As you may know, there are two FDCPAs — the Fair Debt Collection Practices Act and the Federal Debt Collection Procedures Act. This case involves the second FDCPA and is related to attempts by the Consumer Financial Protection Bureau to collect on judgments from a husband and wife who are accused of hiding millions of dollars to settle fines and penalties related to a payday lending scam.
A District Court judge in Kansas has ordered both sides in this case to argue whether the Federal Debt Collection Practices Act preempts state law in Kansas that is being used by the CFPB to recover on its judgment. The ruling is noteworthy not just for the size of the judgment but also for the novel legal questions it raised regarding the interplay between state and federal law.
A critical element of this case was the court’s need to interpret a “novel question” regarding Kansas law and the federal FDCPA. The CFPB had used Kansas state law to obtain a Charging Order attaching James Carnes’s interests in several LLCs. The question arose as to whether payments to Carnes as wages or loan repayments could be considered “distributions” under the Kansas statute, which would be subject to the Charging Order. However, a wrinkle complicated matters: since the CFPB is a federal entity, federal procedures — specifically those outlined in the Federal Debt Collection Procedures Act — may preempt state law.
This potential preemption led the court to consider whether Kansas state law, which lacks a mechanism similar to garnishment for LLC interests, could be overridden by the FDCPA’s garnishment provisions. Federal Rule of Civil Procedure provides that federal courts should use state procedures unless there is an applicable federal statute, which appears to be the case here. The FDCPA, which aims to establish uniform nationwide procedures for collecting debts owed to the federal government, may thus override Kansas law in this situation.
Judge Daniel D. Crabtree of the District Court for the District of Kansas has requested additional briefing from both parties to clarify the preemptive effect of the FDCPA on Kansas law, highlighting a key procedural uncertainty that affects not only this case but potentially many others involving federal debt collection.
