The U.S. Court of Appeals for the Sixth Circuit recently confirmed that a servicer and loan owner who did not bring a debt collection or foreclosure action as a counterclaim to a federal Fair Debt Collection Practices Act lawsuit did not waive their ability to collect on the debt in the future.
A copy of the opinion is available at: Link to Opinion
In August 2004, the borrowers ("Borrowers") obtained a loan and executed a note to purchase property. The note was secured by a mortgage on the property. Later that year, the loan was sold to an investor ("Investor"). The servicer ("Servicer") began servicing the loan in 2008.
In July 2011, Servicer brought a foreclosure action against Borrowers in state court. Under Ohio Law, a party who seeks to foreclose on a mortgage must generally prove that "it is the current holder of the note and mortgage." See BAC Home Loan Servicing, L.P. v. Kolenich, 958 N.E.2d 194, 200 (Ohio Ct. App. 2011). Although Investor was the holder of the note at the time the suit was filed, Servicer allegedly misrepresented that it was the holder and had standing to file the suit.
In 2011, Servicer filed a motion for summary judgment in the foreclosure action. Borrowers filed a memorandum in opposition, arguing that Servicer had not shown that it was the holder of the note. The state court denied Servicer's motion for summary judgment, and Servicer voluntarily dismissed the case.
Borrowers filed a complaint in federal court against Servicer and Investor alleging violations of the federal Fair Debt Collection Practices Act ("FDCPA")
.
As you may recall, a successful FDCPA plaintiff must establish that a defendant is a "debt collector" as defined by the FDCPA. Those "collecting or 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[s]" are excluded from the definition of a "debt collector" under the FDCPA. 15 U.S.C. § 1692a(6)(F)(iii). Because the district court found that Investor and Servicer acquired their interests in the debt prior to the date Borrowers defaulted, the district court found that Investor and Servicer were not debt collectors.
Although Servicer and Investor prevailed in the FDCPA action, they did not bring a foreclosure action as a counterclaim. Borrowers filed a new complaint requesting a declaration barring Servicer or Investor from bringing a future foreclosure action and to quiet title. The district court held that neither entity was required to bring a foreclosure action as a compulsory counterclaim to the FDCPA action and granted their motion to dismiss both claims.
Borrowers appealed and argued that a debt collection (foreclosure) action was a compulsory counterclaim to their FDCPA lawsuit and, therefore, both Servicer and Investor waived their ability to foreclosure in the future through their failure to bring a foreclosure action as a counterclaim.
Rule 13(a) of the Federal Rules of Civil Procedure provides:
A pleading must state as a counterclaim any claim that – at the time of its service – the pleader has against the opposing party if the claim: (A) arises out of the transaction or occurrence that is the subject matter of the opposing party's claim; and (B) does not require adding another party over whom the court cannot acquire jurisdiction.
Fed. R. Civ. P. 13(a)(1).
In order to prove that a foreclosure action is a compulsory counterclaim to an FDCPA action, a borrower must first show that the two claims "arise" out of the same transaction or occurrence. A court looks to whether there is "a logical relationship between the two claims[.]" See Maddox v. Ky. Fin. Co., 736 F.2d 380, 382 (6th Cir, 1984). "Under this test, [a court] determines whether the issues of law and fact raised by the claims are largely the same and whether substantially the same evidence would support or refute both claim." See Sanders v. First Nat'l Bank & Trust Co. in Great Bend, 936 F.2d 273, 277 (6th Cir. 1991). A partial overlap in issues of law and fact does not compel a finding that two claims are logically related. See Peterson v. United Accounts, Inc. 628 F.2d 134, 1137 (8th Cir. 1981).
The Sixth Circuit noted that it had previously held that a counterclaim on the underlying debt in a Truth in Lending Act ("TILA") action is permissive rather than compulsory. See Maddox, 736 F.2d at 383. In so doing, the Sixth Circuit concluded:
While the claim and counterclaim do arise out of the same transaction within the literal terms of Rule 13(a), we do not believe that they are logically related in such a way as to make the counterclaim compulsory. The claim and counterclaim will present entirely different legal, factual and evidentiary questions. It is not clear that the interests of judicial economy and efficiency would be served in the least by requiring that the two claims be heard.
See id. at 383, construing Whigham v. Beneficial Finance Co. of Fayetteville, Inc., 599 F.2d 1322, 1323-24 (4th Cir. 1979) (concluding that debt collection and TILA claims raise "significantly different" issues of fact and law).
Next, the Court noted that while it had yet to address whether a counterclaim to collect the underlying debt is a compulsory in a FDCPA action, the Sixth Circuit noted that the framework in cases dealing with TILA supported a finding that Defendants were not required to bring a debt collection action as a counterclaim to Borrowers' FDCPA lawsuit. See, e.g., Maddox, 736 F.2d at 380; Sanders, 936 F.2d at 273; Whigham, 599 F.2d at 1322.
First, the Sixth Circuit noted that the FDCPA claim raises different issues of law than a foreclosure action. A foreclosure action alleges "that the borrower has defaulted on a private loan contract governed by state law." Whigham, 599 F2d at 1324. Conversely, a FDCPA action requires interpretation of federal statutory law and regulations designed to "eliminate abusive debt collection practices by debt collectors." 15 U.S.C. § 1692(e).
Second, the Sixth Circuit concluded that the factual issues presented by a FDCPA claim and a foreclosure action are not largely the same. Notably, the dispositive issue in the FDCPA action, the date in which the Defendants acquired their interest in the debt, was entirely irrelevant in a foreclosure action. Further, the Sixth Circuit noted that while a foreclosure action requires a lender to prove that a debtor is in default and to prove the amount that a debtor owes, an FDCPA claim focuses on the "use of unfair methods to collect [a debt]." Peterson, 638 F.2d at 1136.
Finally, the Sixth Circuit noted that policy considerations supported finding that a counterclaim on the underlying debt in an FDCPA action is permissive rather than compulsory. Such a rule could systematically usurp state law debt claims for adjudication by state courts. See Maddox, 736 F.3d at 383. Likewise, such a rule would require lenders to initiate foreclosure proceedings as a counterclaim when they otherwise may not have done so – frustrating the purposes of the FDCPA by creating a disincentive for debtors to sue. See id. at 383 n.1.
Accordingly, the Sixth Circuit affirmed the district court's ruling granting Investor and Servicer's motion to dismiss.
Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Maurice 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
Email: rwutscher@MauriceWutscher.com
Email: rwutscher@MauriceWutscher.com
Admitted to practice law in Illinois
California | Florida | Illinois | Indiana | Massachusetts | New Jersey | New York | Ohio | Pennsylvania | Texas | Washington, DC
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates and webinar presentations are available on the internet, in searchable format, at:
and
and
and
and
