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FDCPA & Non-Judicial Foreclosures

In Obduskey v. McCarthy & Holthus LLP, the Supreme Court has agreed to hear an appeal from the Tenth Circuit over whether the provisions of the Fair Debt Collection Practices Act apply to non-judicial foreclosures. The Tenth Circuit held that a foreclosure attorney was not a debt collector under the FDCPA because the FDCPA does not apply to non-judicial foreclosures, and it rejected the idea that every foreclosure was undertaken in an attempt to collect on the underlying debt because a non-judicial foreclosure does not result in a deficiency judgment. The Tenth Circuit did note (without formally deciding) that even in non-judicial foreclosures, a person may become a debt collector under the FDCPA by taking additional actions, such as attempting to induce the borrower to pay by threatening foreclosure. The Tenth Circuit based its holding on both the plain language of the statute and policy considerations.

Under the plain language of the FDCPA, the Tenth Circuit held that enforcing a security interest through non-judicial foreclosure is not an attempt to collect money from the borrower because the borrower has no obligation to pay over any money at the time of the non-judicial foreclosure. The foreclosing entity must thereafter go to the courts to get a deficiency judgment, which is covered by the FDCPA because it is a judicial proceeding and seeks the payment of money from the borrower. Turning to the policy considerations, the Tenth Circuit held that if the FDCPA applied to non-judicial foreclosure proceedings, it would conflict with state mortgage foreclosure law. Because mortgage foreclosure is an essential state interest and because Congress had not manifested a clear intent to supplant state foreclosure law through the FDCPA, the Court held the FDCPA did not apply to non-judicial foreclosures in Colorado. The Tenth Circuit also dismissed concerns that its holding would immunize debt secured by real property where foreclosure was used to collect the debt because it left for another day whether or not more aggressive collection efforts leveraging the threat of foreclosure into the payment of money constitute debt collection. In reaching its decision, the Tenth Circuit sided with the 9th Circuit and disagreed with the Fourth, Fifth, and Sixth Circuits and the Colorado Supreme Court, widening a circuit split over the question of whether non-judicial foreclosures are covered by the FDCPA.

The Supreme Court’s grant of cert follows its recent pattern of taking cases that address the provisions of the FDCPA, such as Midland Funding, LLC v. Johnson and Henson v. Santander, which were both decided in 2017. In Johnson, the Supreme Court held that filing a proof of claim in bankruptcy for a debt that may be subject to a statute of limitations defense did not violate the FDCPA. And in Henson, the Supreme Court unanimously 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 under the FDCPA. This recent pattern of FDCPA cases makes it likely that the Supreme Court will take up more in the near future, such the circuit split created by the Third Circuit over whether the discovery rule applies to FDCPA claims. In Rotkiske v. Klemm, the Third Circuit disagreed with the Fourth and Ninth Circuits to hold the FDCPA’s one-year limitations period begins to run when a would-be defendant violates the FDCPA, not when a potential plaintiff discovers or should have discovered the violation.