The U.S. Court of Appeals for the Third Circuit recently reversed the dismissal of a borrower’s claims under the Federal Fair Debt Collection Practices Act (“FDCPA”) against a foreclosure law firm, holding that not-yet-incurred fees pled in foreclosure complaint -- without conveying that the fees were estimates or imprecise amounts -- could constitute an actionable misrepresentation.
The Court also rejected the foreclosure firm’s arguments that a foreclosure complaint could not serve as the basis of an FDCPA claim.
However, the Court upheld the dismissal of the borrower’s state law claims, due to lack of ascertainable damages.
A copy of the opinion is available at: http://www2.ca3.uscourts.gov/opinarch/141816p.pdf
After the borrower defaulted on a mortgage loan, the mortgagee sued to foreclose. The mortgage provided that the lender could recover attorney’s fees, property inspection, and valuation fees for services performed in connection with the borrower’s default. It also provided for recovery of all expenses incurred in enforcing the mortgage.
In 2011, the lender sent the borrower a notice required as a prerequisite to filing foreclosure under Pennsylvania’s Housing Finance Agency Law.
More than a year later, in September of 2012, the mortgagee filed its foreclosure action. The complaint contained an itemized list of the total amount owed, which included attorney’s fees, title report fees and property inspection fees as of July 2, 2012, two months before the complaint was filed.
While the state court foreclosure action was still pending, the borrower filed a class action complaint against the lender and the foreclosure law firm under the Pennsylvania Loan Interest and Protection Law on the basis that the attorney’s fees stated in the foreclosure complaint were not actually incurred as of July 2, 2012. The defendants removed the case to federal court, and moved to dismiss on the basis that the borrower’s mortgage exceeded the maximum amount covered by the Pennsylvania Loan Interest and Protection Law.
The borrower filed an amended complaint alleging that, because the notice under Pennsylvania’s Housing Finance Agency Law and the amount alleged in the foreclosure complaint were defective, the lender violated the Pennsylvania Fair Credit Extension Uniformity Act, and that the foreclosure attorneys violated the FDCPA, and that both violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The amended complaint also contained a claim for common law breach of contract against the lender.
The defendants moved to dismiss, and the magistrate judge recommended dismissal of the FDCPA claim because allegedly not-yet-incurred, fixed fees were not prohibited by the mortgage or applicable state or federal law. The defendants also argued that the borrower did not show any actual loss resulting from the alleged misrepresentations, such that the state clams should be dismissed as well. The district court agreed, adopted the magistrate’s recommendations, and entered an order dismissing the amended complaint, with prejudice.
The borrower appealed.
As you may recall, the FDCPA – at 15 U.S.C. 1692e(2)(A), (5) and (10) -- imposes strict liability on debt collectors who “use any false, (deceptive, or misleading representation or means in connection with the collection of any debt” and at subsection 1692f(1) prohibits a debt collector from attempting to collect any “amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”
The Third Circuit began its analysis by pointing out that, under established Third Circuit precedent in Rosenau v. Unifund Corp., 5329 F.3d 218, 221 (3d Cir. 2008), the communication on which the FDCPA claim is based is viewed “from the perspective of the least sophisticated debtor.”
After the district court dismissed the amended complaint, the Third Circuit held, in the case of in McLaughlin v. Phelan Hallinan & Schmieg, LLP, 756 F. 3d 240 (3d Cir. 2014), that not-yet-incurred fees listed in a debt collection letter violated the FDCPA when nothing in the letter stated that the not-yet-incurred fees were estimated or in any way suggested that the statement of not-yet-incurred fees was not a precise amount..
The Court concluded that McLaughlin’s holding was broad enough to cover foreclosure complaint, and reversed the district court’s dismissal of most, but not all, of the FDCPA claims against the law firm.
The Third Circuit held that, if the amount actually owed was less that the amount represented, and construing the facts in the light most favorable to the non-movant under Federal Rule of Civil Procedure 12(b)(6), the borrower sufficiently alleged that the not-yet-incurred fees were not expressly authorized by the mortgage and thus violated FDCPA subsection 1692f(1).
The Court, however, upheld the dismissal of the borrower’s FDCPA claim under section 1692e(5), reasoning that the law firm did not threaten to take an action that cannot legally be taken, such as falsely threatening to sue.
The Court then turned to the law firm’s argument that a foreclosure complaint could not serve as the basis of an FDCPA claim, rejecting the argument based on the plain language of the statute and case law interpreting it.
The U.S. Supreme Court established in Heintz v. Jenkins, 514 U.S. 291 (1995), that attorneys engaged in debt collection, including through litigation, are not exempt from the FDCPA.
In addition, because Congress twice amended the FDCPA after Heintz to exempt “formal pleading[s] made in connection with a legal action” from 15 U.S.C. § 1692e(11), and “communication[s] in the form of  formal pleading[s]” from § 1692g(d), two provisions not at issue here, the Third Circuit presumed that Congress was aware of its decision in Heintz, and concluded that “a communication cannot be uniquely exempted from the FDCPA because it is a formal pleading or, in particular, a complaint.”
The Court rejected the law firm’s attempt to distinguish foreclosure complaints from debt collection letters on the basis that the complaint was a communication directed to the court, not the consumer, reasoning because the FDCPA defines a “communication” as “the conveying of information regarding a debt directly or indirectly to any person through any medium” and the foreclosure complaint was served on the borrower directly, or indirectly through his attorney, the borrower was the intended recipient.
Accordingly, the Third Circuit held that the foreclosure complaint “was unquestionably a communication directed at [the borrower] in attempt to collect on his debt.”
Relying on its decision in Simon v. FIA Card Services, N.A., 732 F. 3d 259 (3d Cir. 2013), which refused to dismiss FDCPA claims arising from a pending bankruptcy proceeding because the FDCPA and Bankruptcy Code and Rules were in the eyes of the Third Circuit not in direct conflict, the Court also rejected the foreclosure firm’s argument that foreclosure actions are exempt from the FDCPA because the state rules of civil procedure provide sufficient protection and because the Heintz Court noted the FDCPA has the “apparent objective of preserving creditors’ judicial remedies.”
Moreover, the Third Circuit also noted that the plain language of the FDCPA nowhere excludes foreclosure actions from its broad definition of “debt collection” as “activity undertaken for the general purpose of inducing payment,” and references “action[s] to enforce an interest in real property securing the consumer’s obligation” at 15 U.S.C. 1692i.
Thus, the Court refused to exempt foreclosure actions from the FDCPA even if the mortgagee or foreclosure firm only sought in rem relief.
Accordingly, the Third Circuit reversed the order dismissing the borrower’s FDCPA claims against the foreclosure firm under sections 1692e(2)(A), (1), and 1692f(1), but affirmed the dismissal of the borrower’s claim under section 1692e(5).
The Court then turned to address the borrower’s argument that, by misrepresenting or overcharging for fees in the foreclosure complaint, the lender and law firm violated the Pennsylvania Fair Credit Extension Uniformity Act and the Pennsylvania Unfair Trade Practices and Consumer Protection Law.
The Third Circuit concluded that the borrower failed to state a claim under the Pennsylvania Unfair Trade Practices and Consumer Protection Law, because he failed to allege any ascertainable loss of money or property resulting from the defendants’ prohibited conduct, as required by the statute.
Because the Pennsylvania Supreme Court has not definitively decided what constitutes ascertainable loss under the Pennsylvania Unfair Trade Practices and Consumer Protection Law, the Third Circuit looked to decisions of Pennsylvania’s intermediate appellate courts for guidance.
Those courts have held that, while ascertainable loss is a fact-specific inquiry, the loss must not be speculative. The plaintiff must have suffered actual damages of harm as a result of the defendant’s conduct.
Because the plaintiff in the case at bar was never deprived of his property and never paid the disputed fees, he did not suffer an “ascertainable loss of money or property, real or personal,” and any temporary injury the borrower may have suffered, which disappeared as the foreclosure action proceeded and attorney’s fees were actually incurred, was too speculative to state a claim under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law against the lender or the law firm.
The Third Circuit also rejected the borrower’s claim under Pennsylvania’s Fair Credit Extension Uniformity Act, the state’s analogue to the FDCPA, reasoning that because the state statute does not provide its own private right of action, but instead provides that a violation is also a violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law, it follows that if the borrower cannot state a claim under the Unfair Trade Practices and Consumer Protection Law, he cannot do so under the Fair Credit Extension Uniformity Act.
Accordingly, the Court affirmed the district court’s dismissal of the borrower’s claim against the lender under Pennsylvania’s Fair Credit Extension Uniformity Act.
Finally, the Court affirmed the district court’s dismissal of the borrower’s common law breach of contract claim against the lender because he did not plead damages resulting from the alleged breach of contract. The Third Circuit noted that any loss of property he allegedly incurred was speculative and he did not pay the disputed fees or expenses.
Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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