Supreme Court Tackles Nonjudicial Foreclosure and the FDCPA; Homeowners Might Win

To resolve a split among the circuits, the Supreme Court held oral argument on January 7 to decide whether nonjudicial foreclosure is subject to the federal Fair Debt Collection Practices Act, known as the FDCPA, 15 U.S.C. § 1692-1692p.

Oral argument was difficult for the attorney representing the homeowner, but it was worse for counsel arguing on behalf of the law firm hired to foreclose.

The circuits are split. The Fourth, Fifth and Sixth Circuits hold that the FDCPA applies to nonjudicial foreclosure, while the Ninth and Tenth Circuits concluded that it does not. Although the justices other than Justice Sonia Sotomayor did not clearly stake out their positions, the odds favor a high court ruling that the FDCPA does apply to nonjudicial foreclosure.

The Colorado Case

The case arose in Colorado, where the home mortgage lender hired a law firm to pursue nonjudicial foreclosure under state law. The homeowner sued the law firm, contending that the lender’s lawyers violated the FDCPA.

The district court granted the law firm’s motion to dismiss, concluding that the FDCPA does not apply. The Tenth Circuit affirmed. The Supreme Court granted certiorari on June 28.

The Significance of the Outcome

The outcome is important for consumer in states with nonjudicial foreclosure, because violating the FDCPA automatically imposes statutory damages and an award of attorneys’ fees. In addition, violating the FDCPA can lay the basis for a class action. But of greater significance, the FDCPA protects consumers from a wide range of unfair collection practices.

Counsel for the respondent-law firm conceded at oral argument that the FDCPA does apply to judicial foreclosure when the lender has the right to pursue a deficiency judgment.

The Positions of the Parties

Fundamentally, the case presents a question of statutory interpretation. Did Congress make the FDCPA applicable to nonjudicial foreclosure? Oral argument suggests that the case does not have politically ideological overtones for the justices.

The FDCPA applies to “debt collectors,” defined in the first sentence of 15 U.S.C. § 1692a(6) as someone who “regularly collects or attempts to collect, directly or indirectly, debts owed . . . or due another.” That’s why the statute applies to a law firm pursuing judicial foreclosure when the lender is entitled to a deficiency judgment.

Conversely, the FDCPA does not apply generally if nothing happens aside from the enforcement of a security interest. For example, a “repo man” — someone who repossesses a car in the dark of night, never confronts the driver and never demands payment — is only enforcing a security interest and is thus not generally subject to the FDCPA.

The case turns on the meaning of the third sentence in Section 1692a(6), which applies to enforcement of security interests. “For the purpose of section 1692f(6) [governing the conduct of someone repossessing property nonjudicially],” the third sentence of Section 1692a(6) says that the “term [debt collector] also includes any person who uses [the mail or interstate commerce] in any business the principal purpose of which is the enforcement of security interests.”

In other words, the third sentence applies to nonjudicial foreclosure. However, Section 1692f(6) does not impose all of the FDCPA’s regulations on those who only enforce security interests. Section 1692f(6) only prohibits certain activities, such as threatening to repossess when there is no intention of repossessing or there is no right to repossess. The law firm was not alleged to have violated the proscriptions in Section 1692f(6).

In nonjudicial foreclosure, the law firm argued that the only prohibited activities are those listed in Section 1692f(6), not the myriad other regulations imposed by the FDCPA on debt collectors generally. In other words, the law firm contended that the definitions of debt collectors and those who repossess property are mutually exclusive.

The case presented the familiar question of reading a statute so that none of its language is surplusage.

Briefly stated, the homeowner contended that the words “also includes” in the third sentence of Section 1692a(6) were intended to be expansive, not limiting. The homeowner argued that nonjudicial foreclosure can fall within both the first and third sentences in Section 1692a(6). According to the homeowner, initiating nonjudicial foreclosure was an implicit attempt to collect the debt, thus falling under the first sentence and its definition of “debt collector” as someone who collects a debt.

Both Sides Take a Beating

Justice Elena Kagan said the case presented “a difficult question.”

Justice Samuel Samuel A. Alito Jr. was the first to pose a question. Although he said the homeowner had a “pretty good argument” by focusing on the first sentence in Section 1692a(6), he said the petitioner had a “tough time explaining” why the third sentence did not shield nonjudicial foreclosure from the FDCPA’s larger regulations.

Justice Neil M. Gorsuch asked questions that were seemingly favorable to the law firm, but he probed for reasons to side with the homeowner. The comments from Justice Stephen G. Breyer were ambiguous in terms of where he stands on the outcome, although, on balance, he seemed partial to the law firm’s statutory interpretation.

There is no question that Justice Sotomayor is on the side of the homeowner. She said it is “a bit strange to think that Congress intended to cover judicial foreclosure where a judge is supervising the process but not when it’s a non-judge supervised process. . . . More damage, I think, can be done in a nonjudicial foreclosure because there is no judge there to protect or review what’s occurring.” She said that Section 1692f(6) “seems clearly to support your position.”

Much of the argument focused on whether nonjudicial foreclosure is an implicit attempt to collect a mortgage debt. Although originally sounding as though she was on the side of the law firm, Justice Kagan later observed that the “whole point of getting the security interest in the first place is so the creditor has leverage in order to pressure the debtor to pay his debt.”

Justice Brett M. Kavanaugh seemed on the same wavelength. Nonjudicial foreclosure, he said, is “inherently communicating a message that you need to repay the debt. . . . Well, common sense tells you that this is an effort to have you repay the debt.”

Similarly, Chief Justice John G. Roberts, Jr. showed the same practical approach. He said, “Banks don’t want to own houses. They want to be paid. And the reason they go to foreclosure is to get payment of the debt.” Later, he said that foreclosure “is an indirect effort to collect the debt.”

If at least five justices believe that nonjudicial foreclosure is an implicit effort at collecting the debt, the Court presumably would reverse the Tenth Circuit and make the FDCPA applicable to nonjudicial foreclosure.

There is another issue, however. Even if the first sentence in Section 1692a(6) makes the FDCPA applicable to nonjudicial foreclosure, the justices still could interpret the third sentence to mean that the only regulations applying to nonjudicial foreclosure are those appearing in Section 1692f(6). If the Court reads the third sentence as limiting, the homeowner will lose, and the justices will affirm the Tenth Circuit.

Reading the Tea Leaves

In total, seven justices asked questions. As usual, Justice Clarence Thomas did not. Recovering from surgery, Justice Ruth Bader Ginsberg was not on the bench. However, Court observers say she can participate in the decision by reading the briefs and the transcript of oral argument. 

Counting noses, it’s difficult to judge where Justices Breyer and Thomas stand. Justice Alito may be in the law firm’s camp, and so too Justices Gorsuch and Kavanaugh.

Justices Kagan and Sotomayor seemed inclined for the FDCPA to apply to nonjudicial foreclosure. The Chief Justice may be leaning in that direction.

If Justice Ginsburg does not vote, the decision could be a 4/4 tie, in which event the Tenth Circuit’s opinion will be upheld, but the opinion will be nonprecedential.

In bankruptcy cases recently, the justices have tended to be unanimous. Given that the case amounts to statutory interpretation with few political overtones, the ultimate decision may be 9/0, one way or the other.

Justice Sotomayor has written a disproportionate number of bankruptcy opinions in recent years. If the Court decides that nonjudicial foreclosure is subject to the FDCPA, perhaps she will be the author.

Daniel L. Geyser of Dallas argued for the homeowner. Kannon K. Shanmugam of Washington, D.C., argued for the law firm. The U.S. Solicitor General, as amicus, supported the law firm.