The linchpin of the Federal Fair Debt Collection Practices Act (“FDCPA”) is debt collection. Not surprisingly, litigation often focuses on the crucial question of what is a “debt” and who is a “debt collector” for purposes of the FDCPA. In Ho v. ReconTrust Co., NA, the U.S. Court of Appeals for the Ninth Circuit recently concluded that the enforcement of a security instrument by nonjudicial foreclosure is not debt collection as a matter of law.
The Ho court explained that “[t]he object of a non-judicial foreclosure is to retake and resell the security, not to collect money from the borrower[,]” and because “California law does not allow for a deficiency judgment following non-judicial foreclosure[,]” “the foreclosure extinguishes the entire debt even if it results in a recovery of less than the amount of the debt.” On this basis, the Ho court held that “actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect ‘debt’ as that term is defined by the FDCPA.”
The McNair court distinguished, and in so doing also clarified and strengthened, the value of its decision in Ho. In McNair, the consumer plaintiff defaulted on her monthly homeowner association payments, prompting the association to commence collection of the past due assessments and other charges. The district court granted summary judgment to the defendant relying in part on Hulse v. Ocwen Fed. Bank, FSB for the proposition that foreclosure proceedings are not the collection of a debt for purposes of the FDCPA. On appeal by the consumer, the defendant law firm argued that under Ho, they are not debt collectors because they pursued judicial foreclosure to enforce the association’s lien for unpaid assessments and charges.
The McNair court disagreed and distinguished Ho by explaining that California’s nonjudicial foreclosure statutes at issue in that case did not allow for recovery of deficiency judgments. The court further explained that Arizona’s judicial foreclosure scheme on which the defendant relied in pursuing the assessment and charges “in many cases allows for deficiency judgments.” As such, the judicial foreclosure at issue in McNair lacked the essential characteristic underpinning the Ninth Circuit’s holding in Ho: that the foreclosure would extinguish the entire debt and allowed only for the retaking and reselling of the security.
The McNair court further rejected the district court’s broad interpretation of Hulse as supporting the notion that foreclosure proceedings are categorically not debt collection. Circling back to its recent decision in Ho, the McNair court explained that Ho “endorsed Hulse for the more limited proposition that ‘foreclosing on a trust deed is an entirely different path than collecting funds from a debtor.’”
Ho and McNair make clear that a dispositive fact in any FDCPA case involving foreclosure will be whether the statutory scheme by which the foreclosure is pursued “in many cases allows for deficiency judgments.” In states within the Ninth Circuit—such as California, Oregon and Washington—with broad anti-deficiency statutes in effect for nonjudicial foreclosure, the answer will be “no.”