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Sixth Circuit: FDCPA Requirement to Cease Collection Pending Debt Validation Can Include Third-Party Activities

In a matter of first impression, the U.S. Court of Appeals for the Sixth Circuit has ruled that the Fair Debt Collection Practices Act (FDCPA) requirement for a debt collector to "cease collection of the debt" after receipt of a consumer's dispute of the debt includes stopping third-party activities "set into motion" by the collector. Although the decision only involved statutorily required pre-foreclosure activities performed by third parties, plaintiffs' attorneys are likely to use the decision to argue that the FDCPA requires a debt collector—after receiving a debtor's dispute—to stop any collection activities that it initiated, even if those activities are being conducted by agents or third parties.

In Scott v. Trott Law, P.C., after sending a validation notice—but before it received the debtor's notice disputing the debt—the debt collector, a law firm, took three actions necessary to satisfy the requirements of Michigan law for non-judicial foreclosures. Those actions consisted of arranging for a sheriff's sale to be held on a specified date, contacting a local newspaper to arrange for a foreclosure notice to be published in the newspaper and posted on the debtor's home, and mailing a copy of the notice to the debtor. After the law firm received the debtor's dispute and while its request to the creditor for verification was pending, the notice was posted on the home and published in the newspaper. The debtor then filed a lawsuit alleging violations of the FDCPA and seeking a preliminary injunction to stop the scheduled foreclosure sale. The debtor subsequently filed a Chapter 13 bankruptcy, and the sale did not take place.

The district court granted summary judgment in favor of the law firm on the debtor's FDCPA claim, holding that the law firm had satisfied the FDCPA "cease collection" requirement because after its receipt of the debtor's dispute, the law firm performed no more collection activity. Reversing the district court, the Sixth Circuit ruled that the FDCPA required the law firm to intervene and stop the actions of its agents or third parties that it had put into motion before receiving the debtor's dispute. (The debtor did not appeal the district court's rejection of his claim that the FDCPA requires debt collectors to independently verify the debt.)

As an initial matter, the Sixth Circuit referenced its 2013 decision that held that mortgage foreclosures constitute "debt collection" under the FDCPA. (The U.S. Supreme Court recently held oral argument in Obduskey v. McCarthy & Holthus LLP, et al., which will resolve a circuit split on whether the FDCPA applies to non-judicial foreclosure proceedings.) The Sixth Circuit found that for purposes of the FDCPA "cease collection" requirement, "'collection of the debt' in a statutorily required process such as Michigan's foreclosure by advertisement must include any activities that attempt to satisfy the essential statutorily required elements of that process."

In the court's view, the law firm's argument that it satisfied the FDCPA "cease collection" requirement because it took no collection action after receiving the debtor's dispute was based on a reading of the FDCPA that "produces a result contrary to the plain intent of the FDCPA and this circuit's case law." The Sixth Circuit determined that "the debt collector cannot allow the essential statutory elements of a Michigan foreclosure to proceed after receiving a timely Dispute Letter until it obtains sufficient verification of the debt." Accordingly, it held that the law firm had violated the FDCPA by failing to cancel the sheriff's sale and stop the publication and home posting of the foreclosure notice after it received the debtor's dispute notice.

Plaintiffs' lawyers can be expected to attempt to extend the Sixth Circuit’s decision beyond the foreclosure context by using it as support for the argument that the FDCPA requires a debt collector to stop any collection activities that it initiated, even if those activities are now being conducted by agents or third parties. Such agents or third parties might include repossession companies, auctioneers, asset trace companies, and depository institutions holding accounts a collector seeks to garnish.

Copyright © by Ballard Spahr LLP

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Kaplinksy, partner, New York, finance
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Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

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Christoper Willis, Partner, Ballard Spahr law firm, Consumer Financial Services Litigation attorney
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Christopher J. Willis is Practice Leader of the firm's Consumer Financial Services Litigation Group. He devotes his practice to assisting financial services institutions facing government investigations and examinations, counseling them on fair lending risk and compliance assessments, and defending them in individual and class action lawsuits brought by consumers and enforcement actions brought by government agencies.

Mr. Willis also chairs the firm's Fair Lending Task Force. His clients span the financial services industry and include banks and non-banks, mortgage banking lenders and servicers, debt collectors and buyers, third-party service providers, student lenders and servicers, and auto finance companies.

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Culhane, Ballard, Partner
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John L. Culhane, Jr., is known for his work advising on interstate direct and indirect consumer and residential mortgage loan and leasing programs, through both traditional brick-and-mortar facilities and e-commerce. Before joining Ballard Spahr, Mr. Culhane was associate counsel with Mellon Bank, N.A.; associate counsel with Bank of America NT&SA; and senior attorney (section chief) with the National Credit Union Administration, the federal agency regulating federal credit unions.

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Stefanie Jackman, Ballard Spahr law firm, Partner, financial services institutions lawyer
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Stefanie H. Jackman devotes her practice to assisting financial services institutions facing government investigations and enforcement actions, as well as defending them in individual and class action lawsuits. Ms. Jackman regularly handles matters arising under an array of federal and state consumer financial laws, including UDAP/UDAAP statutes, FDCPA, FCRA, TCPA, EFTA, SCRA, and TILA. Ms. Jackman represents clients across the financial services industry, including banks and nonbanks, mortgage banking lenders and servicers, debt collectors and buyers, third-party...

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