Supreme Court Considers Rules for Home Foreclosures

January 8, 2019 Updated: January 8, 2019

In a case that has political overtones as the 2020 presidential contest begins to take shape, lawyers for a Colorado homeowner facing foreclosure under an expedited nonjudicial foreclosure process urged the Supreme Court to extend to him the protections of a federal law governing debt collections.

The case pits left-wing activists and officeholders against banks trying to protect their shareholders when homeowners can’t pay their bills. Politicians such as Sen. Elizabeth Warren (D-Mass.), who filed a brief in the case, say borrowers need more protection.

The legal case concerns Dennis Obduskey, a Colorado resident, who, not long after the 2007 financial crisis, defaulted on his $329,940 home mortgage, according to a summary by CNBC.

After his 2009 default and six fruitless years trying to foreclose on the property, in 2015, Wells Fargo hired a law firm named McCarthy and Holthus to take care of the foreclosure. According to court documents, the home hasn’t been sold.

The court has been asked to decide whether Obduskey may benefit from legal protections that Congress extended to debtors in the 1970s, or whether the foreclosure isn’t covered because it is a home, as opposed to money, that is in legal jeopardy.

The legal issue hinges on the definition of the phrase “debt collector.” The court is expected to decide whether a law firm attempting to foreclose on a property should be considered a debt collector within the meaning of federal law.

Business Groups

At the Supreme Court, justices tangled with legal counsel over semantics, comparing a foreclosure law firm to “repo men” who arrive in the “dead of night.”

The case could affect millions of Americans in the residential property marketplace.

In 2016, about 200,000 homes were foreclosed on in states that allow lenders to foreclose without heading to court. Business groups say these nonjudicial foreclosures are more efficient and fair to borrowers than court proceedings.

The Mortgage Bankers Association and U.S. Chamber of Commerce say that the status quo should be maintained, and argued in a friend-of-the-court brief against adding an “unwarranted layer of complexity in the foreclosure process, thereby harming both lenders and borrowers.”

In nonjudicial foreclosure proceedings, the creditor isn’t allowed to collect any amount beyond the value of the property itself. To recover any difference between the value of the mortgage and the value of the property, called a deficiency, the lender has to initiate a separate action in court and obtain a judgment for that amount.

Debt Collector

Obduskey’s attorney, Daniel L. Geyser of Dallas, argued that the law firm hired by the lender is a debt collector and must comply with procedural protections in the 1977 Fair Debt Collection Practices Act (FDCPA), which was created to stop debt collectors from using abusive or predatory collection techniques.

“Nonjudicial foreclosures are covered under the Fair Debt Collection Practices Act as a direct or indirect attempt to collect a consumer’s debt,” Geyser told the Supreme Court during oral arguments Jan. 7.

Kannok Shanmugam of Washington, who represents McCarthy and Holthus, said the statute doesn’t apply because, in his view, the law firm isn’t a debt collector. Shanmugam said Congress has long distinguished between those collecting debts and those enforcing security interests.

A federal appellate court seemed to side with Shanmugam. Even though McCarthy and Holthus sent Obduskey a notice identifying itself as a debt collector and demanding payments, that wasn’t considered enough to invoke the FDCPA.

But Justice Brett Kavanaugh challenged Shanmugam.

Kavanaugh suggested the FDCPA may apply to Obduskey and that the law firm involved was indeed a debt collector. “Common sense tells you this is an effort to have you repay the debt,” he said.

“Well, that’s true,” Shanmugam said, “but it’s inherently communicating a message that you need to repay the debt or you’re going to lose the house.”

Chief Justice John Roberts also sparred with Shanmugam.

The FDCPA is “not the way you would have told Congress how to write the statute,” he said. Nor was it the way Geyser would have wanted Congress to write it, Roberts said.

After Roberts said “it certainly is an indirect effort to collect the debt,” Shanmugam admitted the chief justice’s statement “makes it harder for me.”

Justice Elena Kagan said “the grammar of the statute” seemed to say the law firm could either be a debt collector or seeking to enforce a security, but not both. The firm is “paradigmatic” as a collector of a security interest, but it is “a little less odd” to state it isn’t a debt collector.

Justice Sonia Sotomayor seemed to say the law firm could fulfill both roles. “What’s really at issue is the unfair practices,” she said.

Democratic Lawmakers

The Trump administration sided with the law firm seeking to foreclose on Obduskey’s property, while nine Democratic lawmakers signed onto a friend-of-the-court brief filed in the case supporting the homeowner.

In the brief, the officials outlined what they understood to be Congress’s intent when it created the FDCPA. The most prominent of the signers is Warren, who announced Dec. 31, 2018, that she had formed an exploratory committee for a 2020 presidential run. Another is Rep. Maxine Waters (D-Calif.), the new chairman of the House Financial Services Committee.

The other senators are Sherrod Brown of Ohio, himself a potential presidential candidate, along with Jack Reed and Sheldon Whitehouse of Rhode Island. The other House members are Emanuel Cleaver of Missouri, Stephen Lynch of Massachusetts, and Carolyn Maloney and Nydia Velazquez of New York.

According to the lawmakers, in 1975, Congress approved the FDCPA to deal with “the use of abusive, deceptive, and unfair debt collection practices by many debt collectors” that lead to “personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy.”

Congress sought to “eliminate abusive debt collection practices by debt collectors, [and] to ensure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged.”

To achieve these objectives, the statute forbids “debt collectors from engaging in deceptive, misleading, harassing, or abusive practices when attempting to collect debts.”

In Obduskey’s case, the question is “whether non-judicial foreclosure—the process by which a trustee or other entity conducting a foreclosure … takes and sells a consumer’s home to fulfill an unpaid home mortgage—constitutes debt collection within the meaning of the statute.”

The language of the law and evidence of congressional intent “make clear that debt collectors engaging in nonjudicial foreclosures, like other debt collectors, must comply with the requirements of the FDCPA,” the lawmakers said in the brief.

Only eight of the court’s nine justices attended oral arguments Jan. 7. Justice Ruth Bader Ginsburg, who turns 86 in March, is convalescing at home after surgeons excised two cancerous growths from a lung on Dec. 21, 2018. Chief Justice Roberts said Ginsburg would take part in the case “on the basis of the briefs and transcripts of oral arguments.”