Rowe v. Educational Credit Management Corp.

• Decision Date: 18 March 2009
• Docket Number: No. 07-35046.,07-35046.
• Citation: 559 F.3d 1028
• Parties: Jeffrey A. ROWE, Plaintiff-Appellant, v. EDUCATIONAL CREDIT MANAGEMENT CORPORATION, a foreign non-profit Minnesota corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

559 F.3d 1028

Jeffrey A. ROWE, Plaintiff-Appellant, v. EDUCATIONAL CREDIT MANAGEMENT CORPORATION, a foreign non-profit Minnesota corporation, Defendant-Appellee.

No. 07-35046.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 20, 2008.

Filed March 18, 2009.

Terrance J. Slominski, Slominski & Associates, Tigard, OR, for the appellant.

Stephen T. Tweet, Albert & Twett LLP, Salem, OR, Curtis P. Zaun, Education Credit Management, St. Paul, MN, for the appellee.

Teal Luthy Miller, U.S. Department of Justice, Washington, D.C., for the amicus curiae.

Appeal from the United States District Court for the District of Oregon, Michael R. Hogan, District Judge, Presiding. D.C. No. CV-06-01131-HO.

Before: W. FLETCHER and RAYMOND C. FISHER, Circuit Judges, and CHARLES R. BREYER,^* District Judge.

WILLIAM A. FLETCHER, Circuit Judge:

Plaintiff Jeffrey Rowe brought suit in federal district court against Educational Credit Management Corporation ("ECMC"), alleging violations of the federal Fair Debt Collection Practices Act ("FDCPA") and of Oregon state law. The court dismissed plaintiff's federal claims for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) on the ground that defendant's collection activity was "incidental to a bona fide fiduciary obligation" and therefore not subject to the FDCPA, 15 U.S.C. § 1692a(6)(F)(i), and dismissed without prejudice Rowe's state law claims under 28 U.S.C. § 1367(c). We reverse and remand.

I. Background

According to the complaint, Rowe borrowed $2,500 from Jackson County Federal Savings and Loan pursuant to a student loan agreement. The loan was guaranteed by the Oregon State Scholarship Commission ("OSSC"). After graduation, Rowe defaulted on the loan. The OSSC then "turned over and assigned this account to [ECMC] for collection." ECMC sought collection of Rowe's defaulted loan by administratively garnishing Rowe's wages. According to the complaint, Rowe repaid his loan in full on July 18, 2005, but ECMC continued to garnish his wages through November 9 of that year.

Rowe sued ECMC in federal district court, alleging violations of the FDCPA, 15 U.S.C. §§ 1692e(2), 1692e(5), 1692f(1), 1692f(6), the Oregon Unfair Debt Collection Practices Act ("OUDCPA"), Or.Rev. Stat. § 646.639, and Oregon law of conversion. ECMC moved to dismiss Rowe's FDCPA claim under Rule 12(b)(6) for failure to state a claim. ECMC contended that its collection activity was not covered by the FDCPA because it was "incidental to a bona fide fiduciary obligation." 15 U.S.C. § 1692a(6)(F)(i). In the alternative, ECMC contended that its collection activity was not covered because it "concern[ed] a debt which was originated by" ECMC. Id. § 1692a(6)(F)(ii).

The district court granted ECMC's motion to dismiss, holding that ECMC was a "guaranty agency" under the federal Higher Education Act, and that its collection activities were "incidental to a bona fide fiduciary obligation" within the meaning of the FDCPA. The court did not reach ECMC's other contention. The court dismissed the state law claims without prejudice under 28 U.S.C. § 1367(c). Rowe timely appealed.

II. Standard of Review

We review de novo a district court's grant of a Rule 12(b)(6) motion to dismiss. Knievel v. ESPN, 393 F.3d 1068, 1072 (9th Cir.2005). "[W]e accept all factual allegations in the complaint as true and construe the pleadings in the light most favorable to the nonmoving party." Id.

III. Discussion

A. Legal Backdrop of FDCPA Claims

Congress passed the Higher Education Act of 1965 ("HEA"), 20 U.S.C. § 1071, et seq., to "`keep the college door open to all students of ability,' regardless of socioeconomic background." Pelfrey v. Educ. Credit Mgmt. Corp., 71 F.Supp.2d 1161, 1162-63 (N.D.Ala.1999); see 20 U.S.C. § 1070(a). Among other things, the HEA established the Federal Family Education Loan Program ("FFELP"),¹ administered by the Department of Education ("DOE"). See 20 U.S.C. § 1071. The DOE has promulgated regulations to implement the FFELP. See College Loan Corp. v. SLM Corp., 396 F.3d 588, 590 (4th Cir.2005); 20 U.S.C. § 1082(a)(1).

"Under the HEA, eligible lenders make guaranteed loans on favorable terms to students or parents to help finance student education. The loans are typically guaranteed by guaranty agencies" and are ultimately reinsured by the DOE. Pelfrey, 71 F.Supp.2d at 1163. A "guaranty agency" is defined in the FFELP regulations as "[a] state or private nonprofit organization that has an agreement with the Secretary under which it will administer a loan guarantee program under the [Higher Education] Act." 34 C.F.R. § 682.200; see also id. § 682.401(a) ("In order to participate in the FFEL programs, a guaranty agency shall enter into a basic agreement with the Secretary."). "In essence [a guaranty agency] is an intermediary between the United States and the lender of the student loan. The United States is the loan guarantor of last resort. [The guaranty agency] assists the United States in performing that function." Great Lakes Higher Educ. Corp. v. Cavazos, 911 F.2d 10, 15 (7th Cir.1990).

One of the functions assigned to lenders and guaranty agencies under FFELP regulations is collection on defaulted student loans. When a borrower defaults on a loan, the lender is required to engage in a series of "due diligence" activities to try to get the borrower to repay the loan. 34 C.F.R. § 682.411. If the lender is unable to collect the debt despite complying with its due diligence requirements, the lender files a claim with the guaranty agency. Id. § 682.412(e)(2). The guaranty agency acts as a guarantor, paying the lender the unpaid balance of the defaulted loan. The guaranty agency is then assigned the loan by the lender. Id. § 682.410(b)(5)(vi)(A). In turn, guaranty agencies have various agreements with the DOE.

Depending on the precise agreement between a guaranty agency and the DOE, the agency can recover from the DOE 80 to 100 percent of its losses resulting from a defaulted loan, provided that the guaranty agency engages in "due diligence" in seeking to recover on the defaulted loan. 20 U.S.C. § 1078(c); 34 C.F.R. § 682.410. A guaranty agency's due diligence requirements include locating the defaulting borrower, offsetting federal and state tax refunds against money owed by the borrower, initiating administrative garnishment proceedings against the borrower, and filing suit against the borrower. 34 C.F.R. § 682.410(b)(6)(i)-(iv). Within 45 days of paying the default claim of a lender, a guaranty agency must notify the defaulting borrower that "if he or she does not make repayment arrangements acceptable to the agency, the agency will promptly initiate procedures to collect the debt." Id. § 682.410(b)(6)(v). The agency must notify the borrower of the various measures the agency may take "at the discretion of the agency," including offset of a tax refund, administrative garnishment and civil suit. Id.

The FDCPA, 15 U.S.C. § 1692 et seq., was enacted "to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses." 15 U.S.C. § 1692(e). The FDCPA regulates the collection of "debts" by "debt collectors" by regulating the number and type of contacts a debt collector may make with the debtor. The requirements imposed on a "guaranty agency" under the HEA and on a "debt collector" under the FDCPA are not entirely consistent.

B. Analysis of FDCPA Claims

The question before us is whether ECMC is a "debt collector" within the meaning of the FDCPA.

The FDCPA defines "debt collector" as: any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

15 U.S.C. § 1692a(6). The FDCPA provides for a number of exceptions from the term "debt collector." Among them are:

(C) any officer or employee of the United States or any State to the extent that collecting or attempting to collect any debt is in the performance of his official duties; . . .

(F) any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity (i) is incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement; [or] (ii) concerns a debt which was originated by such person[.]

15 U.S.C. §§ 1692a(6)(C), (F)(i)-(ii). Further, a "creditor" is not a "debt collector" under the FDCPA. 15 U.S.C. § 1692a(6)(A); Montgomery v. Huntington Bank, 346 F.3d 693, 698-99 (6th Cir. 2003).

ECMC contends that it is a guaranty agency under the HEA. Based on this conclusion it argues on three grounds that it is not a "debt collector" and that its collection activities are therefore not subject to the FDCPA. First, ECMC argues that its collection activity is "incidental to a bona fide fiduciary obligation." 15 U.S.C. § 1692a(6)(F)(i). The district court held for ECMC on this ground. Second, ECMC argues that its collection activity "concerns a debt which was originated by" ECMC. Id. § 1692a(6)(F)(ii). ECMC made this contention in the district court, but the court did not reach that issue. Third, ECMC argues that it is a "creditor" rather than a debt collector. Id. §§ 1692a(4), 1692a(6)(A). ECMC makes this contention for the first time in this court. The United States has submitted an amicus brief in this court in support of ECMC arguing only the first two grounds. For the reasons that follow, based on the allegations in the complaint, we disagree with the district court's conclusion that ECMC was not covered by the FDCPA because its collection activity was "incidental to a bona fide fiduciary...