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From Banking and Finance Law Daily, January 7, 2019

Is nonjudicial mortgage foreclosure debt collection? Supreme Court hears arguments

By Richard A. Roth, J.D.

Is a law firm carrying out a nonjudicial foreclosure on behalf of a client engaging in debt collection that is subject to the Fair Debt Collection Practices Act? Questions posed by the Supreme Court justices during oral arguments in Obduskey v. McCarthy & Holthus, LLC, implied sympathy for the homeowner’s position that he was protected by the FDCPA, offset by skepticism that the language of the Act actually provided that protection.

The arguments raised by the petition for certiorari focused on the interplay between two parts of the FDCPA:

  1. the definition of "debt collector" in 15 U.S.C. §1692a(6) (the "general purpose" definition"); and
  2. the special provisions included in 15 U.S.C. §1692f(6) that ban unfair practices by persons who are attempting "to effect disposition or disablement of property" (the "limited purpose definition").

The first sentence of the general purpose definition says that a person is a debt collector if he uses interstate commerce or the mail in any business that has debt collection as its principal purpose, or he "regularly collects or attempts to collect, directly or indirectly, debts owed" to someone else. However, the third sentence adds that, for the purposes of 15 U.S.C. §1692f(6), "debt collector" includes someone who uses interstate commerce or the mail in a business that has the enforcement of security interests as its principal purpose.

The issue presented was whether a law firm that was engaged in a nonjudicial foreclosure, but that never demanded any payment from the homeowner, was collecting a debt.

Effect of no payment demand. According to the Tenth Circuit opinion in Obduskey v. Wells Fargo, the bank began servicing the homeowner’s mortgage while it was still current. After the mortgage fell into default, the bank started, but halted, foreclosures several times over a six-year span. In 2014, the company hired McCarthy & Holthus to initiate a nonjudicial foreclosure. That process was started by a letter to the homeowner in which the firm said that it had been instructed to begin foreclosure and that it "may be considered to be a debt collector attempting to collect a debt." The homeowner responded with a suit claiming FDCPA violations.

Three U.S. appellate courts and the Colorado Supreme Court have decided that nonjudicial foreclosures constitute debt collection, the Tenth Circuit said in its opinion. However, one appellate court—the U.S. Court of Appeals for the Ninth Circuit—and a number of U.S. district courts have determined that the FDCPA is not implicated. The Tenth Circuit concluded that the nonjudicial foreclosure was not debt collection under the FDCPA because the law firm had not demanded any payment from the homeowner.

"[E]nforcing a security interest is not an attempt to collect money from the debtor," the appellate court said. In the process of reaching that conclusion, the court disregarded the homeowner’s argument that the end goal of any foreclosure is obtaining payment on the mortgage loan debt (see Banking and Finance Law Daily, Jan. 22, 2018).

Homeowner’s arguments. Attacking the Tenth Circuit’s decision, Daniel L. Geyser, the homeowner’s attorney, described a statutory organization in which the FDCPA first defined who was a debt collector and then added to that group, for purposes of 15 U.S.C. §1692f(6), those persons who were not covered by the general purpose definition but were covered by the limited purpose definition because they were enforcing a security interest.

When challenged by Justice Alito to explain who might be covered by the limited purpose definition of 15 U.S.C. §1692f(6) but not the general purpose definition of 15 U.S.C. §1692a(6), Geyser described a traditional repossession agent who would repossess a car, deliver the car to the creditor, be paid for his services, and not care whether the creditor sold the car or not. Such a person would not be collecting any payment, but he still would be a debt collector under the limited purpose definition.

Justice Gorsuch, however, noted that 15 U.S.C. §1692f(6) not only bans unfair practices, it also bans threats to take banned actions. In other words, it bans talking to the affected consumer. Why was talking to the consumer not covered by the general purpose definition, making the limited purpose definition superfluous, he asked? Geyser argued that the threat might not be an effort to collect payment.

In essence, the justices appeared to view the two "debt collector" definitions as separate, with the limited purpose definition adding a group of persons who were not covered by the general purpose definition. On the other hand, Geyser attempted to convince them that a person could be covered by one or both definitions. Justice Sotomayor alone expressed agreement with that proposition.

Geyser also attempted to minimize the law firm’s claims that the homeowner’s position would set up conflicts with requirements of state law.

In his main argument and his rebuttal, Geyser also cited a different FDCPA section, 15 U.S.C. §1692i, which sets venue rules for collection suits. Under that section, a debt collector who is suing to enforce a security interest must sue in the judicial district where the property is located. That section says nothing about seeking a deficiency judgment, so it must mean that foreclosure constitutes debt collection, he argued.

Law firm’s arguments. Kannon K. Shanmugam, the law firm’s attorney, conceded in response to a question by Chief Justice Roberts that creditors don’t want to own houses, they want to be paid, and that foreclosing a mortgage is a way to be paid. However, he also said that foreclosing a mortgage is a way to be paid that is distinct from being paid by the homeowner. The foreclosure does not demand payment by the homeowner. "[N]ot everything that could lead to the elimination of a debt constitutes debt collection," he said.

Justice Kagan did not accept that argument, asserting instead that a foreclosure was merely an alternative method of securing payment. Justice Kavanaugh seconded that belief, noting that a foreclosure inherently communicated a "pay up or lose your home" message. "[C]ommon sense tells you this is an effort to have you repay the debt," he said.

Shanmugam replied that the purpose of the nonjudicial foreclosure was to foreclose on the property, not to induce a payment. He argued that, in passing the FDCPA, Congress understood that collecting debts and enforcing security interests were distinct concepts. Congress intended that persons enforcing security interests should be subject only to limited restrictions, and the combination of the general purpose and limited purpose definitions accomplished that by treating nonjudicial foreclosures as not being debt collection.

He did concede that a law firm seeking a deficiency judgment as part of a judicial foreclosure would be collecting a debt.

Federal government’s support. The U.S. government, arguing separately from the law firm, also argued that nonjudicial foreclosures are not debt collection. Assistant to the Solicitor General Jonathan C. Bond characterized this as resulting from a congressional compromise that would subject persons enforcing security interests to a ban only on a limited set of practices deemed to be unfair. The broader applicability asserted by the homeowner would upset that compromise, he argued.

The limited purpose definition made clear that Congress intended to regulate debt collectors and security interest enforcers separately, he said. Bond conceded, as had Shanmugam, that a security interest enforcer who also demanded payment would be a debt collector. However, he disagreed with the proposition that a sale of the property after repossession—or foreclosure—mattered. "If you are taking property to be used to satisfy a debt, it doesn’t matter whether you sell it or, indeed, whether anyone sells it," he said.

In Bond’s view, a nonjudicial foreclosure that complies with state law and does not include a payment demand is solely the enforcement of a security interest and not debt collection.

Supreme Court docket. For details about this and other petitions and cases pending before the Supreme Court, please consult this list of selected banking and finance law cases awaiting action in the 2018 term. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each case.

The case is No. 17-1307.

Attorneys: Daniel L. Geyser (Geyser P.C.) for Dennis Obduskey. Kannon K. Shanmugam (Williams & Connolly LLP) for McCarthy & Holthus. Jonathan C. Bond, Assistant to the Solicitor General, Department of Justice for United States, as amicus curiae in support of respondent.

Companies: McCarthy & Holthus, L.L.P.; Wells Fargo, Wells Fargo Bank, Wells Fargo Bank, N.A.; Wells Fargo & Co.; Wells Fargo Home Mortgage

MainStory: TopStory DebtCollection Mortgages SupremeCtNews

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