The U.S. Court of Appeals for the Fifth Circuit recently held that a debt collector did not violate the federal Fair Debt Collection Practices Act (FDCPA) by threatening non-judicial foreclosure on debt that was partially but not fully time barred.
A copy of the opinion is available at: Link to Opinion
The plaintiffs owned a condominium in Houston, Texas. They sued the condominium ownership, its management company and its collection lawyers concerning their efforts to collect assessments and other charges under the association's declaration and related documents.
At the trial court level, the plaintiffs alleged common law claims of breach of contract, wrongful foreclosure, negligent misrepresentation, breach of fiduciary duty and violations of the FDCPA, the Texas Fair Debt Collection Practices Act and the Texas Deceptive Trade Practices Act. The trial court granted the defendants' motion for summary judgment and the plaintiffs appealed. The Fifth Circuit affirmed the lower court ruling.
By way of background, the assessments stretched back several years. Arguably, some but not all of the debt was beyond the Texas four-year statute of limitations.
The Fifth Circuit was not swayed by the collection law firm's argument that it was exempt from liability under section 1692f(6) of the FDCPA because it was merely enforcing security interests. The Court relied on its earlier decision in Kaltenbach v. Richards, which held that once a party satisfies the general definition of debt collector, it satisfies the definition for all purposes even when attempting to foreclose on security interests. Here, the Court concluded, there was "no serious contention" that the law firm was not a debt collector.
Turning to the 1692g claim, the collection law firm had sent a two-page letter referencing the debt. The plaintiffs claimed the validation letter "overshadowed" their FDCPA rights because it demanded that the defendants "needed to pay 'on or before the expiration of thirty (30) days from and after" the date of the letter "or nonjudicial foreclosure would occur." However, section 1692g provides that a debtor has 30 days from receipt of a validation letter to make a written dispute which freezes collection activity until the debt collector provides verification. The plaintiffs alleged that the law firm's demand for payment within 30 days of the date of the verification letter "overshadowed" the longer period provided by section 1692g, which is focused on the date the debtor receives the validation letter.
The Fifth Circuit disagreed, concluding that a "fair interpretation" of the letter demonstrates the plaintiffs were not deprived of their validation rights because the longer 30-day validation language was listed not once, but three times, and in bold type.
Next, the Court addressed the plaintiffs' claim that the law firm threatened a lawsuit on time-barred debt. Examining the Texas Property Code, the Court found that condominium assessments were "covenants running with the land" and that the unpaid assessments and other charges constituted a real property lien. The Court noted there was no Texas case law to answer what limitations period covered such real property liens, but assumed, to resolve this case, that the four-year general statute would bar a small portion of the overall debt.
Whether the letter violated the FDCPA for threatening a suit on a time-barred debt provided a more compelling argument. Just last year in Daugherty v. Convergent Outsourcing, Inc., the Fifth Circuit ruled the FDCPA was violated when a letter merely offered to "settle" a time-barred debt, but did not otherwise threaten a lawsuit.
The Fifth Circuit found the facts here contained important distinctions from Daugherty. First, unlike Daugherty, only a portion of the debt was alleged to be time-barred, less than 25 percent. Second, in Daugherty there was no dispute that the limitations period applicable to the entire debt had expired, but here it was uncertain whether the limitations period had run.
Finally, because the letter in Daugherty did not disclose that a payment made after the debt was time barred could restart the limitations period, the letter arguably would mislead consumers in taking an action adverse to their interests. Here, however, the Court noted that the plaintiffs were not misled because the condominium was ultimately foreclosed for the amount that was demanded.
In reaching its conclusion, the Fifth Circuit went to great lengths to stress the nature of the debt (i.e. real estate debt) and hinted that it might not rule favorably if the debt were of another type, like a credit card or other non-real estate secured debt.
Ralph T. Wutscher
Maurice Wutscher LLP
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