Schmitt v. FMA Alliance

United States Court of Appeals. Eighth Circuit

2005 WL 292446

Summary
The United States Court of Appeals for the Eighth Circuit ruled that debt collectors are not liable under the federal Fair Debt Collections Practice Act (FDCPA) for communicating with consumers represented by counsel, unless the debt collector has actual knowledge of the representation. The creditor’s knowledge that the consumer is represented by counsel, if not passed on to the debt collector, cannot be imputed to the debt collector for purposes of assessing liability under the FDCPA.

Plaintiff Paul Schmitt incurred a debt to First Bank U.S.A., and hired a lawyer, William Michaelson, to represent him in connection with the debt. Michaelson communicated with First Bank twice, and specifically told First Bank to advise its collection agency about his representation of Michaelson. First Bank subsequently transferred the account to FMA Alliance for collection, but apparently never told it that Schmitt was represented by counsel. FMA Alliance sent a letter directly to Schmitt demanding payment of the debt.

Schmitt filed a complaint against FMA Alliance in which he alleged that the letter violated the provision of the FDCPA (15 U.S.C. § 1692c(a)(2)) that prohibits debt collectors from communicating with a consumer about a debt if the debt collector knows the consumer is represented by counsel. United States District Judge Joan N. Ericksen granted FMA Alliance’s motion to dismiss Schmitt’s complaint, since it did not allege that FMA Alliance, as opposed to First Bank, had actual knowledge that  Schmitt was represented by counsel. The Eighth Circuit affirmed.

The appellate court rejected Schmitt’s contention that First Bank’s knowledge could be attributed to FMA Alliance as a matter of law. “The theory of implied knowledge contradicts established agency law, which dictates that while the knowledge of the agent is imputed to the principal, the converse is not true,” the court explained in its per curiam decision. The court also rejected Schmitt’s argument that the FDCPA created a specific exception to this rule, noting that there was not textual basis in the statute to depart from general agency principles. The court observed that it had “no authority to place a duty upon First Bank,” since the FDCPA generally does not regulate the conduct of creditors.

Significance of Case
Following last year’s decision from the Seventh Circuit in Randolph v. I.M.B.S., Inc., 368 F.3d 726 (2004), the Eighth Circuit has become the second federal appellate court to conclude that the knowledge of a creditor may not be imputed to a debt collector for purposes of FDCPA liability. For debt collectors, this represents a welcome turning of the tide—in 2000 and 2001, a District Court in New York ruled that creditors are obligated to convey material account information to a debt collector, including information regarding whether an attorney represented the debtor, and that the creditor’s actual knowledge can be imputed to the collection agent. Powers v. Professional Credit Services, 107 F.Supp.2d 166 (N.D.N.Y. 2000); Micare v. Foster & Garbus, 132 F.Supp.2d 77 (N.D.N.Y. 2001). The Eighth Circuit’s ruling calls into question the precedential value of these two decisions, particularly outside of New York.