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In a landmark Fair Debt Collection Practices Act (“FDCPA”) decision, the U.S. Supreme Court in Obduskey v. McCarthy & Holthus LLP unanimously affirmed that a business engaged in nothing more than nonjudicial foreclosure proceedings is not a debt collector under the FDCPA, except for the limited purposes of 15 U.S.C. § 1692f(6). The decision represents a significant victory for law firms and foreclosing lenders and servicers in nonjudicial foreclosure states. Notably, however, the Court expressly declined to resolve whether activities relating to judicial foreclosures constitute debt collection.
Factual Background and Procedural History
The law firm of McCarthy & Holthus LLP (“McCarthy”) was retained to conduct a Colorado nonjudicial foreclosure on a home owned by Dennis Obduskey. McCarthy sent correspondence to Obduskey regarding the foreclosure, and Obduskey invoked 15 U.S.C. § 1692g(b), which requires debt collectors to cease communication until verifying the debt and mailing a copy of the verification to the debtor.
McCarthy did not verify the debt or respond to the § 1692g(b) communication and instead initiated nonjudicial foreclosure. Obduskey then sued claiming a breach of the FDCPA’s debt verification requirements. The district court dismissed the suit, finding McCarthy was not a “debt collector,” and the Tenth Circuit affirmed. The U.S. Supreme Court granted certiorari to settle a circuit split on whether nonjudicial foreclosure constitutes “debt collection” under the FDCPA.
Justice Breyer wrote the unanimous opinion of the Court, with Justice Sotomayor separately concurring. The Court affirmed the district court and Tenth Circuit for three primary reasons.
First, the text of the relevant FDCPA provisions establishes that an entity that principally conducts nonjudicial foreclosures is an entity that is principally involved in the enforcement of security interests, and such entities are only debt collectors for the limited purpose of section 1692f(6).
The FDCPA defines a debt as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes.” 15 U.S.C. § 1692a(5). A “debt collector” is “any person … in any business the principal purpose of which 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). The primary “debt collector” definition also contains a limited-purpose definition, continuing that “[f]or the purpose of section 1692f(6) [the] term [debt collector] also includes any person … in any business the principal purpose of which is the enforcement of security interests.”
The Court analyzed these textual provisions, noting that under the primary definition of debt collector, an entity engaged in nonjudicial foreclosures would qualify as a debt collector. But the Court found the existence of the limited-purpose definition was decisive, particularly focusing on the word “also.” The Court concluded that by stating that for purposes of section 1692f(6) a debt collector “also” includes enforcers of security interests, Congress “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 determined there was a logical basis to treat enforcers of security interests different than ordinary debt collectors—to avoid conflicts between the FDCPA’s provisions and state nonjudicial foreclosure laws.
Third, the legislative history supported the Court’s conclusion. Congress considered both subjecting security-interest enforcers to the full coverage of the FDCPA and exempting security-interest enforcers entirely. The ultimate language of the FDCPA thus represents a compromise designed to subject security-interest enforcers to limited aspects of the FDCPA.
The Court also explicitly addressed Obduskey’s contentions and found them lacking. Obduskey suggested that the language of § 1692f(6) concerned personal property rather than nonjudicial foreclosure of real property, but if that was the intent of Congress, it could have and likely would have made that explicit. Obduskey suggested the venue provision section of the FDCPA (§ 1692i(a)) supported his position, but the Court noted that the venue provision cannot be read to alter the definition of debt collector, which was the basis for the Court’s conclusion. Obduskey claimed that McCarthy went beyond simply enforcing the security interest by sending various notices, and thus fell within the primary definition of “debt collector.” The Court rejected this argument, stating “we assume that the notices sent by McCarthy were antecedent steps required under state law to enforce a security interest” and the partial carve out for enforcers of security interests must exclude not only the enforcement itself, but the legal means required to enforce. The court concluded that “[t]his is not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices like repetitive nighttime phone calls; enforcing a security interest does not grant an actor blanket immunity from the Act. But given that we here confront only steps required by state law, we need not consider what other conduct (related to, but not required for, enforcement of a security interest) might transform a security-interest enforcer into a debt collector subject to the main coverage of the Act.” And last, Obduskey argued that the Court’s ruling creates a loophole, but the Court noted that any loophole could be filled by state regulation or Congress amending the FDCPA.
Justice Sotomayor concurred, making two points. She first contended the case was a close one, and Congress can revise the FDCPA if it believes the Court got it wrong. She also noted that the Court’s opinion appears cabined to good-faith actions such as the conduct undertaken by McCarthy and does not give enforcers of security interests carte blanche to conduct abusive debt collection activities.
The Court’s decision is undoubtedly a victory for law firms and others involved in nonjudicial foreclosures, resolving a longtime division among circuits’ views of the interplay between the FDCPA and nonjudicial foreclosure. The Court’s decision also rejects a contention frequently raised by borrowers that even if mere enforcers of security interests are carved out of the primary definition of “debt collector” set forth in § 1692a(6), it is rare for a party to be a mere enforcer of security interests. The Court determined that enforcers of security instruments do not become debt collectors merely because they follow state law requirements to complete a nonjudicial foreclosure. The mortgage servicing industry avoided a myriad of operational ramifications with today’s victory from a compliance and cost of doing business standpoint, as well. The ruling also should largely eliminate a cottage industry created by consumer defense attorneys who pursue foreclosing parties and their counsel in nonjudicial foreclosure states to delay or avoid liquidation of secured assets.
The decision is limited, however. The Court explicitly states that “whether those who judicially enforce mortgages fall within the scope of the primary definition [of debt collector] is a question we can leave for another day.” While there are strong arguments that filing a judicial foreclosure and not seeking a deficiency judgment is akin to a nonjudicial foreclosure and simply amounts to the enforcement of a security instrument, that issue will continue to play out in district and circuit courts of appeal throughout the country until and unless the Court or Congress agrees to address that specific issue.