Sixth Circuit Opinion Shows the Importance of the Upcoming Obduskey Decision

An opinion by the Sixth Circuit underscores the significance of the upcoming decision by the Supreme Court in Obduskey v. McCarthy & Holthus LLP, 17-1307 (Sup. Ct.), to resolve a split among the circuits and decide whether the federal Fair Debt Collection Practices Act, or FDCPA, applies to nonjudicial foreclosure.

The Sixth Circuit held in a nonprecedential opinion on January 11 that a mortgage lender’s counsel must cease all nonjudicial foreclosure activities on receipt of a letter by the homeowner disputing the debt. Once the lender responds by verifying the debt, the bank may continue foreclosure activities, the appeals court said.

If the Supreme Court rules in Obduskey that the FDCPA does not apply to nonjudicial foreclosure, homeowners presumably will be obliged to initiate court proceedings to halt foreclosure, even if they have evidence showing that the loan is not in default. The Supreme Court heard oral argument in Obduskey on January 7. To read ABI’s report, click here.

The Facts in the Sixth Circuit

The mortgage lender hired a law firm to conduct nonjudicial foreclosure under Michigan law. In compliance with the FDCPA, 15 U.S.C. § 1692-1692p, the firm sent the homeowner a so-called Fair Debt Letter identifying itself as a debt collector and informing the homeowner it was retained to manage foreclosure proceedings.

About two weeks later, the firm arranged a sheriff’s sale to be held some weeks in the future. The firm also arranged for a foreclosure notice to be posted on the home and published four times in a newspaper.

Within 30 days as specified by the FDCPA after receipt of the Fair Debt Letter, the homeowner sent the firm a certified letter disputing the debt and claiming the mortgage was current. If the FDCPA applied, the dispute letter would have barred the continuation of foreclosure until the homeowner received verification of the debt.

After the firm received the dispute letter, someone hired by the firm posted the foreclosure notice on the home, and the newspaper published notices. The law firm did not respond to the dispute letter within the time specified by the FDCPA and did not take action to halt the sheriff’s sale.

Before the sheriff’s sale, the homeowner filed a chapter 13 petition and sued the law firm in district court for violating the FDCPA. The sale did not occur.

On motion for summary judgment, the district court dismissed the suit against the law firm, reasoning that posting and publishing the notices were not actions taken by the law firm. The district court also held that the FDCPA did not compel the law firm to stop the sheriff from conducting the sale.

The Sixth Circuit Opinion

Saying that the case presented an issue of first impression for her court, Circuit Judge Alice M. Batchelder reversed in a nonprecedential opinion.

Judge Batchelder began with Glazer v. Chase Home Finance LLC, 704 F.3d 453 (6th Cir. 2013), which she described as holding that foreclosures are subject to the FDCPA. In briefs to the Supreme Court in Obduskey, the Sixth Circuit was listed as an appeals court applying the FDCPA to nonjudicial foreclosure.

The law firm argued on appeal that it did not violate the FDCPA because it took no action after receiving the dispute letter. The actions were all taken by third parties, the firm said.

Judge Batchelder said that the case turned on FDCPA Section 1692g(b), which says that “the debt collector shall cease collection of the debt” after receipt of the dispute letter, until the debt collector sends “verification” of the debt to the consumer. In the case on appeal, the law firm had not sent a verification of the debt.

Focusing on the language in Section 1692g(b), Judge Batchelder said that the statute imposes the obligation to halt collection activities on the debt collector. She said that the district court’s “reading of the statute produces a result contrary to the plain intent of the FDCPA and this circuit’s case law.” However, she limited the holding to nonjudicial foreclosures.

Identifying actions “at a minimum” that must cease, Judge Batchelder included “any activities that attempt to satisfy the essential statutorily required elements of [the foreclosure] process.”

The dispute letter, Judge Batchelder held, “must ‘stop the clock’ on the initiated foreclosure.”

Otherwise, she said, the dispute letter “would become irrelevant for Michigan foreclosures by advertisement.”

The result was the same with regard to the scheduled sheriff’s sale. Judge Batchelder said that the law firm’s “failure to stop them after it received the Dispute Letter violated” Section 1692g(b).

Judge Batchelder reversed the grant of summary judgment in favor of the law firm and remanded for further proceedings.