Nonjudicial Foreclosure Firm Finds Narrow Path Around FDCPA in Obduskey

In Obduskey v. McCarthy & Holthus, LLP, the United States Supreme Court considered whether the Fair Debt Collection Practices Act applied to a law firm conducting a nonjudicial foreclosure. The Court unanimously found the FDCPA did not apply.  But the opinion left only a narrow and treacherous path for a firm instituting a nonjudicial foreclosure to traverse. 

In Obduskey, a debtor granted a mortgage over his property to a bank.  The debtor defaulted, and the bank hired a law firm to institute a nonjudicial foreclosure. The law firm sent a letter notifying the debtor, as required under state law.  In response, the debtor sent a letter under § 1692g(b) of the FDCPA, which requires a debt collector to cease collection until verifying the debt and notifying the debtor of the results.  The law firm ignored the letter and commenced the nonjudicial foreclosure action, and the homeowner sued the law firm for violating the FDCPA.  The law firm successfully moved to dismiss, arguing that the FDCPA did not apply because it was not a “debt collector” under the statute.  The Court of Appeals for the Tenth Circuit upheld the dismissal, creating a split between the Ninth Circuit and the Tenth Circuit. 

The Supreme Court’s statutory analysis focused on the definition of “debt collector” under the FDCPA.  The general definition of “debt collector,” applicable to the entire FDCPA, is “any person who uses any instrumentality of interstate commerce or the mails 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 due or asserted to be owed or due another.”  See 15 U.S.C. § 1692a(6).  But later in the same section, the FDCPA contains a more limited definition of “debt collector,” namely that “[f]or the purpose of section 1692f(6) of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.” The Court concluded that although enforcing security interests could be debt collection under a literal reading of the general definition, the limited definition could not be read as superfluous. As a result, the Court held that “one who does no more than enforce security interests does not fall within the scope” of debt collection, unless the plaintiff’s claims are brought under § 1692f(6). The Obduskey law firm was only alleged to be engaged in enforcement of security interests, and thus it did not qualify as a debt collector subject to the FDCPA.

The law firm prevailed in Obduskey, but the Court’s opinion suggested several circumstances in which the firm would have been subject to the FDCPA. Practically speaking, many firms instituting nonjudicial foreclosures likely would remain subject to the FDCPA under the Court’s reasoning.

First, the law firm in Obduskey was alleged to have “engaged in no more than security-interest enforcement.” However, the opinion leaves the door open for potential FDCPA liability if a firm has a regular debt collection practice above and beyond nonjudicial foreclosures, or if the firm otherwise engages in debt collection, as the firm could potentially qualify under the general definition of debt collector. 

Second, the Court accepted the proposition that the law firm’s letter in the Obduskey case was required under state law. The Court reasoned that if nonjudicial foreclosures were partially excluded from the FDCPA, then communications required by state law to accomplish nonjudicial foreclosures must also be excluded.  However, if a law firm sends an unnecessary letter (or engages in other unnecessary communications), it is possible that the law firm would be subject to liability under the FDCPA.

Third, the Court expressly did not decide whether a judicial foreclosure (rather than a nonjudicial foreclosure) would subject a creditor to the FDCPA. However, the Court suggested that the FDCPA may very well apply to judicial foreclosures, which are required in many states.

Fourth, under the FDCPA, a firm would be subject to potential claims for unfair practices related to foreclosure under 15 U.S.C. § 1692f(6), even if its activities only related to nonjudicial foreclosure. 

Financial institutions and law firms should read Obduskey for what it holds—that a law firm that only institutes nonjudicial foreclosures, and only gives notices required by state law, is not a debt collector under the general provisions of the FDCPA.  Interpreting Obduskey as allowing for any broader path around the FDCPA would be a dangerous undertaking, and could create exposure to liability under the statute.