Daily Development for Wednesday, January 11, 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

FAIR DEBT COLLECTION ACT; “CONSUMER:” Homeowner purchasing under contract for deed who did not sign mortgage on property was not a “consumer” under FDCPA and is not entitled to maintain an action against collecting law firm.

McDaniel v. South & Assoc. P.C. , 325 F. S. 2nd 1210 (D. Kan. 2004), reported further under the heading: “Fair Debt Collection Practices Act; ; “Debt Collection;” Judicial Foreclosure.”

Debtor was interested in assisting a friend, Homeowner, in obtaining a home, although Homeowner had bad credit and couldn’t obtain an institutional loan.  Pursuant to prearrangement with Homeowner, Debtor bought a residential property identified by Homeowner, obtaining a mortgage loan from Bank,  and then selling the residence subject to the mortgage on a contract for deed to Homeowner. Debtor never lived in the home.   Homeowner made payment to Debtor, who paid Bank.  Debtor later refinanced the mortgage through Mortgage Company, pursuant to a new contract for deed, and two years later transferred the home to Homeowner by quitclaim deed, subject to the new mortgage,  telling Homeowner to deal directly with the Mortgage Company.

A claimed default occurred, and Mortgage Company retained Law Firm to collect the debt.  Homeowner learned of this retention, and sent Law Firm a timely notice of objection to the claimed default, signing the letter with Debtor’s name. Thereafter, Law Firm mailed default notice letters to Debtor.  Although no foreclosure was filed at that time, a few months later, in response to claimed continued defaults, Mortgage Company again instructed Law Firm to foreclose, and it sent default letters to Debtor and two weeks thereafter initiated a foreclosure action, naming Homeowner and Debtor as defendants.

This scenario became part of a lawsuit initiated by consumer counsel alleging  FDCPA  violations by Law Firm in a series of cases..   The complaint alleged that in these each of these instances  transactions Law Firm had proceeded with foreclosure after receiving objections to the debt in response to is notice letter (known in the trade as a “validation” letter because it states that debtors have thirty days to dispute the claimed default and demand evidence of the disputed debt) and before Law Firm had provided the evidence to the debtors substantiating the debt, as required by the Act.  The  Act requires that  debt collectors suspend further collection efforts until such evidence is provided to the Debtor.

In a decision reported separately (the DIRT DD of 1/10/05) the court decided that a judicial foreclosure is a “debt collection action” within the meaning of the Act, at least when a personal judgment is sought as part of that action, and must be suspended when the objection to the validation letter is received.

But the court went on to conclude that this holding did not aid the plaintiff in this case because Homeowner was not a “consumer” within the meaning of the Act.  The Act defines “consumer” as “any natural person obligated or allegedly obligated to pay any debt.”  The court read this as relating solely to a personal obligation to pay the debt. Although obviously Homeowner was at risk of loss of his home if he did not pay the mortgage, this did not constitute an “obligation to pay the debt.”

The court also noted that it was difficult to make out a case that any stay would have been prevented as against Homeowner because it never sent Homeowner a “validation letter.”  All the letters were addressed to Debtor, and Homeowner responded to the letters as Debtor, rather than in his own name.

Comment 1:   What about Debtor?  The court simply doesn’t discuss any claim by the Debtor.  Either there was no appeal or Debtor never became a plaintiff (remember Debtor never lived in the house and apparently may not have been concerned about a deficiency.)

Note also that in this case Homeowner sent the objection letter to Law Firm even before the validation letter was sent to Debtor.  Under the circumstances, the editor doubts that this would have mattered to the court, which likely felt a mandate to construe the Act broadly.

Comment 2: When the editor first looked at this, he was puzzled because it seems that the Homeowner was acting as the Debtor’s agent in sending the letter, and consequently the court should have found a violation because the Law Firm did in fact get an objecting letter.  But the key to the case is that, even if there was a violation triggered in this manner, the injured party was the Debtor, and the Debtor was not the one who was suing.  As Homeowner had never signed or assumed the note, there was no chance that, from Homeowner’s standpoint, the only possible consequence of the foreclosure action was termination of Homeowner’s rights in the property, and not an judgment on the debt.

Comment 3: Can we argue that in any event a foreclosure is an action to collect a debt because it pressures the owner of the property to pay the debt or lose the property?  This argument was tried in the other three district court cases, and didn’t work.  But those are simple trial court decisions.  Maybe consumer advocates will find the right case and pursue further analysis of this issue on appeal.

Items reported here and in the ABA publications
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