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The Bankruptcy Protector

January 22, 2019

Non-Judicial Foreclosure and the FDCPA: How the Supreme Court’s Looming Decision in Obduskey v. McCarthy & Holthus LLP Could Affect Law Firms and Collections Agencies Alike

By John T. Baxter

The United States Supreme Court heard oral argument in the case Obduskey v. McCarthy & Holthus LLP on January 7, 2019.  The Court’s ruling in this case could have major implications for all organizations—including law firms—that utilize non-judicial foreclosure regarding defaulted mortgages.  

The primary question in Obduskey is whether the Fair Debt Collection Practices Act (the “FDCPA”), 15 U.S.C. § 1692-1692p, applies to non-judicial foreclosures.  There is currently a circuit split regarding this question: the Fourth, Fifth, and Sixth Circuits apply the FDCPA to non-judicial foreclosures, while the Ninth and Tenth Circuits have held that the FDCPA does not apply to non-judicial foreclosures.  The Obduskey decision should resolve this split.

The FDCPA only applies to “debt collectors,” defined under the statute as any person who “regularly collects or attempts to collect, directly or indirectly, debts owed or due . . . another.”  15 U.S.C. § 1692(a)(6).  This definition, however, has certain carve-outs and does not traditionally apply to parties who are seeking only to enforce a security interest without obtaining any payment (e.g. repossessing a car).  In the foreclosure context, judicial foreclosure where the creditor is seeking a deficiency judgment has traditionally fallen under the rubric of the FDCPA, as actions taken in such a proceeding are to collect a monetary debt.  With non-judicial foreclosure where no deficiency is sought, however, the question becomes murkier.  Hence the circuit split.

The Tenth Circuit in Obduskey followed the precedent of the Ninth Circuit’s decision in Ho v. ReconTrust Co., N.A., 858 F.3d 568 (9th Cir. 2017) in holding that a law firm that initiates non-judicial foreclosure where no payment is sought does not fall within the definition of “debt collector” under the act.  The Ninth and Tenth Circuits view non-judicial foreclosure as simply seeking to enforce a security interest. These Circuits rejected the broader, blanket approach adopted by the Sixth Circuit in Glazer v. Chase Home Finance, LLC, 704 F.3d 453 (6th Cir. 2013), which held that every mortgage foreclosure, judicial or non-judicial, is an attempt to collect payment and, therefore, within the scope of the FDCPA.

Whether non-judicial foreclosure falls within the framework of the FDCPA is an important question for lending institutions and law firms representing such institutions.  If the FDCPA is determined to apply to this process, certain homeowner protections will apply in the context of non-judicial foreclosure.  Specifically, statutory damages and attorneys’ fees may be available to homeowners who successfully prosecute FDCPA violations arising from non-judicial foreclosure activity.

The Obduskey decision will have an immediate impact, as this issue arises every day across the country.  Indeed, since oral argument in Obduskey, the Sixth Circuit has already issued an opinion that will be impacted by the Supreme Court’s Obduskey decision. In Scott v. Trott Law, P.C., No. 18-1051, 2019 WL 169237 (6th Cir. Jan. 11, 2019), the Sixth Circuit addressed a situation where a law firm had initiated non-judicial foreclosure, after which a homeowner sent a letter challenging the alleged mortgage debt.  The Sixth Circuit, relying on its previous precedent applying the FDCPA to non-judicial foreclosure, held that the sending of this letter forced the foreclosing party to cease all collection actions until the debt was verified.  The law firm did not send a debt verification letter and foreclosure activity continued.  Accordingly, the Sixth Circuit held that the firm violated the FDCPA.  The court rejected the law firm’s argument that it had taken no further actions since receipt of the letter and that any actions taken in furtherance of the foreclosure were done by third-parties, and not by the firm.  If the FDCPA did not apply, then the law firm’s actions would not have violated the FDCPA. 

Put simply, the Obduskey decision will have a sweeping impact on lenders and creditors’ counsel and homeowners alike.  If the Supreme Court sides with homeowners, practitioners in states where non-judicial foreclosure is available will have to be ever-vigilant to ensure compliance with the FDCPA.



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