file0001216750529by Sarah Walton

Today, the Fourth Circuit issued a published opinion in the civil case of Henson v. Santander Consumer USA. The Fourth Circuit affirmed the district court’s holding that Santander was not considered a “debt collector” within the meaning of Fair Debt Collection Practices Act (“FDCPA”).

Origins of the Dispute

Plaintiff Rick Henson and three others (“Plaintiffs”) entered into loan agreements with CitiFinancial Auto (“Citi”) to finance the purchase of their vehicles. Plaintiffs eventually defaulted on the loans and Citi sold the loans to Defendant Santander Consumer USA, Inc. (“Santander”). After acquiring ownership of the loans, Santander attempted to collect the monies owed. During this process, Plaintiffs alleged that Santander misrepresented the amount of money owed on the loans and whether Santander was entitled to collect on the loans. Plaintiffs ultimately filed suit against Santander, contending that Santander’s actions violated the FDCPA, 15 U.S.C. §§ 1692-1692p, by engaging in prohibitive collection practices.

The District Court Grants Santander’s Motion to Dismiss

Santander moved to dismiss the case under Fed. R. Civ. P. 12(b)(6), arguing that Plaintiffs failed to plead that Santander qualified as a “debt collector” within the meaning of the FDCPA. As a result, Santander argued that the FDCPA did not apply to its actions. The district court agreed with Santander, holding that “creditors collecting debts in their own names and whose primary business is not debt collection” are not considered “debt collectors” under the FDCPA. Plaintiffs appealed.

Santander’s Activities Do Not Fall Within the Definition of “Debt Collector” Under the FDCPA

On appeal, Plaintiffs argued that Santander should be considered a “debt collector” because they acquired ownership of the loans when the loans were already in default. As a result, Plaintiffs contended that because the FDCPA excludes from the definition of “creditor” anyone who “receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another,” Santander must be considered a “debt collector.”

The Fourth Circuit disagreed. The court broke down the statutory definition of “debt collector” into two parts. First, the definition of “debt collector” includes “(1) a person whose principal purpose is to collect debts; (2) a person who regularly collects debts owed to another; or (3) a person who collects its own debts, using a name other than its own as if it were a debt collector.” Second, the statute excludes certain parties from being considered debt collectors. For example, an individual seeking to collect a debt on behalf of another when the debt is not in default is excluded from the definition of debt collector.

Using this definition, the court concluded that Santander did not fall under the definition of a “debt collector.” The court reasoned that Santander did not fit the first and third parts of the definition because the complaint neither alleged that Santander’s principal business was debt collection, nor stated that Santander attempted to use a different name when it collected the debts. Further, the court reasoned that Santander did not fit the second part of the definition because was it was collecting the debt for itself, not for a third party. As a result, the Fourth Circuit held that Santander’s activities did not fall within the meaning of a “debt collector” under the FDCPA and Plaintiffs failed to state a claim under this cause of action.

The Fourth Circuit Affirms the District Court’s Holding

The Fourth Circuit affirmed the district court’s dismissal of Plaintiffs’ complaint, holding that Santander did not qualify as a “debt collector” under the FDCPA.



By Eric Jones

On May 29, 2015, the Fourth Circuit issued a published opinion in the civil case Dillon v. BMO Harris Bank.  The Circuit Court held that the district court erred when it denied appellant’s renewed motion to compel arbitration pursuant to loan agreements that the plaintiff had signed.  Thus, the Fourth Circuit vacated and remanded to the district court for further proceedings.

The Automated Clearing House Network and Payday Lenders

In 2013, James Dillon obtained loans from several online lenders that carried interest rates which substantially exceed the maximum allowable rates under North Carolina State law.  The defendants, BMO Harris Bank, N.A., Generations Federal Credit Union, and Bay Cities Bank (the “Banks”) operated as Originating Depository Financial Institutions (“ODFIs”) in connection with the loans.  Dillon alleges that in doing so they provided the payday lenders with access to the Automated Clearing House (the “ACH”) network, a system to enable secure electronic payments.  When payments were due under Dillon’s loans, the lenders initiated payment transactions through the ACH network.  The Banks then entered the transactions into the ACH network.  Soon after, a central clearing facility transferred funds directly from Dillon’s account to those of the lenders.  In this way, Dillon alleges that the payday lenders were able to establish loans in states where those loans are illegal and unenforceable.

The Motions to Compel Arbitration

Dillon filed a putative class action against the Banks alleging that by operating as OFDIs for payday lenders, they were complicit and necessary parties to the lenders’ unlawful practices.  The Banks filed initial motions to compel arbitration, pointing to clauses in the loan agreements stating that any claims arising from those loans would be submitted to arbitration.  To these motions, the Banks attached the loan agreements themselves bearing Dillon’s name.  In opposition, Dillon argued that the Banks had failed to offer proof that the attached loan agreements had been authenticated.  The Banks argued that because Dillon used the same loan agreements in his complaint, the pleadings themselves established the authenticity of the agreements and the arbitration clause.  Nevertheless, the district court denied the motion to compel arbitration, finding that the Banks had failed to provide authenticating evidence.

To cure the deficiency, the Banks obtained declarations from the lenders purporting to authenticate the loan agreements and filed renewed motions to compel arbitration.  Dillon opposed, arguing that the district court had already ruled on the motion to compel arbitration, and thus the law of the case doctrine should bar reconsideration.  The district court agreed, and the Banks filed a timely interlocutory appeal.

The Federal Arbitration Act and Interlocutory Appeals

The Fourth Circuit began by explaining the history of the Federal Arbitration Act (FAA) and the requirement that courts rigorously enforce agreements to arbitrate.  Section 16(a)(1)(A) of the FAA provides for immediate appeal from an order refusing a stay in any litigation that is referable to arbitration, and § 16(a)(1)(B) provides for immediate appeal for any order denying a petition to compel arbitration.  The Banks argued that the district court’s denial of the renewed motion to compel arbitration and stay the proceedings thus allows immediate appeal.  Dillon, in opposition, argued that the district court’s order denied reconsideration of the motion to compel arbitration, and thus fell outside of the FAA.  The Fourth Circuit, looking to the title of the motions and the clear intention to seek enforcement of an arbitration clause, held that valid jurisdiction existed over the appeal.

The District Court Erred by Interpreting the Renewed Motions as Motions for Reconsideration

Although the district court did not explain why it considered the renewed motions to be motions for reconsideration, the Circuit Court found two potential reasons.  The Fourth Circuit held that neither were convincing.  First, the district court could have believed that the Banks were allowed only one opportunity to invoke the FAA’s enforcement mechanisms.  Alternatively, the district court could have relied on the law of the case doctrine, believing that both motions invoked the same issues.  The Circuit Court addressed each of these in turn.

First, the Fourth Circuit could find no authority which limited a party’s access to FAA’s enforcement mechanisms unless the party is found to be in default.  A party is found to be in default, and thus barred from compelling arbitration or staying the proceedings, only if they have utilized the litigation machinery so substantially that to subsequently permit arbitration would prejudice the party opposing the stay.  Because the district court did not find that the Banks were in default, the order could not have rested upon these grounds.

Second, the Fourth Circuit held that the initial motions to compel arbitration and the renewed motions raised different issues, and thus were not barred by the rule of the case doctrine.  In their initial motions, the Banks argued that the loan agreements were substantially authenticated.  When the district court disagreed, the Banks did not challenge that ruling in their renewed motions.  Rather, they attempted to cure the evidentiary deficiencies that the district court relied on in denying the initial motion.  Thus, the law of the case doctrine did not bar the renewed motions.

The Fourth Circuit Vacated and Remanded for Further Proceedings

Because the district court erred in its interpretation of the Banks’ renewed motions to compel arbitration, the Fourth Circuit vacated the court’s order and remanded for further proceedings.

By Matthew Meyers

Oberg v. Pennsylvania Higher Education Assistance Agency

Jon Oberg sued three student loan corporations on the grounds that they defrauded the Department of Education – and therefore violated the False Claims Act, 31 U.S.C. § 3729– in connection with claims for Special Allowance Payments.  These payments are generous student loan subsidies. The False Claims Act imposes liability on “any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to an agent of the United States.

The three student loan corporations, the Pennsylvania Higher Education Assistance Agency, the Vermont Student Assistance Corporation, and Arkansas Student Loan Authority, moved to dismiss the action under Rule 12(b)(6).  They argued, both to the district court and on appeal, that they were not “persons” within the meaning of the Act.  The Supreme Court had held in Vermont Agency of Natural Resources v. United States that a state or state agency is not a “person.”  But, corporations, even municipal corporations, are persons subject to suit under the Act.

To determine whether a given entity is a corporation is a “state agency” such that it is not a person under the Act, the Fourth Circuit employs the “arm-of-the-state” analysis used in Eleventh Amendment jurisprudence.  A corporation is a part of the state when four factors militate in favor of such a finding:  (1) whether any judgment paid by the corporation will be paid by the state, (2) the degree of autonomy the corporation has from the State, (3) whether the corporation is involved with state, in contrast to non-state or local, control, and (4) whether the treatment of the corporation under State law makes it an arm of the State.

The district court had held that all three agencies were arms of the State.

Applying the four factors, a Fourth Circuit panel found that the Pennsylvania Agency is not an arm of the state.  The State is not bound by any judgment for which the agency is liable, and the agency receives no operational funding from the State (though state officials are appointed to the board of directors and the state has some veto power over its operations) .  The third and fourth factors weighed in favor of a finding that the agency was a state, as the agency primarily directs its operations towards providing financial aid to students within the state.  And a state statute states that the agency performs an essential government function. Construing the facts in favor of Oberg, the panel concluded that the first two factors outweighed the latter two.

The panel found that the Vermont Agency is not an arm of the state as well.  The first factor was inconclusive. The state is required to maintain the agency, but a state statute expressly disavowed any obligation to repay debts resulting from student loans the agency issued.  The second factor was not dispositive either.  While the agency exercises corporate powers and is not funded by the State, it is subject to a state laws that allow the State to alter, amend, or change the agency, and appoint eight of the agency’s eleven directors for the board.  The third and fourth factors weighed in favor of finding that the agency is an arm of the State, as it is involved with statewide concerns and is considered an instrumentality of the state under State law.  Because it was a close call, the panel vacated the district court’s judgment and permitted limited discovery to decide the question.

Finally, the panel affirmed the trial court’s judgment as to the Arkansas agency.  The factors weighed in favor of a finding that the agency is an instrumentality of the state.  There is no law dealing with the state’s obligation to pay the agency’s judgments, but the money earned by the agency becomes state funds.  The state has substantial control of the agency’s operations.  Furthermore, Oberg alleged no facts that the agency was not not involved primarily in state concerns.  Arkansas law treats the agency as an instrumentality of the state.

The Fourth Circuit affirmed in part, vacated in part, and remanded the case to the district court,


By Jordan Crews

Today, in United States v. Pennsylvania Higher Education Assistance Agency, the Fourth Circuit vacated and remanded the decision of the district court, holding that the plaintiff had alleged sufficient facts that Pennsylvania Higher Education Assistance Agency (“PHEAA”) is a “person” for purposes of the False Claims Act (“FCA”).

The plaintiff, Dr. Oberg, as relator for the United States, brought action against PHEAA (a Pennsylvania Corporation), among others, alleging that it defrauded the Department of Education by submitting false claims for Special Allowance Payments (“SAP”), a federal student loan interest subsidy.  According to Dr. Oberg, PHEAA engaged in “noneconomic sham transactions to inflate [its] loan portfolio eligible for SAP, and the Department of Education overpaid hundreds of millions of dollars to [PHEAA] as a result of the scheme.”  Thus, Dr. Oberg alleged that PHEAA violated the FCA when it knowingly submitted these false SAP claims.

The FCA provides a cause of action against “any person” who engages in certain fraudulent conduct, including “knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval” to an officer, employee, or agent of the United States.  The FCA does not define “person,” but the Supreme Court has held that a state or state agency does not constitute a “person” subject to liability under the FCA.  By contrast, corporations are presumptively covered by the term “person.”  Municipal corporations like counties are “persons” subject to suit under the FCA.  The legal framework for this inquiry is the “arm-of-the-state” analysis used in the Eleventh Amendment context.  The district court concluded that PHEAA is part of its respective state and thus not a “person” under the FCA; accordingly, it granted PHEAA’s motion to dismiss.

In applying the arm-of-the-state analysis, four nonexclusive factors are considered to determine whether an entity is “truly subject to sufficient state control to render it a part of the state.”  The Fourth Circuit explained the factors as follows:

First, when an entity is a defendant, we ask “whether any judgment against the entity as defendant will be paid by the State.” . . .  Second, we assess “the degree of autonomy exercised by the entity, including such circumstances as who appoints the entity’s directors or officers, who funds the entity, and whether the State retains a veto over the entity’s actions.” . . .  Third, we consider “whether the entity is involved with state concerns as distinct from non-state concerns, including local concerns.” . . .  Fourth, we look to “how the entity is treated under state law, such as whether the entity’s relationship with the State is sufficiently close to make the entity an arm of the State.”

In applying the first factor, whether Pennsylvania would pay a judgment against PHEAA in this case, the Court stated that this factor weighed “decidedly against holding that PHEAA is an arm of the state.”  Pennsylvania law expressly provides that obligations of PHEAA are not binding on the state.  The state “explicitly disavows liability for all of PHEAA’s debts.”

When looking at the second factor, the degree of autonomy exercised by PHEAA, the Court noted that this is a much closer question.  PHEAA’s board of directors is composed of gubernatorial appointees and state legislators or officials, and as the Court noted, such an arrangement “frequently indicates state control.”  Additionally, state officials exercise some degree of veto power over PHEAA’s operations.  However, other factors strongly suggested that PHEAA is not an arm of the state.  Significantly, PHEAA is financially independent, and receives no operational funding from the state.  PHEAA also has the power to enter into contracts, to sue and be sued, and to purchase and sell property in its own name–all of which suggest operational autonomy.  The Court found that this factor also counseled against holding that PHEAA is an arm of the state.

The third factor, whether PHEAA is involved with statewide, as opposed to local or other non-state concerns, weighed in favor of recognizing PHEAA as an arm of the state.  The state created PHEAA to finance, make, and guarantee loans for higher education, and “higher education is an area of quintessential state concern and a traditional state government function.”

The fourth and final factor, how PHEAA is treated under state law, also supported a finding that PHEAA is an arm of the state.  A state statute provides that “the creation of [PHEAA] was in all respects for the benefit of the people . . . and [PHEAA] performs an essential governmental function.”  Moreover, Pennsylvania state courts have concluded that PHEAA is a state agency for jurisdictional purposes.

In sum, the third and fourth factors suggested that PHEAA is an arm of the state, while the first and second pointed in the opposite direction.  Thus, at this point in the case, “Dr. Oberg [had] alleged sufficient facts that PHEAA is not an arm of the state, but rather a ‘person’ for FCA purposes.”

The Fourth Circuit vacated the judgment of the district court and remanded to permit limited discovery on the question of whether PHEAA is “truly subject to sufficient state control to render it a part of the state.”