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Recent U.S. Supreme Court Decision to Have Significant Industry Impact

Posted By USFN, Wednesday, May 8, 2019

by Richard P. Haber, Esq.
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

In its most significant opinion impacting default law firms in several years, the United States Supreme Court issued its decision in Obduskey v. McCarthy & Holthus LLP on March 20,2019. The issue decided whether McCarthy & Holthus LLP (“McCarthy”) is considered a “debt collector” for purposes of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq., (the “FDCPA”). In a 9-0 decision, the Court held that McCarthy– and therefore other default firms and trustee companies whose primary business is the pursuit of nonjudicial foreclosures– is not a “debt collector” for purposes of the majority and most meaningful provisions of the FDCPA.

The case stemmed from a nonjudicial foreclosure that McCarthy pursued against Dennis Obduskey in the State of Colorado. The specific question arose from the FDCPA’s statutory definition of “debt collector” which, in relevant part, is:

[A]ny person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, either directly or indirectly, debts owed or due or asserted to be owed or due another.

For the purpose of section 1692f(6)of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement `of security interests.15 U.S.C. § 1692a(6).

The Court has characterized the first section as the “primary definition “and the second section as the “limited-purpose definition.” A party included in the primary definition is subject to the full extent of the FDCPA, including its main requirements: that a “mini-Miranda” warning be given when communicating with a debtor; that a debt validation notice be sent by the debt collector; that, upon receiving a consumer dispute as to the validity or amount of a debt, the debt collector cease collection activity until it verifies the debt; and the prohibition on making false, deceptive or misleading representations in connection with a debt, such as misstating a debt’s “character, amount, or legal status.”

However, a party covered only by the limited-purpose definition is merely subject to the FDCPA’s requirement that it not “tak[e] or threaten to take any nonjudicial action to effect dispossession or disablement of property if: (A) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from dispossession or disablement.” 15 U.S.C. § 1692f(6).

McCarthy argued that because its primary business – the pursuit of nonjudicial foreclosures where no deficiency judgment is permitted – is plainly the enforcement of security interests, it is subject only to the limited-purpose definition. The firm further argued that by using the word “also “in the limited-purpose definition, Congress could not have meant for enforcers of security instruments to be included in the primary definition.

Obduskey, the homeowner, countered by arguing that it was possible or McCarthy to be covered by both the primary and limited-purpose definitions, rather than just one or the other. He argued that the limited-purpose definition was meant to capture parties who do not outwardly seek to collect debt by sending demand letters and having other direct communications with consumers, such as the “repo man” who has no interaction with the consumer at all but merely comes in the middle of the night to repossess a car.

McCarthy, and various amicus curiae in support of its position (including USFN), also argued that subjecting the firm to the Act would cause conflict with state foreclosure laws, which was not an intention of Congress when enacting the FDCPA. For example, the FDCPA limits debt collectors from communicating with third parties about the debt, but Colorado foreclosure law requires advertising the foreclosure sale. Thus, accepting Obduskey’s position would mean that McCarthy was violating the FDCPA merely by following Colorado foreclosure law anytime it advertised a foreclosure sale.

Finally, McCarthy argued that the legislative history of the FDCPA supports its interpretation because there was, at one point, competing bills before Congress – one of which would have clearly included enforcers of security instruments in the primary definition and one that would have completely excluded enforcers of security instruments from the Act altogether. The final statute was therefore a compromise of the two bills, whereby the limited-purpose definition was created to regulate only certain activity of security instrument enforcers.

Obduskey also advanced some other arguments, including that McCarthy did more than just “enforce” a security instrument and therefore the other acts it took should bring it within the primary definition. Additionally, Obduskey argued that a ruling in favor of McCarthy would create a “loophole” in the FDCPA, allowing those pursuing foreclosures to engage in various abusive practices otherwise forbidden by the Act.

In reaching its conclusion that McCarthy is only subject to the limited-purpose definition of “debt collector” and not the primary definition, the Court relied on the three primary arguments outlined above:(1) the Act’s text itself ; (2) a determination that Congress wanted “to avoid conflicts with state nonjudicial foreclosure schemes”; and (3) the legislative history of the FDCPA.

While the Court made sure “not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices like repetitive nighttime phone calls,” the decision makes clear that default firms and trustee companies whose primary business is the pursuit of nonjudicial foreclosures are not subject to the vast majority of FDCPA requirements. In the same way, a firm whose principal business purpose is the pursuit of foreclosures in a judicial state where the foreclosure judgment simultaneously acts as a money judgment against the borrower personally, is a “debt collector” covered by the full extent of the FDCPA because of the money judgment component.

With respect to judicial foreclosures, the Court specifically stated “whether those who judicially enforce mortgages fall within the scope of the primary definition is a question we can leave for another day,” but there is a good argument that the holding in
Obduskey v. McCarthy& Holthus LLP extends to firms specializing in judicial foreclosures that result only in in rem judgments, without an in persona deficiency component.

Because the term “debt collector” is defined based on the “principal purpose” of the business, an interesting question is how the
Obduskey v. McCarthy & Holthus LLP decision will impact multistate firms that practice in both judicial and nonjudicial states. Arguably a firm can have only one “principal purpose” and if a majority of the firm’s revenue is generated from nonjudicial foreclosures, judicial foreclosures where there is no deficiency judgment and other non-collection-related activities, it would seem that the firm as a whole should be excluded from the primary definition of “debt collector.”

Another open question is what effect, if any, this case will have on the banks and servicers whose loans are at issue. The
Obduskey v. McCarthy & Holthus LLP decision arguably affects only the default firms and trustee companies that are on the front lines pursuing nonjudicial foreclosures. It seemingly does not change the fact that servicing a mortgage loan for another party would capture a bank or services within the FDCPA’s primary definition of debt collector because those banks and servicers are entities “who regularly collects or attempts to collect, either directly or indirectly, debts owed or due or asserted to be owed or due another.”

Finally, it remains to be seen whether Congress reacts to the decision by amending the FDCPA. The Court was clear that it ruled based on the text of the Act as currently drafted and its perception of Congressional intent. But, of course, Congress is free to amend the Act if it wants to sweep nonjudicial foreclosure firms and trustee companies into the broader FDCPA requirements.

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