Friday, May 1, 2020

Sixth Circuit Examines Who is a Debt Collector for Purposes of FDCPA Section 1692(f)(6)


By Anna Claire Turpin



The Sixth Circuit Court of Appeals recently explored the limitations of Section 1692(f)(6) and held that a property preservation and maintenance company was not a debt collector for purposes of that section.  The opinion highlights the importance that principal purpose and timing have on this limited provision of the FDCPA. Thompson v. Five Bros. Mortg. Co., 2020 U.S. App. LEXIS 2881  (6th Cir. Jan. 27, 2020).



In Thompson, the consumer alleged that Defendant, a property preservation and maintenance company, violated 15 U.S.C. §1692f(6) by dispossessing her of her personal property when there was no legal right to possession.  Central to the court’s determination was whether the defendant was a debt collector for the limited purposes set forth in Section 1692(f)(6).  More specifically, the “central inquiry … is whether the principal purpose of Five Brothers’ business is the enforcement of security interests.”  Thompson, 2020 U.S. App. LEXIS, 2881 at *5.



The facts, as pleaded by the plaintiff, became integral to the Court’s reasoning and emphasize the importance that careful pleading and timing can play in FDCPA cases. Plaintiff, a consumer, defaulted on the mortgage for her home. The mortgagee, the bank, pursued a nonjudicial foreclosure of the property. Pursuant to state law, the bank held a sheriff’s sale at which it purchased the property, leaving a deficiency. The plaintiff failed to redeem the property during the statutory redemption period. After the redemption period ended and title passed to the bank, the defendant, a property-preservation and maintenance company that was hired by the bank, entered the property for the first time.  The defendant attempted to contact the plaintiff to post notices on the property that the bank had foreclosed the property and advising her of certain rights available. After no contact from the plaintiff, the defendant informed the bank that the property was vacant, and began to secure the property by performing maintenance and clearing the property, including removing belongings and changing the locks. The plaintiff alleged that the defendant violated 15 U.S.C. §1692f(6) by dispossessing her of her property when there was no legal right to possession.



PRINCIPAL PURPOSE.  Under the FDCPA, for the limited purposes set forth in §1692f(6), a “debt collector includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests.” 15 U.S.C. §1692(a)(6) (emphasis added).   While the parties disputed “whether, in the abstract, a property-preservation company that secures and maintains properties on behalf of a mortgagee during non-judicial foreclosure proceedings can be said to the in the business of enforcing security interests,” the Court did not reach that issue because the Plaintiff did not allege nor offer evidence as to Defendant’s general practices.



TIMING IS EVERYTHING.  Instead, the Court considered the defendant’s practices as they specifically related to its  actions in this case: Defendant entered the property and began to clear and secure the property after the foreclosure proceedings had ended and title had passed to the bank. Because the redemption period had ended prior to defendant’s involvement, the plaintiff’s rights in property had already been extinguished. Furthermore, the Court reasoned that the fact that the bank was entitled to a deficiency judgment did not change the result because there was no evidence that Defendant would take part in that action, nor was there evidence that Defendant’s “principal purpose” was to do so. The Court was further persuaded by the fact that the right to seek a deficiency judgment stems from the promissory note and does not relate to the enforcement of a security interest.



Based on that reasoning, the Court held that the defendant, did not meet the definition under 15 U.S.C. §1692f(6) and affirmed the district court's judgment in favor of the defendant.



Anna Claire Turpin is a member of Smith Debnam’s Consumer Financial Services Litigation and Compliance team.




Saturday, April 25, 2020

North Carolina Department of Insurance Extends Deferral Period

The North Carolina Department of Insurance has extended its previous order which activated the payment deferral provisions of N.C.Gen. Stat. 58-2-46.  The Order would have expired April 26th and has been extended an additional thirty (30) days through and including May 27, 2020.  A copy of the Extended Order can be found here.  

Additionally, in response to the number of questions posed with respect to the obligations of collection agencies and others licensed by the North Carolina Department of Insurance, the Department has now published  a list of FAQs.  Collection agencies should be mindful that the North Carolina Collection Agency Act encompasses to the collection of commercial, as well as consumer debts, and that this Order, by extension, applies similarly. The FAQs make clear:
  •  There is no affirmative duty on collection agencies to send a mass mailing to debtors offering deferrals.  Instead, it is "up to the customer" to contact the collection agency to discuss options.  If, however, a collection agency contacts a debtor to discuss repayment, the agency is affirmatively obligated to advise the customer of the option to defer payment for 30 days.
  • A request for deferment acts as a cease and desist for the 30 day period.  "Not just payments are deferred; ANY collection activity should cease for 30 days should the customer request a deferral."
  • The Order and Extended Order apply to all payments, including those required by payment plans, ACHs and credit card repayment agreements. If the customer requests the deferments, the collection agency should cease all collection payment, including collection according to pre-arranged ACHs, credit card payments and other pre-arranged agreements for the 30 day period.
  • While the Order and Extended Order do not generally apply to law firms and attorneys collecting debt, the Order and Extended Order do apply to law firms and attorneys to the extent they are seeking to collect payments under insurance contracts or policies.  In those instances, the law firm or attorney "must delay collection activities on behalf of its clients during the deferral period.
Collection agencies and others impacted by the Order and Extended Order should continue to check periodically for further extensions of the Order.

Tuesday, March 31, 2020

North Carolina Department of Insurance Amends COVID-19 Order

On March 30th, Commissioner Mike Causey amended his March 27th Order regarding COVID-19 to provide for thirty days rather than sixty days.  The Order will now expire April 26th. A copy of the Amended Order can be found here.  Aside from the change in the Order's expiration date, the Order remains in effect as originally reported yesterday.  

The DOI Order notes the emergency conditions in the state and invokes the provisions of N.C. Gen. Stat. § 58-2-46 (1)-(3). N.C. Gen. Stat. § 58-2-46(2) requires collection agencies and debt buyers to give their customers the option of deferring premium or debt payments[.]” The DOI Order designates the entire state as the affected geographic area, so consumers located anywhere in the state must be given the option to defer payments. Further, Chapter 58 of the General Statutes broadly defines “consumers” to include businesses, so the mandate applies equally to traditional consumer debt (that incurred for personal, family or household debt) and commercial debt. 

Additionally, the NCDOI has confirmed that licensed entities are not required to preemptively notify "consumers" of the waiver option but do have an obligation to offer the deferred payment to "consumers" when discussing payment. The option to defer payments must be given for payments that are due through and including the time period covered by the DOI Order as amended. Subsection 2 goes on to state that the deferral period “shall be 30 days from the last day the premium or debt payment may be made under the terms of the policy or contract.” While this statutory section is open to (at least) a few possible interpretations, we believe the best reading is that the option to defer must be given until at least April 26, 2020, when the DOI Order is currently set to expire. If a consumer elects to defer a payment, the deferral must be granted and the new payment date should be set 30 days after the original payment date. 

Monday, March 30, 2020

Governor Cooper and Dept of Insurance Issue COVID-19 Orders Affecting Debt Collection Agencies, Others


By: Caren Enloe and Zachary Dunn



In response to the rapidly developing COVID-19 pandemic, North Carolina Governor Roy Cooper issued an order on March 27, 2020 requiring all people in the state to stay in their homes “except as permitted in” the order. In a related move, the Department of Insurance invoked statutory powers which require collection agencies and others licensed and regulated by the Department of Insurance to offer their customers the option to defer debt payments. Both orders are effective statewide and have the potential to affect business operations for the time being. The basics of each order are discussed in more detail below.



Stay at Home Order

The Stay at Home Order, available here, applies statewide and requires all persons present in North Carolina to stay in their homes except for certain specified essential purposes.  The Order additionally only allows certain specified essential businesses to remain physically open. The Order takes effect at 5:00pm Monday, March 30, 2020.



As far as financial institutions and debt collectors are concerned, there are two definitions of “Essential Businesses” which may apply and therefore allow employees to physically report to work:



Businesses that Meet Social Distancing Requirements: The Stay at Home Order exempts businesses that “conduct operations while maintaining Social Distancing Requirements” between and among its employees and customers. Social Distancing Requirements, in turn, is defined in the Stay at Home Order as

·         Maintaining at least six (6) feet distancing from other individuals;

·         Washing hands using soap and water for at least twenty (20) seconds as frequently as possible or the use of hand sanitizer;

·         Regularly cleaning high-touch surfaces; and

·         Facilitating online or remote access by customers if possible.



Financial and Insurance Institutions: The Stay at Home Order also exempts a large array of financial and insurance institutions, including “bank, currency exchanges, consumer lenders” and “affiliates of financial institutions.” While debt collectors and creditors are not specifically included on the enumerated list, this section of the order is broadly worded and arguably may include those businesses. However, whether this section applies would likely be fact specific.



Please note that the Order allows for local orders which are more restrictive and those entities with physical operations in North Carolina should verify whether or not a local order is in place which contains additional restrictions.  Please be aware that violation of the Stay at Home Order is a Class 2 misdemeanor.



Department of Insurance Order

The Department of Insurance, which regulates debt collectors, debt buyers, and insurance companies in North Carolina, also issued a state-wide order last Friday, available here. The DOI Order notes the emergency conditions in the state and invokes the provisions of N.C. Gen. Stat. § 58-2-46 (1)-(3). The order currently expires May 26, 2020.



N.C. Gen. Stat. § 58-2-46(2) requires collection agencies and debt buyers to give debtors the option of deferring debt payments[.]” The DOI Order designates the entire state as the affected geographic area, so consumers located anywhere in the state must be given the option to defer payments. Further, Chapter 58 of the General Statutes broadly defines “consumers” to include businesses, so the mandate applies equally to traditional consumer debt (that incurred for personal, family or household debt) and commercial debt.



The option to defer payments must be given for payments that are due through and including the time period covered by the DOI Order. Subsection 2 goes on to state that the deferral period “shall be 30 days from the last day the premium or debt payment may be made under the terms of the policy or contract.” While this statutory section is open to (at least) a few possible interpretations, we believe the best reading is that the option to defer must be given until at least May 26, 2020, when the DOI Order is currently set to expire. If a consumer elects to defer a payment, the deferral must be granted and the new payment date should be set 30 days after the original payment date. However, if that new payment date is still within the time period during which the DOI Order is in effect – i.e. is before May 26, 2020 – the new payment date should be extended to May 26, 2020.



Key Takeaways

The Stay at Home Order and DOI Order are focused on different very subjects, but both have the potential to affect business operations. While working from home is likely the best option if feasible, businesses may be able to stay open if they can fit within one of the exceptions in the Stay at Home Order. However, interpretation and enforcement of the order is still very much up in the air, and violation risks a Class 2 misdemeanor penalty. If you have any doubts, we recommend contacting your attorney to discuss.



The DOI Order requires debt collectors give debtors, both commercial and individuals, the option to defer debt payments until (at least) May 26, 2020. While neither the DOI Order nor N.C. Gen. Stat. § 58-2-46(2) explicitly require notification of the option to defer to consumers, notification of the option to defer is likely the safest course of action and should be built into all current scripts and correspondence.


Wednesday, March 4, 2020

House Passes Bill to Provide Additional Protections to FDCPA for Servicemembers


The House has passed a bipartisan bill that amends the FDCPA to provide additional protections to servicemembers.  The bill, H.R. 5003, amends 15 U.S.C. §§1692c and f to add provisions regarding communications to servicemembers, their dependents, and those discharged within the past year ("covered persons").  The bill proposes to amend Section 1692c, which addresses communications in connection with debt collection to prohibit debt collectors in connection with the collection of any debt of a covered person from threatening with a reduction in rank, a revocation of security clearance or military prosecution. The bill proposes to similarly amend Section 1692f to consider such representations made to covered persons as being an unfair debt collection practice.  The bill has been forwarded to the Senate’s Committee on Banking, Housing and Urban Affairs for further consideration.


Monday, February 17, 2020

Sixth Circuit Side Steps the Bona Fide Error Defense


A recent opinion issued by the Sixth Circuit should prove helpful to attorneys facing unsettled issues of state law.  As drolly described by the Court, “[a] lawyer sued two lawyers, and each side hired more lawyers.  Five years later, after ‘Stalingrad litigation’ tactics, discovery sanctions, and dueling allegations of professional misconduct, we are left with $3,662 in damages and roughly $180,000 in attorney’s fees.”  Van Hoven v. Buckles & Buckles, 2020 U.S. App. LEXIS 1483, *2 (6th Cir. Jan. 16, 2020).   So what caused this apocalyptic litigation war?  A series of post judgment garnishments.

In Van Hoven, a law firm enforced a judgment by filing a series of garnishments.  With each garnishment, the law firm included within the post-judgment costs accrued to date their garnishment filing fees.  The consumer contended that the law firm violated §1692e of the FDCPA by seeking the costs of each garnishment, contending that doing so violated Michigan law because: (a) the law firm was not allowed to include the costs of the present garnishment within the amount due; and (b) the law firm was not allowed to include the costs of prior unsuccessful garnishments.  Michigan law, at the time, was unclear as to whether a creditor could include the costs of the present garnishment in their calculation of costs.  At the trial court level, the consumer and the class she represented were successful and were awarded a total of $3,662.00 in damages and $186,600.00 in attorney’s fees.  The law firm appealed.

On appeal, the Sixth Circuit was left to address whether “an inaccurate statement about state law counts as a ‘false … representation’?”  Id. at *8.  The Court started by noting that not every violation of state law is a violation of the FDCPA.  In order for an inaccurate statement about state law to be actionable, the statement must be both inaccurate and material.

While the Court quickly determined the statements at issue were material, it ultimately concluded they were not false.  “Even though the Act covers ‘false’ material statements about state law, that does not mean it extends to every representation about the meaning of state law later disproved.”  Id. at *9.  While the Court considered the Supreme Court’s holdings in Jerman v. Carlisle, 559 U.S. 573 (2010) and Heintz v. Jenkins, 514 U.S. 291 (1995), it veered away from employing the bona fide error defense when considering the law firm’s interpretation of Michigan law.  In doing so, the Court explained that “[t]he key question … is not whether the bona fide error defense applies to interpretations of state law; it is whether this is a cognizable “false representation.”  Id. at *21.

Instead, the Court turned to Rule 11, stating that “[m]ore helpful is the analogy to sanctions based on attorneys’ statements in litigation” and noting that it is only sanctionable to advance legal contentions that are not warranted by existing law.  Id. at *13.   Key to the Court’s determination that the statements were not false was the fact that at the time the statements were made (and the costs sought), the law was unsettled.[1]  The Court noted that

[i]n dealing with open questions of state law, excellent arguments sometimes will appear on either side.  And we generally don’t think of a position on the meaning of state law as false at the time it was issued whenever a higher court over time takes a different position in a later case … A representation of law is not actionably false every time it turns out wrong.”

Id. at *14.  Drawing from Rule 11 and its threshold for sanctions, the Court held that “a lawyer does not ‘misrepresent’ the law by advancing a reasonable legal position later proved wrong. This logic applies with even more force to representations of law given the frequent before-the-case difficulty, sometimes indeterminacy of legal questions.”  Id.

Applying this rationale, the Court reversed the district court on the issue as to whether the law firm made misrepresentations in seeking its current garnishment costs.  The Court additionally remanded the remaining issue (whether the law firm improperly sought costs for prior unsuccessful garnishments) to the district court to determine whether that claim was subject to the bona fide error defense.

The opinion provides an excellent road map for law firms dealing with unsettled areas of law and should provide law firms with additional avenues for defense.





[1] Michigan later amended its rules to clarify that creditors may include their current costs in their garnishment requests.