Does the Act of Repossessing a Debtor’s Vehicle Constitute a Violation of the FDCPA When the Interest Terms are Usurious?
This discreet issue was recently ruled upon by the U.S. Court of Appeals for the Third Circuit in Goldenstein v. Repossessors Inc., 815 F.3d 142 (3d Cir. 2016).
By way of background, Mr. Goldenstein obtained a $1,000 loan from Sovereign Lending Solutions, LLC. The terms of the loan required Goldenstein to place his car for collateral and agree to a 250% interest rate on the loan.
Shortly after Goldenstein received the loan, Sovereign began withdrawing the monthly installments from his bank account. Goldenstein claimed that he was not aware that the withdrawals were related to repayment of the loan, and as such he removed the money from his account. After Goldenstein missed three successive payments, Sovereign hired a company to repossess Goldenstein’s car.
Goldenstein filed suit in the U.S. District Court for the Eastern District of Pennsylvania against the defendants involved in the repossession for violations of the Fair Debt Collection Practices Act (FDCPA), RICO and Pennsylvania law. Goldenstein claimed that since the interest rate associated with the loan was usurious, the defendants had no right to repossess his car. As to the RICO claim, he argued that the possession companies were engaged in an “enterprise” to collect an “unlawful debt.”
The defendants filed for summary judgment. In response to the FDCPA claim, the defendants argued that a usurious interest rate alone could not invalidate an otherwise lawful loan. With respect to the RICO claim, the defendants argued that the repossession of collateral was distinguishable from the collection of an unlawful debt because they were not collecting cash but were instead collecting personal property pledged as collateral. The district court sided with the defendants and granted summary judgment on both arguments.
On appeal, the Third Circuit affirmed the district court’s ruling on the FDCPA claims. The Court held that the district court was correct to conclude that the defendants had a “present right to possession” when they repossessed Goldensteins’s car. Therefore, there was no violation of the FDCPA.
The defendants were not so fortunate on the RICO claim. The Court found no evidence in the RICO statute that Congress intended to limit RICO’s prohibition of “collection of an unlawful debt” to collection of cash at the exclusion of other collateral used to secure the unlawful debt. Therefore, even a valid repossession could potentially fall under the auspices of RICO if the repossession resulted from a usurious loan.
On its face, this decision appears to be positive for the collection industry, but it also provides a warning that other potential pitfalls may come into play when collection of a questionable debt is undertaken.