>Daily Development for Tuesday, January 10, 2005
>by: Patrick A. Randolph, Jr.
>Elmer F. Pierson Professor of Law
>UMKC School of Law
>Of Counsel: Blackwell Sanders Peper Martin
>Kansas City, Missouri
>dirt@umkc.edu
>
>FAIR DEBT COLLECTION ACT; “DEBT COLLECTION;” JUDICIAL FORECLOSURE: Although private exercise of a power of sale may not fit within the definition of “debt collection” under the Act, filing a judicial foreclosure action is.

>
>McDaniel v. South & Assoc. P.C. , 325 F. S. 2nd 1210 (D. Kan. 2004)
>
>This was a group of actions against a collection law firm in a state that requires that collection of a debt secured by real estate be by judicial foreclosure.  Earlier, decisions in three other District Courts in other Circuits (in West Virginia, Oregon and Texas)  had concluded that collection of a debt through private exercise of a power of sale is not a “collection.”  In this particular case, the issue was important as preliminary to the plaintiffs’ argument that the law firm had failed to suspend collection actions after the debtors had notified it that they contested the debt.

>
>Under the Act, a debt collector must send a “verification letter” to a debtor as a preliminary to collection action.  The letter tells the debtor that the debt will be presumed valid if the debtor fails to protest the debt within 30 days. If the debtor protests, the collector must provide evidence verifying the existence of the debt.  The collector need not delay the collection action during the thirty day period (at least according to this court), but the collector must suspend efforts to collect the debt if the debtor sends the letter demanding verification.  The collector cannot resume efforts to collect until it has provided the demanded information.

>
>In each of the three cases presented here, the debtor allegedly had sent the necessary letter protesting the debt, and the collector allegedly  had violated the Act by taking further steps to collect or at least had not suspended an ongoing collection action pending the provision of the supporting information on the debt.  In one case, the collector never provided the information.

>
>The court distinguished the three cases on non-judicial foreclosure, holding that the filing of a foreclosure action, at least in Kansas, did constitute a “debt collection” action and had to be suspended upon receipt of the verification letter because, unlike a non-judicial foreclosure, a Kansas judicial foreclosure action involved the entry of a personal judgment against the debtor.

>
>Interestingly (and strangely) the court maintained its position even in a case in which the collector specifically had styled its action as “in rem” for foreclosure purposes only (the debtor was in bankruptcy.)  Although, in that case, the collector arguably should have postponed its foreclosure efforts even before it amended the complaint to make it “in rem,” the court makes nothing of this, but simply concludes that the reasoning it had undertaken in one of the other cases - that the foreclosure involves a personal judgment - applied here as well.  Hmmmm.

>
>As to the specific violation - failure to suspend - the collector raised the “good faith mistake” defense in addition to that involving application of the Act to judicial foreclosure.  It indicated that it had a computerized system in effect that would suspend collection efforts against a debtor if an attorney reviewing correspondence had concluded that it was a request for verification.  Here, however, the lawyer reviewing the debtor’s letter took six days to review it.  During that time a judicial foreclosure proceeding had been commenced.  The appeals court overruled summary judgment for the defendant collector, but also denied summary judgment for the debtor, deciding that a jury should determine whether, in light of prior difficulties distributing letters as they came in, the six day delay was too long.

>
>In another case, although the collector took no action advancing the foreclosure after receiving the letter, the collector did nothing to stop the sheriff from serving process pursuant to the petition it had already filed.  The court noted that, upon receiving process, the debtor was compelled to respond, and thus the failure to suspend the service of process in fact constituted an affirmative debt collection action.

>
>Comment 1: The editor, as noted, is very puzzled by the apparent conclusion that an in rem action in which the plaintiff asserts it is not seeking a personal judgment nevertheless is a debt collection action and different from a attempt to exercise a private power of sale.  Perhaps the court concluded that, regardless of what the plaintiff says in its foreclosure petition, the court necessarily must enter a judgment against the property owner in order to support a judicial order of foreclosure.  In other states, this may not be a necessary prelude to a judicial foreclosure, and thus in those states this case could be distinguished.

>
>Comment 2: Note that the court’s interpretation of “debt collection action” may be only for purposes of the “verification notice” process.  There are other situations in which the carrying out of a nonjudicial foreclosure may trigger some obligations under the Act.  For example, the FDCPA prohibits contact with third parties after the debt collector has initiated collection procedures.  Those contacts with third parties vital to the foreclosure process, such as publication of an advertisement, may be outside the scope of this rule.  But the editor’s former colleague Ray Warner has warned debt collector lawyers not to assume that informal contacts not critical to the foreclosure, such as negotiations with friends or relatives of the debtor, are OK just because they are done during the time that a nonjudicial foreclosure is pending.

>
>Comment 3: As a policy matter, the interpretation of the situation might in fact be the opposite of what the current case law suggests.  If, as most believe, the purpose of the “verification letter” process is to permit the debtor to avoid inappropriate foreclosures, the debtor is far more exposed in nonjudicial foreclosure than in a judicial one.  Judges in judicial foreclosures often bend over backwards to give debtors their day in court and explain their position on the debt.  But nonjudicial foreclosures provide no such opportunity at all.  But the fact is that nonjudicial foreclosures typically are carried out by trustees with official roles, and consequently the Act simply doesn’t apply.

>
>Comment 4: Another aspect of the case is reported under the heading:  “Fair Debt Collection Practices Act; ‘Consumer,’” tomorrow’s DD.

>
>
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