(April 22, 2019) - The federal courts are plagued by what we might charitably refer to as creative claims under the Fair Debt Collection Practices Act (FDCPA). Many of those law suits are filed against lawyers assisting their clients in debt collection-related matters. Happily for members of the bar, and for some businesses, the United States Supreme Court has unanimously ruled that certain activities by attorneys and their clients do not fall fully within the scope of the FDCPA. On March 20, 2019, the Court held in Obduskey v. McCarthy & Holthus LLP, No. 17-1307, 2019 WL 1264579, that a business that is principally engaged in the enforcement of security interests, such as a non-judicial foreclosure proceeding, is not a “debt collector” under the statute’s primary purpose definition.
Entities that meet the primary definition of a debt collector under the FDCPA are subject to a myriad of limitations aimed at protecting consumers. Businesses that are principally engaged in enforcing security interests are covered only by the restrictions imposed by Section 1692f(6). Under that section, debt collectors are prohibited from taking or threatening to take nonjudicial action to effect dispossession or disablement of property if there is no present right to possession, no present intent to take possession, or the property is exempt by law from such dispossession of disablement.
The High Court held that the Colorado law firm sued in that case fell under the ambit of the statute’s limited-purpose definition. The Court’s conclusion was based on an analysis of the statutory text and the legislative history. The Court determined that the limited-purpose definition must be read to constrict the primary definition. The Court opined that Congress may have chosen to “treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state non-judicial foreclosure schemes.” Finally, the Court found that the FDCPA’s legislative history suggests that the limited-purpose definition was a compromise between full inclusion of security interest enforcement and exclusion from coverage.
Based on its analysis, the Court ruled that businesses whose “principal purpose … is the enforcement of security interests” fall outside the scope of the primary ‘debt collector’ definition, provided that the business “is engaged in no more than the kind of security-interest enforcement at issue here—non-judicial foreclosure proceedings.” In sum, businesses and attorneys who principally enforce security interests are not within the FDCPA’s full scope as long as they are engaged in non-judicial foreclosure proceedings permissible in roughly half of the 50 states. As a result, because the Court “exclude[d] the legal means required” to enforce security interests, sending pre-foreclosure notices should not subject a business or attorney to the primary purpose definition. It remains to be determined how many businesses and lawyers will be able to take advantage of this ruling to evade the morass of FDCPA litigation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.