By: Stephen D. Richman, Esq. - Senior Counsel-
Kohrman, Jackson & Krantz
(A Watch Your Language Series Article)
As established in other “Watch
Your Language” articles for this Blog, as a general rule, courts will
uphold language in commercial agreements, unless it is contrary to statutory
law or public policy. Because of this judicial deference to commercial
language, you must “say what you mean, precisely, or a judge will
decide what you meant.”
Saying what you mean, precisely, is
as important in drafting statutes and ordinances as it is in commercial
agreements. As a general rule, courts will also uphold clear and unambiguous
statutory language. “Statutes clear in their
terms need no interpretation; they simply need application. If the …language of
a statute reveals … a meaning which is clear, unequivocal and definite… the
statute must be applied accordingly." Provident
Bank v. Wood (1973). Alternatively,
ambiguous statutes will be interpreted by judges who may or may not uphold the
meaning intended by the legislative authority who drafted such statutes.
In the
recent case of Obduskey v. McCarthy &
Holthus LLP, 138 S. Ct. 2710 (2018), the United States Supreme Court
determined that the Fair Debt Collection Practices Act (“FDCPA”
or the “Act”) was not clear and unequivocal, and accordingly, the court
decided what Congress meant by the term “debt collector.”
The facts of the
case are simple enough; the law, not so much.
Facts of the Case
In 2007,
Dennis Obduskey (the petitioner) bought a home in Colorado with a $329,940 loan
secured by a mortgage on the property. Approximately two years later, Mr. Obduskey
defaulted on the loan. In 2014, Wells Fargo Bank, N. A., the servicer for the
lender hired a law firm, McCarthy & Holthus LLP (the respondent) to act as
its agent in carrying out a nonjudicial foreclosure.
McCarthy
first mailed Mr. Obduskey a letter that stated McCarthy had been instructed to
commence foreclosure against the property, disclosed the amount past due and outstanding
on the loan and identified the creditor. Mr. Obduskey responded with a letter
disputing the amount of the debt, and requesting written verification of the
debt in accordance with §1692g(b) of the FDCPA. McCarthy did not provide any
such verification. Instead, the law firm initiated a nonjudicial foreclosure
action in accordance with Colorado state law.
Mr. Obduskey
then filed a lawsuit in federal court alleging that the McCarthy law firm had
violated the FDCPA by failing to comply with the verification procedure and
other provisions and procedures required by the Act. The federal district court
dismissed the suit on the ground that the law firm was not a “debt collector”
within the meaning of the Act, so the verification procedure and other relevant
Act requirements did not apply. On appeal, the Court of Appeals for the Tenth
Circuit affirmed the dismissal. Mr. Obduskey then petitioned the United States
Supreme Court for certiorari (an order
by which a higher court reviews a decision of a lower court).
Applicable
Law
To better understand the Obduskey decision, a quick primer on nonjudicial
foreclosures and the Act is in order.
Nonjudicial foreclosure. As well explained by the court in Obduskey: “When a person buys a home, he or she usually
borrows money from a lending institution, such as a bank. The resulting debt is
backed up by a ‘mortgage’—a security interest in the property designed to
protect the creditor’s investment… The loan likely requires the homeowner to
make monthly payments. And if the homeowner defaults, the mortgage entitles the
creditor to pursue foreclosure, which is ‘the process in which property
securing a mortgage is sold to pay off the loan balance due’… Every state
provides some form of judicial foreclosure: a legal action initiated by a
creditor in which a court supervises the sale of the property and distribution
of the proceeds. These procedures offer various protections for homeowners,
such as the right to notice and to protest the amount a creditor says is owed...About
half the States also provide for what is known as nonjudicial foreclosure,
where notice to the parties and sale of the property occur outside court
supervision.” Ohio is not one of the states
that permits nonjudicial foreclosures.
The FDCPA- The Fair Debt Collection Practices Act is the main federal law that
governs debt collection practices.
Generally, the FDCPA prohibits debt collectors from using abusive,
unfair or deceptive practices to collect debts. Specifically, the Act imposes a multitude of
requirements on “debt collectors.” For example, pursuant to §1692d of the Act, debt
collectors may not use or threaten violence, or make repetitive phone calls.
Nor (pursuant to §1692e of the Act) can debt collectors make false, deceptive
or misleading representations in connection with a debt, like misstating a
debt’s “character, amount, or legal status.” And, pursuant to §1692g(b) of the
Act, if a consumer disputes the amount of a debt, a debt collector must cease
collection until it “obtains verification
of the debt” and mails a copy of such verification to the debtor.
There is also
a separate subsection of the Act (§1692f(6)), that prohibits a debt collector
from: “Taking or threatening to take any
nonjudicial action to effect dispossession or disablement of property if— (A)
there is no present right to possession of the property . . . ; (B) there is no
present intention to take possession of the property; or (C) the property is
exempt by law from such dispossession or disablement.”
What is a
“debt collector” for purposes of the Act? Pursuant to §1692a(6) of the Act , a “debt collector” is “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.” This definition, however, goes on to say
that “[f]or 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.”
The Issue before the Court: The issue faced by the court in Obduskey
was essentially; what did Congress mean by enacting, in effect, a two-part
definition of “debt collector” in the Act. In other words, does the “2nd
part of the definition” (the last sentence) mean that one principally involved
in the enforcement of security interests is not a debt collector (except
regarding section 1692f(6) of the Act)? If so, numerous other provisions of the
Act, like the verification requirement would not apply to the McCarthy law firm.
Or, does the 2nd part of the definition simply reinforce the fact that
those principally involved in the enforcement of security interests are subject
to §1692f(6), in addition to the Act’s other provisions?
Holding/Court Analysis of Obduskey: The United States Supreme Court in Obduskey
held that a security interest enforcer engaged in no more than nonjudicial
foreclosure proceedings is not a “debt collector” under the FDCPA,
except for the limited purpose of §1692f(6) of the Act. In other words, the
vast majority of the Act does not apply to nonjudicial foreclosures.
Most
decisive and important to the court was the text of the Act itself. The court
interpreted the first part of the Act’s definition of debt collector as the
Act’s “primary definition,” and the last sentence of the definition as the
“limited purpose” part of the definition. The court in Obduskey then reasoned that if security interest enforcers were
meant to be included in the primary definition, there would have been no need
for the addition of a limited purpose definition that specifically addresses security
interest enforcers (in nonjudicial foreclosures).
As
explained in the case syllabus, “The
limited purpose definition says that “[f]or the purpose of Section 1692f(6)” a
debt collector ‘also includes’ a
business, like McCarthy, ‘the principal purpose of which is the enforcement of
security interests.’ §1692a(6) (emphasis added). This phrase, particularly the
word ‘also,’ strongly suggests that security interest enforcers do not fall
within the scope of the primary definition. If they did, the limited purpose
definition would be superfluous.”
The court
also pointed out that its interpretation is supported by legislative history,
which suggests that “the Act’s present
language was the product of a compromise between competing versions of the
bill, one which would have totally excluded security-interest enforcement from
the Act, and another which would have treated it like ordinary debt collection.”
Mr. Obduskey
made a number of legal arguments which were summarily dismissed by the court. He
also expressed a “floodgates argument” claiming that the court’s decision will
open a loophole, permitting creditors and their agents to engage in a host of
abusive practices. The court seemed concerned enough about this argument to
issue a warning, by stating, “This is not
to suggest that pursuing nonjudicial foreclosure is a license to engage in
abusive debt collection practices.” However, the Court was not swayed
enough to change its decision. In fact, the court countered that it would not
be the role of the Supreme Court of the United’s States to curtail any
collateral damage from its decision. Rather, “states can…guard against such practices”, and “Congress may choose to expand the reach of the FDCPA.” According to the court, the United States Supreme
Court’s only job is to “enforce the
statute that Congress enacted.”
Moral of the Story
For
legislators, “say what you mean, precisely, or a judge will decide what you
meant.” And, remember that judges do not always
get it right. Even Justice
Sotomayor, in her concurring opinion in Obduskey recognized
this adage by stating: “this is a close case, and today’s opinion does not
prevent Congress from clarifying this statute if we have gotten it wrong.”
For debt
collectors, heed the court’s warning (“enforcing a security interest does
not grant an actor blanket immunity from the mandates of the Act”), rather
than focus on its holding. Also keep in mind that there is no penalty for
adhering to consumer protection statutes that may not be applicable, even if
you are an attorney or other security interest enforcer involved in a nonjudicial
foreclosure. What would be the harm, for example in using the “verification of
the debt language” called for in the Act, when there is no requirement to do so?
Remember that debt collection protections are also governed at the state and
local level, in spite of a limited loophole in the FDCPA.
