Can a bank be sued for acting as a “debt collector” under the California Rosenthal Act? You are probably tempted to answer “yes” it can, because you know the Act defines a “debt collector” to include an entity that is collecting on behalf of itself or on behalf of third parties. But a closer look at the activities performed by employees of the bank in question may reveal that it is not, in fact, collecting on its own behalf. Instead, all collection activities may be handled through separate, though related, servicing companies, or by third parties. A consumer may have no basis for suing the bank under the Rosenthal Act, and elimination of the bank from the action could significantly reduce the available damages and decrease business interruption for bank officers.
First, a quick review of some key provisions of the Rosenthal Act. Unlike the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et. seq., (“FDCPA”), which, generally speaking, only applies to third party debt collectors, the Rosenthal Act broadly defines a “debt collector” to include persons or entities that collect on behalf of themselves or others. See Cal. Civ. Code § 1788.2(c) (“The term ‘debt collector’ means any person who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection. . . .”) (emphasis added). The Act defines “debt collection” as “any act or practice in connection with the collection of consumer debts.” Id. § 1788.2(b). The Rosenthal Act also incorporates by reference certain sections of the FDCPA, and makes any violation of those FDCPA provisions into a violation of California state law. Id. § 1788.17. Courts have held that consumers may pursue class actions under the Rosenthal Act, and the statutory damages in such cases are capped at the lesser of $500,000 or one percent of the net worth of the defendant. See, e.g., Gonzales v. Arrow Financial Services, LLC, 660 F.3d 1055, 1065 (9th Cir. 2011).
Thus, if the employees of a bank actually handle collection activity on behalf of the bank, it may be a “debt collector” subject to the Rosenthal Act. But if the bank relies on employees of a related servicing company or other third parties to collect, then is the bank actually engaged in “debt collection” as defined by the Act? Probably not.
If the bank does not have employees who engage in collection efforts, such as making collection phone calls or sending collection letters, there is a strong argument the bank is not a “debt collector” under the Rosenthal Act. In an analogous context, courts have regularly held that a debt buyer who simply purchases and owns unpaid accounts, and then utilizes other entities to actually collect them, is not a “debt collector” under the FDCPA. See, e.g., Gold v. Midland Credit Mgmt., Inc., 82 F. Supp. 3d 1064, 1072-73 (N.D. Cal. 2015) (summary judgment granted on FDCPA and Rosenthal Act claims for debt buyer that retained affiliate company to collect debts); Kasalo v. Trident Asset Mgmt., LLC, 53 F. Supp. 3d 1072, 1077 (N.D. Ill. 2014) (“[a]n entity that acquires a consumer's debt hoping to collect it but that does not have any interaction with the consumer itself does not necessarily undertake activities that fall within this purview.”); Scally v. Hilco Receivables, LLC, 392 F. Supp. 2d 1036, 1037 (N.D. Ill. 2005) (“Hilco did not act directly to collect Scally’s debt: Hilco never contacted Scally to collect the debt nor did Hilco mail the allegedly offending collection letter. Rather, Hilco outsourced the activity of debt collection to co-defendant MRS, which mailed the letter that is the basis of Scally’s complaint.”).
Why does any of this matter, you may ask? Well, it may matter a lot, depending on the claims asserted in the litigation, the identity of the parties, and the procedural posture of the case. If the only claim asserted against the bank arises under the Rosenthal Act, it may be subject to a dispositive motion, thereby sparing the bank and its officers of the cost and distraction associated with litigation. Employees of the servicing companies who actually do the collection work will likely make better witnesses to support other defenses to a Rosenthal Act claim. Eliminating the bank as a defendant could also impact the damage exposure in the case. For example, in a Rosenthal Act class action, statutory damages are capped at the lesser of $500,000 or one percent of the net worth of the debt collector. The dismissal of a bank from the case could significantly reduce the exposure to statutory damages. Depending on the procedural posture of your case, there may be other strategic considerations bearing on when and how this defense is best raised.
What’s the bottom line? Do not assume that a bank or other financial institution is a “debt collector” under the Rosenthal Act until you closely analyze the functions performed by employees of the bank, as opposed to activities performed by employees of related servicing entities or third parties. If you determine the bank is not a “debt collector” under the Act, think strategically about when and how to break the news to your adversary.