U.S. Supreme Court holds that Enforcers of Security Interests in Nonjudicial Foreclosures are not “Debt Collectors” under Federal Fair Debt Collection Practices Act

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz
(A Watch Your Language Series Article)

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in commercial agreements, unless it is contrary to statutory law or public policy. Because of this judicial deference to commercial language, you must “say what you mean, precisely, or a judge will decide what you meant.”

Saying what you mean, precisely, is as important in drafting statutes and ordinances as it is in commercial agreements. As a general rule, courts will also uphold clear and unambiguous statutory language. “Statutes clear in their terms need no interpretation; they simply need application. If the …language of a statute reveals … a meaning which is clear, unequivocal and definite… the statute must be applied accordingly." Provident Bank v. Wood (1973). Alternatively, ambiguous statutes will be interpreted by judges who may or may not uphold the meaning intended by the legislative authority who drafted such statutes.

In the recent case of Obduskey v. McCarthy & Holthus LLP, 138 S. Ct. 2710 (2018), the United States Supreme Court determined that the Fair Debt Collection Practices Act (“FDCPA” or the “Act”) was not clear and unequivocal, and accordingly, the court decided what Congress meant by the term “debt collector.”

The facts of the case are simple enough; the law, not so much.

Facts of the Case
In 2007, Dennis Obduskey (the petitioner) bought a home in Colorado with a $329,940 loan secured by a mortgage on the property. Approximately two years later, Mr. Obduskey defaulted on the loan. In 2014, Wells Fargo Bank, N. A., the servicer for the lender hired a law firm, McCarthy & Holthus LLP (the respondent) to act as its agent in carrying out a nonjudicial foreclosure.

McCarthy first mailed Mr. Obduskey a letter that stated McCarthy had been instructed to commence foreclosure against the property, disclosed the amount past due and outstanding on the loan and identified the creditor. Mr. Obduskey responded with a letter disputing the amount of the debt, and requesting written verification of the debt in accordance with §1692g(b) of the FDCPA. McCarthy did not provide any such verification. Instead, the law firm initiated a nonjudicial foreclosure action in accordance with Colorado state law.  

Mr. Obduskey then filed a lawsuit in federal court alleging that the McCarthy law firm had violated the FDCPA by failing to comply with the verification procedure and other provisions and procedures required by the Act. The federal district court dismissed the suit on the ground that the law firm was not a “debt collector” within the meaning of the Act, so the verification procedure and other relevant Act requirements did not apply. On appeal, the Court of Appeals for the Tenth Circuit affirmed the dismissal. Mr. Obduskey then petitioned the United States Supreme Court for certiorari (an order by which a higher court reviews a decision of a lower court).

Applicable Law
To better understand the Obduskey decision, a quick primer on nonjudicial foreclosures and the Act is in order.

Nonjudicial foreclosure. As well explained by the court in Obduskey: “When a person buys a home, he or she usually borrows money from a lending institution, such as a bank. The resulting debt is backed up by a ‘mortgage’—a security interest in the property designed to protect the creditor’s investment… The loan likely requires the homeowner to make monthly payments. And if the homeowner defaults, the mortgage entitles the creditor to pursue foreclosure, which is ‘the process in which property securing a mortgage is sold to pay off the loan balance due’… Every state provides some form of judicial foreclosure: a legal action initiated by a creditor in which a court supervises the sale of the property and distribution of the proceeds. These procedures offer various protections for homeowners, such as the right to notice and to protest the amount a creditor says is owed...About half the States also provide for what is known as nonjudicial foreclosure, where notice to the parties and sale of the property occur outside court supervision.” Ohio is not one of the states that permits nonjudicial foreclosures.

The FDCPA- The Fair Debt Collection Practices Act is the main federal law that governs debt collection practices. Generally, the FDCPA prohibits debt collectors from using abusive, unfair or deceptive practices to collect debts. Specifically, the Act imposes a multitude of requirements on “debt collectors.” For example, pursuant to §1692d of the Act, debt collectors may not use or threaten violence, or make repetitive phone calls. Nor (pursuant to §1692e of the Act) can debt collectors make false, deceptive or misleading representations in connection with a debt, like misstating a debt’s “character, amount, or legal status.” And, pursuant to §1692g(b) of the Act, if a consumer disputes the amount of a debt, a debt collector must cease collection until it “obtains verification of the debt” and mails a copy of such verification to the debtor.

There is also a separate subsection of the Act (§1692f(6)), that prohibits a debt collector from: “Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if— (A) there is no present right to possession of the property . . . ; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from such dispossession or disablement.”

What is a “debt collector” for purposes of the Act?  Pursuant to §1692a(6) of the Act , 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.” This definition, however, goes on to say that “[f]or the purpose of section 1692f(6)…the term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”

The Issue before the Court: The issue faced by the court in Obduskey was essentially; what did Congress mean by enacting, in effect, a two-part definition of “debt collector” in the Act. In other words, does the “2nd part of the definition” (the last sentence) mean that one principally involved in the enforcement of security interests is not a debt collector (except regarding section 1692f(6) of the Act)? If so, numerous other provisions of the Act, like the verification requirement would not apply to the McCarthy law firm. Or, does the 2nd part of the definition simply reinforce the fact that those principally involved in the enforcement of security interests are subject to §1692f(6), in addition to the Act’s other provisions?

Holding/Court Analysis of ObduskeyThe United States Supreme Court in Obduskey held that a security interest enforcer engaged in no more than nonjudicial foreclosure proceedings is not a “debt collector” under the FDCPA, except for the limited purpose of §1692f(6) of the Act. In other words, the vast majority of the Act does not apply to nonjudicial foreclosures.
Most decisive and important to the court was the text of the Act itself. The court interpreted the first part of the Act’s definition of debt collector as the Act’s “primary definition,” and the last sentence of the definition as the “limited purpose” part of the definition. The court in Obduskey then reasoned that if security interest enforcers were meant to be included in the primary definition, there would have been no need for the addition of a limited purpose definition that specifically addresses security interest enforcers (in nonjudicial foreclosures).

As explained in the case syllabus, “The limited purpose definition says that “[f]or the purpose of Section 1692f(6)” a debt collector ‘also includes’ a business, like McCarthy, ‘the principal purpose of which is the enforcement of security interests.’ §1692a(6) (emphasis added). This phrase, particularly the word ‘also,’ strongly suggests that security interest enforcers do not fall within the scope of the primary definition. If they did, the limited purpose definition would be superfluous.”

The court also pointed out that its interpretation is supported by legislative history, which suggests that “the Act’s present language was the product of a compromise between competing versions of the bill, one which would have totally excluded security-interest enforcement from the Act, and another which would have treated it like ordinary debt collection.”

Mr. Obduskey made a number of legal arguments which were summarily dismissed by the court. He also expressed a “floodgates argument” claiming that the court’s decision will open a loophole, permitting creditors and their agents to engage in a host of abusive practices. The court seemed concerned enough about this argument to issue a warning, by stating, “This is not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices.” However, the Court was not swayed enough to change its decision. In fact, the court countered that it would not be the role of the Supreme Court of the United’s States to curtail any collateral damage from its decision. Rather, “states can…guard against such practices”, and “Congress may choose to expand the reach of the FDCPA.”  According to the court, the United States Supreme Court’s only job is to “enforce the statute that Congress enacted.”

Moral of the Story
For legislators, “say what you mean, precisely, or a judge will decide what you meant.” And, remember that judges do not always get it right.  Even Justice Sotomayor, in her concurring opinion in Obduskey recognized this adage by stating: “this is a close case, and today’s opinion does not prevent Congress from clarifying this statute if we have gotten it wrong.”

For debt collectors, heed the court’s warning (“enforcing a security interest does not grant an actor blanket immunity from the mandates of the Act”), rather than focus on its holding. Also keep in mind that there is no penalty for adhering to consumer protection statutes that may not be applicable, even if you are an attorney or other security interest enforcer involved in a nonjudicial foreclosure. What would be the harm, for example in using the “verification of the debt language” called for in the Act, when there is no requirement to do so? Remember that debt collection protections are also governed at the state and local level, in spite of a limited loophole in the FDCPA.

If you are an enforcer of a security interest in a judicial foreclosure (required in Ohio and other states), note that the holding of Obduskey v. McCarthy & Holthus LLP does not apply to you. As clearly stated by the court in Obduskey, “Whether those who judicially enforce mortgages fall within the scope of the primary definition [of “debt collector”] is a question we can leave for another day…for here we consider nonjudicial foreclosure.” In other words, since enforcers of security interests in judicial foreclosures were not deemed excluded from the Act’s definition of “debt collector”, to be prudent, you should consider yourself included in the definition, and consequently, subject to all provisions of the Act.

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