March 21, 2019

Law Firms Performing Non-Judicial Foreclosure Declared Not a “Debt Collector” by U.S. Supreme Court

The United States Supreme Court decided another case (Obduskey v. McCarthy & Holthus LLP) under the Fair Debt Collection Practices Act (FDCPA) on March 20, 2019. The Court held, unanimously, that a law firm hired to pursue a non-judicial foreclosure under Colorado law was not a “debt collector” under the FDCPA. The Court did not decide whether the FDCPA applies to judicial foreclosures.

The decision turned on the definition of a “debt collector” in the FDCPA. The FDCPA defines a “debt collector” as “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.” It also provides that “[f]or the purpose of section 1692(f) of this title, [the] term [debt collector] also includes any person…in any business the principal purpose of which is the enforcement of security interests.” Section 1692(f) prohibits a “debt collector” from taking nonjudicial action to effect dispossession or disablement of property under specified circumstances. The Supreme Court was asked to resolve a split in the lower courts. 

The U.S. Court of Appeals for the 10th Circuit in Obduskey ruled that the law firm was not a “debt collector” under the FDCPA because a nonjudicial foreclosure does not automatically result in the right to collect a deficiency judgement against the mortgagor and was, therefore, not an attempt to collect a debt, but other U.S. Courts of Appeals ( Fourth, Fifth, and Sixth) had held that the FDCPA applies to nonjudicial foreclosure proceedings because every foreclosure action is undertaken for the purpose of obtaining payment on the underlying debt.

The Supreme Court first rejected any attempt to distinguish between direct and indirect attempts to collect a debt for purposes of applying the FDCPA’s “debt collector” definition. It remarked 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” that would be regulated if done by a debt collector (emphasis provided.)

It was a portion of the definition of debt collector that swayed the Court to hold that the FDCPA did not apply on these facts. The fact that FDCPA’s debt collector definition states “for purposes of section 1692(f), a “debt collector” also includes those engaged in the enforcement of security interests” was a “serious, indeed an insurmountable, obstacle to subjecting [the law firm] to the main coverage of the Act.” In the Court’s view, “giving effect to every word [of this language] narrows the [broader definition of debt collector] so that the debt-collector-related prohibitions of the FDCPA (with the exception of § 1692f(6)) do not apply to those who, like [the law firm], are engaged in no more than security-interest enforcement.” (emphasis provided.)

Rob Horwitz, General Counsel and Chief Compliance Officer