The U.S. Supreme Court cited the Restatement of the Law Third, Property: Mortgages, in holding that a business that engaged in no more than the enforcement of a security interest—such as a law firm that pursued nonjudicial foreclosures on behalf of clients—was not a “debt collector” within the meaning of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692a(6), except for the limited purpose of § 1692f, which prohibited entities from threatening to foreclose on a consumer’s home without having legal entitlement to do so.

In Obduskey v. McCarthy & Holthus LLP, No. 17-1307 (March 20, 2019), a borrower who defaulted on a mortgage on his home sued a law firm that was hired by the borrower’s lender to act as its agent in carrying out a nonjudicial foreclosure against the borrower’s home, alleging that the law firm violated the Fair Debt Collection Practices Act by, among other things, failing to provide verification of the debt to the borrower and failing to cease collection efforts against the borrower. The U.S. District Court for the District of Colorado dismissed the borrower’s complaint on the ground that the law firm was not a “debt collector” within the meaning of the Act. The U.S. Court of Appeals for the Tenth Circuit affirmed, ruling that the mere act of enforcing a security interest through a nonjudicial-foreclosure proceeding did not fall under the Act.

The Supreme Court unanimously affirmed. In delivering the Court’s opinion, Associate Justice Stephen G. Breyer explained that several considerations led to the conclusion that the law firm was not subject to the main coverage of the Act, including the text of the Act itself, the likelihood that Congress chose to treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state nonjudicial-foreclosure schemes, and the legislative history of the Act.

Discussing the text of the Act, the Court quoted the definition of a “mortgage” set forth in Restatement of the Law Third, Property: Mortgages § 1.1 in support of its conclusion that, while the purpose of a mortgage was to secure an obligation to pay money, and foreclosure was a means of collecting a debt, the language of the Act strongly suggested that one who did no more than enforce security interests did not fall within the scope of the Act’s general definition of a “debt collector”; reading the Act otherwise would render § 1692a’s reference to § 1692f superfluous.

Moving on to the probability that Congress intended to avoid conflicts with state nonjudicial-foreclosure schemes, the Court cited Restatement of the Law Third, Property: Mortgages § 8.2—which described some of the remedies available to a mortgage lender—in explaining that state nonjudicial-foreclosure laws provided various protections designed to prevent sharp collection practices and to protect homeowners, some of which were in tension with aspects of the Act. By way of example, Justice Breyer pointed out that, while state nonjudicial-foreclosure schemes typically required advertisements of foreclosure sales, the Act broadly limited debt collectors from communicating with third parties in connection with the collection of any debt.

Justice Breyer concluded by observing that the legislative history of the Act appeared to reflect a compromise between subjecting enforcers of security interests to the full coverage of the Act and totally excluding such entities from the Act’s coverage. The Court rejected the borrower’s arguments in favor of holding that law firms and other entities in the business of enforcing security interests through nonjudicial-foreclosure proceedings were debt collectors, noting that, if Congress found that state protections against abusive practices in the context of nonjudicial-foreclosure proceedings were inadequate, it could choose to expand the reach of the Act.

Read the case here.

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Andrea K. Wooster

The American Law Institute

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