Supreme Court Limits Liability for Attorneys Handling Non-Judicial Foreclosures
by Jack J. Kubiszyn Jr., Partner
Attorneys and law firms handling non-judicial foreclosures have been holding their breath on whether the U.S. Supreme Court would include such representation in the definition of a “debt collector” subject to the restrictions, requirements and penalties of the federal Fair Debt Collection Practices Act (“FDCPA”). The legal profession can breathe a little easier as the Supreme Court recently released its decision in Obduskey v. McCarthy & Holthus LLP (“Obduskey”), which specifically limited an attorney’s liability under the FDCPA when handling non-judicial foreclosures on behalf of clients.
The following is a summary of the reasoning and rationale behind the Court’s decision.
In Obduskey, the Plaintiff bought a home with funds received from a nationally recognized lender. The loan was secured by a mortgage on the property. When the plaintiff failed to make payments under the loan, the lender hired a law firm to foreclose under the mortgage. Notice was provided to the Plaintiff that the lender would be pursuing its foreclosure rights under the mortgage. The Plaintiff responded that it disputed the debt under the FDCPA. Rather than obtaining additional verification under the FDCPA as the Plaintiff requested, the attorney representing the lender moved forward with the non-judicial foreclosure. The Plaintiff then filed a lawsuit in federal court alleging that the attorney representing the lender qualified as a debt collector under the FDCPA and that the attorney’s actions pursuing the non-judicial foreclosure violated the FDCPA.
The District Court dismissed the Plaintiff’s suit finding that the law firm handling the non-judicial foreclosure did not qualify as a debt collector under the FDCPA. This dismissal was affirmed on appeal and the U.S. Supreme Court elected to address this issue due to the different views among the various circuits on the FDCPA’s application to non-judicial foreclosure proceedings.
The FDCPA defines a debt collector as follows:
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 due or asserted to be owed or due another.
However, the definition of debt collector goes on to provide:
For purposes 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[1].
In Obduskey, the Supreme Court recognized that the definition of a debt collector under the FDCPA created two categories of debt collectors – the first being those that fall under the primary definition of a debt collector subject to all of the requirements of the FDCPA and the second being those that fall under the limited definition of a debt collector subject only to section 1692f(6) of the FDCPA. Since there was no dispute that the attorney was enforcing the lender’s security interest, the question before the Supreme Court was whether the action of enforcing the security interest by non-judicial foreclosure fell under the primary definition of a debt collector, and thus subject to the myriad of requirements and penalties under the FDCPA, or under the limited definition of a debt collector and subject only to the limited requirements of section 1692f(6).
The Supreme Court concluded that attorneys enforcing a security interest by means of a non-judicial foreclosure action do not fall under the primary definition of a debt collector under the FDCPA, and therefore, such non-judicial foreclosure actions need only comply with the limited requirements set forth in section 1692f(6). The Supreme Court based its decision on three main factors.
First, the Supreme Court held the plain language in the FDCPA dictates that enforcement of a security interest by non-judicial foreclosure does NOT fall under the primary definition of a debt collector. The second part of the definition of debt collector, including the word “also,” indicates that an additional category was being created for certain times of debt enforcers. That is, just enforcing a security interest is not enough to qualify as a debt collector under the general definition as certain types of debt collectors are given separate status under the definition. If this was not the intent, adding the second portion of the definition of debt collector under the FDCPA would have been superfluous – that is, if security-interest enforcers are covered by the primary definition, why would Congress have needed to say anything special about section 1692f(6)?
Next, the Supreme Court reasoned that it appeared Congress intended to treat the enforcement of security interests differently from general debt collection so as to avoid conflicts with the non-judicial foreclosure laws of individual states. To hold otherwise would potentially cause state required procedures under foreclosure sales, such as advertising such foreclosure, to violate the requirements of the FDCPA. Considering that the purpose of advertising a foreclosure sale is to attract multiple bidders and the highest price possible – all benefits to the debtor – to hold that such requirement violates the FDCPA would defy common sense and would not carry out the intent of the applicable laws.
Finally, the Supreme Court reviewed the legislative history behind the drafting of the FDCPA and noted that its history indicated a compromise for the limitations contained in section 1692f(6) to only cover security interest enforcement.
The Supreme Court’s decision in Obduskey provides clarity to the various circuits that attorneys handling non-judicial foreclosures on behalf of clients do not qualify as a debt collector under the primary definition of the FDCPA. Therefore, an attorney handling a non-judicial foreclosure is not required to comply with the vigorous requirements set forth in the FDCPA. However, it is important to note that this decision does not give an attorney the unfettered right to engage in abusive debt collection practices as part of its foreclosure proceedings. As Justice Sotomayor noted in her concurring opinion, the question decided by the Supreme Court only involved the limited and specific enforcement of the type security interest before the Court and nothing in the opinion should be construed “to suggest that pursuing non-judicial 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.”
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[1] Section 1692f(6) prohibits a debt collector from taking limited actions, namely:
Taking or threatening to take any non-judicial action to effect dispossession or disablement of property if:
- there is no present right to possession of the property claimed as collateral through an enforceable security interest;
- there is no present intention to take possession of the property; or
- the property is exempt by law from such dispossession or disablement.