In a key decision resolving a split among appeals courts, the Supreme Court unanimously ruled today, in Obduskey v. McCarthy & Holthus LLP, that law firms that carry out nonjudicial foreclosures are not considered debt collectors under the Fair Debt Collection Practices Act. The decision resolves a circuit split, overruling decisions to the contrary from the Third, Fourth and Sixth Circuits.
Applicable law—With certain enumerated exceptions, the federal Fair Debt Collection Practices Act applies solely to the conduct of debt collectors, a term the FDCPA defines to mean a person whose “principal purpose . . . is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or asserted to be owed or due another.” (15 U.S.C. § 1692a(6)).
A “limited purpose exception,” contained within the same definition, provides that: “For the purpose of Section 1692f(6) of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.” In turn, Section 1692f(6)(A) makes it an unfair practice to take or threaten to take any nonjudicial action to effect dispossession under certain circumstances.
Obduskey case—In 2014, after Dennis Obduskey, a Colorado resident, defaulted on a mortgage loan from Wells Fargo, the bank retained law firm McCarthy & Holthus LLP to pursue a nonjudicial foreclosure on its behalf. (Colorado is among those states that allow for this process.)
Upon receiving mail regarding the foreclosure from the law firm, Obduskey disputed the debt, invoking an FDCPA provision (15 U.S.C. § 1692g) that states that if a consumer disputes the amount of a debt, a “debt collector” must “cease collection” until it “obtains verification of the debt” and mails a copy to the debtor. The law firm then initiated a nonjudicial foreclosure, which action Obduskey alleged failed to comply with the FDCPA’s verification procedure. The district court dismissed on the ground that McCarthy was not a “debt collector” within the meaning of the FDCPA, and the Tenth Circuit affirmed.
The appeals court’s decision on this issue was not alone, joining the Ninth Circuit’s holding in Vien-Phuong Thi Ho v. ReconTrust Co., NA, 858 F.3d 568, 573 (9th Cir. 2016), which held that ReconTrust, an entity whose only role is the enforcement of security interests, is not a debt collector under the FDCPA. That said, there was a split among the U.S. Courts of Appeal, with panels in the Third, Fourth and Sixth Circuits reaching a contrary result. See Kaymark v. Bank of America, N.A., 783 F.3d 168, 179 (3d Cir. 2015) (entity is debt collector for purpose of all FDCPA requirements), Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013) (same) and Wilson v. Draper & Goldberg, PLLC, 443 F.3d 373, 376 (4th Cir. 2006) (same).
Resolving the split, the Supreme Court held, in an opinion from Justice Breyer, that McCarthy was not a “debt collector” under the FDCPA, except for the limited purpose of Section 1692f(6), but only as to the conduct proscribed by that provision. The Court reached this conclusion for three reasons.
First, the Court looked to the text itself. As a threshold matter, the Court confirmed that, broadly speaking, a law firm pursuing nonjudicial foreclosures would, under the FDCPA’s “capacious language,” standing alone, be one that “regularly collects or attempts to collect, directly or indirectly, debts.” The problem for the plaintiff, however, is the limited-purpose definition that follows, and that “poses a serious, indeed an insurmountable, obstacle to subjecting [the law firm] to the main coverage” of the FDCPA.
That language reads: “For the purpose of section 1692f(6)” a debt collector “also includes” a business like the law firms where “the principal purpose” of the firm is “the enforcement of security interests.” (emphasis added) Justice Breyer noted that this phrase—especially the inclusion of the word “also”—“strongly suggests that one who does no more than enforce security interests does not fall within the scope of the general definition. Otherwise why add this sentence at all?”
Second, the Court speculated that Congress logically chose to treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state nonjudicial foreclosure schemes. “If this rule were applied to nonjudicial foreclosure proceedings, then advertising a foreclosure sale—an essential element of such schemes—might run afoul of the FDCPA.”
Third, although appearing to find the language unambiguous, the Court looked to legislative history and discovered competing (and conflicting) broad and narrow definitions of “debt collector” that were resolved by compromise. “Given these conflicting proposals, the Act’s present language has all the earmarks of a compromise: The prohibitions contained in §1692f(6) will cover security-interest enforcers, while the other “debt collector” provisions of the Act will not.”
As a result, the Court concluded that “but for §1692f(6), those who engage in only nonjudicial foreclosure proceedings are not debt collectors within the meaning” of the FDCPA.
Why it matters
As mentioned, the unanimous decision resolves a split that had impacted how entities were able to do business in various jurisdictions. But in a concurring opinion, Justice Sotomayor still describes the issue as a “close case.” As a result, our readers should be wary of drawing too much from the unanimous decision. That said, the decision still reaches beyond foreclosure law firms. Further, this decision logically impacts a recent ruling in the Third Circuit that deemed passive debt buyers to be debt collectors under the FDCPA, in Barbato v. Crown Asset Management, and held that they “should bear the burden of monitoring the activities of those they enlist to collect debts on their behalf.”
While the Supreme Court makes clear in Obduskey that law firms that engage in nonjudicial foreclosures are not debt collectors for that purpose, Barbato distinguishes between a debt-buying business and a business that, among other things, buys debt. Especially given Justice Sotomayor’s warning, how future courts address this issue is anyone’s guess, but the Court’s refusal to stretch the FDCPA beyond its intended purposes should be instructive for future courts that deal with Barbato-like facts.