Supreme Court to Consider Whether FDCPA Applies to Nonjudicial Foreclosures

In 2019, the U.S. Supreme Court will decide whether federal debt collection laws apply to nonjudicial foreclosure proceedings.

By , Attorney

In January 2019, the U.S. Supreme Court will hear the case of ​Obduskey v. McCarthy & Holthus, LLP​, No. 17-1307 (2018) to determine whether the federal Fair Debt Collection Practices Act (FDCPA) applies to nonjudicial foreclosures. The fate of potentially thousands of lawsuits challenging nonjudicial foreclosures depends on the Supreme Court's decision.

Fair Debt Collection Practices Act

The FDCPA (15 U.S.C. §§ 1692 to 1692p) prohibits debt collectors from using abusive and deceptive tactics. For example, a debt collector's first communication with you must tell you that the collector is attempting to collect a debt and that any information obtained from you will be used for that purpose. Also, a collector can't contact you:

Obduskey v. McCarthy & Holthus, LLP​

In the case of Obduskey v. McCarthy & Holthus, Wells Fargo, acting as a loan servicer, sought to foreclose a home owned by Dennis Obduskey, a Colorado resident. Obduskey had defaulted on the mortgage loan in 2009, and over the next six years, nonjudicial foreclosure proceedings were started several times, but never completed. Eventually, Wells Fargo hired McCarthy & Holthus—a foreclosure law firm—to handle the Colorado foreclosure. McCarthy & Holthus then sent Obduskey a letter, which said that the firm could be considered a debt collector that it was beginning a nonjudicial foreclosure. Obduskey disputed the debt, but McCarthy & Holthus didn't provide verification, which is a violation of the FDCPA. Instead, the firm initiated a nonjudicial foreclosure.

Obduskey filed a suit alleging the firm violated the FDCPA. But the district court ruled against him, and noted that while courts have disagreed about whether the FDCPA applies to nonjudicial foreclosures, the majority view is that nonjudicial foreclosure proceedings don't constitute debt collection. Obduskey then appealed the court's decision.

On appeal, the Tenth Circuit determined that a nonjudicial foreclosure isn't an attempt to collect money from a debtor and, generally, the FDCPA only governs entities that attempt to collect money. Therefore, while Obduskey had made sufficient claims that McCarthy & Holthus had violated the FDCPA, the FDCPA doesn't apply to a nonjudicial foreclosure, like Obduskey's, in Colorado. (A judicial foreclosure, on the other hand, might be covered under the FDCPA because of a deficiency judgment.)

Obduskey again appealed.

So, What's at Stake?

Some courts say nonjudicial foreclosures fall under the FDCPA, while others say they don't. The Tenth Circuit's decision agreed with the Ninth Circuit, but was in conflict with the decisions that the Fourth, Fifth, and Sixth Circuits reached on this topic. To settle the matter once and for all, the Supreme Court granted certiorari (agreed to hear the case).

The question the Supreme Court must ultimately consider is whether nonjudicial foreclosure proceedings, which seek to collect on a promissory note by foreclosing a home without seeking any money from the borrower, fall under the FDCPA. If the Supreme Court ultimately upholds the Tenth Circuit's decision and says that the FDCPA doesn't pertain to nonjudicial foreclosures, it could open homeowners up to abusive collection practices by firms that conduct nonjudicial foreclosures. And, homeowners wouldn't be able to file a lawsuit about those practices based on federal law.

The Supreme Court will hear arguments in the case on January 7, 2019, and we'll provide updates accordingly.

Effective date: January 7, 2019