NJ Appellate Division Holds Debt Purchaser Not Liable Under NJ Consumer Fraud Act for Failing to Obtain State License

A recent decision from the New Jersey Appellate Division comes as welcome relief for purchasers of defaulted debt. The decision, Woo-Padva v. Midland Funding LLC, concerns the New Jersey Consumer Finance Licensing Act (CFLA), and whether a debt buyer who failed to have such a license could be liable under the state’s consumer protection law.

After she defaulted on two credit-card accounts with the original creditors, the plaintiff’s accounts were charged-off and sold to a third-party debt purchaser who then placed the accounts with a law firm debt collector for servicing. Thereafter the plaintiff paid one of the debts in full to the debt collector and no other entity sought to collect that account. On the other account the law firm sued the plaintiff and the parties entered into a consent judgment pursuant to which the plaintiff made payments on the account.

Over three and a half years later, the plaintiff filed suit against the debt buyer as it was not licensed under the CFLA and sought a declaratory judgment that her consent judgment was “void.” The plaintiff also sought damages under the New Jersey Consumer Fraud Act (NJCFA) again based on collecting the accounts without having the CFLA license. The plaintiff also had a count for unjust enrichment based on collecting the accounts without the CFLA license.  The plaintiff’s complaint was filed on behalf of a putative class and sought damages, including disgorgement of all funds collected from proposed class members.

Regarding the account that had the consent judgment, the trial court previously found that res judicata and the entire controversy doctrine barred the plaintiff’s claims. However, since the other account was settled without a judgment, neither res judicata nor the entire controversy doctrine applied.

The trial court granted summary judgment to the debt purchaser on all of the plaintiff’s claims, finding that the debt buyer was not a consumer lender and thus did not require the CFLA license. The trial court also held that the plaintiff’s claims were not covered by the NJCFA because the purchaser did not offer to sell the plaintiff any services or merchandise and because she had not suffered the requisite “ascertainable loss.”

The Appellate Division affirmed the CFLA dismissal but for reasons other than those found by the trial court. As the Appellate Division saw it, the CFLA does not provide for a private right of action, and the plaintiff cannot use the Uniform Declaratory Judgments Act to circumvent that lack of a private right of action. Instead, violations of the CFLA are enforceable only by the Commissioner of Banking and Insurance.

Regarding the NJCFA, the Appellate Division agreed with the trial court that the statute did not apply to the debt purchaser. To state a claim under the NJCFA, the offending conduct must be “in connection with the sale or advertisement of merchandise and real estate.”  The New Jersey Supreme Court has also held that the NJCFA applies to “the provision of credit.”  Ultimately, the offending misrepresentation must be material to the transaction and “made to induce the buyer to make the purchase.”  There was no allegation that the debt purchaser sold credit or offered anything to the plaintiff. Instead, the offending conduct was misrepresenting “that it had the legal right to collect on the account when it lacked the proper license to do so.”  However, since this conduct was not made in connection with the origination of the debt, it could not constitute a violation of the NJCFA.

In addition, the Appellate Division found that the plaintiff did not sustain an ascertainable loss, another prerequisite to recovery under the NJCFA. Here, the plaintiff acknowledged that she owed the debt to the original creditor, and her payment of that valid debt to the debt purchaser did not constitute an ascertainable loss.