Possibility of Vicarious Liability for Lenders in Ninth Circuit

Financial Services Law

In another case involving agency liability, the U.S. Court of Appeals for the Ninth Circuit ruled that while the owner of a student debt is not per se liable for violations committed by a loan servicer it engages, it may be liable if an agency relationship exists based on traditional agency principles.

The Telephone Consumer Protection Act prohibits using an automatic telephone dialing system to call a number when the called party has not provided “prior express consent.” Debt servicers sometimes use “skip tracing” (a process of obtaining other numbers than the one a consumer provides that are associated with that consumer) in order to track down people they wish to contact. Calling numbers obtained through skip tracing violates the TCPA if the called party has not provided consent to be called at that number.

Shyriaa Henderson fell behind on her student loans and began to receive calls from debt collectors. Because she received prerecorded messages many times in short intervals on a phone number she had not provided in connection with her loans or consented to be called on, she alleged that her number had been obtained through skip tracing and that the calls were placed with auto dialers.

Henderson’s loans were originated by a creditor that then retained a separate servicer. That servicer, in turn, hired debt collectors to collect on Henderson’s loans. The creditor did not have a contractual relationship with the debt collectors or any day-to-day dealings with them, but it did have access to daily, weekly and monthly reports tracking their performance. It also regularly reviewed the servicer’s operations and performance, including its regulatory compliance.

The creditor then discovered allegedly improper collection practices and recommended corrective action in multiple years. But the servicer allegedly continued to use the same debt collectors, a fact the creditor was aware of but did nothing to change.

Henderson sued the creditor for alleged TCPA violations related to the collection of her student loan debt. The servicer and the debt collectors, also named in the suit, were dismissed for lack of personal jurisdiction. A district court judge granted summary judgment to the creditor on the theory that there was no evidence of an agency relationship between it and the debt collectors.

The Ninth Circuit panel ruled that while Federal Communications Commission orders and prior decisions demonstrated that the creditor was not per se liable for the alleged TCPA violations, a reasonable jury could find that an agency relationship existed, and therefore reversed the district court’s decision.

In 2008, the FCC issued an order that stated: “Calls placed by a third party collector on behalf of that creditor are treated as if the creditor itself placed the call.” Applying Chevron deference to the order, the court agreed with Henderson that a creditor can be liable for a debt collector’s TCPA violations, but that such liability was not per se or automatic.

Rather, the panel relied on a 2013 FCC Order that courts should apply federal common law agency principles to determine vicarious liability for TCPA violations. In addition, the panel relied on Gomez v. Campbell-Ewald Co. 768 F.3d 871, 879 (9th Cir. 2014), aff’d, 136 S.Ct. 663 (2016), as revised (Feb. 9, 2016), which interpreted the 2013 Order to hold that vicarious liability may lie when a “plaintiff establishes an agency relationship, as defined by federal common law.”

In considering the record in the case before it, the panel found that a reasonable jury could determine that the creditor had ratified the debt collectors’ actions, and therefore did not need to determine whether they acted with implied actual authority.

The panel found that the debt collectors purported to act as agents of the creditor and a reasonable jury could conclude that the creditor accepted the benefits—loan payments—of the collectors’ calls while knowing some of the calls may have violated the TCPA. It therefore concluded that “a reasonable jury could find that [the creditor] ratified the debt collectors’ calling practices by remaining silent and continuing to accept the benefits of the collectors’ tortious conduct despite knowing what the collectors were doing or, at the very least, knowing of facts that would have led a reasonable person to investigate further.”

In dissent, Judge Jay Bybee agreed that there was no per se vicarious liability, but wrote that the record did not support the majority’s conclusions regarding ratification. He also concluded that there was insufficient evidence to support the plaintiff’s other theory that the creditor had granted implied actual authority to violate the TCPA. Judge Bybee expressed concern for the real-world consequences of the majority’s ruling, noting that “I think this decision will send shudders through the industry. Maybe that is a good thing, but I don’t see our mandate in the TCPA to cause such disruption.”

The panel remained similarly divided on the lender’s request for rehearing en banc, denying the motion. The majority did amend the opinion, however, rejecting the creditor’ contention that it could not have ratified the actions of the debt collectors based on Ninth Circuit case law.

To read the opinion in Henderson v. United Student Aid Funds, Inc., click here.
To read the denial of rehearing en banc, click here.

Why it matters: The Ninth Circuit decision provides a warning to lenders about the potential for vicarious liability for the actions of debt collectors, servicers and other third parties. The panel held that debt holders do not have per se liability for the actions of debt collectors, but could result in liability for debt holders that do not actively police their debt collectors for potential TCPA violations.