Third Circuit: The Repossession of Your Car as Collateral on a Usurious Loan is Not an FDCPA Violation

Car RepossessionThe U.S. Court of Appeals for the Third Circuit recently held that a repossession company did not violate the Fair Debt Collection Practices Act (“FDCPA”) when it repossessed the defaulting debtor’s car, even though the loan may have been usurious.  Goldenstein v. Repossessors Inc., 815 F.3d 142 (3d Cir. 2016).

In April 2012, Mr. Goldenstein obtained a $1,000 loan online from Sovereign Lending Solutions, LLC (“Sovereign”).  Mr. Goldenstein used his car as collateral, and agreed to an extremely high interest rate of 250%.  After wiring the loan money to Mr. Goldenstein, Sovereign began withdrawing monthly installments from Mr. Goldenstein’s bank account.  Not recognizing the account activity as repayment of the loan, Mr. Goldenstein removed all funds from his bank account, but never informed Sovereign that he had done so. He then missed three loan payments. Sovereign was rejected when it attempted to collect another installment payment in August 2012. Sovereign then hired a repossession company, Repossessors, Inc., which in turn hired Premier Finance Adjusters (“Premier”) to repossess the collateral (Mr. Goldenstein’s car), which  Premier did, shortly thereafter.  In order to get his car back, Mr. Goldenstein had to pay the repossession company $2,393 to satisfy the loan and the repossession fee.

Mr. Goldenstein filed suit in the U.S. District Court for the Eastern District of Pennsylvania against Repossessors, Inc., Premier, and other defendants involved with the repossession for violations of the FDCPA and Pennsylvania law.  With respect to those claims, he alleged that the loan was usurious and, therefore, defendants had no right to repossess his car.  Mr. Goldenstein also brought claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), alleging that Repossessors, Inc. and Premier were engaged in an “enterprise” to collect on an “unlawful debt.”

On summary judgment, the district court held, based on a long line of cases, that “a usurious rate alone does not invalidate or void a loan in its entirety.”  2014 WL 3535112, at *6.  Thus, the district court concluded that even though the interest rate was usurious, the repossession companies still had a right to repossess (i.e., a valid security interest in) Mr. Goldenstein’s car.  As to plaintiff’s RICO claims, the district court summarily held that Plaintiff’s RICO claim fails as a matter of law because “[i]t is well-settled by this court that the repossession of collateral is clearly distinguishable from the collection of unlawful debt and does not give rise to a RICO claim.”  Id., at *8.

On appeal, the Third Circuit affirmed the district court’s FDCPA ruling, holding that the district court correctly concluded that the defendants “had a present right to possession and did not violate the FDCPA when they repossessed Goldenstein’s car.”  815 F.3d at 147.  The Court explained that, “having admittedly defaulted on his loan – including removing the funds from his bank account without further communication with the lender and failing to make three monthly payments before his car was repossessed – Goldenstein cannot now contest Sovereign’s right to repossess the collateral he posted in the event of just such a default.”  Id.

As to the RICO claim, however, the Court disagreed.  The Court noted that, although some judges in the Eastern District of Pennsylvania have drawn a sharp distinction between the repossession of a car as collateral for an unpaid debt, on the one hand, and the collection on the unpaid debt itself, on the other, this is a false dichotomy. The Court found that “[n]othing in RICO suggests that Congress intended to limit its prohibition on the ‘collection of unlawful debt’ to the seizure of cash and to exclude the forfeiture of collateral used to secure unlawful debt.”  Id. at 148.  Further, as a practical matter, “Premier repossessed Goldenstein’s car for one of two purposes: either Goldenstein would pay off the loan for the return of his car or the car would be liquidated with the proceeds used to pay off that loan.  Either way, the debt would be collected and the usurious loan discharged.”  Id. at 149.  The collection of collateral and the “collection of unlawful debt” was, therefore, a “distinction without a difference.”  Thus, the Third Circuit concluded that “RICO’s prohibition on the ‘collection of unlawful debt’ can reach even a legitimate repossession company that forfeits on collateral for a usurious loan—assuming, that is, that the plaintiff can establish the other elements of the violation.”  Id.

As a result, the Court reversed the district court’s ruling as to Mr. Goldenstein’s RICO and Pennsylvania law claims and remanded for further factual development because the record below was not “sufficiently developed.”  Id. at 149–50.  On remand, the court will need to develop facts as to whether Repossessors, Inc. and Premier were actually engaged in an “enterprise,” and whether they possessed the mens rea (i.e., the bad intent) required for RICO claims.

Although the Third Circuit ruled that the repossession of Mr. Goldstein’s car was not a violation of the FDCPA, it remains to be seen whether Mr. Goldstein’s RICO and Pennsylvania law claims will succeed.  In the meantime, the Goldenstein case serves as a lesson to borrowers that they should be prepared to lose their collateral in the event of a default.  Even if the interest rate on the loan was illegally high, collection of the collateral remains lawful.

Dan Goldberger

Dan Goldberger

Dan is a partner in the Trial Group in Dorsey's New York office. He represents clients in a diverse range of industries in matters relating to banking, entertainment, intellectual property, trade secret, non-compete, real estate and healthcare. Dan also has experience advising and litigating on behalf of clients involved in partnership and other business disputes.Dan is an adjunct professor of law at Cardozo Law School, where he teaches a course on legal writing, research and oral advocacy.Dan has performed extensive pro bono work throughout his career, including the representation of a community of Amish farmers involving constitutional claims against their town government

Daniel W. Beebe

Daniel W. Beebe

Dan is an associate in Dorsey’s New York office. He advises and represents clients regarding a wide range of commercial disputes, including banking, consumer finance, securities, and products liability.

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