Supreme Court Unanimously Holds Law Firms Performing Non-Judicial Foreclosures Are Not Collectors Under FDCPA

In a unanimous vote, the Supreme Court yesterday ruled law firms that perform non-judicial foreclosures do not meet the definition of debt collectors under the Fair Debt Collection Practices Act, in a case that may eliminate thousands of similar homeowner lawsuits across the country.

A copy of the ruling in Obduskey v. McCarthy & Holthus can be accessed by clicking here. [Editor’s Note: will be hosting a webinar on March 22 that will analyze the ruling. You can register by clicking here.]

Colorado is one of 33 states that allow for non-judicial foreclosures.

Dennis Obduskey is a homeowner who defaulted on his mortgage and had non-judicial foreclosure proceedings initiated against him. He argued that a servicer sent him a letter which said that it “may be considered a debt collector attempting to collect a debt,” and “any information obtained will be used for that purpose.” Obduskey subsequently disputed the amount of the debt and “invoked the FDCPA’s debt-validation procedures, which required respondent to cease all collection activity until confirming the validity of the debt and providing the necessary documentation to petitioner.” The servicer did not do that.

He then filed a lawsuit against the servicer. The District Court granted a motion from the servicer to dismiss the case, a decision which was appealed to the Tenth Circuit Court of Appeals, which upheld the dismissal. That ruling was appealed to the Supreme Court.

In the opinion, written by Justice Stephen Breyer, the Supreme Court ruled that whether the law firms in question meet the definition of debt collector turned on one sentence in the FDCPA.

Section 1692a(6) of the FDCPA defines debt collectors. In that definition is the following clarification: For the purpose of section 1692f(6) of this title, such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests. The use of the word “also” is what the justices focused on in their ruling.

“This phrase, particularly the word ‘also,’ strongly suggests that security- interest enforcers do not fall within the scope of the primary definition,” Justice Breyer wrote. “If they did, the limited purpose definition would be superfluous.”

Later, Justice Breyer expanded on the court’s thinking.

The FDCPA “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 one who does no more than enforce security interests does not fall within the scope of the general definition. Otherwise why add this sentence at all?

Justice Sonia Sotomayor wrote a concurring opinion in favor of the ruling.

The ruling will likely mean that homeowners facing non-judicial foreclosures will no longer be able to sue the lender or servicer for potential violations of the FDCPA.

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