Supreme Court rules law firms engaging only in “nonjudicial” foreclosures escape the Fair Debt Collection Practices Act
Argument: January 07, 2019
Decision: March 20, 2019
Petitioner Brief: Dennis Obduskey
Respondent Brief: McCarthy & Holthus LLP, et al.
Court Below: Tenth Circuit Court of Appeals
Dennis Obduskey got a home loan in 2007 and defaulted within a short time. By 2009, Wells Fargo owned the servicing rights and hired a law firm, McCarthy & Holthus, to seek foreclosure.
The firm sent Obduskey a letter saying that the firm intended to foreclose, and Obduskey sought certain protections based on federal law: the Fair Debt Collection Practices Act (FDCPA).
This case was about whether McCarthy & Holthus can be held to FDCPA standards. That depends on whether McCarthy & Holthus is a “debt collector” as the act describes.
Nonjudicial foreclosure
Often times, a party seeking foreclosure must go to court to get a judge to order the foreclosure. However, about half of the states allow a streamlined process by which a creditor can make a sale of a home without going to court to get a judgement first. In fact, in these situations, the loan contract includes an automatic right of sale in case of default.
Obduskey had signed such a contract, and McCarthy & Holthus had been hired by Wells Fargo to pursue a “nonjudicial foreclosure.” The question in this case is whether the firm, just seeking to enforce a security interest (nonjudicial foreclosure), is bound by the FDCPA.
FDCPA definitions
Is a nonjudicial foreclosure firm a “debt collector” under the FDCPA?
The FDCPA includes a general definition of “debt collector” that Obduskey said applies to McCarthy & Holthus. Basically, it says anyone in the business of collecting on debts — directly or indirectly — qualifies.
Sounds simple enough. McCarthy & Holthus is indirectly trying to collect on a debt. The firm seeks to foreclose to get money to satisfy a debt.
Not so fast. There’s another more limited definition of debt collector in the FDCPA. It’s a definition clarifying who is bound by the FDCPA provision relating to nonjudicial actions. This more limited definition includes anyone who is the business of enforcing security interests. McCarthy & Holthus argued the more limited definition is the only one that applies to the firm. The firm, more specifically, is enforcing security interests; and so the firm is only bound by the one FDCPA provision relating to nonjudicial actions.
Supreme Court ruling
The Supreme Court ruled for McCarthy & Holthus. The general definition of debt collector isn’t for nonjudicial foreclosure firms. Those firms are only bound by the specific FDCPA provision relating to nonjudicial actions. The rest of the FDCPA’s limitations don’t apply, unfortunately for Obduskey. The Justices all agreed that a plain reading of the text justified the conclusion.
Furthermore, the Court continued, it makes sense that Congress may have wanted to let states conduct more details about how nonjudicial foreclosures are regulated. Some states, for example, require parties pursuing nonjudicial foreclosures to advertise the foreclosure sale. Yet the FDCPA doesn’t allow “debt collectors” to communicate with third parties regarding the debt. The two laws would conflict if the FDCPA governed parties seeking nonjudicial foreclosures.
Lastly, the Court said, the legislative history of the FDCPA suggested that the specific treatment of parties pursuing nonjudicial actions under the FDCPA was actually a compromise between Congressional members, some of whom wanted nonjudicial foreclosures to be regulated just like a general debt collection under the FDCPA and others who wanted to exempt coverage of nonjudicial foreclosures all together.
As Sotomayor wrote in her concurrence, the Court’s opinion “makes a coherent whole of a thorny section of statutory text.”
For more information on the parties’ arguments before the Court, see our Argument Explainer below.
Argument Explainer
Jan 7, 2019
Does the law firm seeking nonjudicial foreclosure have to abide by the federal fair debt collection law?
Dennis Obduskey got a home loan in 2007 and defaulted within a short time. By 2009, Wells Fargo owned the servicing rights and hired a law firm, McCarthy & Holthus, to seek foreclosure.
This case is about whether McCarthy & Holthus can be held to the federal fair debt collection standards under the Fair Debt Collection Practices Act (FDCPA). That depends on whether McCarthy & Holthus is a “debt collector” as the act describes.
The arguments
Obduskey’s case sets out the “simple” version: Yes, the firm is a debt collector. It was seeking to foreclose as a means to collecting debt. Furthermore, the letter that the law firm sent to Obduskey said that McCarthy “may be considered a debt collector attempting to collect a debt.” That’s a line that debt collectors bound by the FDCPA would send.
However, McCarthy & Holthus have a distinction to make. The firm sought a “nonjudicial” foreclosure. Many states have this type of foreclosure. It’s a streamlined process that allows for the creditor to make the sale of the home without going to court to get a judgement first. In fact, the loan contract includes an automatic right of sale in case of default.
As McCarthy notes, a nonjudicial foreclosure right gives the creditor a right in the property and not directly in the right against the person to collect the money. McCarthy was only trying to enforce this property right (in rem, as it’s called in the law) and not trying to collect on the debt, which is a right in personum.
Obduskey says this theoretical difference shouldn’t rise above the main point of the FDCPA – to provide protections for debtors at risk of abuse. Furthermore, the text of the FDCPA’s definition of debt collector includes people who are trying to collect a debt indirectly. That would cover this case of foreclosure-as-a-means-to-collecting.
Federalism
McCarthy has a “federalism” argument on its side that the Supreme Court will likely address, particularly as it was brought up by both McCarthy and the U.S. government (in an amicus brief). In short, regulating private ownership of real property is a state government issue. The federal law should not be overriding how states choose to go about such processes. For more information on this argument, see SCOTUSblog’s Argument Preview.
