National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

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Accrued Interest on Student Loan Discharged as Undue Hardship

A Kansas bankruptcy court did not err in granting the debtor a discharge of the accrued interest on her student loans where she met the Tenth Circuit’s flexible version of the Brunner test, and the court has equitable power to grant less than a complete discharge. ECMC v. Metz, No. 18-1281 (May 2, 2019).

The debtor, age 59, was never in default on her student loans. Though she was continuously employed over the repayment period, the amount she owed grew over time from the original loan amount of $16,613.73 to $67,277.88. Beginning in 2001, she filed three Chapter 13 bankruptcies and made all payments under her plans, receiving a discharge in the first two. In the third and current bankruptcy, the debtor sought to discharge her consolidated student loan. The bankruptcy court found undue hardship but discharged only the accrued interest on the debt. The student loan creditor, ECMC, appealed. The debtor filed a cross-appeal seeking to have the entire debt discharged. NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor. [Read more…] about Accrued Interest on Student Loan Discharged as Undue Hardship

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9th Circuit BAP Finds Disclosure of Debtor’s Claim in the SOFA Sufficient for Abandonment (Subtitle: BAP Surveys Cases Nationally on Disclosure and Abandonment)

In an unpublished opinion entered on April 29, 2019, the 9th Circuit Bankruptcy Appellate Panel addressed the thorny issue of whether a debtor’s disclosure of an asset in the SOFA but not in the Schedules of Assets and Liabilities precludes abandonment under 11 U.S.C. § 554(c).

Before filing for bankruptcy, the Debtor and his sister, lent money ($696,704.42) to Dr. Nasseri (the Doctor) which was secured by the Doctor’s real and personal property. The Debtor and his sister filed a state court collection action against the Doctor and the Doctor filed a counterclaim.

The Debtor then filed a Chapter 7 bankruptcy. He did not list the state court action in his schedule B but did list it in the SOFA identifying the court, case name, and number, describing the nature of the suit as “Title to Property” and noting that the case was “open.” The Debtor never listed the Doctor’s counterclaim in his schedules or SOFA nor did he list the Doctor as a creditor. The Doctor did not receive formal notice of the Debtor’s bankruptcy filing.

At the 341 meeting, the Trustee questioned the Debtor about the state court action. The Debtor stated he told the trustee that the case had not yet been tried and that the Doctor was living in Dubai. The Debtor obtained a discharge on February 11, 2011. On September 29, 2011, the trustee filed a notice of intent to specifically abandon the state court action. The Doctor was not served with the notice.

In April of 2012, when the Doctor learned of the bankruptcy, the parties filed a stipulation and order that agreed that the Doctor’s counterclaim would not violate the discharge and any debts owed to the Doctor (on account of his counterclaim) would not be discharged. Thereafter the trustee filed his final report. The bankruptcy was closed on May 4, 2012.

Subsequently, the Debtor and his sister continued the lawsuit against the Doctor and won a judgment against him for $547,173.44. The Doctor’s counterclaim was not successful. The Doctor argued for a directed verdict arguing Debtor lacked standing as the asset had never been abandoned under 11 U.S.C. §§ 554(a) or (c) which was denied by the state court.

The Debtor then attempted to collect the debt from the Doctor. He employed multiple attorneys both locally and in Dubai (where the Doctor lived) and twice brought the matter before the Supreme Court in Dubai to have the Judgment domesticated there.

In 2017, the Doctor moved to reopen the Debtor’s bankruptcy hoping to agree with the trustee to compromise or set regular payments on the judgment amount. The bankruptcy court reopened the case and appointed a new trustee. The Debtor then moved for an order of abandonment of the state court action and to re-close his case.  The court granted Debtor’s motion.

The issues before the BAP were as follows:

  • Was the state court action sufficiently scheduled under 11 U.S.C. § 541(a)(1) so that the trustee could abandon it? Further, does an asset need to be formally listed in Schedule B to be disclosed?
  • Does laches apply to the Doctor’s assertion that the asset was not disclosed and therefore still part of the bankruptcy estate?

To read more click here.

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Ambush at State Trial Costs Creditor and Her Counsel over $200,000 for Discharge Injunction Violation

The creditor and her counsel were found liable for violation of the discharge injunction to the tune of over $200,000 after the creditor and her counsel blindsided the debtor during closing arguments in their state court litigation by grossly expanding the scope of the creditor’s claimed damages to encompass discharged debts. In re Renfrow, No. 17-1027 (Bankr. N.D. Okla. April 23, 2019). [Read more…] about Ambush at State Trial Costs Creditor and Her Counsel over $200,000 for Discharge Injunction Violation

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SCOTUS Hears Arguments on Discharge Violation Sanctions

Addressing the reach of a bankruptcy court’s contempt powers in the context of a violation of the discharge injunction, the Supreme Court heard arguments on April 24, in the case of Taggart v. Lorenzen, No. 18-489.

Daniel Geyser appeared for the debtor, Bradley Taggart. Nicole Saharsky represented the creditor, Shelley Lorenzen, executor. Sopan Joshi, from the office of the Solicitor General, argued as amicus not in support of either party. NACBA submitted an amicus brief in support of reversal.

The controversy hinged on a state court finding that Mr. Taggart’s creditor could seek contractual attorney fees in the litigation before it, even though those fees would have been subject to the discharge order injunction had Mr. Taggart not “returned to the fray.” The bankruptcy court found that the “returned to the fray” doctrine did not apply and that the litigation violated the discharge injunction. It awarded sanctions, at least in part representing the debtor’s attorney’s fees. The Ninth Circuit ultimately reversed the sanctions stating broadly that a creditor acting in good faith cannot be held liable for discharge injunction violation even if that belief is unreasonable. Lorenzen v. Taggart (In re Taggart), 888 F.3d 438 (9th Cir. 2018).

At the outset, all the parties agreed that the Ninth Circuit rule was incorrect. The parties agreed that in the case of a discharge violation, even one made in good faith, the bankruptcy court may order the creditor to cease the violation and restore any property taken.

Where there was disagreement between parties was in the application of the bankruptcy court’s contempt powers. Calling contempt a severe remedy, several of the Justices appeared concerned at its application in the context of discharge injunction where the creditor’s conduct was based on a “fair ground of doubt.”

The debtor advocated for the bankruptcy court’s discretion under section 105(a) to make the determination as to the nature of the creditor’s conduct and whether it merits sanctions, including attorney’s fees. The creditor has a “safe harbor” in Rule 4007 which allows it to seek guidance on the question of dischargeability from the bankruptcy court.

The government advocated for a purely objective test as to the reasonableness of the creditor’s belief that the discharge injunction did not apply. In Justice Gorsuch’s questioning, it appeared that an objective reasonableness would prevail even in the absence of the creditor’s subjective reasonableness (i.e. where there existed good reason to believe the conduct non-violative but the creditor was unaware of that good reason and went forward nonetheless.)

The creditor advocated a similar “reasonable good faith belief,” test as the government (though with the subjective element intact) emphasizing the “chilling effect” of requiring a creditor to jump through the Rule 4007 hoop to have dischargeability determined in an action before the bankruptcy court.

One concern expressed by several Justices was the establishment of a strict liability standard which put the creditor in a position of being permitted to seek a ruling on dischargeability from the state court but not be able to rely on that ruling as a defense to discharge injunction violation if the state court was in error.

The question of who should bear the burden of harm echoed throughout the questioning. Justice Kavanaugh noted to Mr. Geyser that under tradition rules of injunction good faith is a defense. Mr. Geyser disagreed stating that traditionally, the burden of uncertainty falls on the person subject to the decree. In a similar vein, Justice Kagan asked Ms. Saharsky: “As between the victim of the violation and the person who, with all the good faith in the world, perpetrated the violation, why shouldn’t we look to the person who perpetrated the violation?”

Justice Roberts, while noting the long history of the American Rule against fee-shifting, posited the possibility that a bankruptcy court could award sanctions for contempt using the debtor’s attorney’s fees as a reasonable number for that award.

See the SCOTUS blog for further discussion of the argument here.

Taggart SCt transcript April 2019

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Debtor Not a Borrower under Reverse Mortgage

The debtor, who had only a remainder interest in her mother’s property and was not a signatory to her mother’s reverse mortgage, was not a “borrower” entitled to remain in the residence after her mother’s death without paying the underlying debt. Reverse Mortgage Solutions v. Nunez, No. 18-22204 (S.D. Fla. March 21, 2019).

Aleida Nunez’s mother borrowed $531,000 secured by a reverse mortgage on her residence. The loan was memorialized in a Home Equity Conversion Note (Note) and a Home Equity Conversion Loan Agreement (Loan Agreement). The Note stated that the loan was secured by property described in a Security Instrument. While Ms. Nunez’s mother was the only signatory to the Note and Loan Agreement, Ms. Nunez was listed on the Security Instrument as having a “remainderman interest,” and she signed the document as “remainderman.” After her mother died, Ms. Nunez filed for chapter 13 bankruptcy and proposed a plan under which she would be treated as a borrower under the reverse mortgage, allowing her to cure tax and insurance defaults on the residence while continuing to live in the house without paying off the underlying loan. RMS objected to the plan, arguing that Ms. Nunez was not a borrower and that her mother’s death rendered the debt due.

The bankruptcy court reviewed the many documents surrounding the reverse mortgage but ultimately relied on the Security Instrument to find that Ms. Nunez was a borrower along with her mother on the loan. It confirmed her plan. On RMS’s motion for reconsideration, the court found the Security Instrument to be unambiguous and reached the same conclusion.

On RMS’s appeal, the district court found that in order to determine the intent of the parties to a transaction, Florida applies a “doctrine of mutual construction” requiring that when there are multiple documents executed at the time of the transaction, they should all be taken into consideration. The district court found guidance in a recent case out of Florida, Onewest Bank, FSB v. Palmero, 2018 W L 1832326 (FIa. 3d DCA 2018), where the mortgage and many other documents executed contemporaneously with the subject transaction were signed by the husband as “borrower.” The wife signed only the mortgage as a borrower, and on that document she was described as having an interest in the property as one of three remaindermen. The Palmero court found that, taking all the documents into consideration, only the husband was the “borrower.”

In this case, the court noted that Ms. Nunez’s mother was the sole signatory on eight documents relating to the reverse mortgage, including the Note, the Loan Agreement, the Residential Loan Application for Reverse Mortgages, a Borrower’s Certificate, and the Settlement Statement for the Reverse Mortgage. Significantly, the Note listed only Ms. Nunez’s mother as the borrower on the reverse mortgage. The court reasoned that treating Ms. Nunez as a borrower on the reverse mortgage based on the Security Instrument would nullify the terms of the Note, whereas the reverse was not true. The district court therefore found that the bankruptcy court erred in relying solely on the Security Instrument when it concluded that Ms. Nunez qualified as a borrower under the reverse mortgage.

Holding that Ms. Nunez was not a borrower, the court reversed and remanded.

Nunez SD Fla March 2019

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Bifurcated Attorney Fee Agreement Gets Thumbs Up

A Utah bankruptcy court upheld a chapter 7 debtor’s attorney’s bifurcated fee agreement in the face of a motion for sanctions by the U.S. Trustee. In re Hazlett, No. 16-30360 (Bankr. D. Utah Apr. 10, 2019).

Attorney Russell B. Weekes, of Capstone Law, entered into a fee agreement with the chapter 7 debtor, Brett Hazlett, under which Mr. Hazlett would pay no retainer fee, but would pay post-petition costs and expenses in the amount of $2,400 in ten monthly installments. Capstone had an arrangement with BK Billing, under which BK Billing would buy the account from Capstone for $1,800 and collect the fee payments from Mr. Hazlett. Mr. Weekes explained that arrangement to Mr. Hazlett. Mr. Weekes filed all the necessary bankruptcy papers and Mr. Hazlett received his chapter 7 discharge without complications in March of 2017.

In September, 2017, the U.S. Trustee reopened the case and moved for sanctions based on the fee agreement. Specifically, the UST challenged: “(1) the marketing of Zero-Down Chapter 7 bankruptcy services; (2) the bifurcation of bankruptcy services into pre-petition and post-petition fee agreements; (3) filing the petition and the Initial Bankruptcy Papers for purportedly no charge; (4) the reasonableness of the $2,400 post-petition fee; (5) the use of BK Billing to factor and collect the fee; and (6) the propriety of utilizing electronic signatures in bankruptcy.”

In its preliminary discussion, the court noted several factors contributing to the problem of fees for chapter 7 representation, not least of which is the fact that chapter 7 debtors tend not to have the funds to pay a retainer. Adding to the difficulty, the Supreme Court held in Lamie v. United States Trustee, 540 U.S. 526 (2004), that a chapter 7 debtor’s attorney cannot be paid out of estate funds and that any fee still owed at the time of the petition is dischargeable along with other debts. The court reviewed the various, less-than-optimal, choices chapter 7 debtors have, beginning with the pro se route (or use of petition-preparers who often overcharge and underperform), which typically results in needlessly complicated chapter 7 cases and a low discharge rate of 70%.

In the absence of established law in the district on the topic of bifurcated fee agreements, the court found guidance in an ethics opinion issued by the Utah State Bar which emphasized that any such agreement must be for post-petition service, must be entered into after full disclosure and evidence of an understanding on the part of the debtor, and must be permissible under bankruptcy law.

The court found that Capstone’s fee agreement procedures—which included verbal explanation of the ramifications of all the payment options; extensive documents to be signed by the client laying out the disclosures, warnings and explanations; a general information document requiring the client’s initials on each paragraph; and more—satisfied the requirements of full disclosure and informed consent.

The court turned next to whether such agreements are permissible in bankruptcy. Section 329 requires that fees be reasonable, and Rule 2016(b) imposes disclosure requirements on attorneys. Evidence of compliance with both requirements must be presented to the court in the Form B2030 Disclosure of Compensation. The court found that bifurcated fee agreements are not per se prohibited and set forth the following “prime directives” for their use:

  1. The agreement must be in the debtor’s best interest.
  2. All fees must be reasonable and necessary. Where the attorney charges more for the post-petition agreement, he or she must justify the increased fee other than by work performed pre-petition.
  3. The fee arrangement must be revealed in Form B2030 within fourteen days of the petition.
  4. If the debtor opts to proceed pro se or with different counsel, the attorney must comply with the Local Rule pertaining to withdrawal or substitution of counsel.

The court acknowledged that Local Rule 2091-1 essentially requires a lawyer to complete all aspects of a bankruptcy case, but noted that in this case, the attorney fee agreement contemplated just that; Mr. Weekes was obligated under the agreement to complete the bankruptcy case unless the debtor opted to proceed pro se or hire new counsel.

Finding that Mr. Weekes’s fees were reasonable and necessary, the court went on to examine Capstone’s use of BK Billing for collection of payments. The court expressed concern about the use of such services due to systemic issues of overcharging debtors and creating a conflict of interest for the debtor’s attorney between the debtor and the collector. It noted, however, that the Utah Ethics Opinion found that such arrangements were permissible so long as all the requirements of full disclosure, informed consent, and reasonable fees were met. The court found that to be the case here.

The same was true for Capstone’s use of electronic signatures for some of the documents Mr. Hazlett signed. Though Local Rule 5005-2(e), which pertains to documents an attorney must retain, refers to “original signatures,” various rules and statutes in Utah sanction the use of electronic signatures, and it was therefore not unreasonable for Capstone to use e-signatures. Moreover, from a practical standpoint, the court noted that it is not always feasible to obtain wet signatures when financial pressures require immediate action.

The court concluded that Mr. Weekes provided valuable and ultimately successful services to Mr. Hazlett, that the terms of the fee agreement were fully disclosed, that the fee itself was reasonable and necessary and that, for all these reasons, sanctions were not warranted.

Hazlett Opinion Bankr Utah April 2019

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Ninth Circuit Finds No Standing for FCRA Claim Despite Reduced Credit Scores

In an unpublished opinion, the Ninth Circuit reached the alarming conclusion that plaintiffs alleging inaccuracies on credit reports that lowered their credit ratings, had no constitutional standing to sue the credit reporting agencies under the FCRA because they could not show “that they had tried to engage in or were imminently planning to engage in any transactions for which the alleged misstatements in their credit reports made or would make any material difference.” Jaras v. Equifax, No. 17-15201(9th Cir. March 25, 2019) (unpublished). [Read more…] about Ninth Circuit Finds No Standing for FCRA Claim Despite Reduced Credit Scores

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Bankruptcy Court Joins Minority, Grants Discharge, and Denies the Trustee’s Motion to Dismiss for Delinquent Post-Petition Mortgage Payments

On March 28, 2019, the Bankruptcy Court for the District of Arizona Denied the Trustee’s Motion to Dismiss based on the Debtors’ post-petition mortgage default. In doing so, she joined the minority position on this issue.

The Debtors filed their Chapter 13 bankruptcy on July 18, 2014. Their plan proposed to pay back mortgage arrears to their mortgage lender through plan payments to the trustee. The plan also indicated that they would make direct payments to the mortgage lender for future monthly mortgage payments. At the end of the plan, the mortgage lender filed a Response to the Trustee’s Notice of Final Cure for Prepetition Arrears on the Mortgage Claim, agreeing that the prepetition default was cured, but stating that the post-petition payments due on and after September 1, 2017, were delinquent. The Trustee then filed a motion to dismiss.

The court addressed the issue of whether payments on a mortgage paid directly to the mortgage holder and referenced in a chapter 13 plan are “payments under the plan” for purposes of 11 U.S.C. §1328(a) and if delinquent is a legitimate basis to dismiss the bankruptcy and deny a discharge.

Section 1328(a) states in pertinent part: “as soon as practicable after completion by the debtor of all payments under the plan,… the court shall grant the debtor a discharge of all debts provided for by the plan…” Similarly, 11 U.S.C. § 1307(c)(6) allows a trustee to move to dismiss for cause including “material default by the debtor concerning a term of a confirmed plan;…” As a result several Chapter 13 trustees file motions to dismiss if they discover that a debtor is delinquent in mortgage payments.

There are two schools of interpretation of “payments under the plan.”

To read more click here.

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Court Orders Student Loan Discharge

In a compassionate and pragmatic opinion, a bankruptcy court in the Northern District of Georgia found that the debtor met the difficult burden of showing a “certainty of hopelessness,” and that she otherwise satisfied the Bruner test for a hardship discharge of her student loans. Hill v. Educ. Credit Mgmt. Corp., No. 17-56656, Adv. Proc. No. 17-5131 (Bankr. N.D. Ga. April 1, 2019).

Chapter 7 debtor, 46-year-old, Risa Rozella Hill, attended college intermittently between 1998 and 2011, for a social work degree. During that time, she accumulated the 23 student loans owed to ECMC which were the subject of this adversary proceeding. She never made any payments on the loans because, at all times, they were either in forbearance or deferment. Prior to trial, ECMC voluntarily reduced her debt from $127,000 to $70,000.

Ms. Hill was employed as a social worker from 2002 to 2013 when she began experiencing signs of psychosis including hallucinations, delusions and voices in her head. Her illness led to hospitalizations and a period of homelessness. She was diagnosed with “Bipolar Type I disorder with psychotic features and post-traumatic stress disorder (“PTSD”),” and was found to be depressed and dangerous to herself and others. She became dependent upon numerous medications with significant side-effects, and a host of medical and counseling professionals to regulate her mental illness. After the onset of her illness, Ms. Hill was no longer able to work and she began receiving Social Security Disability Insurance Benefits as her sole source of income. She obtained housing using a Housing Voucher through the Atlanta Housing Authority, received food stamps until she failed to fill out the forms to continue that benefit, and had Medicare for her medical expenses. A Representative Payee received her SSDI and paid her bills for her. In her bankruptcy schedules she listed excess income in the amount of $212.00 per month for unexpected expenses.

She sought discharge of the student loans as undue hardship under section 523(a)(8).

ECMC suggested, among other things, that rather than discharge, she enter an income-based repayment plan, “Revised Pay as You Earn” or REPAYE, under which she would pay nothing so long as she maintained the yearly recertification of her income, and her debt would be cancelled at the end of 20 years. Ms. Hill, however, feared that she would not be able to maintain the recertifications and the loans would go into default possibly leading to set-off of her disability benefits.

Applying the Bruner test for undue hardship, court began by looking at whether paying the student loans would prevent Ms. Hill from maintaining a minimal standard of living. There was no dispute that Ms. Hill could not pay her loans out of her surplus income even with the lowered amount determined by the ECMC. ECMC argued, however, that because she would pay nothing in the REPAYE program, she could not meet this first Bruner requirement. The court turned this argument on its head finding that the fact that under the REPAYE program Ms. Hill would pay nothing is simply further evidence of her inability to repay the loans. Furthermore, “[r]equiring Debtor’s participation in such a program will do nothing but impose an ongoing administrative burden on Debtor and create possible tax implications that may arise after the debt is cancelled subsequent to the repayment period.” Her SSDI benefits would also be at risk if, at the end of the twenty-year REPAYE program, she could not satisfy those tax requirements. The fact that Ms. Hill had recently failed to fill out the paperwork for her food stamp benefits and had earlier failed to follow through with the paperwork for an administrative discharge, was evidence that the administrative burden inherent in maintaining the REPAYE program would overwhelm her.

Importantly, the court went on to explain that the Bruner test required a finding that the debtor would not be able to maintain a minimal standard of living if she paid off the original loans, not loans subject to an income-based repayment plan. The court noted that a contrary finding would essentially put undue hardship discharge out of reach for student loan debtors in general.

The court turned to the second prong of the Bruner test. The Eleventh Circuit applies an onerous “certainty of hopelessness” to the question of whether the cause of a debtor’s inability to pay her student loans will persist. The court found that Ms. Hill met that test. Despite some progress in her treatment for PTSD, her other mental illnesses were unlikely to abate, and her need for medication with debilitating side-effects would prevent gainful employment into the foreseeable future. The court noted that Ms. Hill’s eligibility for SSDI was based on a finding of the persistent nature of her illnesses.

The court added that even if Ms. Hill were able to work at the income level she enjoyed prior to the onset of her illnesses, she would not earn enough money to pay off the loans and meet her daily needs. Moreover, employment would mean loss of SSDI, her housing voucher, Medicaid and other benefits that currently allow her to receive the treatment necessary to prevent further psychotic episodes. The court thus found her situation “hopeless.”

Finally, the court addressed whether Ms. Hill had made a good faith effort to repay her loans. ECMC argued that because Ms. Hill had never made any payments on her loans, nor had she taken advantage of the REPAYE program, she has not demonstrated good faith. The court disagreed based on the facts that at no time were Ms. Hill’s loans in default, and she was in school all but two of the years the loans were outstanding. Because Ms. Hill was never financially able to make payments on the loans, the fact that she did not do so does not constitute bad faith. Again, the court cautioned that a finding of bad faith based on failure to participate in an income-based repayment plan would graft a regulatory requirement onto section 523(a)(8) that Congress did not include in the provision.

The court was also unpersuaded by ECMC’s argument that the fact that her student loans comprised a disproportionate percentage of her debt in bankruptcy was an indication of bad faith. To the contrary, the court found Ms. Hill saddled with substantial non-educational debts that would have justified filing for bankruptcy in and of themselves.

The court thus found that Ms. Hill met the standard of undue hardship necessary to discharge of her student loans under section 523(a)(8).

Hill Bankr ND Ga April 2019

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SCOTUS Addresses “Debt Collector” Definition

In a unanimous, narrow, decision, the Supreme Court held that an entity merely carrying out nonjudicial foreclosures is not a “debt collector” within the meaning of the FDCPA. Obduskey v. McCarthy & Holthus LLP, 586 U.S. ___, No. 17-1307 (March 20, 2019).

The action arose when the law firm of McCarthy & Holthus, acting as agent for the mortgagee, initiated nonjudicial foreclosure proceedings against Dennis Obduskey. In response to McCarthy’s notice of foreclosure, sent in compliance with Colorado nonjudicial foreclosure law, Mr. Obduskey invoked the FDCPA and sent a letter disputing the debt. When McCarthy went forward with the foreclosure proceedings, Mr. Obduskey filed a complaint in district court alleging violation of the FDCPA’s requirement that, upon notification of a disputed claim, a debt collector must cease collection activities and obtain verification of the debt. The district court found that McCarthy was not a debt collector to which the FDCPA requirements applied. The Tenth Circuit affirmed. Obduskey v. Wells Fargo, 879 F. 3d 1216 (2018).

The Supreme Court agreed. Justice Breyer’s majority opinion relied primarily on textual interpretation. Section 1692(a)(6) of the FDCPA sets forth a two-part definition of “debt collector.” First, a “debt collector” is “any person . . . in any business the principal purpose of which is the collection of any debts, or who regularly collects or at­tempts to collect, directly or indirectly, debts.” The FDCPA then provides what the Court called a “limited-purpose” definition, stating that “[f]or the purpose of section 1692f(6) . . . [the] term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”

The Court found that, in the absence of the “limited-purpose” phrase, an entity carrying out a nonjudicial foreclosure would fall under the FDCPA’s primary definition of debt collector. But Congress’s use of the phrase “also includes,” suggests that entities whose sole purpose is to enforce security interests, would not otherwise be deemed a debt collector. As the text is structured, therefore, the entity against which the FDCPA is being wielded must first be in the business of debt collection and, only if that is the case, have as its principal purpose enforcement of security interests.

In so holding, the Court reasoned that this structure could indicate congressional intent not to interfere with state nonjudicial foreclosure procedures. In fact, the definition appeared to be a legislative compromise between including entities enforcing security interests in the primary definition of “debt collector,” and excluding them from the definition altogether.

The Court went on to address and reject Mr. Obduskey’s counterarguments. First, the Court was unpersuaded that the limited-purpose provision was intended to draw repo-men into the definition of debt collector, finding instead that the text was broadly written to include all security interests, not just personal property. Furthermore, the fact that McCarthy sent letters seeking payment of the debt prior to taking foreclosure action was attributable to state nonjudicial foreclosure requirements rather than an indication that McCarthy was acting as a debt collector. There was no indication that McCarthy engaged in other debt collection activities.

The Court noted that its holding was limited to instances of conduct involving adherence to state nonjudicial foreclosure requirements and that had McCarthy engaged in more extensive, abusive, conduct, it might not have escaped liability under the FDCPA’s primary definition.

In her concurring opinion, Justice Sotomayor emphasized the narrow nature of the Court’s majority opinion as applying to good faith conduct, and voiced her concern that in enacting section 1692(a)(6)’s definition, Congress may not have anticipated the conclusion reached by the Court.

Obduskey USSCt March 2019