The U.S. Court of Appeals for the Sixth Circuit recently held that: (1) consumer mortgage foreclosure is debt collection under the federal Fair Debt Collection Practices Act; and (2) a third-party servicer or subservicer that obtained the servicing rights before the loan was in default is not subject to the federal Fair Debt Collection Practices Act.
A copy of the opinion is available at: http://www.ca6.uscourts.gov/opinions.pdf/13a0016p-06.pdf.
A borrower obtained a loan from a mortgage company to purchase property, securing the loan with a mortgage against the property. Eventually, defendant servicer ("Servicer") became the mortgage servicer of the loan on the subject property.
Borrower later died, and the loan went into default. Servicer hired defendant law firm ("Law Firm") to foreclose on the property. Law Firm prepared an assignment of the note and mortgage purporting to transfer all rights and interest in the note and mortgage to Servicer and commenced a foreclosure action in state court, alleging that Servicer owned the note and that the original note had been lost or destroyed.
The foreclosure complaint sued the plaintiff here, as he had inherited the property under the borrower's will. Plaintiff answered, asserted defenses, and disputed the debt with Law Firm, requesting verification of the mortgage debt. Law Firm allegedly refused to verify the amount of the debt or to identify the true owner of the loan. In response to the foreclosure action, therefore, Plaintiff argued that the assignment transferred no rights because another entity still owned the note and mortgage as a result of mortgage company's assignment shortly after loan origination. Plaintiff further asserted that Servicer fraudulently concealed the true owner of the loan and that the original note was in fact not lost or destroyed.
Law Firm eventually moved for summary judgment in the foreclosure action, representing that Servicer owned the note. The lower court granted the motion, but vacated the ruling and demanded that Law Firm produce the original note to the court. Servicer later dismissed the foreclosure action.
Meanwhile, Plaintiff filed an action against Servicer, alleging that Bank and Law Firm had violated the federal Fair Debt Collection Practices Act and Ohio law by falsely making a number of assertions in the foreclosure action, including the assertion that Servicer owned the mortgage and note. Plaintiff also alleged that Servicer and Law Firm had refused to verify the debt upon request.
Servicer and Law Firm moved to dismiss. Plaintiff then moved to amend his complaint four months after he allegedly discovered new evidence regarding the status of the loan when Servicer acquired the servicing rights, and one month after the magistrate issued his recommendation to grant the motion to dismiss. Adopting the recommendations of the magistrate, the lower court granted the motion to dismiss, denied Plaintiff leave to amend because of delay in requesting such leave, and declined to exercise jurisdiction over the state-law claims. Plaintiff appealed.
The Sixth Circuit affirmed in part and reversed in part.
As you may recall, the FDCPA provides for debt collector liability for certain improper conduct taken "in connection with the collection of any debt" and defines a "debt collector" as one who has his or her principal business purpose "the collection of any debts or who "regularly collects or attempts to collect, directly or indirectly, debts owed or due . . . another." 15 U.S.C. § 1692a(6).
The FDCPA further specifies that "[f]or the purpose of section 1692f(6) [concerning non-judicial repossession abuses], 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." Id. Moreover, debt collection under the FDCPA can be performed through either "communication," "conduct," or "means." See 15 U.S.C. §§ 1692c, 1692d, 1692e, 1692f.
In addition, one of the FDCPA's exceptions to the definition of "debt collector" provides that the term "debt collector" does not include any person attempting to collect "any debt owed or due or asserted to be owed or due another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person." 15 U.S.C. § 1692a(6)(F)(iii).
Also, the FDCPA defines "debt" as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes[.]" 15 U.S.C. § 1692a(5).
The Servicer here argued that it started servicing the loan before it was in default. The Sixth Circuit rejected the Plaintiff's argument that the exception for loans not in default when acquired applies only to mortgage servicers who own the debt obligation they service. The Sixth Circuit also rejected the Plaintiff's argument that the exception does not apply to subservicers, who service the underlying debt on behalf of the contractually obligated servicer.
Taking issue with Plaintiff's delay in requesting leave to amend long after discovery of "new" evidence purportedly indicating that Servicer was indeed a "debt collector," his "wait-and-see" attitude with regard to the magistrate's recommendation, and his waiting to seek to amend a full month after the magistrate recommended granting Servicer's motion to dismiss, the Court of Appeals concluded that Plaintiff had waited too long to amend and that the delay unduly prejudiced Servicer.
Accordingly, the Sixth Circuit ruled that the lower court properly refused to grant Plaintiff leave to amend in response to the magistrate's recommendation. See, e.g., Begala v. PNC Bank, Ohio, Nat'l Ass'n, 214 F.3d 776, 784 (6th Cir. 2000)(reasoning that "Plaintiffs were not entitled to an advisory opinion from the Court informing them of the deficiencies of the complaint and then an opportunity to cure those deficiencies.").
Next, in noting the confusion on the question whether mortgage foreclosure is "debt collection" under the FDCPA, and that the FDCPA does not define the term "debt collection," the Court expressed its disagreement with the view of the majority of district courts that mortgage foreclosure is not debt collection, because the majority view does not consider enforcement of a security interest to be debt collection. The Sixth Circuit further declined to follow the view that if a money judgment is sought against the mortgagor in connection with a foreclosure, then, in that limited case, the attempt to collect money still owed on the note constitutes "debt collection."
Instead, following the "guideposts" offered by the FDCPA, the Sixth Circuit examined the FDCPA's definition of the term "debt," according to which, in this court's view, the determining factor was not whether an obligation was secured, but the purpose for which it was incurred. Thus, the Court concluded that a home loan is a "debt," even if it is secured, as such a loan is usually obtained "primarily for personal, family, or household purposes[.]". See, e.g., Reese v. Ellis, Painter, Ratterree & Adams, LLP, 678 F.3d 1211, 1216-17, 1218(11th Cir. 2012.
The Sixth Circuit also took into consideration various debt-collection activities, concluding that the use of legal proceedings, including mortgage foreclosure, to recover on a debt owed constitutes debt collection under the FDCPA. In so doing, the Court noted that mortgage foreclosure, both judicial and nonjudicial, is undertaken in the Court's view for the sole purpose of obtaining payment on the underlying debt, and that this interpretation is reinforced by decisions from sister circuits, and by the FDCPA's provisions prohibiting debt collectors from using unfair or unconscionable means to "collect any debt" and requiring a debt collector bringing an action against a consumer "'to enforce an interest in real property securing the consumer's obligation'—e.g., a mortgage foreclosure action – to file in the judicial district where the property is located." See 15 U.S.C. § § 1692(a)(1); 1692f; see also Wilson v. Draper & Goldberg, P.L.L.C, 443 F.3d 373 (4th Cir. 2006)(rejecting a foreclosing firm's assertion that once foreclosure proceedings began, plaintiff's debt ceased to be a "debt" under the FDCPA, and determining that the debt remained a "debt" because the foreclosure was simply an attempt to collect on that debt); Piper v. Portnoff Law Assocs., Ltd., 396 F.3d 227 (3d Cir. (2005)("Piper")(noting in part that "if 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). Therefore, in the Sixth Circuit's view, foreclosure is debt collection under the FDCPA, because its purpose is the payment of money.
Finally, interpreting the definition of "debt collector" in the FDCPA as clarifying that even property repossession agencies, "whose business does not primarily involve communicating with debtors in an effort to secure payment of debts" are subject to the FDCPA, the Sixth Circuit concluded that only these particular entities have a role in the collection process that is strictly limited to enforcing security interests – i.e., repossessing or disabling property. The Court thus determined that law firms engaged in mortgage foreclosures do not meet the narrow criteria pertaining to repossession agencies, because foreclosure law firms fall under the general definition of debt collectors if either their principal business is mortgage foreclosure or if they "regularly" perform mortgage foreclosures.
Accordingly, the Court reversed the portion of the lower court's judgment dismissing Plaintiff's FDCPA claims against Law Firm, ruling that the lower court erred in concluding that mortgage foreclosure was not debt collection. However, the Sixth Circuit affirmed the portions of the judgment dismissing Plaintiff's FDCPA claims against Servicer and denying Plaintiff leave to amend. The Court also vacated the dismissal of Plaintiff's state-law claims and remanded for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher LLP
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