Locke Lord QuickStudy: U.S. Supreme Court: FDCPA Is Inapplicable to Businesses Merely Engaged in Nonjudicial ‎Foreclosure Proceedings

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. ‎

Legal Analysis

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.‎

Ramifications

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.‎