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Given the financial impact of COVID-19 on the country and world, both federal and local governments have scrambled to impose new protections for consumers. Federal protections have been put in place to prevent the collection of both principal and interest on certain federally-held student loans, as well as relief from foreclosure for many federally-backed mortgage loans. Many state governments have also placed limits on debt collection and collection-related activities, leaving many companies wondering to what extent their daily business could be impacted.
While the language of each state’s order or regulation will vary, and must be reviewed carefully (for example, Illinois has prohibited the repossession of vehicles while Texas has prohibited service on writs of garnishment), many have imposed wider restrictions on debt collection as a whole. Massachusetts, in Emergency Order 940 CMR 35:00, considers it an unfair or deceptive act or practice for any creditor, including debt collectors, to initiate, file, or threaten to file any new collection lawsuit, as well as to initiate, threaten to initiate, or act upon other legal or equitable collection remedies, including for the garnishment, seizure, attachment, or withholding of wages, earnings, property, or funds for the payment of a debt to a creditor, with a wide range of other similar collection-related activities also prohibited. Nevada’s Financial Institutions Division has determined that collection agencies are not essential businesses and, therefore, must close, ceasing collection activity, and Washington D.C. has implemented restrictions surrounding the initiation, filing, or threat of filing lawsuits related to debt collection.
Most state guidance prohibits these actions by “creditors” and/or “debt collectors”, and each state defines these terms differently. Generally, though, these state definitions mirror those found in the Fair Debt Collection Practices Act (“FDCPA”), a set of federal laws that provide consumers with protection from harassment or abuse in connection with the collection of a debt. Relevant definitions within the FDCPA, Section 803 include:
- Creditor: any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.
- Debt: any 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, whether or not such obligation has been reduced to judgment.
- Debt Collector: any person who uses any instrumentality of interstate commerce or the mails in any business for the principal purpose of 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. Notwithstanding the exclusion provided by clause (F) of the last sentence of this paragraph, the term includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. For the purpose of section 1692f(6) of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business for the principal purpose of the enforcement of security interests.
The Massachusetts order, for example, provides substantially similar definitions:
- Creditor: any person and his or her agents, servants, employees, or attorneys engaged in collecting a debt owed or alleged to be owed to him or her by a debtor and shall also include a buyer of delinquent debt who hires a third party or an attorney to collect such debt provided, however, that a person shall not be deemed to be engaged in collecting a debt, for the purpose of 940 CMR 7.00, if his or her activities are solely for the purpose of serving legal process on another person in connection with the judicial enforcement of a debt.
- Debt: money or its equivalent which is, or is alleged to be, more than 30 days past due and owing, unless a different period is agreed to by the debtor, under a single account as a result of a purchase, lease, or loan of goods, services, or real or personal property, for personal, family or household purposes or as a result of a loan of money which is obtained for personal, family or household purposes whether or not the obligation has been reduced to judgment.
- Debt Collector: any person or business whose principal purpose is the collection of a debt, or who regularly collects or attempts to collect, directly or indirectly, a debt owed or due or asserted to be owed or due another. The term debt collector shall also include any person who buys or acquires debt that is in default at the time of purchase or acquisition and who seeks to collect such debt. The term debt collector shall include a creditor who, in the process of collecting his own debt, uses any name other than his own which would indicate that a third person is collecting or attempting to collect the debt. The term debt collector shall also include a person in a business the principal purpose of which is the enforcement of security interests.
Businesses, then, must undertake to determine whether they are considered to be a “creditor” and/or a “debt collector” within the meaning of the relevant statute or governing order. Generally, companies that pursue subrogation are not considered to be creditors or debt collectors, as collection of a debt is not their primary purpose. Further, while it’s easy to think of the practice as a collection-type activity when money is exchanged between adverse parties, courts have historically been hesitant to consider subrogation pursuit actual collection and subject to the FDCPA or its state-law counterparts.
In Hawthorne v. Mac Adjustments, Inc., 140 F.3d 1367 (11th Cir. 1998), Liberty Mutual’s insured was involved in a motor vehicle accident with another party. Liberty Mutual paid their insured’s claim, then referred the case to a third-party administrator (“TPA”) to pursue recovery from the negligent driver (Hawthorne). After hearing challenges involving violations of the FDCPA, the court ultimately held that the FDCPA did not apply to a TPA’s communications to the tortfeasor, because the payment obligation was not considered to be a “debt”. Since the FDCPA will arise when a “debt” is considered, there must be a consumer transaction – here, the payment obligation arose from the act of driving negligently and causing an accident, not a consumer transaction. This logic has held true throughout review of Hawthorne: see Shaw v. Credit Collection Services, 2008 WL 2941261 (M.D. La. 2008) (unreported) (TPA’s subrogation claim against driver liable for Allstate’s loss sustained in motor vehicle accident was based in tort and was not “debt,” citing Hawthorne); Antoine v. State Farm Mut. Auto Ins. Co., 662 F. Supp.2d 1318 (M.D. Fla. 2009) (alleged negligent driver’s FDCPA claim against State Farm for efforts to collect state court judgment debt stated no cause of action because obligation arose from tort claim).
States have also begun to tackle this issue. In Ybarra v. Greenberg & Sada, P.C., 2018 CO 81, ¶ 3, 429 P.3d 839, 841, reh’g denied (Nov. 19, 2018), Francis Ybarra brought suit against a Colorado law firm representing the subrogation interest of State Farm, pursuant to damages State Farm had paid to its insured in connection with an accident caused by Ms. Ybarra. The law firm, on behalf of State Farm, pursued a default judgment against Ms. Ybarra for her negligence. Ms. Ybarra alleged several violations of the Colorado Fair Debt Collection Practices Act (which closely mirrors the federal FDCPA), but the Colorado Supreme Court ultimately held that the tort claim to which State Farm was subrogated did not obligate Ms. Ybarra to pay any money and, therefore, was not a debt within the Colorado FDCPA. The court explained that whether the claim is viewed as tort or contractual, it did not give rise to an obligation to pay money and, therefore, could not be considered a debt. “It is enough here that a tort, at the very least, cannot be a transaction capable of giving rise to an obligation to pay money at all, and that a subrogated tort claim is at least not a transaction giving rise to an obligation of the tortfeasor to pay money. With regard to the first, Ybarra’s assertion is refuted as much by the nature and meaning of “tort” as by the Act’s definition of “Debt.” With regard to the second, Ybarra’s assertion is refuted by the fact that a contract for subrogation is not a transaction with the tortfeasor at all, much less one that creates an obligation of the tortfeasor to pay money.” Ybarra v. Greenberg & Sada, P.C., at ¶ 13.
It is important to note that subrogation activity can sometimes blend into what could be considered collection further down the road. For example, companies sometimes will take a default judgment against an uninsured defendant with intent to later pursue the individual’s property or wages. When a company has a judgment or a lien in hand, they’re more likely to fall within the applicable definitions of a “creditor” attempting to collect a “debt” and, therefore, this secondary type of collection following subrogation should be viewed carefully in light of the relevant COVID-19 consumer protection orders. Consideration should also be given to subrogation and reimbursement claims asserted against a company’s own insured – for example, asserting a recovery interest from an insured’s med pay or UM coverage might result in a “debt” being owed, though one need carefully still consider whether they are considered to be a “creditor” or “debt collector”.
While companies must be careful to evaluate and properly classify their business activities and review each state’s order language, most pursuing subrogation or reimbursement as a subrogee of their insured will not have their daily operations substantially impacted by prohibitions on collection activity in the era of COVID-19.
If you should have any questions regarding this article or subrogation in general, please contact Amy Smith at [email protected].
 https://www.consumerfinance.gov/about-us/blog/what-you-need-to-know-about-student-loans-and-coronavirus-pandemic/; see generally § 3513 of the CARES Act: https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf
 See generally § 4022 of the CARES Act, https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf