News & Views

Collecting for a Creditor vs. Collecting for a Debt Collector?

Section 1692g of the FDCPA requires that “within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall . . . send the consumer a written notice” of the consumer’s validation rights.  But how many such notices are required? Must each successive debt collector send a new notice?

Although a few thinly-reasoned district court decisions have held that a consumer is entitled to a single validation notice from the first collector with whom a debt is placed and not from subsequent collectors, the first appellate court to reach the issue held to the contrary.  In Hernandez v. Williams the Ninth Circuit Court of Appeals held that each successive debt collector to which a debt is assigned must send its own validation notice after its initial contact with the consumer regarding a particular debt.

However, a recent decision by the United States District Court for the Eastern District of Washington has put a new twist on the issue.  In Laak v. Quick Collect the court held that Hernandez applies to successive collectors that collect for the same creditor, but not those that collect for the same debt collector.

Quick Collect started trying to collect from Laak in 2001, first by sending an FDCPA validation notice and then by suing and obtaining a default judgment against him.  In 2011, the judgment was renewed, and in 2016, Quick Collect engaged Jesse Conway as its attorney.  Conway served garnishment papers on Laak and Laak’s employer.  Leak then sued, alleging that Quick Collect and Conway were liable under the FDCPA because Conway did not send him a validation notice within five days of sending the garnishment notice.

Noting that the FDCPA applies to attorneys engaged in litigation activities, including the filing of an application for a writ of garnishment, the court nevertheless distinguished Hernandez, concluding that Conway had no liability and therefore Quick Collect had no vicarious liability for Conway’s failure to send a validation notice.  The outcome rests upon basic principles of agency law and the Supreme Court’s recognition that “[t]he relationship between client and attorney, regardless of the variations in particular compensation agreements or the amount of skill and effort the attorney contributes, is a quintessential principal-agent relationship.”

Finding that Conway was Quick Collect’s agent and that Quick Collect was a debt collector that had already sent a validation notice, the district court held that Hernandez was inapposite because the court of appeals failed to reach the applicability of Section 1692g to successive collectors who act on behalf of a debt collector, rather than a creditor.  Analogizing to a relay race in which a runner hands the baton to a teammate to continue the race, the district court concluded that Conway was acting as an agent for a principal debt collector that had already complied with the FDCPA validation notice requirements; therefore, Conway was not required to send his own validation notice

There are two clear limits on the holding.  First, the district court found that Quick Collect’s validation notice was compliant with the FDCPA.  Had it not been, it is not clear that the same outcome would have been reached.  Second,

If the principal debt collector were to transfer the debt to another debt collector, the first debt collection process would end, and the subsequent debt collector would be required to begin a new collection debt process, including sending a validation notice that complies with § 1692g(a), as the Hernandez court held

The Laak decision presents an interesting defensive argument (under limited circumstances) for attorneys who represent collection agencies and debt buyers and for agencies and debt buyers against whom vicarious liability is asserted in connection with validation notice claims.  If the debt buyer or agency has already sent a proper validation notice to a consumer, defects in a later validation notice sent by the attorney may be excused, eliminating both direct and vicarious liability.  Of course, it is unclear whether the Laak analysis will be adopted by appellate courts, but for now, it presents a defense worth considering.

Caution should be exercised in reading this case beyond the facts presented.  It seems doubtful that an attorney representing a direct creditor or a new debt owner would succeed as Conway did in this case.  He was, after all, a “debt collector,” and he was attempting to collect a debt covered by the FDCPA.  If he had been acting as an agent for any entity other than another “debt collector” that had already provided a validation notice to the consumer there would be no way to distinguish this case from Hernandez.

The court’s denial of vicarious liability should be of interest not only to collection agencies that sue in their own names, but also to debt buyers who are regularly sued for alleged deficiencies in the letters of the debt collectors whom they retain.