Nonjudicial Foreclosures are not Subject to the FDCPA, says the Supreme Court

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Until the Supreme Court’s recent decision in Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029 (2019), if you were an entity engaged solely in the enforcement of security interests on loans, such as through nonjudicial foreclosure proceedings, the federal Fair Debt Collection Practices Act (the “FDCPA”) would have been applied to you in some states but not others.  That is because the United States Courts of Appeals were divided on the issue, with the Ninth and Tenth Circuits finding that the Act did not apply, and the Third, Fourth, and Sixth Circuits finding that it did apply.  The Supreme Court resolved that Circuit split last month when it found that businesses engaged solely in security-interest enforcement do not qualify as “debt collectors” under the FDCPA.

The FDCPA places certain obligations and prohibitions on debt collectors in order to prevent abusive debt collection practices. 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.”  15 U.S.C. § 1692a(6).

When Plaintiff Dennis Obduskey defaulted on a loan he obtained to purchase his home, the lender hired McCarthy & Holthus LLP (“McCarthy”), the Defendant, to carry out a foreclosure.  Colorado, like approximately half the States in the United States – including Massachusetts – provides for a foreclosure procedure known as nonjudicial foreclosure.  While nonjudicial foreclosure procedures vary by state, such foreclosures, as the name suggests, generally occur without the involvement of the courts for all or most of the process.

Obduskey filed suit against McCarthy alleging that the firm had violated certain provisions of the FDCPA.  The District Court dismissed Obduskey’s complaint on the ground that McCarthy was not a “debt collector” under the FDCPA.  The Tenth Circuit Court of Appeals affirmed.  In upholding the Court of Appeals’ ruling, the Supreme Court considered three things.

First, the Court considered the text of the FDCPA itself, noting that while the general definition of “debt collector” did include indirect debt collection attempts, and could therefore be read to include nonjudicial foreclosure actions, the Act also included a “limited-purpose definition.” That limited-purpose definition strongly suggested that entities that only enforce security interests do not fall within the Act’s general definition.  (Such entities, the Court noted, are governed by the prohibitions of only one provision of the Act, Section 1692f(6), inapplicable in the Obduskey case.)

Second, the Court explained that it believed Congress did not want to interfere with state nonjudicial foreclosure schemes and thus treated debt collection differently than nonjudicial foreclosure.

Finally, the Court found that the legislative history of the Act supported its finding.  Congress had considered several different potential versions of the Act, including a version that would have made all enforcement of security interests subject to the Act’s general provisions and a version that would have excluded such enforcement of security interests from the Act entirely.  The version ultimately passed by Congress was, the Court reasoned, a compromise, with security-interest enforcers subject only to the prohibitions contained in Section 1692f(6) of the Act and not to the general debt collector provisions.

In holding that the FDCPA did not apply, the Court admonished that “[t]his is not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices…enforcing a security interest does not grant an actor blanket immunity from the Act.”  The Court made clear that its ruling was based on the fact pattern at-hand, in which the Defendant undertook only the steps required by state law for nonjudicial foreclosure.   The Court did not, therefore, need to 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.”

Justice Sotomayor wrote a concurring opinion in which she explained that the statute was complex, “this is a close case, and today’s opinion does not prevent Congress from clarifying this statute if we have gotten it wrong.”  She further explained that she concurred in the Court’s ruling “[b]ecause the Court rightly cabins its holding to the kinds of good-faith actions presented here and because we are bound to apply Congress’ statutes as best we can understand them.”

As a result of the Supreme Court’s decision in Obduskey v. McCarthy & Holthus LLP, entities that engage in only nonjudicial foreclosure actions are, with the exception of Section 1692f(6), not debt collectors within the meaning of the FDCPA.  All entities engaged in nonjudicial foreclosure actions, however, should be mindful of the Court’s warning that the Act might apply when an entity takes actions not strictly required for a nonjudicial foreclosure action.


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