State Supreme Court Decision Defines Forwarders as Collection Agencies

The Michigan Supreme Court recently overturned two lower court rulings and expanded the definition of “collection agency” to include forwarders and forwarding companies. The case may require certain forwarding companies to obtain a collection agency license in the state.

In a case that pitted a collection agency against the creditors and forwarders that gave it business, the high court ruled that forwarders or forwarding companies are indeed defined as “collection agencies” under Michigan’s Occupation Code. The case is Badeen v. PAR, Inc., et al.

The plaintiff owns a collection agency licensed to collect debts in Michigan. He sued a host of creditors and forwarding companies – including Bank of America, Toyota Motor Credit, and PNC Bank – alleging that the forwarders were operating as collection agencies without obtaining the proper license and that the creditors were in violation for hiring unlicensed collectors.

The case represented a nuanced reading of a practice that has evolved since most debt collection laws were written: the use of forwarding intermediaries to farm work out to local and regional collection agencies.

In its unanimous decision, the Michigan Supreme Court Justices wrote that Badeen’s disputes “lie in the shifting landscape of collection practices.” Where once a creditor would simply manage its own national network of local collection agencies, now forwarders are stepping in to help them.

“The forwarding companies operate nationwide, and when a creditor needs a collection it contracts with a forwarding company, which, in turn, allocates the collection to a collection agent in the appropriate location,” the Justices wrote in the introduction.” The forwarding companies maintain networks of collection agents and negotiate favorable rates that save creditors money and allow the forwarding companies to make a profit. Plaintiffs allege that this business model negatively affects licensed local collection agents.”

The initial trial court and the Michigan Court of Appeals sided with the defendants, finding that since forwarders do not solicit consumers directly to collect the debts, they should not be considered collection agencies subject to licensing. Michigan’s Occupation Code requires a company to “solicit a claim for collection” to be defined as a collection agency.

But the Supreme Court disagreed with the meaning of “solicit a claim for collection.” The Justices said that when a forwarder contacts the creditor for unpaid accounts to be collected by agencies, that satisfies the “solicit a claim for collection” clause.

While the high court ruled against the defendants in this matter, there were other issues held over from the appeals court that were not addressed. The case is remanded for further proceedings. But forwarders operating in Michigan should take note and consider becoming licensed.