Law360, New York (June 12, 2015, 11:01 AM ET) —
|Martin C. Bryce Jr.|
The United States Court of Appeals for the Third Circuit recently ruled that foreclosure complaints can serve as the basis of Fair Debt Collection Practices Act (FDCPA) claims. Kaymark v. Bank of America NA, 783 F.3d 168 (3d Cir. 2015), rehearing denied (3d Cir. May 18, 2015). Kaymark continues the Third Circuit’s expansive interpretation and application of the FDCPA.
The case was filed as a putative class action by a mortgagor who alleged that a law firm had violated the FDCPA by filing a foreclosure complaint that stated amounts for attorneys’ and other fees that were already due and owing when such fees had not yet actually been incurred (because they related to not-yet-performed services). According to the plaintiff, the complaint violated FDCPA provisions that prohibit debt collectors from using any “false, deceptive, or misleading representations or means in connection with the collection of any debt” or attempting to collect amounts not “expressly authorized by the agreement creating the debt or permitted by law.”
In reaching its decision, the Third Circuit primarily relied upon Heintz v. Jenkins, 514 U.S. 291, 299, 115 S.Ct. 1489, 131 L.Ed.2d 395 (1995), in which the U.S. Supreme Court established that attorneys “engage[d] in consumer debt collection activity, even when that activity consists of litigation,” are covered by the FDCPA. 783 F.3d at 176. In so holding, the Supreme Court had explained that Congress repealed an express exemption from the definition of “debt collector” in an earlier version of the statute for “any attorney-at-law collecting a debt as an attorney on behalf of and in the name of a client.” Id. at 294, 115 S.Ct. 1489 (quoting Pub.L. No. 95–109, § 803(6)(F), 91 Stat. 874, 875 (1977)). Once Congress amended the law without creating another exemption to fill its void, the Supreme Court had explained, “Congress intended that lawyers be subject to the [FDCPA] whenever they meet the general ‘debt collector’ definition.” Id. at 295, 115 S.Ct. 1489.
The Third Circuit also relied upon post-Heintz amendments to the FDCPA, which did not exempt foreclosure litigation from the FDCPA. 783 F.3d at 177. As Kaymark explained, subsequent to Heintz, Congress twice amended the statute and exempted “formal pleading[s] made in connection with a legal action” from 15 U.S.C. § 1692e(11), as amended Pub.L. No. 104–208, § 2305(a), 110 Stat. 3009, 3009–425 (1996), and “communication[s] in the form of [ ] formal pleading[s]” from § 1692g(d), as amended Pub.L. No. 109–351, § 802(a), 120 Stat. 1966 (2006), two provisions not at issue in Kaymark. The Kaymark court concluded that if Congress intended that all conduct in the course of formal pleadings be exempt from the FDCPA, then these express exemptions would be superfluous, and “courts should disfavor interpretations of statutes that render language superfluous.” 783 F.3d at 177 (citations omitted).
In holding that the plaintiff had stated an FDCPA claim based on the foreclosure complaint, the Third Circuit heavily relied and expanded upon its 2014 decision in McLaughlin v. Phelan Hallinan & Schmieg LLP, 756 F.3d 240 (3d Cir. 2014). In McLaughlin, the court held that attorneys’ fees and costs in a demand letter that were not clearly disclosed as estimates constituted actionable misrepresentations under the FDCPA. Id. at 246. The court also concluded the demand letter constituted a debt collection communication, broadly defining “debt collection” as “activity undertaken for the general purpose of inducing payment.” Id. at 245.
Indeed, the Third Circuit went so far as to hold that “a communication need not contain an explicit demand for payment to constitute debt collection activity.” Id. Post-McLaughlin courts within the Third Circuit have gone so far as to conclude that a communication as mundane as a “welcome letter” from a new servicer constitutes a debt collection communication. See, e.g., Grubb v. Green Tree Servicing LLC, (D.N.J. July 24, 2014).
In Kaymark, the Third Circuit applied that broad definition in concluding that a foreclosure complaint can be the basis of FDCPA claims. Kaymark, 783 F.3d at 179 (“Given our holding in McLaughlin based on nearly-indistinguishable facts, we conclude that the fact that the debt collection activity at issue here involves a foreclosure complaint, rather than a debt collection letter, does not remove it from the FDCPA’s purview under McLaughlin.”).
In addition to rejecting the law firm’s argument that FDCPA claims cannot be based on formal pleadings, the Third Circuit also rejected the firm’s arguments that: a complaint is not a communication to the consumer subject to such FDCPA provisions because it is directed to the court; and a foreclosure action cannot be the basis of FDCPA claims because the mortgagor is entitled to other protections under Pennsylvania’s Rules of Civil Procedure. Id. at 178-79.
Reversing the district court’s dismissal of the FDCPA claims, the Third Circuit found that, because the foreclosure complaint plainly indicated that the disputed fees were due in specific amounts on a particular date, the plaintiff had stated a claim that the law firm had misrepresented the amount of the debt in violation of the FDCPA. Id. It also found that the plaintiff had stated a claim that the law firm had attempted to collect unauthorized amounts because the mortgage only allowed the mortgagee to charge for services “performed” in connection with the mortgagor’s default and collect expenses “incurred” in pursuing its lawful remedies. Id.
The decision of the Third Circuit in Kaymark, which allows a foreclosure defendant to bring an FDCPA suit upon the theory that an allegation in a foreclosure complaint or other filing, such as to damages, is incorrect risks creating a parallel and potentially contradictory system of litigation in all foreclosure suits. Indeed, where, as in Kaymark, an FDCPA claim is based on the theory that an allegation in a pending state court foreclosure suit is false or misleading, the possibility exists that the state court may determine that the defendant does, in fact, owe those sums to the plaintiff while the federal court determines that the defendant is liable under the FDCPA for attempting to collect sums that were not authorized by law or the note and mortgage.
Consequently, at least two circuits have held that the FDCPA is not intended to regulate state court pleadings where the defendant is well-protected by specific state court procedures. See Gabriele v. American Home Mortgage Services Inc., 2012 U.S. App. LEXIS 24478 (at *5, n1) (2d Cir. Nov. 27, 2012) (unpublished) (quoting Simmons v. Roundup Funding LLC, 622 F.3d 93, 96 (2d Cir. 2010) (“While the FDCPA’s purpose is to protect unsophisticated consumers from unscrupulous debt collectors, that purpose is not implicated when a defendant is instead protected by the court system and its officers.”); Beler v. Blatt Hasenmiller Leibsker & Moore LLC, 480 F.3d 470, 473 (7th Cir. 2007) (“[t]he state’s rules of procedure, not federal law, determine which facts, and how much detail, must be included in documents filed with a clerk of court for presentation to a judge … whatever shorthand appeared in the Complaint … was harmless rather than an effort to lead anyone astray. It was the judge, not [the plaintiff], who had to be able to determine to whom the debt was owed, for it is the judge (or the clerk of court) rather than the defendant who prepares the judgment specifying the relief to which the prevailing party is entitled.”).
A number of district courts around the country had reached the same conclusion. See, e.g., Ananiev v. Aurora Loan Services LLC, 2012 U.S. Dist. LEXIS 95441, *9-11 (N.D. Cal. 2012) (citing to a number of district courts in California finding that foreclosing on a deed of trust does not invoke the statutory protections of the FDCPA). But see Glazer v. Chase Home Finance LLC, 704 F.3d 453, 461 (6th Cir. 2013) (“mortgage foreclosure is debt collection under the FDCPA”).
The extent to which the Third Circuit will continue to take an expansive approach with respect to the FDCPA remains to be seen. One issue on which the Third Circuit has not yet opined could lead to a drastic expansion of the statute’s scope if the circuit does not follow the overwhelming body of law.
A growing body of authority recognizes a materiality component in FDCPA claims, i.e., that any false representation of fact must be materially false to be actionable. The district court in Kaymark v. Bank of America NA, 11 F.Supp.3d 496 (W.D.Pa. 2014), though it did not exclusively rely on materiality in dismissing the plaintiff’s FDCPA claims, found that its materiality analysis “inform[ed] [its] determination and buttress[ed] [its] finding” that the plaintiff was neither misled or deceived, id. at 515 — a determination that was, of course, subsequently reversed. However, the Third Circuit did not address the district court’s materiality analysis.
The Second, Fourth, Sixth, Seventh and Ninth Circuits, as well as several district courts in the Third Circuit, have read the materiality requirement into the FDCPA’s prohibition of false, deceptive or misleading practices in the collection of a debt. See Wallace v.Washington Mutual Bank FA, 683 F.3d 323, 326 (6th Cir. 2012) (“[A] statement must be materially false or misleading to violate Section 1692e.”); Warren v. Sessoms & Rogers PA, 676 F.3d 365, 374 (4th Cir. 2012) (“Although Congress did not expressly require that any violation of § 1692e be material, courts have generally held that violations grounded in ‘false representations’ must rest on material misrepresentations.”); Donohue v. Quick Collect Inc., 592 F.3d 1027, 1034 (9th Cir. 2010) (“[F]alse but nonmaterial misrepresentations are not likely to mislead the least sophisticated consumer and therefore are not actionable under § 1692e.”); Hahn v. Triumph Partnerships LLC, 557 F.3d 755, 758 (7th Cir. 2009) (“A statement cannot mislead unless it is material, so a false but non-material statement is not actionable.”); Gabriele v. American Home Mortgage Servicing Inc., 503 Fed.Appx. 89 (2d Cir. 2012); Jensen v. Pressler & Pressler LLP, No. 13–1712, (D.N.J. Apr. 29, 2014); Souders v. Bank of America, No. 12–1074, (M.D.Pa. Nov. 4, 2013); Rogozinski v. NCO Financial Systems Inc., No. 11–2594, (E.D.Pa. Oct. 25, 2012).
Most recently, the United States District Court for the Eastern District of Pennsylvania followed and applied the materiality standard. Burton v. Nationstar Mortg. LLC, — F.Supp.3d —-, (E.D.Pa. April 13, 2015). Applying that standard, the court ultimately concluded that statements made in foreclosure filings were not actionable under the FDCPA. As it had to in light of Kaymark, it concluded that the foreclosure constituted a debt collection activity. Id. at *3. However, it also concluded, notwithstanding Kaymark, that the Third Circuit would ultimately follow the materiality requirement. Id. at *5-6.
As the plaintiff in Burton chose not to appeal, whether the district court in that case accurately predicted the direction of the Third Circuit will remain to be seen. At this juncture, it is probably safe to say that the Third Circuit has not yet had the last word on the FDCPA.
—By Martin C. Bryce Jr., Ballard Spahr LLP