by Charles Prueter
The Fair Debt Collection Practices Act, which was signed into law by President Jimmy Carter in 1977, has a simple and straightforward purpose: Protect unsophisticated consumers from unscrupulous debt collectors. The statute itself, however, has proved to be anything but simple and straightforward. The Supreme Court has opined on the meaning and scope of the FDCPA repeatedly in recent years. What if a debt collector’s violation of the rules in the FDCPA was the result of a “bona fide error”? May a company collect debts that it has purchased for its own account without being subject to the restrictions of the FDCPA? Does it violate the FDCPA to file a proof of claim in bankruptcy on an old debt? These somewhat arcane questions have been answered with varying certitude by the Court, but in all events providing the debt collection industry with additional guidance about how to navigate the web of rules created by the FDCPA. Yet another one is now pending before the justices — Obduskey v. McCarthy & Holthus, LLP, No. 17-1307, which was argued last month.
As noted above, the FDCPA has created a high volume of significant litigation for financial services firms engaged in debt buying, servicing, and collecting. The statute, as its title reflects, generally prohibits abusive, deceptive, and unfair debt collection practices, and the facts surrounding the particular practices at issue typically determine whether a debt collector will be liable under the statute. Certain methods of “debt collection” are categorically excluded as a matter of law, however.
In this case, the holder of a note on a home sought to move forward with a non-judicial foreclosure, which is a widely recognized remedy available to a lender when a debtor defaults on a loan secured by property. As the term itself indicates, the right to a non-judicial foreclosure means that a lender need not go to court to foreclose on and sell a home secured by a defaulted loan. Here, the homeowner accuses the law firm that handled the non-judicial foreclosure of violating the FDCPA, relying on a number of disclosure and validation requirements imposed on debt collectors.
But the question before the Supreme Court is whether pursuing non-judicial foreclosure falls under the FDCPA in the first place. Indeed, non-judicial foreclosure does not require the debtor to pay money, which is the essence of the debt collection activities that do fall under the FDCPA. Various lower federal courts are split — some have adopted this view and have held that non-judicial foreclosures are not governed by the FDCPA, but some have held that non-judicial foreclosures in fact are debt collection activities and therefore are subject to the disclosure and validation requirements imposed by the FDCPA.
The Court’s decision undoubtedly will have an impact on the way in which firms with interests in home mortgages, and other loans secured by property, decide to exercise non-judicial foreclosure rights. A decision is expected this Spring.
Another case in the pipeline that readers in the financial services industry may wish to watch is an Exchange Act case. In Emulex Corp. v. Varjabedian, No. 18-459, the question is whether the Act allows a private plaintiff to bring a private cause of action based on an alleged negligent false statement in connection with a tender offer (i.e., an open offer by a prospective acquirer to all shareholders of a public company). It is well established that the Act creates a cause of action for an intentional false statement, but the Ninth Circuit has created a circuit split with its decision in this case, holding that a plaintiff may maintain a lawsuit based on mere negligence. All other circuit courts of appeals heretofore had held that such a lawsuit was not cognizable under the Act. I expect the Court to side with that majority and hold that, under the plain language of the statute, claim may not be premised on a negligent false statement. But if I’m wrong, I’ll fess up to it here in these pages.
Charles W. Prueter is a trial and appellate lawyer at Waller Lansden Dortch & Davis, LLP, in Birmingham. He can be reached by email at firstname.lastname@example.org.