Utah District Court Finds Petition Clause Bars FDCPA Suit Brought Against Debt Buyer for Filing Collection Suit Without a License

Over the last several years, debt buyers have been subject to a steady stream of lawsuits (often filed as a class) in Utah wherein consumer attorneys have taken advantage of Utah’s vague licensing statute and pursued debt buyers with a vengeance. Despite the financial success consumer attorneys have found pursuing these matters, the party may be coming to an end as the result of an Order issued by Judge Howard Neilson in the case of Holmes v. Crown Asset Management, LLC case No 2:19-cv-00758 (Dist. Ct. Utah August 6, 2021)

Background: The basis for the lack-of-license lawsuits:

Utah Code Section §12-1-1 states that “[n]o person shall conduct a collection agency, collection bureau, or collection office in [Utah] or … collect or receive payment for another…” without a license. The statute does not address debt buyers which do not have an office in Utah and only collect debt they own. 

Seizing on this area of gray, in a series of near cookie-cutter complaints, consumer attorneys have alleged that debt buyers filing lawsuits against consumers without holding a debt collection license have violated the Fair Debt Collection Practices Act (FDCPA) and Utah state law. Notably, these lawsuits typically involve cases where the debt buyer successfully obtained a judgment against the consumer in state court.

The FDCPA claims typically allege that by filing collection lawsuits without a license, the debt buyer violated the FDCPA by (a) taking an action that could not legally be taken; and (b) using unfair and unconscionable means to collect a debt.  The Utah state law claims consumers file against debt buyers are typically based solely on the alleged failure to obtain a debt collection license before attempting to collect the debt.  

The defense in the Holmes case:

In response to the suit filed against it by multiple consumers, Crown Asset Management (Crown) argued that the Petitions Clause of the U.S. Constitution barred the suit. For those of us not generally familiar with the Petitions Clause (admittedly, whatever I learned about this in law school was long gone from my head, probably replaced by some meaningless baseball statistic), the “Petition Clause” is found in Article I of the U.S. Constitution which provides that “Congress shall make no law . . . abridging . . . the right of the people . . . to petition the Government for a redress of grievances.”  Per Judge Neilson, the case law on the matter provides that the Petition Clause thus immunizes litigants from liability for their petitioning activities (i.e., filing a lawsuit) unless the petitioning is a sham.

To determine whether a lawsuit is a sham, the Court implemented a two-step approach which asks (1) is the petitioning objectively reasonable? (2) if not objectively reasonable, what is the subjective intent behind the petitioning?” Under this approach, Judge Nielson concluded that the Crown lawsuits were not a sham, as Crown actually prevailed in each suit. Further, the lawsuits could not be considered a sham since the vague nature of the Utah statute could have led Crown to reasonably believe that it was permitted to file the lawsuits without a license. Since the Utah statute does not define what a “collection agency,” “collection bureau,” or “collection office” is, Crown, which only collected debts it owns, could have reasonably believed it did not fit into any of those categories.

What about all the cases holding collection suits are subject to the FDCPA?

While the Order in the Holmes case makes clear that immunity provided by the Petition Clause is a constitutional right, it provides additional clarity by distinguishing two Supreme Court cases that have allowed FDCPA suits based on collections litigation to proceed. Specifically, the Order distinguishes Heintz v. Jenkins, 514 U.S. 291 (1995), on the basis that Heintz rejected only the categorical proposition that the act never applies to lawyers in litigation; and Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573 (2010) on the basis that Jerman, held only that the FDCPA’s bona fide error defense does not apply to legal errors.

Unlike Heintz and Jerman, the entirety of the consumers’ claims in the Holmes matter were based solely upon the filing of the state court lawsuits and did not allege any other act or omission by the debt buyer. As such, Judge Nielson concluded that since a lawsuit to recover a debt is covered by Petition Clause Immunity, Crown could not be held liable under the FDCPA for seeking to recover debts through the state court, absent a showing that Crown filed sham petitions. This is so even though the consumers alleged the debt buyer used “false, deceptive, and misleading representations” to attempt to collect the debt in violation of the FDCPA.  

insideARM Perspective:

First, Kudos to Crown Asset Management and its counsel Mark Nickel and David Garner of Gordon  & Rees, for presenting this argument to the court. These lack-of-license cases against debt buyers in Utah began to surface around 2018.  The results have been mixed, and many have ended in settlements. Until the August 6, 2021 Order in the Holmes matter, there had not been a decision that clearly put an end to the litigation.  As an added bonus, in addition to dismissing the suit, Judge Neilson provided a highly detailed analysis of the Petitions Clause and its application to the facts, which is clear enough that it may give other debt buyers a means to dispose of similar lawsuits.