On March 20, 2019, in a unanimous opinion, the United States Supreme Court issued a decision holding that law firms and attorneys who perform non-judicial foreclosures of security interests are not considered debt collectors under the Fair Debt Collections Practices Act (“FDCPA). For practitioners in Massachusetts who perform non-judicial foreclosures on behalf of lenders, servicers, and timeshares, the decision provides more protection under the FDCPA, however the Court’s holding is admittedly narrow and does not extend to attorneys and law firms who perform judicial foreclosures, which is the mechanism required for an association to foreclose on a statutory condominium lien in Massachusetts.
...the Court’s holding is admittedly narrow and does not extend to attorneys and law firms who perform judicial foreclosures, which is the mechanism required for an association to foreclose on a statutory condominium lien in Massachusetts.
In Obduskey v. McCarthy & Holthus LLP, No. 17-1307, a law firm (McCarthy) was engaged on behalf of a mortgagee to carry out a non-judicial foreclosure on a Colorado home owned by the plaintiff, Obduskey, who had defaulted on his mortgage obligations. After McCarthy sent written notice of default and intent to foreclose, which is required under Colorado law, Obduskey responded by sending McCarthy a letter purporting to dispute the amount of the debt, and claimed that his affirmative act of tendering the written dispute required McCarthy to immediately cease its attempt the collect the debt until it obtained verification mailed same to the debtor under 15. U.S.C. 1692(g)(b). McCarthy responded by initiating the non-judicial foreclosure action, and Obduskey filed suit in federal court in Colorado, characterizing one of its claims as McCarthy failing to adhere to the written verification procedure under the FDCPA.
Obduskey’s claim was dismissed by the District Court on the basis that McCarthy was not a debt collector as defined under the FDCPA. The Tenth Circuit affirmed the District Court’s decision and held that “the mere act of enforcing a security interest through a non-judicial foreclosure proceeding does not fall under” the FDCPA. Obduskey v. Wells Fargo, 879 F. 3d 1216, 1223 (2018). Up through and including the decision by the Tenth Circuit in Obduskey, there had been a split among other Circuits on whether a law firm performing a non-judicial foreclosure was treated as a “debt-collector” under the FDCPA, so the Supreme Court granted certiorari and oral argument was heard in January.
Ultimately the Supreme Court affirmed the Ten Circuit’s decision and held that MCarthy, as the law firm conducting the foreclosure, did not fall under the primary definition of a “debt collector” under 15 U.S.C. 1692(a)(6). The Court noted that notwithstanding its conclusion that McCarthy was not a debt collector under the FDCPA, because the firm was still in the business of enforcing security interests, it remained subject to Section 1692(f)(6) which prohibits taking or threatening to take any nonjudicial action “to effect dispossession or disablement of property” if, among other things, there is no present right to possession of the property though an enforceable security intertest or if there is no present intent to take possession of the property in the first instance. In this instance, McCarthy was not alleged to have engaged in conduct violative of Section 1696(f)(6).
Limited Current Application for Condominium Liens in Massachusetts
While the Obduskey decision has an immediate and positive impact on law firms and attorneys representing lenders, servicers, and timeshares in Massachusetts, as foreclosures of those security interests are conducted in non-judicial fashion, the ruling does not extend protection to those foreclosing on condominium liens in Massachusetts, as the process, under M.G.L. c. 183A, s. 6, requires the association to file a complaint and obtain a judicial order of sale. While not reaching the issue, instead leaving a decision for “another day,” the Court does raise the question of whether “those who judicially enforce mortgages fall within the scope fall within the primary definition” of the FDCPA. The Court noted that the potential and availability of a deficiency judgment in a judicial foreclosure would be an important distinction in the Court’s mind in determining whether those who perform judicial foreclosures are also except from the definition of a debt-collector under the FDCPA.
In Massachusetts, the prudent approach when foreclosing on a condominium lien is to file the action in-rem¬ against the unit itself, and not seek to retain the right to pursue any deficiency against the unit owner in their personal capacity, even though that right is afforded under M.G.L. c. 183A, s. 6(b).
While this won’t guarantee the protection afforded by Obduskey, it will favorably address a prospective key factor signaled by the Court as one they would look at closely.
For condominium associations and their managers, there are also steps that can be taken prior to sending a potential lien enforcement action to your legal counsel that will also assist the attorney in properly advancing the enforcement and complying with the requirements of the FDCPA, where applicable:
▪ Confirm that all payments have been reflected and properly applied;
▪ Confirm the outstanding balance and the exact amount of the monthly common area fee as well as any supplemental or special assessments;
▪ That the ledger is up-to-date at the time is it sent to counsel;
▪ If interest and late fees are added to the ledger, ensure that they are both properly calculated and the amount of the fees and rate of interest are permitted under the governing documents;
▪ Notify your counsel of any disputes advanced by the unit owner, verbally or in writing, as to the outstanding balance;
▪ Notify your counsel of any payment plans that may have been previously entered into between the association and the delinquent unit owner;
▪ Advise your counsel if the unit is owner-occupied, leased to a tenant, or is vacant.
Lastly, credit bureaus have recently been accepting delinquency information related to unpaid common area assessments from associations and their managing agents. While the FDCPA would likely not apply to an association who simply reported a delinquency, the risk of accidentally reporting incorrect information (clerical errors in calculating amount due, legal name of the unit owner, etc.) creates a host of risk and liabilities for associations that substantially outweigh any potential benefit of report the delinquency. The exposure could be compounded if an association selectively chose certain unit owners report to the credit bureaus and at differing stages of delinquency, which could result in a discrimination claim against the association. Given the strength of the super-lien in Massachusetts, associations do not need the hassle and potential exposure associated with credit bureau reporting.