Attorneys Can Be Considered Debt Collectors Under FDCPA
My firm's General Counsel, indefatigable in her mission, opens my eyes on a weekly basis to new and creative ways in which lawyers can been sued, lately in situations where the mistake is not an obvious one that allows you to think, "Sure, but that could never happen to me!" In that regard, heed the latest warning that hails from the Sixth Circuit and rings loudest in the ears of the real estate practitioners among us.
The 6th Circuit's January 2013 decision in Glazer v. Chase Home Finance LLC (Case No. 10-3416) represents a significant expansion – or confirmation of the reach – of the application of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §1692 et seq. The FDCPA was enacted some 35 years ago with the objective of protecting consumers by eliminating abusive, deceptive and unfair debt collection practices by debt collectors. It generally applies to third party debt collectors, but has the potential to affect a much broader universe.
Attorneys, originally exempt from the purview of the Act, became subject to the Act in 1986 if they otherwise satisfied the definition of a debt collector (15 U.S.C. §1692a(6)) and did not qualify for one of the six statutory exemptions:
any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.
As a result, there are certain instances in which attorneys will be considered debt collectors and subject to compliance with the Act (which, among other things, may require lawyers to include in their correspondence with debtors specific language and recitations of debtor's rights to obtain further information and/or copies of the underlying documentation of the debt).
Glazer v. Chase brings the application of the Act against attorneys into stark relief. It involved a claim under the FDCPA against a mortgage servicing company and the law firm it hired to foreclose on property Glazer inherited. While the 6th Circuit upheld the district court's dismissal of the FDCPA claims against the servicer – because the proof showed the servicer entered on the scene when the debt was still current, which qualified for one of the FDCPA exceptions to the "debt collector" definition – it reversed the dismissal against the lawyers. The claim against the lawyers was that they violated the Act by falsely stating that Chase owned the note and mortgage in the foreclosure complaint (apparently, FNMA owned the debt pursuant to an unrecorded assignment, and Chase was solely the servicer), improperly scheduling a foreclosure sale (which was ultimately canceled) and refusing to verify the debt upon the debtor's request.
In upholding the claims against the lawyers, the 6th Circuit cited that the Act was unclear because it failed to define "debt collection" and did not exclude foreclosure or the general enforcement of security interests from its scope. And, the Court rejected what it characterized as the majority view adopted in many district courts that mortgage foreclosure, without a claim for a money judgment in the foreclosure complaint, is not debt collection, but simply enforcement of a security interest.
Despite the absence of a definition of "debt collection" in the Act, the panel examined the Act's definition of "debt" which is defined as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes." 15 U.S.C. §1692a(5). Further, the Court focused upon the Act's substantive provisions that debt collection is performed through either "communication" or "conduct" (§ 1692c, d), which it found to be an indication of a very broad view of what could be considered "collection" under the statute. As to the argument that enforcement of a security interest should be distinguished, the panel stated, "The focus on the underlying transaction indicates that whether an obligation is a 'debt' depends not on whether the obligation is secured, but rather on the purpose for which it was incurred," concluding that a home loan was a "debt" whether or not secured.
So, ultimately, the 6th Circuit's holding was that the very purpose of any mortgage foreclosure is to obtain payment on the underlying debt, either by persuasion (a settlement payment) or compulsion (a foreclosure judgment and application of the sale proceeds against the debt), and thus a lawyer who regularly tries to obtain payment of consumer debts through legal proceedings is a lawyer who regularly attempts to collect those debts per the Act. Stated otherwise, if the purpose of an activity taken in relation to a debt is to obtain payment of the debt, then the activity is properly considered debt collection under the FDCPA.
This holding, which is echoed in several recent opinions from the 3rd and 4th Circuits, places real estate attorneys squarely in the path of the FDCPA. And, while there could still be arguments for exemption – if, for instance, an attorney does not "regularly" seek to collect such debts – it strikes this lawyer that a conservative approach is a sounder approach for those of us engaged in any foreclosure activities on behalf of our clients. Ensuring compliance with the Act will require examination of the form and substance of all oral and written correspondence with consumer debtors (including emails) to consider whether or not to append disclaimers or statutorily required language, and diligence in respect of counsel's conduct throughout the foreclosure proceedings…and, no doubt, will generate more food for thought for my General Counsel.