ARE THEY OR AREN’T THEY – U.S. SUPREME COURT CLARIFIES SCOPE OF “DEBT COLLECTOR” UNDER FDCPA

5/22/2019

First published in the Oregon State Bar Debtor-Creditor Newsletter Vol. XXXVIII, No. 1

In March, the U.S. Supreme Court unanimously held that parties who principally enforce security interests are not “debt collectors” within the broader meaning of that term under the Fair Debt Collection Practices Act. See Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029 (2019). In this uncharacteristically short and sweet opinion, the Supreme Court made a very narrow legal ruling with potentially far-reaching consequences.

The facts in Obduskey are simple. Dennis Obduskey defaulted on his mortgage with Wells Fargo (“WF”). On behalf of WF, McCarthy & Holthus LLP (“McCarthy”) initiated a nonjudicial foreclosure. To kick off that process, McCarthy sent Obduskey a letter identifying WF, providing his loan balance, and indicating that McCarthy was “instructed to commence foreclosure.” The letter also indicated that it was sent “‘[p]ursuant to, and in compliance with,’ both the Fair Debt Collection Practices Act (FDCPA) and Colorado law.” In response, Obduskey challenged the validity of the debt, evoking § 1692g(b) of the FDCPA. Upon such a challenge of validity, that section 7 requires a “debt collector” to cease all collection action until it provides the debtor with verification of the disputed debt.

McCarthy did not provide verification of the debt and boldly marched forth with the foreclosure process prescribed by Colorado state law. It next filed a mandatory “notice of election and demand” with a state official called a “public trustee.” The trustee then recorded the notice and sent a copy to Obduskey. That notice provided Obduskey with information about the balance of his mortgage loan, his right to cure the default, and the time and place of the foreclosure sale.

Obduskey filed suit against McCarthy alleging that it violated the FDCPA by seeking to collect a debt (his mortgage loan) without first providing the requested verification. The District Court dismissed the lawsuit, finding that McCarthy was not a “debt collector” within the meaning of the FDCPA, so the relevant requirements did not apply. On appeal, the Tenth Circuit Court of Appeals affirmed, concluding that the “mere act of enforcing a security interest through a non-judicial foreclosure” does not fall within the scope of the FDCPA. Stepping through an analysis of the text and context of the FDCPA, the Supreme Court affirmed that decision.

The Court’s decision turns on section 1692a(6) of the FDCPA. Justice Breyer, writing for the Court, explained that section 1692a(6) provides both a “primary” and a “limited-purpose” definition of the term “debtor collector.” That section first states that 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 owed or asserted to be owed or due another” (i.e., the “primary definition”). However, that section goes on to add that, “[f] or the purpose of section 1692f(6),” a “debt collector” “also includes any person … in any business the principal purpose of which is the enforcement of security interests” (i.e., the “limited-purpose definition”).

In turn, § 1692f(6), 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.

In contrast to § 1692f(6), the rest of the FDCPA imposes a wide range of restrictions on debt collectors, including the debt verification requirement raised by Obduskey (e.g., debt collectors are prohibited from making false, deceptive or misleading representations when collecting a debt).

The Court summarily indicated that there was no question that McCarthy fell within the scope of § 1692f(6). The real question was whether it fell within the broader, “primary” definition of “debt collector” triggering the remaining myriad requirements of the FDCPA. Pointing to three different “considerations,” the Court concluded that McCarthy was not a “debt collector” as provided in the “primary” definition.

First, the Court explained that businesses like McCarthy that principally focus on the enforcement of security interests are clearly collecting debts. However, if they were lumped into the primary definition of “debt collector,” that would make the “limited-purpose definition” essentially superfluous. Under well-established rules of construction, the Court must save all statutory language from the threat of superfluity. Second, the Court opined that “Congress may well have chosen to treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state nonjudicial foreclosure schemes.” Obduskey, 139 S. Ct. at 1037. It went on to discuss how, for example, public foreclosure notices would violate the FDCPA’s restrictions on communications with third parties in connection with debt collection.

Lastly, the Court explained that the legislative history strongly suggests that the FDCPA was the product of compromise between two competing versions of the Act — one that included and one that excluded businesses that enforce security interests from the definition of “debt collector.”

Finally, the Court goes on to address each of Obduskey’s main arguments. Although the Court deftly rejects each argument, its discussion also seems to narrow the scope of its ruling. In part, Obduskey argued that McCarthy did more than “simply enforce[e] a security interest,” and thus should be treated as a full-fledged debt collector. Obduskey suggested that the pre-foreclosure notices sent by McCarthy would be interpreted by most consumers as a threat of foreclosure and attempt to collect a debt. The Court expressly acknowledged the “gravity” of such letters. However, the Court went on to state that in this specific case, it was assumed that the communications sent by McCarthy were required by Colorado foreclosure law. (There were no arguments to the contrary raised on appeal.) As such, those actions were excluded from the FDCPA. The Court pointedly clarified that it is not suggesting that “pursuing nonjudicial 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. But given that we here confront only steps required by state law, we need not consider what other conduct (related to, but not required for, enforcement of a security interest) might transform a security-interest enforcer into a debt collector subject to the main coverage of the Act.” Id. at 1039–40.

There has been a torrent of litigation throughout the country regarding FDCPA violations in the foreclosure context. Many were hoping that the Supreme Court’s ruling in Obduskey would calm the storm. Given the clean facts and narrow legal interpretation, Obduskey still leaves the door open for debtors to file FDCPA actions whenever a foreclosing law firm steps outside the confines of state foreclosure law.

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