The fate of potentially thousands of lawsuits challenging nonjudicial foreclosures is up for grabs after the U.S. Supreme Court on June 28 agreed to hear a case that will determine whether federal debt collection laws apply to out-of-court home repossessions.
The high court elected to hear an appeal of a Jan. 19 ruling in the U.S. Court of Appeals for the Tenth Circuit that found that the Fair Debt Collection Practices Act does not apply to foreclosures that are not done with a judge’s supervision.
While the specifics of the case turn on narrow technical readings of the FDCPA, a 1977 law that aimed to stop abusive debt collection practices, the stakes of the case are high.
If the Supreme Court upholds the Tenth Circuit’s finding in the case, homeowners seeking to assert that debt collectors violated federal law during foreclosure proceedings will lose the opportunity to challenge those practices through litigation, Brian Frontino, a partner in Stroock & Stroock & Levan LLP’s Financial Services Litigation, Regulation and Enforcement group, told Bloomberg Law.
“The petitioner admitted that if the respondent is correct, that it doesn’t apply, then there’s hundreds, if not thousands, of lawsuits that shouldn’t be filed,” Frontino said in a June 28 phone interview.
At the heart of the case is the attempt by Wells Fargo & Co. to foreclose on a home owned by Dennis Obduskey, a Colorado resident, according to Obduskey’s petition for a writ of certiorari filed March 13.
Wells Fargo was servicing the approximately $330,000 mortgage issued to Obduskey in 2007 by Magnus Financial Corp. Obduskey defaulted on the loan in 2009, and the San Francisco-based bank began several unsuccessful attempts to push through a nonjudicial foreclosure against him.
Wells ultimately turned to McCarthy & Holthus LLP, a debt collection law firm based in San Diego, in 2015, the petition said.
McCarthy & Holthus subsequently sent Obduskey a letter in May 2015, stating that it could be considered a debt collector that was beginning a nonjudicial foreclosure.
However, the firm did not include the amount of money that it was seeking to collect, which Obduskey alleges was a violation of the FDCPA. The law says that debt collectors have to inform borrowers how much they owe.
Obduskey sued and lost at the district court level. The Tenth Circuit said in its January ruling that while Obduskey had made sufficient claims that the firm had violated the FDCPA, the law did not apply to nonjudicial foreclosures.
That ruling put the Tenth Circuit at odds with the U.S. Courts of Appeals for the Third, Fourth, and Sixth Circuits, as well as the state supreme courts of Alaska and Colorado, according to the petition.
The Ninth Circuit has also aligned with the Tenth Circuit’s reading of the FDCPA as it pertains to nonjudicial foreclosures in the October 2016 decision in Ho v. ReconTrust Co.
The split “has provoked widespread confusion in courts nationwide. And it threatens to deprive consumers of the FDCPA’s protections in an area that hits (literally) closest to home,” Daniel Geyser of Geyser P.C., the attorney representing Obduskey, said in a June 28 email to Bloomberg Law.
Tom Goyda, a spokesman for Wells Fargo, which was dismissed from the lower court case but has asked to be included in the Supreme Court proceedings, declined to comment in an email to Bloomberg Law. Representatives for McCarthy & Holthus did not respond to requests for comment.
The difference between the circuits comes down to whether nonjudicial foreclosure proceedings, which seek to collect on a promissory note by taking a home without asking the debtor to pay any money, meet the FDCPA’s standard for collecting money.
The Ninth and Tenth Circuits say such proceedings do not fall under the FDCPA, while the other courts do.
Consumer advocates support the broader reading of the FDCPA backed by the majority of circuits, and worry that a Supreme Court that is likely to get even more conservative with the retirement of Justice Anthony Kennedy could open homeowners up to abusive practices.
“It would really carve out a big exception for debt collectors that are enforcing mortgages. It would mean they could lie to people. It would mean they could harass people,” Geoff Walsh, a staff attorney with the National Consumer Law Center, told Bloomberg Law in a June 28 phone interview.
More than 30 states allow for nonjudicial foreclosure proceedings, with most of those states allowing creditors to choose whether they want to go through the court process or conduct proceedings without judicial oversight.
In those states where there is an option, most mortgage servicers elect to go through the nonjudicial route, Walsh said.
“The lenders always pick nonjudicial foreclosure because there’s less judicial oversight, and it’s easier and faster,” he said.
According to Obduskey’s petition, there were nearly 400,000 foreclosures in the U.S. in 2016, with about 200,000 of those being done outside of the court system. About 330,000 homes were at some stage in the foreclosure process by the end of 2016, the petition said, citing statistics from research firm CoreLogic.
Given the large number of foreclosures that are done outside of court, a win for McCarthy & Holthus and Wells Fargo could eliminate debt collection lawsuits as a threat to banks and collections firms that elect for nonjudicial foreclosures.
Obduskey’s petition acknowledged that risk.
“If respondent is right, plaintiffs are filing hundreds or thousands of lawsuits that should never be filed (and wrongly winning in multiple circuits and dozens of district courts),” Obduskey’s petition said.
Wells Fargo is represented by Hogan Lovells LLP and Snell & Wilmer LLP. McCarthy & Holthus is represented by Williams & Connolly LLP.
The case is Obduskey v. McCarthy & Holthus LLP , U.S., No. 17-1307, 6/28/18 .
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