The Court of Special Appeals of Maryland held that a foreclosure proceeding was subject to state law collection agency requirements, and therefore that a statutory trust that owned a consumer mortgage loan was required to hold a collection agency license prior to proceeding with foreclosure.
In McCray v. Federal Home Loan Mortgage Corp., the U.S. Court of Appeals for the Fourth Circuit determined that a borrower stated a claim under the Fair Debt Collection Practices Act, 15 U.S.C. §1692 et seq., (“FDCPA”) against a foreclosure law firm, noting that the definition of a “debt collector” does not require an “express demand for payment.” Rather, relying on its prior holding inWilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 374-76 (2006), the Court determined that Borrower sufficiently alleged that a law firm and substitute trustees were engaged in conduct regulated by the FDCPA, because their foreclosure activities were “in connection with” the collection of a debt or “an attempt” to collect a debt.
The Court also determined inapplicable the FDCPA’s exclusion from the definition of a “debt collector” for collection activities “incidental to a bona fide fiduciary obligation” noting that foreclosure is “central to,” not incidental, to the trustees’ obligation under the deed of trust.
A copy of the opinion can be found here.
Shortly after foreclosure proceedings commenced against her Maryland home, Borrower brought an action for damages under the FDCPA in federal court against the law firm (“Law Firm”), and attorneys within the firm who were appointed as substitute trustees under the deed of trust securing her mortgage loan (collectively “Substitute Trustees”). Borrower also sued the owner of the loan and her loan servicer, claiming, among other things, that they violated the federal Truth-in-Lending Act (“TILA), 15 U.S.C. § 1601, et seq. As to all defendants, Borrower alleged that defendants failed to provide her with certain notices and requested information purportedly required by these statutes. Regarding the owner of the loan, she claimed that it failed to provide her notice when it purchased the loan, as required under TILA, 15 U.S.C. § 1641(g). As to her loan servicer, she asserted that an assignment of her deed of trust also required it to afford her notice under TILA.
The district court dismissed the FDCPA claims against Law Firm and the Substitute Trustees, distinguishing their role in initiating foreclosure proceedings, from a role focused on collecting the debt. The district court noted that, even where a communication included a provision indicating that it was “an attempt to collect a debt,” it does not qualify as an attempt to collect a debt under Blagogee v. Equity Trustees, LLC, 2010 Wl 2933962 at *5-6, “unless there is an express demand for payment and other ‘specific information about the debt, including the amount of the debt, the creditor to the debt is owned, the procedure for validating the debt, and to whom the debt should be paid.” Id. Applying the Blagogee factors, the district court concluded that Borrower had failed to “allege any facts indicating that [Law Firm] or the [Substitute Trustees] were engaged in any attempt to collect a debt.” Op. at 7.
The district court also either dismissed or granted summary judgment as to Borrower’s remaining claims against the lender and loan servicer. Borrower thereafter appealed.
Reversing the dismissal of the FDCPA claims against the Law Firm and Substitute Trustees, the Fourth Circuit concluded that Borrower had adequately alleged that they were debt collectors, and that their actions constituted debt collection activity regulated by the FDCPA. Op. at 16.
Citing the definition of a “debt collector” under Section 1692a(6), the Court determined that such definition does not include any requirement that a debt collector be engaged in an activity by which it makes a “demand for payment.” Op. at 11. Rather, to be actionable, a debt collector need only have used a prohibited practice “in connection with” the collection of a debt or in an “attempt” to collect a debt.” Op. at 12 (citing Powell v. Palisades Acquisition XVI, LLC, 782 F. 3d 119, 123 (4th Cir. 2014)).
The Court found dispositive its prior holding in Wilson, in which it determined that a law firm that sent the borrower notice that it was preparing foreclosure papers, and who later initiated foreclosure proceedings, could be a debt collector under the meaning of the FDCPA because those foreclosure actions constitute attempts to collect a debt.
Thus, here, the Court concluded that “[i]t is clear from the complaint in this case that the whole reason that the [Law Firm] and its members were retained by [the creditor] was to attempt, through the process of foreclosure to collect on the $66,500 loan in default.” Op. at 14. The Court observed that documents furnished by the Law Firm and/or Substitute Trustees to Borrower indicated that they were pursuing foreclosure because she missed one or more payments; indicated that if she did not bring the loan current, such as by repayment, a foreclosure action may be filed in court; and provided Borrower with the nature of the default and the amount necessary to cure. “Thus, all of the defendants’ activities were taken in connection with the collection of a debt or an attempt to collect a debt.” Op. at 15 (Emphasis in original).
The Fourth Circuit also found inapplicable the fiduciary exclusion to the definition of debt collector under Section 1692a(6)(F)(i) for collections activities “incidental to a bona fide fiduciary obligation.” Op. at 15-16. The Court noted that foreclosure was “central” – not incidental – to the trustee’s obligation under the deed of trust.
As to the TILA claim regarding allegations of failure to provide notice of the transfer of ownership of the loan under 15 U.S.C. § 1641(g), the Court noted that Borrower failed to challenge the trial court’s determination that she was required to allege that the loan transferred after 2009, when the subject provision was enacted. Further, the Court also determined that, because Borrower conceded that she had notice of the transfer to the owner of the loan more than one-year prior to filing the lawsuit, the claim was barred by TILA’s one-year statute of limitations.
The Court also affirmed the district court’s dismissal of the TILA claim against her loan servicer, determining that allegations of assignment of the beneficial interest under a deed of trust (as opposed to legal title) did not implicate the statute. In addition to failing to challenge such ruling, the Court observed that her allegations were inconsistent with her claims against the loan owner.
Consequently, the Court reversed only the dismissal of the FDCPA claims against the Law Firm and Substitute Trustees and remanded the case for further proceedings, expressly stating that its conclusion “is not to be construed to indicate, one way or the other, whether they, as debt collectors, violated the FDCPA.” Op. at 20.
In Dubois v. Atlas Acquisitions, LLC, a majority panel of the Fourth Circuit recently held that, while the filing of a proof of claim in a borrower’s bankruptcy proceeding constitutes “debt collection”, filing a proof of claim in a Chapter 13 bankruptcy based upon a time-barred debt does not violate the FDCPA or state collection laws so long as the statute of limitations itself does not extinguish the debt. The Court noted that under Maryland law, the statute of limitations does not extinguish the debt itself, but merely bars the remedy.
Consequently, the Fourth Circuit rejected the Eleventh Circuit’s holding in Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259-60 & n.6 (11th Cir. 2014), noting that the “[t]he Eleventh Circuit in Crawford is the only court of appeals to hold that filing a proof of claim on a time-barred debt in a Chapter 13 proceeding violates the FDCPA.”
A copy of the opinion can be found here.
At the outset, the Court determined that filing a proof of claim is debt collection activity subject to the FDCPA. The Court explained that “[d]etermining whether a communication constitutes an attempt to collect a debt is a ‘commonsense inquiry’ that evaluates the ‘nature of the parties’ relationship,’ the ‘[objective] purpose and context of the communication,’ and whether the communication includes a demand for payment.” Op. at 9 (citations omitted).
In the bankruptcy context, the “only relationship between [the parties] [is] that of a debtor and debt collector. . . . [and] the ‘animating purpose’ in filing a proof of claim is to obtain payment by sharing in the distribution of the debtor’s bankruptcy estate.” Op. at 9-10. Consequently, “[p]recedent and common sense dictate that filing a proof of claim is an attempt to collect a debt. The absence of an explicit demand for payment does not alter that conclusion, . . . nor does the fact that the bankruptcy court may ultimately disallow the claim.” Op. at 10.
Nevertheless, in an explicit departure from the Eleventh Circuit’s holding in Crawford, the Court determined that filing a proof of claim based on a debt that is beyond the applicable statute of limitations does not violate the FDCPA.
To that end, the Court considered whether a time-barred debt fell within the definition of a claim in the bankruptcy context. The Court observed that “while the Bankruptcy Code provides that time-barred debts are to be disallowed, see, e.g., 11 U.S.C § 558, the Code nowhere suggests that such debts are not to be filed in the first place.” Op. at 16. Rather, recent amendments to Rule 3001 suggest that “the Code contemplates that untimely debts will be filed as claims but ultimately disallowed.” Op. at 16-17. As such, they fall within the definition of a claim within the bankruptcy context.
Further, the Court determined that excluding time-barred debts from the scope of bankruptcy “claims” would frustrate the Code’s intended effect to define the scope of a claim as broadly as possible, and provide the debtor the broadest possible relief. The Court also observed that under applicable Maryland law, the statute of limitations does not extinguish the debt, but merely bars the remedy. Accordingly, the Court concluded that “when the statute of limitations does not extinguish debts, a time-barred debt falls within the Bankruptcy Code’s broad definition of a claim.” Op. at 17.
Moreover, the Court noted a unique consideration in the bankruptcy context: “if a bankruptcy proceeds as contemplated by the Code, a claim based on a time-barred debt will be objected to by the trustee, disallowed, and ultimately discharged, thereby stopping the creditor from engaging in any further collection activity.” Op. at 18. Alternatively, “[i]f the debt is unscheduled and no proof of claim is filed, the debt continues to exist and the debt collector may lawfully pursue collection activity apart from filing a lawsuit.” Op. at 19.
The Court rejected the borrower’s claim that trustees and creditors fail to object to time-barred debts, noting that “for most Chapter 13 debtors, the amount they pay into their bankruptcy plans is unaffected by the number of unsecured claims that are filed.” Op. at 20. “As additional claims are filed, unsecured creditors receive a smaller share of available funds but the total amount paid by most Chapter 13 debtors remains unchanged. Thus, from the perspective of most Chapter 13 debtors, it may in fact be preferable for a time-barred claim to be filed even if it is not objected to, as the debtor will likely pay the same total amount to creditors and the debt can be discharged.” Op. at 20-21 (emphasis in original).
Moreover, the Court noted various other considerations that differentiate filing a proof of claim on a time-barred debt from filing a lawsuit to collect such debt. Op. at 21-23. Consequently, the majority concluded that “filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the FDCPA when the statute of limitations does not extinguish the debt.” Op. at 23. Accordingly, the Court affirmed the dismissal of the Debtor’s FDCPA and state law collection claims.