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Analysis: Court Allows FDCPA Claim to Proceed on "Principal Purpose" Theory

My analysis, below, of the decision in Holloway v. JTM Capital Mgmt., LLC., No. 1:18-cv-1794, 2019 WL 1040851 (N.D. Ohio Mar. 5, 2019) was originally published in the March 21, 2019 edition of AccountsRecovery.net’s ARM Compliance Digest. Click here for more information on the case.

In its 2017 Henson decision, the Supreme Court provided an open invitation to litigants and courts to test the bounds of the “principal purpose” definition of a debt collector in future cases.  How much of a company’s operations must be devoted to debt collection to constitute a “principal purpose”?  When alleging that a defendant’s principal purpose is debt collection, how much factual detail must a plaintiff plead to survive a motion to dismiss?   

The recent Holloway decision in the Northern District of Ohio is noteworthy for its attempt to address some of these issues.  Ultimately, however, one hopes that the case has little precedential value in light of the muddled allegations and arguments, and the court’s cursory analysis, relating to the principal purpose test.  The complaint conflates the two statutory definitions of a debt collector.  It alleges that the defendant “regularly uses the instrumentalities of interstate commerce” (invoking a portion of the “principal purpose” test) to “collect debts that are in default” and for which the defendant was “not the original lender” (concepts applicable only to the “regularly collects” portion of the definition).  The complaint makes no explicit mention of the “principal purpose” definition nor does it contain any factual allegations about the defendant’s business operations.  Nonetheless, the court determined that the complaint sufficiently alleges that the defendant falls within the principal purpose definition under the statute.  While other courts (notably the Third Circuit’s decisions in the Tepper and Barbato cases) have undertaken closer scrutiny of what amounts to a business’s “principal purpose,” the Holloway decision indicates that this remains an under-developed area of the law.   

Less controversial is the Holloway court’s holding that a credit inquiry for the purpose of “collection” may, at the pleading stage, amount to an FDCPA violation assuming, as alleged, that there was no valid debt to collect.  In recent years, plaintiffs’ attorneys have leveraged consumer bankruptcy proceedings to open the door to FDCPA and FCRA claims.  This decision is yet another example of those pitfalls.  And yet, because the decision arises in the context of a motion to dismiss, the lesson here may be a modest one—while there are often good reasons to take a shot at a motion to dismiss, outright victories at the pleading stage are uncommon. 

Mark Rooney