For many, the term “debt collection” calls to mind threatening letters and harassing, late-night phone calls. There’s no doubt that many debt collection practices involve aggressive and unseemly tactics used to collect credit card and other unpaid debts, and, as a result, Congress stepped in to curb these practices by passing the Fair Debt Collection Practices Act (“FDCPA”).
At the same time, debt collection is a necessary mechanism of a well-functioning economy and credit market. If those who extend debt are unable to collect debt, then consumers and businesses would have limited access to capital to buy homes, cars, and make capital investments, without recourse.
One of the challenges that borrowers and lenders face is determining their respective rights and obligations under the laws and regulations that govern debt collection practices. The U.S. Supreme Court recently decided in the case of Obduskey v. McCarthy & Holthus LLP, the issue of whether a law firm carrying out a non-judicial residential foreclosure is a “debt collector” under the FDCPA. The Court ruled that such a law firm is not a debt collector, and therefore, is not subject to many of the rules and regulations that would otherwise apply under the FDCPA.
Background of the Case
After homeowner Dennis Obduskey defaulted on the mortgage loan that was secured by his home, the lender hired the law firm of McCarthy & Holthus, LLP to conduct a non-judicial foreclosure of the property. The firm sent Obduskey a letter indicating its intent to proceed with a non-judicial foreclosure, and Obduskey responded with a request that the firm provide him with verification of the debt as required under the FDCPA, which, if applicable, would require the firm to cease collection until it obtained verification of the debt.
The firm did not respond, and instead initiated a non-judicial foreclosure action by filing a notice of election and demand with the county trustee. Obduskey then filed a lawsuit alleging the firm violated the FDCPA.
The U.S. District Court dismissed the case on the ground that the law firm was not a “debt collector” within the meaning of the FDCPA and the Court of Appeals for the Tenth Circuit affirmed. The case was then appealed to the Supreme Court.
The Court’s Decision
In a unanimous decision in favor of the law firm, the Supreme Court based its decision on the FDCPA’s definition of “debt collector.” Under the statute, a debt collector is defined as any person who “regularly collects or attempts to collect, directly or indirectly, debts owed or due . . . another.” 15 U.S.C. § 1692(a)(6). This definition, however, has certain carve-outs and does not traditionally apply to parties who are seeking only to enforce a security interest without obtaining any monetary payment. In particular, the Supreme Court focused on additional language in 15 U.S.C. § 1692 that states, “[f]or the purpose of section 1692f(6) . . . such term also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”
In light of that language, the Supreme Court considered whether an entity exclusively engaged in “the enforcement of security interests” under the latter portion of the definition is considered a “debt collector” with respect to all provisions of the FDCPA or only a “debt collector” with respect to the prohibited actions listed in Section 1692f(6).
The Supreme Court explained that non-judicial foreclosure proceedings do constitute an attempt to collect a debt under the FDCPA. However, because of what the Supreme Court called the “limited purpose” definition contained in Section 1692f(6) of the FDCPA, it found that “one who does no more than enforce security interests does not fall within the scope of the general definition” of “debt collector.” Ruling otherwise, the Supreme Court explained, would render the “limited purpose” definition found in Section 1692f(6) superfluous. Therefore, the law firm, which was engaged in security interest enforcement, was not subject to the debt-collector-related prohibitions of the FDCPA, other than those found in Section 1692f(6).
The Supreme Court also based its decision on the fact that Congress likely considered potential conflicts between the FDCPA and state non-judicial foreclosure statutes in choosing “to treat security-interest enforcement differently from ordinary debt collection....” For example, while the FDCPA prohibits debt collectors from communicating with third parties, advertising foreclosure sales—which would likely violate the FDCPA—is a routine part of non-judicial foreclosure proceedings.
Finally, the Supreme Court pointed to the legislative history of the FDCPA in support of its position. A prior version of the bill made parties enforcing security interests subject to all provisions of the FDCPA. Another version sought to completely exclude such entities. The Supreme Court noted that the final language, “has all the earmarks of a clear compromise: The prohibitions contained in §1692f(6) will cover security-interest enforcers, while the other ‘debt collector’ provisions of the Act will not.” Accordingly, based on the Court’s decision, law firms conducting non-judicial foreclosures enforcing a security interest only, readily comply with the provisions found in Section 1692f(6).