Locke Lord QuickStudy: “Debt Collector” Or “Enforcer of Security Interest”— That Is The Question; Supreme Court To Answer Next Term.

On June 28, 2018, the United States Supreme Court granted certiorari in Obduskey v. McCarthy & Holthus LLP, No. 17-1307. In doing so, the Court decided to resolve a circuit split and further clarify what constitutes debt collection under the Fair Debt Collection Practices Act.

Background

Obduskey obtained a loan from Wells Fargo, N.A. in 2007, secured by a mortgage on property located in Colorado, a non-judicial foreclosure state. Obduskey defaulted and Wells Fargo retained a law firm, McCarthy & Holthus, to pursue the non-judicial foreclosure.

The law firm sent Obduskey a letter indicating it had been “instructed to commence foreclosure against the … property.” The firm further stated: (a) it may be a debt collector attempting to collect a debt; (b) the amount due; (c) it would assume the debt was valid unless Obduskey disputed it within 30 days; and, (d) the foreclosure could start before the end of the 30 days. 

Obduskey filed an FDCPA claim against the law firm, alleging he requested verification of the debt and never received it. The district court granted the law firm’s motion to dismiss, concluding that the non-judicial foreclosure was not debt collection under the FDCPA and the law firm did not engage in any other debt-collection activity.

The Tenth Circuit affirmed. The court held that enforcing a security interest was not debt collection because, in Colorado, a consumer has no obligation to pay money as part of a non-judicial foreclosure; a separate action is required to collect any deficiency. 

Basis for Certiorari

Obduskey sought certiorari, arguing the circuits were split on whether non-judicial foreclosure is debt collection. Three circuits hold foreclosure is debt collection regardless of whether money can be collected. Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6th Cir. 2013); McCray v. Fed. Home Loan Mortg. Corp., 839 F.3d 354 (4th Cir. 2016); Wilson v. Draper & Goldberg, P.L.L.C, 443 F.3d 373 (4th Cir. 2006); Kaymark v. Bank of Am., N.A., 783 F.3d 168 (3d Cir. 2015). The Tenth Circuit joined the Ninth Circuit (Ho v. Recon-Trust Co., NA, 858 F.3d 568 (9th Cir. 2016)) in disagreeing with those decisions and holding that non-judicial foreclosure is not debt collection.

The law firm argued no conflict existed because the other decisions concerned judicial foreclosures and were based, at least in part, on variances in state law. In granting certiorari, the Supreme Court appears to have agreed with Obduskey that the split in authority is real and significant enough to warrant resolution. 

Ramifications

The Court’s decision to grant certiorari should pique the interest of law firms that handle non-judicial foreclosures. Firms in non-judicial states encompassed by the Third, Fourth, and Sixth Circuits should be cheered by the decision given the potential that their status as debt-collectors could be reversed. But because those firms have likely already implemented FDCPA compliance procedures, the decision will be more impactful for firms in the Ninth and Tenth Circuits should the Court reverse Obduskey. Those firms may not have implemented FDCPA compliance procedures and thus would need to substantially revamp their operations in response to an adverse ruling.

The Court’s decision could also potentially affect firms in judicial foreclosure states. To the extent those firms waive or disclaim any right to a deficiency at the outset of foreclosure lawsuits, they could claim protection from the FDCPA under the reasoning adopted by the Ninth and Tenth Circuits. Whether that argument remains viable will be decided by Obduskey, and it would not be surprising if the Court explicitly addressed that issue in dicta. 

Given the changing composition of the Court (including the new vacancy), it is difficult to gauge how the Court will come down on this issue. But we will be watching closely and will have an update as soon as the Court rules.