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A Catch-22 for Foreclosure Lawyers?

Foreclosure attorneys struggle to find an appropriate way to comply with the FDCPA’s requirement that a validation notice correctly state the amount of the debt in cases in which the balance is changing constantly due to a variety of factors.  In Carlin v. Davidson Fink LLP, 2017 U.S. App. LEXIS 5438 (7th Cir. Mar. 29, 2017), the Second Circuit Court of Appeals rejected a law firm’s attempt to disclose properly its client’s estimated charges in its validation notice.

Debt Collector Status

The defendant law firm filed a foreclosure complaint to collect a defaulted mortgage. The summons indicated that “[t]he relief sought in the within action is a final judgment directing the sale of the premises described above to satisfy the debt secured by the Mortgage described above.” The Foreclosure Complaint stated that “this action may be deemed to be an attempt to collect a debt.” App. at 17. The Foreclosure Complaint also included a paragraph requesting:

That if the proceeds of said sale of the mortgage premises aforesaid be insufficient to pay the amount found due to the plaintiff with interest and costs, the officer making the sale be required to specify the amount of such deficiency in his report of sale so that plaintiff may thereafter be able to make application to this Court, pursuant to Section 1371 of the Real Property Actions and Proceedings Law, for a judgment against the defendant(s) referred to in paragraph FOURTH of this Complaint for any deficiency which may remain after applying all of such moneys so applicable thereto, except that this shall not apply to any defendant who has been discharged in bankruptcy from the subject debt[.]

On these facts the Court had no difficulty in finding that the defendant was a debt collector for FDCPA purposes.

The Conduct at Issue

The defendant attached to the Foreclosure Complaint a “Notice Required by the Fair Debt Collection Practices Act,” which stated that “the amount of the debt is stated in the complaint hereto attached,” and also that “the debt . . . will be assumed to be valid . . . unless the debtor, within thirty (30) days after receipt of this notice, disputes the validity of the debt.” However, the Foreclosure Complaint did not state the amount of the debt.

In response to the Foreclosure Complaint, Davidson sent the law firm a letter disputing the debt and requesting verification of amount. The law firm responded with a letter that included a Payoff Statement good through August 14, 2013, and a “Total Amount Due” of $205,261.79. Below the amount due, however, the statement added, in small print:

To provide you with the convenience of an extended “Statement Void After” date, the Total Amount Due may include estimated fees, costs, additional payments and/or escrow disbursements that will become due prior to the “Statement Void After” date, but which are not yet due as of the date this Payoff Statement is issued. You will receive a refund if you pay the Total Amount Due and those anticipated fees, expenses, or payments have not been incurred.

The Payoff Statement neither indicated what those estimated fees, costs, or additional payments were, nor explained how they were calculated.

Rejecting Carlin’s claim that the complaint was an “initial communication”  under the FDCPA because it was accompanied by a validation notice, the Court of Appeals held that 15 U.S.C. § 1692g(d) forecloses such an argument because a “communication in the form of a formal pleading in a civil action” is not an initial communication.   The court held that the exclusion applies to “any communication forming any part of a pleading” and that the “exclusion naturally extends to exhibits attached to a complaint.”

Carlin next alleged that the letter which he sent to the law firm was an initial communication under the FDCPA.  Holding that a communication initiated by a debtor to a debt collector does not qualify as an initial communication, the Second Circuit followed similar holdings by a number of district courts.  See, e.g., Derisme v. Hunt Leibert Jacobson P.C., 880 F. Supp. 2d 339, 367-68 (D. Conn. 2012); Lane v. Fein, Such & Crane, LLP, 767 F. Supp. 2d 382, 387 (E.D.N.Y. 2011); Gorham-Dimaggio v. Countrywide Home Loans, Inc., No. 1:05-cv-0583, 2005 U.S. Dist. LEXIS 34237, 2005 WL 2098068, at *2 (N.D.N.Y. Aug. 30, 2005).

However, the Court of Appeals found that the law firm’s response to Carlin’s dispute was indisputably an initial communication for FDCPA purposes.  The court then found that the response letter failed to state the amount of the debt as required by § 1692g.

The court stated:

We do not hold that a debt collector may never satisfy its obligations under § 1692g by providing a payoff statement that provides an amount due, including expected fees and costs. But a statement is incomplete where, as here, it omits information allowing the least sophisticated consumer to determine the minimum amount she owes at the time of the notice, what she will need to pay to resolve the debt at any given moment in the future, and an explanation of any fees and interest that will cause the balance to increase.

Reversing the district court’s dismissal of the case the Court of Appeals stated:

We are not ignorant of the safe-harbor statement we formulated in Avila v. Riexinger & Assocs., LLC, 817 F.3d 72 (2d Cir. 2016). There, we held:

[A] debt collector will not be subject to liability under Section 1692e for failing to disclose that the consumer’s balance may increase due to interest and fees if the collection notice either accurately informs the consumer that the amount of the debt stated in the letter will increase over time, or clearly states that the holder of the debt will accept payment of the amount set forth in full satisfaction of the debt if payment is made by a specified date.

817 F.3d at 77. However, the Payoff Statement only expresses that the Total Amount Due may include estimated fees and costs. There is no clarity as to whether new fees and costs are accruing or as to the basis for those fees and costs.

Notices such as the Payoff Statement here may very well be commonplace in the debt collection industry. But the FDCPA does not insulate a debt collector from liability merely because others in the industry engage in the same practice. It is no great chore for Davidson Fink and other debt collectors to revise their standard payoff statements to clarify the actual amount due, the basis of the fees, or simply some information that would allow the least sophisticated consumer to deduce the amount she actually owes.

This decision presents new challenges for attorneys who handle foreclosures.  The Court of Appeals hinted that the path to success may be merely to state the balance that is actually due on the date of the collection letter, followed by the Avila safe harbor notice.  However, the reality of foreclosure is that at any given moment, various processes may be in motion for which the debtor is contractually liable, but for which the charges have not yet been posted.  It remains for a future case to decide whether those charges are an existing obligation that render the amount of debt inaccurate or future addition to the debt that is covered by the Avila disclaimer.  Foreclosure firms will need to solve the problem of how to carry out their obligation not to compromise a client’s claim without consent while also satisfying the validation notice requirements imposed by this decision.