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*169 WHEN REPOSSESSION, FORECLOSURE, AND OTHER ACTS ARE NOT "DEBT
COLLECTION" UNDER FAIR DEBT COLLECTION PRACTICES STATUTES
Lawrence A. Young [FNa1]
Heather H. McIntyre [FNa2]
Copyright © 2005 by Conference on Consumer Finance Law; Lawrence A. Young,
Heather H. McIntyre
I. Introduction--The FDCPA
Under sections 1692(d) and 1692(e) of the Fair Debt Collection Practices Act (FDCPA), [FN1] liability attaches only to those meeting the statutory definition of "debt collector." [FN2] Section 1692a(6) provides that a debt collector is any person who uses an instrumentality of interstate commerce or the mail 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. [FN3]
II. Enforcement of Security Interests in Personal Property
The courts generally have concluded that the repossession and sale of personal property collateral is not debt collection activity under the FDCPA. In a noteworthy opinion, the Sixth Circuit U.S. Court of Appeals addressed the issue in Montgomery v. Huntington Bank. [FN4] In Montgomery, a repossession company repossessed the plaintiff's car when the plaintiff ceased to make payments in accordance with a personal loan agreement which also gave the lender a security interest in the car. [FN5] The plaintiff sued the lender and the repossession company for FDCPA violations. [FN6] The district court dismissed the complaint because the defendants *170 were not "debt collectors," and the plaintiffs appealed. [FN7]
The Sixth Circuit determined that the bank fell under an exception to the definition of debt collector because it was collecting its own debts. [FN8] The court also found that the repossession company was not a debt collector because it was enforcing a security interest. [FN9] The court relied on Jordan v. Kent Recovery Serv., Inc., [FN10] which held that "an enforcer of a security interest, such as a repossession agency, falls outside the ambit of the FDCPA for all purposes, except for the purposes of section 1692f(6)." [FN11]
Jordan also involved enforcement of a security interest in a car. [FN12] Interpreting the FDCPA, the Jordan court determined that including enforcement of a security interest as debt collection under section 1692f(6) implies that the term "debt collector" does not include an enforcer of a security interest in any other section of the FDCPA. The court reasoned that Congress sought to prevent conduct by repossession agencies which have "no present right to the possession of the property claimed." [FN13] Conversely, Congress must have intended to leave unregulated those who enforce legitimate security interests. [FN14]
Furthermore, the Jordan court noted that the purpose of the FDCPA is to prevent harassment in seeking to collect money the debtor does not have. [FN15] This purpose is not furthered by preventing holders of security interests from foreclosing on their collateral, because the secured party is enforcing a present right to the property and has a right to possession. [FN16] The debtor may have possession of the property, but the secured party owns a present interest in the property, and has the right to obtain possession. [FN17] Failure to return the property is the debtor's deliberate decision to deny the secured party its property interest, and there is no public policy or FDCPA interest to be served by protecting this failure.
The Jordan court also noted a 1988 FDCPA Commentary issued by the Federal Trade Commission. The FDCPA Commentary states that:
[b]ecause the FDCPA's definition of "debt collector" includes parties whose principal business is enforcing security interests only, for section 808(6) [section 1692f(6)] purposes, such parties (if they do not otherwise fall within the definition) are subject only to this provision and not to the rest of the FDCPA. [FN18]
III. Foreclosure of Mortgages on Real Property
Courts apply a similar analysis to non-judicial foreclosure of mortgages on houses. In Bergs v. Hoover, Bax & Slovacek, LLP, [FN19] the plaintiffs purchased a house and executed a deed of trust (in effect, a mortgage in common law states) to a bank. The Bergs failed to make timely payments and the bank employed the defendant law firm to foreclose the mortgage on the house. The defendant foreclosed on the house and the plaintiffs then filed suit alleging violations of the FDCPA. [FN20] The defendant argued that it did not meet the definition of "debt collector" and thus was not liable.
After noting that no Texas law or Fifth Circuit U.S. Court of Appeals precedent existed regarding whether foreclosure proceedings amount to debt collection under the FDCPA, the court adopted the reasoning in Hulse v. Ocwen Federal Bank, [FN21] finding that it does not. In Hulse, the plaintiffs bought a house and executed a deed of trust. [FN22] As in Bergs, the Hulse plaintiffs failed to make timely payments and the bank instituted foreclosure proceedings under the deed of trust. [FN23] The plaintiffs counter-sued and alleged FDCPA violations. The bank contended that it was not liable under the FDCPA because it was not a debt collector. [FN24] The court agreed, finding that "foreclosure by the trustee is not ... an attempt to collect funds from the debtor." [FN25]
Because the FDCPA's purpose is to curtail objectionable acts in collecting money from the debtor, it does not apply to an in rem foreclosure action. [FN26] Foreclosure actions address realization of an interest in property and are not an attempt to collect payment from the debtor. [FN27] Thus, in Hulse any action the bank took concerning the foreclosure was not actionable under the FDCPA. [FN28]
*171 More recently, the court in Sweet v. Wachovia Bank and Trust Co. et al [FN29] also followed the holding in Hulse. The Sweet court concluded that non-judicial foreclosure is not debt collection under the FDCPA, citing Hulse and Bergs as support. In Sweet, the plaintiff failed to make the payments on her home loan. Attorneys for the holder and servicer of the loan sent a foreclosure notice letter to the plaintiff. The plaintiff then sued alleging violations of the FDCPA.
The Sweet defendants argued that foreclosure is not debt collection under the FDCPA, citing Hulse and Heinemann v. Jim Walter Homes, Inc. [FN30] The court found the "[d]efendant's reasoning persuasive on this issue and follow [ed] the court in Hulse in finding that the FDCPA does not include foreclosure in 'debt collection."' [FN31] "As did the plaintiff in Hulse, Sweet received both notice of foreclosure and a fair debt collection notice. The institution of foreclosure proceedings ... failed to substantiate an FDCPA violation." [FN32]
Similarly, the court in James v. Olympus Servs., Inc. [FN33] dismissed claims for violation of the FDCPA for sending the plaintiff a notice of intent to foreclose. The plaintiff was in default for failure to pay two mortgage payments. The mortgage servicing company sent a notice of intent to foreclose as required under the mortgage. Because the mortgage expressly required the mortgage servicer to send the notice prior to acceleration, no violation of the FDCPA occurred and the court dismissed the plaintiff's claims. [FN34]
Likewise, the court in Beadle v. Haughey [FN35] granted the defendants' motion for summary judgment stating that "[b]ecause defendants were executing a non-judicial foreclosure proceeding rather than collecting a debt, their activities are not subject to the FDCPA provisions plaintiffs invoke." [FN36] The plaintiffs sued Mr. Haughey and the members of his law firm who were engaged by Countrywide Home Loans, Inc. to foreclose on a loan it was servicing. Mr. Haughey sent the plaintiffs two letters and placed newspaper advertisements announcing the foreclosure sale. [FN37] The key question for the court was "not whether defendants' law firm [was] a 'debt collector,' but rather, whether defendants were engaged in collecting a debt." [FN38]
After reviewing the cases cited in this section the court determined "it seems very well established that foreclosing on a mortgage does not constitute debt-collecting activity under the FDCPA." [FN39] The defendants were not seeking personal liability against the plaintiffs or instructing the plaintiffs to pay them, rather than the creditor, to prevent the foreclosure; thus, their activities were not subject to the FDCPA.
The most recent circuit case to broach the issue of proceeding in rem, Piper v. Portnoff Law Assocs., Ltd., [FN40] seems to suggest that proceeding in rem is debt collection and subject to the FDCPA. However, Piper can be distinguished in several ways. Although the court states that "[i]f a collector were able to avoid liability under the FDCPA simply by choosing to proceed in rem rather than in personam, it would undermine the purpose of the FDCPA," the facts differ from the non-judicial foreclosure of a security interest discussed in this article. [FN41]
In Piper, a city engaged the defendant law firm to collect payment for overdue water and sewer obligations. The law firm sent multiple letters to the plaintiff requesting payment to be made directly to the law firm. [FN42] State statutes provided a lien to secure delinquent water obligations.
The plaintiff's house was scheduled for a sheriff's sale when she filed suit. By attempting to collect a personal liability and requesting payment to be made directly to the law firm instead of to the city, the law firm subjected itself to the FDCPA. These facts differ from simply foreclosing on a security interest without seeking personal liability.
In addition, the Third Circuit stated that "the issue for decision is whether PLA's communications to Piper were communications by a 'debt collector' with a 'consumer' in 'connection with the collection of a [debt.]"' [FN43] The defendant argued that the decision to eventually proceed in rem, after failing to collect personally from the plaintiff, removed its communications from the purview of the FDCPA. The Third Circuit ruled that it did not.
IV. The Bankruptcy Context
When foreclosing on real property of a debtor who has been discharged in bankruptcy, the secured creditor is foreclosing on its property interest and is not collecting a debt. The First Circuit in Arruda v. Sears, Roebuck Co. [FN44] recognized that a bankruptcy discharge extinguishes only the personal liability of a debtor. Thus, "the debtor no longer has a personal 'financial or pecuniary obligation' for the debt." [FN45] But the debt and the creditor's in rem interest in the property remain. [FN46]
*179 If the creditor forecloses on real property subject to a discharged debt, the foreclosing creditor is not collecting a debt because the debtor has no obligation to pay the money. Absent a debtor's obligation to pay money, the FDCPA is not implicated. It should be noted, however, that the real estate foreclosure cases discussed above apply to in rem foreclosures when no deficiency is sought. Other cases may hold that the FDCPA applies to foreclosures in which a deficiency judgment, and therefore personal liability of the debtor, is part of the relief requested.
V. Forbearance Context
In Bailey v. Security Nat'l Servicing Corp., [FN47] the debtors had defaulted on their original loan and entered into a forbearance agreement with the lender. Upon receiving a letter from the loan servicer listing the next four payments due under the new agreement, the debtors filed a class action lawsuit alleging FDCPA violations.
The Seventh Circuit U.S. Court of Appeals found that that the loan servicer was not a debt collector under the FDCPA because it was seeking payment currently due under a superceding agreement. [FN48] Because the debtor was not in default under the forbearance agreement and the servicer only sent reminders of future payment under the agreement, the lender was not a "debt collector" and was not subject to FDCPA requirements. [FN49]
VI. Conclusion
In rem foreclosures and repossessions that do not attempt to collect a deficiency are not debt collection under the FDCPA. In addition, foreclosing on property that secures a debt previously owed by a debtor who has been discharged in bankruptcy merely forecloses the creditor's in rem interest in the property. The discharge in bankruptcy releases the debtor from any personal obligation to pay money, but leaves the lien intact absence a modification by the court. The foreclosure is not an attempt to collect a debt because the bankruptcy discharged the debtor's liability for the debt, and the secured party is merely seeking to enforce the remaining lien.
Similarly, under the rationale of the Bailey case, there must be a "dunning" letter for a notice of past due debts to rise to the level of debt collection. Reminders of future or current payments do not rise to this level.
The caveat in this analysis of the mortgage foreclosure area is that there are only *183 a small number of cases nationally that address the question of debt collection activity in the context of lien foreclosure. Most of these cases are discussed in this article. Nevertheless, the logic that recognizes the secured creditor's realization of its property interest and draws the line at seeking a deficiency as a personal liability of the debtor appears to be sound and well-established in the law.
[FNa1]. Lawrence A. (Larry) Young is a Partner with Hughes, Watters and Askanase, in Houston, Texas, and practices consumer and commercial finance law, bankruptcy, and related litigation. He is the immediate-past Chairman of the Governing Committee of the Conference on Consumer Finance Law and is a former Editor of the Consumer Finance Law Quarterly Report. Larry is the Texas editor for CARLAW and HOUSELAW and is a member of the Advisory Board of the Consumer Financial Services Law Report. He is a fellow of both the American College of Consumer Financial Services Lawyers and the American College of Commercial Finance Lawyers. He is the past Chairman of the Debt Collection and Bankruptcy Subcommittee of the Consumer Financial Services Committee of the American Bar Association and past Chairman of the ABA Consumer Bankruptcy Committee, and is also the past Chair of the ABA Interest and Usury Subcommittee of the Commercial Financial Services Committee. Larry also serves as a member of the ABA's Business Law Section Task Force on Bankruptcy Court Structure and the Insolvency Process. A former U.S. Marine officer, Larry is a graduate of the University of Michigan Law School and was a law clerk for the Michigan Supreme Court.
[FNa2]. Heather H. McIntyre is an associate with Hughes Watters and Askanase. Her practice focuses mainly on reorganizations and workouts for corporations and individuals, representation of secured creditors in and out of bankruptcy, and representation of bankruptcy trustees. She graduated from the University of Houston Law Center in 2003 and obtained a bachelor's degree from the University of Texas at Austin.
[FN1]. 15 U.S.C. § § 1692-1692o.
[FN2]. See, e.g., Montgomery v. Huntington Bank, 346 F.3d 693, 695 (6th Cir. 2003).
[FN3]. 15 U.S.C. § 1692a(6). See generally Mike Vorhees, Definitional Issues for Debt Collectors Under the FDCPA, 58 Consumer Fin. L. Q. Rep. 83 (2004); Robert J. Lepri, The Proposed Fair Debt Collection Practices Act Amendments--A Quick Fix or Meaningful Reform, id., at 88; Kathleen Ley, How the FDCPA Can Apply to Creditors and Other Non-Third Party Collectors--Case Examples and Other Horror Stories, 54 Consumer Fin. L. Q. Rep. 211 (2000); Joseph Williams, New Twists in the Scope of the FDCPA, id., at 215.
[FN4]. 346 F.3d 693.
[FN5]. Id. at 695.
[FN6]. Id. at 696.
[FN7]. Id.
[FN8]. Id. at 699; 15 U.S.C. § 1692a(6)(F)(iii).
[FN9]. 346 F.3d at 700.
[FN10]. 731 F.Supp. 652, 656 (D. Or. 1990).
[FN11]. Id. at 656. Section 1692f(6) provides that:
A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section: ... 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.
[FN12]. Jordan, 731 F.Supp. at 654.
[FN13]. Id. at 657; 15 U.S.C. § 1692f(6)(A).
[FN14]. Jordan, 731 F.Supp. at 657. Such conduct is, of course, regulated by Uniform Commercial Code Article 9 Part 6.
[FN15]. Jordan, 731 F.Supp. at 658.
[FN16]. Id.
[FN17]. Id.
[FN18]. General Policy or Interpretation Staff Commentary on the Fair Debt Collection Practices Act, 53 Fed. Reg. 50,097, at 50,108 (1988).
[FN19]. Bergs v. Hoover, Bax & Slovacek, LLP, 2003 WL 22255679, *1 (N.D. Tex. Sept. 24, 2003).
[FN20]. Id. at *2.
[FN21]. 195 F.Supp.2d 1188 (D. Or. 2002).
[FN22]. Id. at 1193.
[FN23]. Id. at 1197.
[FN24]. Id. at 1202.
[FN25]. Id. at 1204.
[FN26]. Hulse, 195 F.Supp.2d at 1204.
[FN27]. Id.
[FN28]. Id. See also Heinemann v. Jim Walter Homes, Inc., 47 F.Supp.2d 716 (D.W. Va. 1998), aff'd, 173 F.3d 850 (4th Cir. 1999) (holding that the trustee was not "collecting on the debt at the time, but merely foreclosing on the property pursuant to the deed of trust, these activities do not fall within the terms of the FDCPA").
[FN29]. CV 1212-R (N.D.Tx. 2004).
[FN30]. 47 F.Supp.2d 716, 722 (N.D.W. Va. 1998), aff'd, 173 F.3d 850 (4th Cir. 1999) ("Since the trustees were not collecting on the debt at that time but merely foreclosing on the property pursuant to the deed of trust, these activities do not fall within the terms of the FDCPA").
[FN31]. Id. at 4.
[FN32]. Id.
[FN33]. James v. Olympus Servs., Inc., 2003 WL 21011804, *5 (N.D. Ill. May 5, 2003).
[FN34]. Id.
[FN35]. Beadle v. Haughey, 2005 WL 300060 (D.N.H. Feb. 9, 2005).
[FN36]. Id. at *4.
[FN37]. Id. at *2.
[FN38]. Id. at *3.
[FN39]. Id.
[FN40]. Piper v. Portnoff Law Assocs., Ltd., 396 F.3d 227 (3d Cir. 2005).
[FN41]. Id. at 236.
[FN42]. Id. at 230.
[FN43]. Id. at 232.
[FN44]. Arruda v. Sears, Roebuck Co., 310 F.3d 13 (1st Cir. 2002).
[FN45]. Id. at 23.
[FN46]. See Farrey v. Sanderfoot, 500 U.S.291, 111 S.Ct. 1825, 1829, 114 L.Ed.2d 337 (1991) ("Ordinarily, liens and other secured interests survive bankruptcy"); Johnson v. Home States Bank, 501 U.S. 78, 111 S.Ct. 2150, 2154, 115 L.Ed.2d 66 (1991) ("[A] bankruptcy discharge extinguishes only one mode of enforcing a claim--namely, an action against the debtor in personam-- while leaving intact another--namely, an action against the debtor in rem"); Long v. Bullard, 117 U.S. 617, 620-621, 6 S.Ct. 917, 918, 29 L.Ed. 1004 (1886)(holding that a discharge in bankruptcy does not release real estate of the debtor from the lien of a mortgage created by him before the bankruptcy).
[FN47]. Bailey v. Security Nat'l Servicing Corp., 154 F.3d 384 (7th Cir. 1998).
[FN48]. Id. at 387.
[FN49]. Id. at 388. See also Santoro v. CTC Foreclosure Serv. Corp., 2001 WL 275008 (9th Cir. 2001) (finding that "a letter suggesting workout options" and a foreclosure sale notice did not seek to collect a debt; thus, the FDCPA and California's Rosenthal Debt Collection Act did not apply).
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