed by attorneys could mislead consumers into believing that attorneys had reviewed the consumer’s file and that the CFPB had thus stated deception claims under both the FDCPA and the CFPA.

The court similarly held that the CFPB stated both a FDCPA and a CFPA claim with respect to its allegations that the defendants used affidavits when they knew or should have known that the affiants lacked personal knowledge of the facts in the affidavits. In reaching this conclusion, the court rejected the defendants’ arguments that the heightened pleading standard of Federal Rule of Civil Procedure 9 applies to such claims. Rule 9 requires that in cases “alleging fraud or mistake” a complaint must “state with particularity the circumstances constituting fraud or mistake,” as distinguished from the general pleading rules, which require only a “short and plain statement of the claim.” Noting that district courts are split on this question, the court reviewed the purposes behind the heightened pleading standard in fraud cases and determined it did not apply to the CFPB’s claims. Addressing the sufficiency of the CFPB’s affidavit claims under normal pleading standards, the court expressly noted that the CFPB’s claims focus on debt collection activities in the “context of the debt buyer market.” The court then took judicial notice “that debt buyers often or may routinely lack evidence of the debt they seek to recover.” Against “this backdrop,” the court held that the CFPB stated plausible claims under both the FDCPA and the CFPA. The holding that heightened pleading standards do not apply, if upheld on appeal, may have broader implications for other cases brought by the CFPB. Similarly, the court’s comments about the “debt buyer market” indicate judicial concerns about an area that the CFPB itself has highlighted as fraught with risks for consumers.

Finally, the court deferred decision on the applicable statute of limitations. In doing so, the court expressly rejected the CFPB’s argument that no statute of limitations applies to government enforcement actions under the FDCPA. Instead, the court held that either a one-year statute of limitations (which applies to private actions under the FDCPA) or a three-year statute of limitations (which applies to certain actions under the CFPA) applies to the CFPB’s claims. Determining that decision of this issue should not affect the scope of discovery, the court deferred decision on the issue to allow for further judicial developments. The ruling marks the second time a district court has ruled against the CFPB with respect to the applicability of a statute of limitations. In March of this year, the Southern District of Indiana dismissed the CFPB’s Truth in Lending Act (TILA) claims against ITT Educational Services, Inc. as barred by TILA’s one-year statute of limitations, which the CFPB had argued did not apply to government enforcement actions. The continued development of the law in this area may impact the CFPB’s decision as to whether to pursue claims in federal district court or administratively. The CFPB has held that no statute of limitations applies to administrative claims brought under the Real Estate Settlement Procedures Act, using reasoning that the CFPB may argue also applies to other statutes that the CFPB enforces.

A copy of the district’s decision is available here. A copy of the decision in the ITT case is available here. A copy of the CFPB’s decision in PHH addressing the statute of limitations under RESPA is available here.