U.S. Supreme Court ruling on non-judicial foreclosure raises questions

Listen to this article

PAT MURPHY

BridgeTower Media Newswires

The U.S. Supreme Court’s recent decision placing a law firm beyond the reach of federal debt collection law includes an important caveat that will shift the focus of — rather than end — consumer protection litigation against those in the business of executing nonjudicial foreclosures.

That’s the consensus of experts reading the tea leaves from the court’s March 20 decision in Obduskey v. McCarthy & Holthus.

“This opinion, without question, is going to change the dynamic between those attorneys [who] represent consumers and the law firms that engage in the foreclosure process,” said Christopher M. Lefebvre, a consumer protection attorney in Pawtucket, Rhode Island.

The case involved a Colorado homeowner who sued a law firm retained to carry out a nonjudicial foreclosure of his property. The plaintiff claimed that the defendant firm violated the Fair Debt Collection Practices Act by failing to provide verification when he disputed the amount owed on his mortgage.

In upholding the dismissal of the complaint, the Supreme Court agreed with lower courts that the law firm was not a “debt collector” subject to the statute’s requirements. In a unanimous opinion authored by Justice Stephen Breyer, the court held that, with one narrow statutory exception, “those who engage in only nonjudicial foreclosure proceedings are not debt collectors within the meaning of the Act.”

The National Consumer Law Center in Boston filed an amicus brief in Obduskey in support of the plaintiff. April Kuehnhoff, an NCLC staff attorney, said the decision was narrow, limited to defendants whose “principal purpose” is the enforcement of security interests.

Consequently, Kuehnhoff said she foresees more litigation focusing on the principal purpose standard and its application to a particular defendant.

“There will be a lot of courts looking carefully at whether or not a case is the type of scenario outlined by the Supreme Court,” Kuehnhoff said. “This decision does not mean that all entities engaged in nonjudicial foreclosure are exempt from the broader coverage of the FDCPA.”

Every state provides for judicial foreclosure under which a creditor brings an action for a court to supervise the sale of property and distribute proceeds. Nonjudicial foreclosure entails the notification of parties and sale of property of someone in default on a mortgage outside of court supervision.

But even in nonjudicial foreclosures parties can refer certain matters — such as a dispute over title — for resolution by a court.

North Carolina is among the 30 states in which nonjudicial foreclosures are permitted and are the primary method of foreclosing on residential properties.

The issue in Obduskey was whether those in the business of carrying out nonjudicial foreclosures — law firms, mortgage lenders and servicers — are “debt collectors” subject to all the requirements of, and liability under, the FDCPA.

The defendant law firm in Obduskey — California-based McCarthy & Holthus — argued it was not a true debt collector because a nonjudicial foreclosure is in essence a proceeding to enforce a security interest rather than an action to collect a debt.

The 10th U.S. Circuit Court of Appeals in Obduskey and the 9th Circuit in a 2016 case held that an entity whose only role is the enforcement of security interests is not a debt collector under the FDCPA. On the other hand, the 3rd, 4th and 6th circuits had found entities involved in nonjudicial foreclosures to be debt collectors for the purpose of all the act’s requirements.

The FDCPA’s broad definition of “debt collector” would appear to support the view adopted by the majority of circuits. Under 15 U.S.C. §1692a(6), the term debt collector  “means 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.”

Breyer said that, on its face, §1692a(6) applies to those entities engaged in pursuing nonjudicial foreclosures. He wrote that “even if nonjudicial foreclosure were not a direct attempt to collect a debt, because it aims to collect on a consumer’s obligation by way of enforcing a security interest, it would be an indirect attempt to collect a debt.”

However, §1692a(6) adds what Breyer labeled a “limited purpose” definition, stating: “For the purpose of section 1692f(6) of this title, such term also includes any person … in any business the principal purpose of which is the enforcement of security interests.”

Section 1692f(6) prohibits a debt collector from “taking or threatening to take any nonjudicial action to effect dispossession or disablement of property” under certain specific conditions, including whenever the debt collector has no “present right” or “present intention” to possess the property.

Boston attorney Maura K. McKelvey defends mortgage holders, servicers and lenders in consumer protection actions. She pointed out that §1692f(6) itself is aimed at preventing abusive collection behaviors when enforcing security interests. The FDCPA may apply in §1692f(6)’s narrow context, even when a defendant doesn’t fall within the act’s basic definition of a debt collector, she added.

The Supreme Court concluded that Congress, by inserting §1692f(6), intended that those enforcing security interests in nonjudicial foreclosures would be subject only to the requirements of §1692f(6) and not the broader requirements of the FDCPA.

“Giving effect to every word of the limited-purpose definition narrows the primary definition, so that the debt-collector-related prohibitions of the FDCPA (with the exception of §1692f(6) do not apply to those who, like McCarthy, are engaged in no more than security-interest enforcement,” Breyer wrote.