Supreme Court to the Rescue with a Narrow Interpretation of the FDCPA
The Fair Debt Collections Practices Act (FDCPA or Act) is an archaic consumer protection statute. Well-intentioned when enacted in 1977, unlike fine wine the FDCPA has not aged gracefully. Lower and appellate courts have pulled and twisted the Act in ways those regulated by it never expected. Yesterday’s 9-0 U. S. Supreme Court decision in Obduskey v. McCarthy & Holthus, LLP marked the third ruling in the last several years based on a well-reasoned, narrow analysis, rather than allowing expansive, nuisance theories that have been the prior theme of FDCPA interpretation. Even among the most liberal of justices, judicial restraint and strict statutory construction seem to have won the day.
Background of the Case
Wells Fargo hired the law firm of McCarthy & Holthus, LLP as its agent in carrying out a nonjudicial foreclosure on a residential mortgage. The real property was located in Colorado, which permits notice to the parties and sale of the property outside the supervision of the court. Another 25 states also permit nonjudicial foreclosure. The Colorado state court-approved procedure requires that the creditor first send a notice with preliminary information including the telephone number for the Colorado foreclosure hotline. Thirty days thereafter, the creditor is permitted to file a notice with a state official or “public trustee.” The public trustee then records the notice and mails copies to the borrower, along with other materials, such as information on the balance of the loan, the right to cure, and the time and place of the foreclosure sale. If the borrower does not cure the default or file bankruptcy, the creditor can seek an order from the court authorizing the sale of the property.
Prior to proceeding with the nonjudicial foreclosure process, the law firm mailed Obduskey the statutorily required disclosures under the FDCPA. The disclosures notified Obduskey of the law firm’s representation of Wells Fargo, the balance due on the loan, and the right and opportunity to dispute and seek validation of the debt. Obduskey invoked his dispute rights under § 1692g(b) of the FDCPA. Once a consumer invokes his dispute rights, the FDCPA requires a debt collector to cease all collection activity until verification of the debt is provided. The law firm did neither, and proceeded with nonjudicial foreclosure proceedings. Obduskey sued the law firm, alleging violations of the FDCPA for, among other things, pursing non-judicial foreclosure without first verifying the debt. The federal district court dismissed the case on the ground that the law firm was not a debt collector because it was seeking solely to enforce a security interest which does not fall within the purview of the Act. The 10th Circuit affirmed the dismissal. Because of a split among federal appellate courts about the application of the FDCPA to nonjudicial foreclosures, the Supreme Court granted certiorari.
The U.S. Supreme Court Holding
Justice Breyer, writing for the majority, began his analysis by looking at the plain language of the statute. §1692a(6) of the FDCPA defines a debt collector first as:
… 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 due or asserted to be owed or due another.
The statute then qualifies this definition, which the Court refers to as the “limited-purpose definition”:
For the purpose of section 1692f(6) of this title, such term also includes any person … in any business the principal purpose of which is the enforcement of security interests.
§ 1692f(6) 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 claimed as collateral through an enforceable security interest;
(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.
Working within this statutory framework, the Court unanimously held that the law firm was not a debt collector and not subject to the Act for three reasons. First, because §1692a(6) qualifies the general definition of a debt collector by also including the limited purpose definition, the use of the word “also” suggests that one who “does no more than enforce a security interest does not fall within the general definition.” The Court noted that if Congress wanted enforcers who solely handle security interests to be included in the general definition, then the limited purpose definition would be superfluous.
Second, by treating the enforcement of security interest differently, the Court felt Congress wanted to avoid conflicts with state nonjudicial foreclosure laws. As an example, the Court noted that advertising the sale of a property would be in direct violation of the FDCPA because the FDCPA prohibits debt collectors from communicating with third parties about a debt. By limiting the scope of a debt collector in this context, the Court noted is was quite possible Congress wanted to avoid the risk of such conflicts altogether.
Finally, the Court reviewed the legislative history of the Act. The original, proposed version of the FDCPA presumed that anyone who enforced a security interest was a debt collector. Another proposed version excluded that activity completely from the Act. The Court reasoned that the current language, which has been in existence for 42 years, clearly showed a compromise by Congress on the definition.
Future FDCPA Interpretation
The FDCPA is a litigious statute. Over the past two decades, many federal district and appellate courts have taken great liberties in twisting and stretching the interpretation of the Act to surprising lengths. As an example, several years ago, the use of a QR code or bar code, visible through a window envelope that did not reveal any information about the consumer or the debt, became the source of considerable liability for the industry. Many courts, including the Third Circuit, found the use of such symbols an invasion of privacy because they could potentially reveal information about the consumer and the debt. Countless other examples exist of federal courts going beyond not only the plain meaning of the FDCPA, but well beyond what most believe Congress considered to be abusive and harassing debt collection activity.
Remarkably, the U.S. Supreme Court seems to be the only court that truly understands the FDCPA. Like Obduskey, the last two FDCPA Supreme Court decisions were also unanimous. In Sheriff v. Gillie, a law firm was hired by a State’s Attorney General to collect debts owed to the state. The law firm was permitted to use the Attorney’s General letterhead when communicating with consumers. The majority opinion was written by Justice Ginsburg, who found that use of the letterhead was not false or misleading because it could not create a false impression of the law firm’s task. Further, Justice Ginsburg noted, “the [FDCPA] bars debt collectors from deceiving and misleading consumers; it does not protect consumers from fearing the actual consequences of their debts.” In the recent case of Henson v. Santander, Justice Gorsuch, writing his first opinion for the unanimous majority, held that individuals and entities who regularly purchase debts originated by someone else and then seek to collect those debts for their own account, are not “debt collectors” subject to the FDCPA. The Court narrowly applied the definition of a debt collector to the particular facts in the Henson case.
The Supreme Court’s continuing interpretations of the FDCPA should be a wakeup call for those lower courts that view the FDCPA as an opportunity for judicial advocacy. The Supreme Court makes clear in this decision that if Congress intended the FDCPA to predict certain outcomes, it would have stated so in the plain language of the statute. As Justice Sotomayor’s concurrence in Obduskey suggested, if the Court’s interpretation of the FDCPA is viewed as wrong based upon the plain meaning of the Act, the solution is to change the Act. In the interim, the lower courts should review the declaration of purpose of the FDCPA, specifically §1692(e): “It is the purpose of this subchapter to eliminate abusive debt collection practices by debt collectors [and] to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged” (emphasis added). The past two decades of FDCPA jurisprudence suggest this lesson has not been learned.
Clark Hill’s Consumer Financial Services Regulatory & Compliance Group is a national leader in the field of consumer financial services law, providing strategic legal counsel to financial institutions, law firms, credit reporting agencies, and the debt collections industry throughout the country in all areas of consumer finance. Our exceptional team of lawyers and government and regulatory advisors has extensive experience and an in-depth understanding of the laws and regulations governing financial products and services.