Gerner & Kearns Co., L.P.A.

Nonjudicial Foreclosure is Not Debt Collection Under the FDCPA

In a long-awaited decision, the U.S. Supreme Court on March 20, 2019 held unanimously that when a business initiates an In Rem only nonjudicial foreclosure on behalf of a mortgage lender, the provisions of the Fair Debt Collection Practices Act (FDCPA), with the exception of S 1692f(6), do not apply because the business does not fall under the primary definition of a "debt collector." The decision was limited to the facts situation that the firm of McCarthy & Holthus LLP was only enforcing the Security Instrument and was not attempting to collect on the Note.

Rather, the court reasoned in Obduskey v. McCarthy & Holthus LLP, that In Rem nonjudicial foreclosure actions are instead only security-interest enforcement actions, and the business is not a "debt collector" under the FDCPA, except for the limited purpose of S 1692f(6), which triggers the much narrower set of responsibilities under the FDCPA, as set forth in S 1692f(6). If the Colorado law firm that instituted the nonjudicial foreclosure proceedings had met the primary definition of a debt collector, all responsibilities would have been triggered under the Act.

We recently wrote in this space a comprehensive blog about the legal issues in Obduskey. As we explained, the federal appeals courts were split on the issue whether the FDCPA applies to In Rem only nonjudicial foreclosures, so the Supreme Court broke the tie. Obduskey overrules Glazier v. Chase Home Finance LLC from the 6th Circuit, in which our law firm is located. Glazier had instead held that both judicial and nonjudicial foreclosure actions are methods of debt collection, thus invoking all requirements of the FDCPA.

Supreme Court reasoning

The Supreme Court based its conclusion that when the law firm initiated the nonjudicial foreclosure it was not acting as a debt collector for purposes of the Act on three main factors:

  • The language of the statute supports this conclusion because there is not only the primary definition of debt collector, but also a "limited-purpose definition" that says for purposes of S 1692f(6) with a different set of responsibilities, a business that principally enforces security interests like the law firm in this case is also a debt collector. The Supreme Court focused on the word "also" in finding that the inclusion of that "limited-purpose definition" would have been "superflous" if Congress had intended the "primary definition" to cover all debt collectors, such as the law firm in this case.
  • The purpose for Congress separating the definition of a security-interest enforcer from a debt collector may be to "avoid conflicts with state nonjudicial foreclosure schemes."
  • The legislative history of the Act suggests the treatment of security-interest enforcement differently than debt collection broadly may have been a compromise between the competing versions of the Act then before Congress, one which would have completely excluded security-interest only enforcement from the Act, and the other which would have made security-interest only enforcement completely covered by the Act. 

Any business that engages in security-interest enforcement like nonjudicial foreclosure that has questions about the impact of this case should inquire of an experienced attorney who represents creditors, collectors and similar companies.

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