By Richard A. Roth, J.D.
In a narrowly drawn opinion addressing an unusual set of facts, the U.S. Court of Appeals for the Sixth Circuit has decided that a limited liability company is a “person” under the Fair Debt Collection Practice Act. That means the company can sue over misrepresentations allegedly made during a home mortgage foreclosure. The court was quick to add, however, that its decision did not imply the company could win such a suit (Anarion Investments LLC v. Carrington Mortgage Services, LLC, July 23, 2015, Kethledge, R.)
The unusual circumstances of the suit began with a common transaction—a house was purchased with borrowed money, and a mortgage was given to secure the loan. The house soon was transferred to the owner’s trust, which leased it to an attorney, giving him a five-year term with a purchase option.
The attorney exercised the option but, according to the court’s opinion, took no further steps to obtain title to the property. The original owner, however, stopped making mortgage payments. The home went into foreclosure, and the attorney assigned his lease and purchase rights to an LLC he owned.
The mortgage servicer printed foreclosure notices in a local newspaper. Included in the notices was the assertion that a law firm—Brock & Scott, PLLC—had been designated substitute trustee “by an instrument duly recorded.” Asserting that no such instrument had been recorded, the LLC sued both the servicer and the law firm for misrepresentations under the FDCPA.
The federal district court judge dismissed the suit after concluding that the LLC was not a person under the act and thus could not sue.
What is a person? Referring to the FDCPA civil liability section, the appellate court observed that a debt collector who violates the act “with respect to any person is liable to such person” (15 U.S.C. §1692k(a)). However, the act does not define “person.”
The court then turned to the federal Dictionary Act, which says that under federal laws “person” includes entities like LLCs unless the context indicates it does not. In the 24 places where the FDCPA uses the word “person,” it sometimes refers only to artificial entities and sometimes to both artificial entities and individuals. In the only section that clearly was intended to exclude artificial entities, the act uses the term “natural person.”
The court’s conclusion was that “person” includes LLCs, allowing the attorney’s LLC to sue.
Little reason for worry. The court turned away the argument that its interpretation of “person” would extend the FDCPA too far. First, the act only applies to the collection of consumer debts; the collection of business debts is not covered. In this unusual case, the LLC was suing over an alleged misrepresentation in the effort to collect the original purchaser’s loan.
Second, the opinion answered only one question—who is a person? It did not consider whether any misrepresentation was made “with respect to” the LLC, and there could be no liability in the absence of a misrepresentation to the person who filed the suit.
Dissenting opinion. A dissenting opinion by Judge Donald took issue with the majority’s conclusion that the FDCPA did not indicate that “person” did not apply to artificial entities. The legislative history of the act made clear that it was intended to protect consumers, i.e. not artificial entities, she said. While the act included artificial entities as persons when referring to debt collectors and creditors, only individuals were persons when the act referred to debtors, she maintained.
The fact that this company might not be able to describe a valid claim under the FDCPA does not mean that all other companies will be equally impotent, the dissenter said. In particular, she warned that the decision “effectively provides a new cause of action in foreclosure appeals.”
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