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Supreme Court Excludes Non-Judicial Foreclosure From FDCPA

On March 20, 2019, the United States Supreme Court issued its decision in Obduskey v. McCarthy & Holthus, LLP, holding that that business engaged solely in non-judicial foreclosure activities are generally exempt from the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. Justice Breyer wrote for a unanimous court, with a concurring opinion by Justice Sotomayor. It is unclear what impact the decision on the debt collection and foreclosure industry beyond the limited facts of the case, but as in Henson v. Santander Consumer USA, Inc., the Court demonstrated the careful statutory analysis that lower courts should employ when interpreting the FDCPA.

Obduskey, a homeowner, sued McCarthy & Holthus, asserting that the law firm had violated the FDCPA when it proceeded with a non-judicial foreclosure prior to responding to a timely request for debt validation under Section 1692g of the FDCPA. The District Court dismissed the suit on the ground that the law firm was not a “debt collector” as defined in the FDCPA. On appeal, the Tenth Circuit Court of Appeals affirmed the dismissal, concluding that the “mere act of enforcing a security interest through a non-judicial foreclosure proceeding does not fall under” the Act. The Supreme Court granted Obduskey’s petition for a writ of certiorari to determine the “debt collector” issue.

Justice Breyer’s opinion juxtaposed the “primary definition” of debt collector and the “limited purpose” definition. The “primary definition” of debt collector being “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.” The “limited definition” refers to the limiting third sentence in Section 1692a(6) of the Act, which states that “For 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.” Obduskey, at 6, quoting 15 U.S.C. § 1692a(6).

Looking directly at those two sentences, the Court first found that the “limited purpose” definition would be “superfluous” if Congress had meant for the “primary definition” to cover all debt collectors, including those whose principal business purpose was the enforcement of security interests.

By contrast, giving effect to every word of the limited-purpose definition narrows the primary definition, so that the debt-collector-related prohibitions of the FDCPA (with the exception of § 1692f(6) do not apply to those who, like McCarthy, are engaged in no more than security-interest enforcement.

Second, the Court noted the inherent tension between the FDCPA and various state law schemes which employ a nonjudicial foreclosure process: “we think 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.” This is not the strongest argument made by the Court, but its inclusion suggests that future litigants may wish to consider and address potential federalism issues implicated in the tension between the FDCPA and state law procedures.

Finally, the Court looked to the legislative history of the FDCPA which perhaps provided the clearest guidance. Looking at two different drafts of the bill from 1977, the Court notes two different definitions proposed for “debt collector” which were as diametrically opposite as possible. One expressly encompassed both debt collection and security interest enforcement; the other completely exclude security interest enforcement. The current structure of the FDCPA was a clear compromise convincing the Court that those businesses who meet the “limited purpose” definition are exempt from the “primary purpose” definition.

The question for attorney debt collectors is the extent to which the Obduskey decision will apply to other types of security interest enforcement. The Court has held that “those who engage in only nonjudicial foreclosure proceedings are not debt collectors within the meaning of the Act.” It is not at all clear that this holding will apply to those who are engaged in judicial enforcement of liens, and it seems probable that the outcome of casers seeking to apply Obduskey to judicial proceedings is likely to hinge on whether the foreclosure proceeding seeks any more relief than an order of foreclosure. If a deficiency judgment is sought (or possible with contractual fees and costs) such a request for relief might be sufficient to trigger the FDCPA’s “debt collector” definition. Similar risks may lie in wait for attorneys who pursue replevin actions.

Nevertheless, the Court’s adherence to traditional methods of statutory construction reinforces the need to look at the FDCPA’s definitional structure and legislative history when attempting to explain or interpret the Act. Cases presently pending in the Second and Third Circuits seem likely to refer to Obduskey when appellate decisions are finally written.