Saturday, September 15, 2012

FYI: 3rd Cir Rules FDCPA Claim Arose When Borrower Signed Loan Mod and Foreclosure Firm Did Not Dismiss Complaint

The U.S. Court of Appeals for the Third Circuit recently held that a borrower's purported claim under the federal Fair Debt Collection Practices Act was not timely filed, where the foreclosure firm's representations of the character, amount or legal status of the debt in its foreclosure complaint became objectively false when the borrower signed a loan modification, more than one year prior to the filing of her FDCPA action.
The Court also ruled that:  (1) the original complaint failed to give the law firm fair notice of the FDCPA claim against it and there was no relation back to the date of the original pleading under Federal Rule 15(c);  (2) the law firm's filing of a foreclosure complaint against the borrower was "in connection with . . . the prosecution of a lawsuit to reduce a debt to judgment," and thus excluded the law firm from the definition of "debt collector" under Pennsylvania's Fair Credit Extension Uniformity Act.
A copy of the opinion is available at:
Plaintiff borrower obtained a mortgage loan from a bank ("Lender") and later became unable to make the payments.  Lender's law firm ("Law Firm") contacted Borrower about the missed payments and eventually filed a foreclosure complaint against Borrower, but Lender took no further action on the foreclosure complaint.   Lender subsequently assigned Borrower's loan to a loan servicer ("Servicer"), which entered into a loan modification agreement with Borrower.  Borrower made the payments under the loan modification plan, but Law Firm did not withdraw the foreclosure complaint until over a year after the date of the loan modification agreement. 
Because of the delay in dismissing the foreclosure complaint, Borrower filed a putative class-action complaint in Pennsylvania state court against Lender, Servicer and the Law Firm, alleging violations of Pennsylvania's Fair Credit Extension Uniformity Act, 73 Pa. Cons. Stat. Ann §  2270.1 et seq. ("FCEUA"),  which in turn were based on broadly alleged violations of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq.   Defendants removed the case to federal District Court and filed motions to dismiss.
Several months later, the Federal Deposit Insurance Corporation ("FDIC"), in its capacity as receiver for Lender, filed motions to stay the proceedings in order for Borrower's claims against Lender to go through the FDIC's administrative claims review process.    The FDIC denied Borrower's claim against Lender over a year after the filing of the original complaint. 
Following the FDIC's denial of her claim, Borrower filed a first amended complaint, adding a count against the Law Firm for supposed FDCPA violations arising out of its alleged failure to dismiss the foreclosure complaint after Borrower entered into the loan modification agreement.   Law Firm successfully moved to dismiss for failure to state a claim. 
Borrower then filed a second amended complaint, restyling the FDCPA claim against Law Firm to specifically allege that in failing to withdraw the foreclosure complaint, Law Firm violated the FDCPA by misrepresenting that Borrower's mortgage debt remained unpaid.   
Law Firm moved to dismiss the second amended complaint.  The District Court granted the motion as to the FDCPA claim, ruling that the amended complaint was not filed within the FDCPA's one-year statute of limitations and did not relate back to the timely filed original complaint under Federal Rule of Civil Procedure 15(c)(1)(B).  The District Court also dismissed Borrower's FCEUA claims against Law Firm, ruling that Law Firm's conduct associated with filing the foreclosure complaint excluded it from the FCEUA's definition of "debt collector."
Borrower appealed.  The Third Circuit affirmed.
As you may recall, Federal Rule of Civil Procedure 15(c)(1)(B) provides that an amendment to a pleading relates back to the date of the original pleading where "the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out – or attempted to be set out – in the original pleading."  Fed. R. Civ. Pro. 15(c)(1)(B).
In addition, the FDCPA, which defines a "debt collector" as "any person who .  . who regularly collects or attempts to collect . . . debts owed . . .  to another," prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt," including falsely representing "the character, amount, or legal status of any debt."  15 U.S.C §§ 1692a(6), 1692e.  The FDCPA also provides a one-year statute of limitations for filing claims.  15 U.S.C. § 1692k(d). 
Moreover, Pennsylvania's Fair Credit Extension Uniformity Act prohibits "unfair methods of competition and unfair or deceptive acts or practices with regard to the collection of debts," including any violation of the FDCPA by a "debt collector."  73 Pa. Cons. Stat. Ann. § 2270.1 et. seq.  Providing a two-year statute of limitations, the FCEUA defines "debt collector" as "[a] person not a creditor . . . engaging or aiding . . . in collecting a debt,"  including  "[a]n attorney, whenever such attorney attempts to collect a debt . . . except in connection with the filing or service of pleadings or discovery or the prosecution of a lawsuit to reduce a debt to judgment."    73 Pa. Cons. Stat. Ann. § 2270.3, 2270.5(b).
The Third Circuit began its analysis by examining whether Borrower's amended FDCPA claim against Law Firm related back to the original complaint under Rule 15(c)(1)(B).  In so doing, the Court noted some factual overlap between the original complaint and the second amended complaint, but concluded that the allegations in the original complaint were nevertheless factually and legally distinct from the allegations in the amended complaint. 
Specifically, the Third Circuit pointed out that the original complaint accused Law Firm "only of making a debt-collection phone call and of filing a Foreclosure Complaint demanding payment of purportedly unlawful attorney's fees" and that, on the other hand, the second amended complaint alleged that Law Firm "fail[ed] to withdraw the Foreclosure Complaint against [Borrower]" after [Borrower] signed the loan modification agreement, which foreclosure complaint "constituted a 'continuing representation'" that Borrower was still in arrears on the mortgage debt.   
Observing among other things that Borrower's "amended FDCPA claim differed in 'time and type' from the claims" alleged against Law Firm in the original pleading, the Court ruled that the original complaint did not give Law Firm fair notice of the amended claim to qualify for relation back under Rule 15(c).  See Bensel v. Allied Pilots Ass'n, 387 F.3d 298, 310 (3d Cir. 2004)(noting that Rule 15(c)(1)(B) requires "a common core of operative facts in the two pleadings), Baldwin Cty. Welcome Ctr. v. Brown, 466 U.S. 147, 149 n.3 (1984)(Rule 15(c) is premised on providing notice that comports with notice requirements of statutes of limitations for particular occurrence); Meijer, Inc. v. Biovail Corp., 533 F.3d 857, 866 (D.C. Cir. 2008)(test for Rule 15(c) analysis "is whether the original complaint adequately notified the defendants of the basis for liability the plaintiffs would later advance in the amended complaint").  
As the Court explained, "the facts alleged in [the first complaint]  . . .  even under the most generous reading, gave no suggestion that the [Law Firm] Defendants were culpable in any way for the conduct attributed to [Lender] or [Servicer]."   
Next, addressing the FDCPA's one-year statute of limitations, the Third Circuit rejected Borrower's arguments that Law Firm's alleged FDCPA violations occurred only after Law Firm learned of the modification agreement and that the statute of limitations was tolled during the time her claim against Lender was under review by the FDIC.   The Court noted in part that because the FDCPA is a "strict liability" statute, liability for the representation in the foreclosure complaint did not hinge on Law Firm's knowledge that it was false as of the date the loan modification agreement was signed. 
The Court thus ruled that the FDCPA claim against Law Firm accrued on the date Borrower signed the loan modification agreement when the representation about Borrower's debt became "objectively false"  -- over a year prior to the filing of the amended FDCPA claim. 
Finally, analyzing the requirements of Pennsylvania's FCEUA, the Court noted that Law Firm did not fall within its definition of "debt collector," which, unlike the federal FDCPA, excludes parties whose activities are "in connection with . . . the prosecution of a lawsuit to reduce a judgment to debt." Accordingly, while observing that Borrower's FCEUA claim would have been timely under the FCEUA's two-year statute of limitations, the Court ruled that Borrower failed to state a claim under the FCEUA, because Law Firm was not a "debt collector" under the FCEUA definition.
The Third Circuit thus affirmed the District Court's dismissal of Borrower's FDCPA and FCEUA claims against Law Firm. 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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