Banking and Finance Law Daily Are nonjudicial foreclosures debt collection? Supreme Court will decide
Thursday, June 28, 2018

Are nonjudicial foreclosures debt collection? Supreme Court will decide

By Richard A. Roth, J.D.

The Supreme Court has granted a homeowner’s request that it consider whether nonjudicial mortgage foreclosures constitute debt collection that is subject to the Fair Debt Collection Practices Act. The appeal challenges a decision by the U.S. Court of Appeals for the Tenth Circuit that nonjudicial foreclosures are not debt collection because they do not demand any payment from the homeowner (see Obduskey v. Wells FargoBanking and Finance Law Daily, Jan. 22, 2018). The petition is Obduskey v. McCarthy & Holthus LLP, No. 17-1307.

When the homeowner’s mortgage loan fell into default, the servicer—Wells Fargo—retained the law firm of McCarthy & Holthus to pursue a nonjudicial foreclosure. The firm began by sending the homeowner a notice that named the creditor, stated the amount due, and explained that it had been told to begin foreclosure proceedings. The homeowner disputed the debt in writing, but the firm did not reply to the dispute; rather, it started the foreclosure.

The homeowner sued the firm for claimed FDCPA violations. However, the U.S. district judge decided that the law firm was not a debt collector under the FDCPA because nonjudicial foreclosures are not debt collections.

Appellate court opinion. While noting that different courts had reached different conclusions on the point, the appellate court agreed with the district court judge. There was no debt collection because "enforcing a security interest is not an attempt to collect money from the debtor," the appellate court said. The firm had never demanded any payment, the court added.

The court explained its logic by noting that, under the relevant Colorado law, judicial and nonjudicial foreclosures treat the possibility of deficiency judgments differently. If the sale of the property under a judicial foreclosure does not yield enough to repay the full amount due, a judgment for the unpaid amount can be entered against the homeowner. On the other hand, a judgment for the deficiency can be obtained after a nonjudicial foreclosure only if a separate suit is filed. The court rejected the homeowner’s assertion that the ultimate goal of any foreclosure is to obtain payment on the debt.

One interesting, and possibly relevant, fact is that the Tenth Circuit’s decision conflicts with a Colorado Supreme Court decision that nonjudicial foreclosures are debt collection (Shapiro & Meinhold v. Zartman, 823 P.2d 120 (1992)). Generally, it might be thought that the state court would be the authority when the interpretation of state law is in question. The apparent conflict could be resolved by remembering that the Tenth Circuit viewed the issue as the interpretation of the FDCPA, not Colorado state law.

Differences among the circuits. The Tenth Circuit is not the only appellate court to distinguish between judicial and nonjudicial foreclosures based on the possibility of a delinquency judgment.

For example, the U.S. Court of Appeals for the Ninth Circuit decided in Ho v. ReconTrust Co. that a nonjudicial foreclosure was not debt collection under California law because the state’s law extinguishes the debt after the nonjudicial foreclosure. In other words, the collection of any further amount from the homeowner is not permitted (see Banking and Finance Law Daily, Oct. 20, 2016).

However, the Ninth Circuit has recently made clear that Ho applies only to nonjudicial foreclosures. The possibility of a deficiency judgment after a judicial foreclosure means that it is debt collection (McNair v. Maxwell & Morgan PC, see Banking and Finance Law Daily, June 26, 2018).

A difference between the two state laws should be pointed out. According to the appellate court opinions, a nonjudicial foreclosure extinguishes the possibility of a deficiency judgment in California, while a suit for a deficiency is possible in Colorado.

Other appeals. Obduskey is the third time the issue has been presented to the Supreme Court recently. A petition for certiorari in Ho was rejected by the Court (No. 17-278); however, a petition raising the same issue in Greer v. Green Tree Servicing (No. 17-1351) remains pending. Greer also is an appeal from the Ninth Circuit.

Companies: McCarthy & Holthus, LLP

The case is No. 17-1307.

Supreme Court docket. For details about this and other petitions and cases pending before the Supreme Court, including information on the petitions for certiorari in Ho and Greer, please consult this list of selected banking and finance law cases in the 2017 term. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each case.

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