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FDCPA Requirement To Cease Collection Pending Debt Validation Can Include Repossessions

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.

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