The Federal Fair Debt Collection Practices Act (FDCPA) is the leading debt collection practices act, serving as the lynchpin of federal consumer protections in the area of debt collection as well as serving as a model for numerous state enactments. Not surprisingly, litigation often focuses on the crucial questions of who is a “debt collector” and what is “debt collection” for purposes of the FDCPA. This area of law has received close scrutiny in recent years with published cases from the U.S. Supreme Court and the U.S. Court of Appeals for the Ninth Circuit.
In Obduskey v. McCarthy & Holthus LLP, the Supreme Court had to decide whether “one principally involved in ‘the enforcement of security interests’ is . . . a debt collector” for purposes of the FDCPA. Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029, 1031 (2019). The Court concluded that the statutory language of the FDCPA’s definition of “debt collector” places:
those whose “principal purpose . . . is the enforcement of security interests” outside the scope of the primary “debt collector” definition, [15 U.S.C.] § 1692a(6), where the business is engaged in no more than the kind of security-interest enforcement at issue here—nonjudicial foreclosure proceedings.
Id. In Ho v. ReconTrust Co., NA, the Ninth Circuit concluded that the enforcement of a security instrument by nonjudicial foreclosure is not debt collection as a matter of law. 858 F.3d 568, 573 (9th Cir. 2017) (“An entity does not become a general ‘debt collector’ if its ‘only role in the debt collection process is the enforcement of a security interest.’”) (citation omitted). However, in McNair v. Maxwell & Morgan PC, the Ninth Circuit clarified its view by explaining that its “decision in Ho does not, however, preclude FDCPA liability for an entity that seeks to collect a debt through a judicial foreclosure scheme that allows for deficiency judgments.” 893 F.3d 680, 683 (9th Cir. 2018).
The Ninth Circuit recently published a further opinion on this issue in Barnes v. Routh Crabtree Olsen PC, No. 16-35418, 2020 WL 3527088 (9th Cir. June 30, 2020). In Barnes, the defendant was a law firm prosecuting a judicial foreclosure in Oregon. The district court dismissed the consumer’s FDCPA complaint on the basis that “none of the defendants had engaged in debt collection by initiating the judicial foreclosure proceeding.” Id. at *2. The Ninth Circuit initially affirmed the district court’s dismissal of the complaint but requested further briefing upon the consumer’s petition for rehearing after the Supreme Court issued its opinion in Obduskey. Id.
Analyzing recent Ninth Circuit cases and the Obduskey opinion, the Barnes court explained that “unless a deficiency judgment is on the table in the proceeding, a person judicially enforcing a deed of trust is seeking only the return or sale of the security, not to collect a debt.” Id. at *4. The court further explained that because Oregon “strictly circumscribes the availability of a deficiency judgment when a person judicially enforces a residential deed of trust,” there was no risk of a “money award” and “Oregon’s anti-deficiency provision extinguishes the debtor’s personal liability upon judicial foreclosure of a residential deed of trust.” Id. at *4-5. The court also noted the historical fact that foreclosure “is a traditional domain of state authority.” Id. at *5 (citing Ho, 858 F.3d at 576). On this basis, the court concluded that a “judicial foreclosure proceeding is not a form of debt collection when the proceeding does not include a request for a deficiency judgment or some other effort to recover the remaining debt.” Id. at *6.
Given that the Ninth Circuit’s recent opinions in Ho and McNair already made clear that a dispositive fact in any FDCPA case involving foreclosure will be whether the statutory scheme by which the foreclosure is pursued “allows for deficiency judgments,” Barnes should not be construed as yet another endorsement of a bright-line rule that foreclosure is never debt collection. Rather, Barnes should serve as a warning that to avoid crossing the line into “debt collection” for purposes of the FDCPA, it is important that no attempts be made to collect sums outside of the foreclosure process if such process otherwise does not permit deficiency judgments.