Daily Development for
Thursday, October 14, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

FORECLOSURE; FAIR DEBT COLLECTION PRACTICES ACT; "DEBT COLLECTORS:" Attornies who are solely engaged in formal "legal" collection of a debt, including foreclosures, and not in otherwise pursuing the collection of the debt, may nevertheless be "debt collectors" and subject to the provisions of the Act. Heintz v. Jenkins, U.S.S.Ct. No. 94-367 (April 18, 1995)

Attorney was retained by a bank to collect a car loan. When the attorney sent a notice to the debtor that inaccurately stated the amount of the debt, in that the notice claimed insurance amounts that were not properly part of the debt, the debtor brought a suit against the attorney under the Federal Fair Debt Collection Practices Act.

The Act imposes technical and detailed requirements upon parties attempting to collect consumer debts on behalf of another, and renders the debt collector, not the debt claimant, liable for violations. The Act provides for statutory damages of up to $1000 for violations, also allows for actual damages (including emotional distress), and provides for attornies' fees. In short, it is absolutely terrifying for debt collectors who run afoul of it without carefully considering issues of compliance in advance.

There has been an issue for some time as to whether the Act applied to attornies who limit their practice in the area to filing lawsuits, and do not engage in sending dunning letters or other informal collection techniques (an earlier articluation of the Act had an exemption for attornies.) The Court resolves that issue here. There apparently is still an issue as to the Act's application to lawyers who limit their debt collection practices to foreclosure. But don't count on it.

The Supreme Court held that the Act must be read to apply to lawyers engaged in consumer debt-collection litigation for two rather strong reasons.

First, a lawyer who regularly tries to obtain payment of consumer debts through legal proceedings meets the Act's definition of "debt collector:" one who "regularly collects or attempts to collect, directly or indirectly, [consumer] debts owed . . . another," 15 U. S. C. 1692a(6). Second, although an earlier version of that definition expressly excluded "any attorney-at-law collecting a debt as an attorney on behalf of and in the name of a client," Congress repealed this exemption in 1986 without creating a narrower, litigation-related, exemption to fill the void.

The attorney argued that many of the Act's requirements, if applied directly to litigation activities, will create harmfully anomalous results that Congress could not have intended. The Court suggests that federal courts will find ways to read the statute so as to avoid many of the inherent anamolies that first appear when the statute is applied to litigation. The court also placed great stock in the fact that the Act says explicitly that a debt collector may not be held liable if he shows by a preponderance of evidence that the violation was not intentional and resulted froma bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.- 1692k(c).

The attorney also pointed out that a nonbinding "Commentary" by the Federal Trade Commission's staff establishes that attorneys engaged in sending dunning letters and other traditional debt-collection activities are covered by the Act, while those whose practice is limited to legal activities are not. The Court simply dismissed the FTC position as "unconvincing."

The Supreme Court's refusal to honor the commentary by the Federal Trade Commission on this issue may undercut the acceptance of other FTC commentary in this area or in other consumer areas where the Commissioner's commentary is only advisory.

The real "bite" for real estate lawyers, though, is upon those who are called upon to do the occasional foreclosure and do not develop "systems" to avoid error. There are many pitfalls in working with the Act, and a number of them likely will not be "read out" of the Act by the federal courts.

One example is the very issue raised in this case - the misstatement of the debt. The error here was one of law - the lender could not legally include the insurance payment as part of its debt claim. Typically, decisions under the Truth in Lending Act's bona fide error exception limit the scope of the exception to computational errors. If the same approach is taken here, incorrect claims on such issues as the claiming of attorney's fees, default interest, late payment charges, prepayment charges, or other such charges may be actionable if the law does not permit those claims. This may be a good thing, and prevent the overreaching that sometimes occurs in foreclosure practice. But, whether the policy is good or bad, the lawyer will be liable personally for the error.

Another more problematic impact has to do with the prohibition on discussion of the debt claim with third parties. The Act prohibits discussion of the debt with parties other than the debtor. What happens when a relative or spouse of the debtor, concerned about the foreclosure, calls the attorney's office? Even to discuss the most minor detail of the matter with such a person may be a violation of the Act, despite the fact that the attorney is attempting to be solicitous and assist the debtor in avoiding foreclosure and saving the property.

Many attornies in small towns in fact provide a useful mediation role in assisting in the collection of real estate debts. Now it likely will be advisable for the attorney to play things strictly "by the numbers." In private power of sale foreclosures, attornies in some jurisdictions also perform the role of trustee. (Although the editor has never understand how this can occur ethically.) Foreclosure trustees are called upon to make numerous communications to numerous parties concerning the debt. How does performance of the trustee's responsibilities conform to the requirements of the Act? Should the attorney representing the lender decline to serve as trustee even if state law permits it?

By the way, don't count on the "regular involvement" test being an easy out. In analogous consumer law areas, attornies who engage in the identified practice only four or five times a year have been held to be "regularly engaged" in that line of work. In Catherman v. First State Bank, 796 S.W.2d 299 (Tex. App. 1990), 10-15 cases over a five year period did not result in a determination of "regular involvement." But there are numerous cases, many unreported, that impose a very low threshold for application of the Act. See, generally, Hobbs, Fair Debt Collection - a regularly updated treatise available in most Law School libraries, that is a fine (debtor oriented) source of authority on most issues concerning the Act.

The editor has written an article on this subject: P. Randolph, "Lawyers, Foreclosure and the Fair Debt Collection Practices Act," Nov/Dec Probate & Property 30 (1992). The article is available on Westlaw in the Real Property practice area subdirectory.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260.

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.