The U.S. Supreme Court mulled the applicability of a key federal law regulating debt collection to nonjudicial foreclosures during oral arguments on Jan. 7, with some conservative justices raising doubts about how different the widely used tool is from collecting a debt.
Colorado homeowner Dennis Obduskey has argued that nonjudicial foreclosures are covered under the Federal Debt Collection Practices Act, saying they’re essentially efforts to collect debt owed by consumers, while his opponent — a California-based law firm known as McCarthy & Holthus LLP — has contended that such foreclosures are initiated to enforce security interests in mortgaged property, not seek repayment.
But Chief Justice John Roberts expressed skepticism with this distinction on Monday, suggesting that banks initiate these foreclosures with the ultimate intent of getting paid back.
“The banks don’t want to own houses,” Justice Roberts said. “They want to be paid. And the reason they go to foreclosure is to get payment of the debt.”
Appearing for McCarthy & Holthus, Kannon M. Shanmugam of Williams & Connolly LLPresponded that while that may be true from a creditor’s point of view, “what is taking place here is not an effort to obtain or demand payment from the debtor, consistent with the ordinary meaning of these terms.”
“It is, at most, an effort to initiate a process that could lead to the elimination or reduction of the debt, and not everything that could lead to the elimination of a debt constitutes debt collection,” Shanmugam said.
But this drew pushback from Justices Brett Kavanaugh and Elena Kagan, who argued that typical consumers would understand a foreclosure notice as a warning to pay up or else lose their home.
“Even if the express words aren’t there, everyone who gets something like that, who has the money, and wants to, will understand this is a letter seeking to get you to repay,” Justice Kavanaugh said.
The appeal argued Monday stems from a 2015 lawsuit that Obduskey filed against Wells Fargo Bank NA and McCarthy & Holthus, which had been hired by the bank to initiate nonjudicial foreclosure proceedings on Obduskey’s home.
In the suit, Obduskey accused the bank and the law firm of having violated state law and the FDCPA, but a Denver federal court wound up dismissing the case, agreeing with McCarthy & Holthus that the FDCPA doesn’t apply in this context. A Tenth Circuit panel then backed up the lower court on appeal, and in so doing, followed in the footsteps of the Ninth Circuit while splitting from the Fourth, Fifth and Sixth circuits.
The FDCPA, which was passed in the 1970s to curb abuses by debt collectors, places a host of restrictions on debt collectors, defining them as anyone “who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”
For the sake of a narrower set of prohibitions regarding “dispossession or disablement of property,” the law says the “term also includes any person … in any business the principal purpose of which is the enforcement of security interests.”
During oral arguments on Monday, Justice Samuel Alito said that the law’s inclusion of this second, more limited definition of debt collector presents “a lot of problems” for Obduskey’s position, even if he might have a “pretty good argument” that nonjudicial foreclosures count as debt collection when the first, broader definition is examined on its own.
“If a business whose principal purpose is the enforcement of security interests fell within the prior definition, the all-purpose definition, there wouldn’t be a reason for that provision,” Justice Alito said. “I think you’ve got a tough time explaining that away.”
But Obduskey’s counsel, Daniel L. Geyser of Geyser PC, stressed that second definition’s use of the term “also includes” has an expansive rather than exclusive function, bringing in persons who don’t otherwise fall into the first definition and applying a set of restrictions to them. Those restrictions, meanwhile, also apply to anyone who fits under the first definition, Geyser noted.
“It’s sort of like a Venn diagram,” Geyser said. “There are some people who collect debts without enforcing a security interest. There are some people who enforce security interests without collecting debts … And then there’s the middle category, like the foreclosure agents, who are doing both, because they’re sending notices that are absolutely indistinguishable from classic debt collection activity.”
While acknowledging that those initiating nonjudicial foreclosures seemed to fit into both categories, a skeptical Justice Kagan said the “grammar of the statute suggests that we now have to kick them out of one or the other.”
“Foreclosures are paradigmatic enforcement of security interests,” Justice Kagan said. “There’s nothing that gets more enforcing a security interest than foreclosing on a mortgage. So kicking them out of that one seems a little bit more odd than kicking them out of a very broad definition of debt collectors.”
Geyser disagreed, however, returning to his point that the categories aren’t mutually exclusive. If Congress had phrased the second definition as an exclusion rather than an addition, “then I think that that point would have more force,” he said, adding that Congress knew how to expressly exclude certain persons from the definition if it had wanted to.
But Shanmugam countered later that this dual framework “is exactly the way that you would expect Congress to have reached the Goldilocks outcome where parties who enforce a security interest are subject to only one substantive provision.”
Shanmugam received support on this point from Jonathan C. Bond, counsel for the government, which submitted an amicus brief on the side of McCarthy & Holthus and was allotted time to participate in the arguments on Monday.
“If Congress were really trying to do what petitioner suggests, of just tacking on this small sliver of repossession agents, it’s a highly unnatural way to go about it,” Bond said. “If instead, as we submit, Congress was trying to preserve the existing distinction between enforcing security interests and debt collection and the practical difference between those two … you would expect it to write a statute along these lines.”
“Not really,” Justice Kavanaugh replied. “I mean, this is a pretty unnatural way to do that, too.”
Bond conceded that the statute could be clearer, but he said it still reflected Congress’ intent to treat debt collection and enforcing a security interest differently.
“We think each side has a plausible reading of that first sentence,” Bond said, referring to the first, broader definition. “But at the end of the day the second sentence tells you how Congress viewed these. And it chose to regulate security interest enforcers separately.”
Not participating in Monday’s arguments was Justice Ruth Bader Ginsburg, who spent the day working from home as she continues recuperating from cancer surgery last month. She will still take part in debating and deciding the case, however, based on briefs and oral argument transcript, Justice Roberts said Monday.
Counsel for McCarthy & Holthus declined to comment. Counsel for Obduskey did not immediately return a request for comment late Monday.
Appearing for Obduskey was Daniel L. Geyser of Geyser PC.
Appearing for McCarthy & Holthus was Kannon K. Shanmugam of Williams & Connolly LLP.
Appearing for the government was Jonathan C. Bond of the U.S. Department of Justice.
The case is Obduskey v. McCarthy & Holthus LLP et al., case number 17-1307, in the U.S. Supreme Court.