By Richard A. Roth, J.D.
A law firm engaged in a nonjudicial foreclosure on a consumer’s residence is not a debt collector under the Fair Debt Collection Practices Act, the Supreme Court has unanimously decided. The text of the FDCPA, an apparent congressional intent to avoid interfering with state foreclosure proceedings, and the Act’s legislative history all show that, for most purposes, a business that has the enforcement of security interests as its principal purpose is not included in the general definition of "debt collector," the Court decided (Obduskey v. McCarthy & Holthus LLP, March 20, 2019, Breyer, S.).
The decision affirms a judgment by the U.S. Court of Appeals for the Tenth Circuit that rejected the consumer’s suit.
Foreclosure process. When a homeowner fell behind on his mortgage payments, the loan servicer hired the law firm of McCarthy & Holthus to carry out a nonjudicial foreclosure under Colorado law. The first step in that process was a state-law mandated letter to the homeowner in which the firm said that it had been instructed to begin foreclosure and that it "may be considered to be a debt collector attempting to collect a debt." The homeowner responded with a suit claiming FDCPA violations.
The Tenth Circuit agreed with the law firm that it was not a debt collector, and thus not subject to the FDCPA, because it had not demanded any payment from the homeowner. The nonjudicial foreclosure could not result in a deficiency judgment against the consumer, the court pointed out. That could only happen in a separate suit. "[E]nforcing a security interest is not an attempt to collect money from the debtor," the court said.
What is a debt collector? The FDCPA’s definitions of "debt collector" are a bit confusing. In 15 U.S.C. §1692a, the Act says generally that a debt collector is anyone who either is in a business that has, as its principal purpose, the collection of debts, or who regularly collects or attempts to collect debts. However, the Act then adds that for the purposes of §15 U.S.C. §1692f(6)—which addresses the improper taking or threatening of nonjudicial actions to foreclose on property—a person in a business that has, as its principal purpose, enforcing security interests also is a debt collector.
The homeowner argued that this last, specific provision meant the law firm was a debt collector.
The Supreme Court disagreed. The added provision does not mean that a person in the business of enforcing security interests is a debt collector under the general definition; rather, it means that such a person is a debt collector for the specific purpose of the impermissible threat part of the FDCPA, but for no other part.
Meaning of the FDCPA. According to the Court’s opinion, authored by Justice Breyer, the result was compelled by the text of the FDCPA.
If the Act gave only the general definition of "debt collector," the law firm would have been included, the opinion said. A loan to buy a home is an obligation to pay money; the mortgage secures that obligation; a foreclosure sells the property to repay that debt; and a company that engages in nonjudicial foreclosures would be collecting that debt.
It was irrelevant that the payment was not being collected from the consumer directly, the opinion added, as the FDCPA applies to the collection of debts indirectly.
However, the opinion asked, if a foreclosure agent were to be deemed a debt collector under the general definition, what was the purpose of the specific definition that applies to impermissible threats in foreclosures? And, more explicitly, why does the specific definition say that, for that part of the Act, "debt collector" also includes a foreclosure agent?
The only way to give meaning to the entire definition was to construe the specific definition as adding something to the general definition, Justice Breyer concluded. Therefore, a company that engages in nonjudicial foreclosures is, in general, not a debt collector subject to the FDCPA. However, it is subject to the FDCPA’s ban on impermissible foreclosure threats and actions.
Supporting arguments. The Court noted two additional arguments in favor of its decision. First, Congress might have wanted to treat nonjudicial foreclosures differently from other debt collection activities in order to avoid disrupting established state foreclosure regimes. These state laws often include significant consumer protection aspects that could be seen as violating the FDCPA.
The legislative history of the FDCPA also supports the decision, the opinion said. When the Act was being considered by Congress, two conflicting versions were considered. One would have included nonjudicial foreclosures fully, while the other would have excluded them completely. The version that was passed "has all the earmarks of a compromise" that makes clear what Congress settled on.
Consumer’s assertions rejected. The Court considered, but rejected, a series of arguments made by the consumer.
First, the imperative to find meaning in all of the FDCPA’s text would not be satisfied by interpreting the special definition as applying to repossession agents. The Act spoke of enforcing all security interests, not just personal property interests. If Congress intended to include only "repo men," it would have made that clear by limiting the specific definition to the repossession of personal property.
Second, it is true that the FDCPA includes venue requirements on debt collection suits, the Court agreed. However, a provision of the Act that applies in litigation does not affect the application of the Act to nonjudicial activities. The opinion then noted that the Court was deciding only whether those engaged in nonjudicial foreclosures are debt collectors; those carrying out judicial foreclosures might be debt collectors, particularly since a judicial foreclosure includes the possibility of a deficiency judgment against the consumer.
Next, the Court said that the law firm’s mailing of notices to the consumer did not change the result. By sending the notices, the firm was not taking steps that went beyond foreclosing; rather, it was carrying out steps required by state law as part of the foreclosure process.
The Court concluded by adding that if the decision created a loophole that foreclosure agents could exploit to engage in the various abusive collection tactics the FDCPA bans, state laws often already addressed that danger. If more protection was needed, Congress would have to amend the Act. The Court could only enforce the Act as Congress had written it.
Concurring opinion. Justice Sotomayor’s concurring opinion first noted that Justice Breyer’s opinion "makes a coherent whole of a thorny section of statutory text." However, she also said that a nonjudicial foreclosure would be the indirect collection of a debt under the general definition.
The need to give meaning to all of the Act’s text led her to agree with the Court’s decision, she said, but "all the same, this is too close a case for me to feel certain that Congress recognized that this complex statute would be interpreted the way that the Court does today." Congress still could act to extend the FDCPA’s consumer protections to all debt collection activities.
Justice Sotomayor also reinforced that part of the Court’s opinion saying nonjudicial foreclosure agents were not being given "a license to engage in abusive debt collection practices." This decision should be seen as applying only to a foreclosure agent’s good-faith efforts to comply with state laws while actually carrying out a nonjudicial foreclosure, she wrote.
The implication is that, in Justice Sotomayor’s belief, abusive collection tactics carried out under the guise of a nonjudicial foreclosure, with no intent actually to foreclose, would violate the FDCPA.
The case is No. 17-1307.
This article previously appeared in the Banking and Finance Law Daily.
